<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
-------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
---------------------- ----------------
Commission File Number: 333 - 64597
---------------------------------------
Golden State Holdings Inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-4669792
- -------------------------------------------------------------------------------
(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 November 10, 1998: 1,000 shares of common stock.
Page 1 of 47 pages
Exhibit index on page: 45
<PAGE>
GOLDEN STATE HOLDINGS INC.
THIRD QUARTER 1998 REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Unaudited Consolidated Balance Sheets
September 30, 1998 and December 31, 1997...................................................3
Unaudited Consolidated Statements of Income
Nine months ended September 30, 1998 and 1997..............................................4
Unaudited Consolidated Statements of Income
Three months ended September 30, 1998 and 1997.............................................5
Unaudited Consolidated Statements of Comprehensive Income
Nine months ended September 30, 1998 and 1997..............................................6
Unaudited Consolidated Statements of Comprehensive Income
Three months ended September 30, 1998 and 1997.............................................7
Unaudited Consolidated Statement of Stockholder's Equity
Nine months ended September 30, 1998.......................................................8
Unaudited Consolidated Statements of Cash Flows
Nine months ended September 30, 1998 and 1997..............................................9
Notes to Unaudited Consolidated Financial Statements......................................11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................................17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.........................................................................44
Item 2. Changes in Securities.....................................................................45
Item 3. Defaults Upon Senior Securities...........................................................45
Item 4. Submission of Matters to a Vote of Security Holders.......................................45
Item 5. Other Information.........................................................................45
Item 6. Exhibits and Reports on Form 8-K..........................................................45
</TABLE>
Page 2
<PAGE>
<TABLE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(Unaudited)
(dollars in thousands, except per share data)
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Assets
------
Cash and amounts due from banks $ 552,762 $ 350,214
Interest-bearing deposits in other banks 44,263 36,164
Short-term investment securities 591,947 25,933
----------- -----------
Cash and cash equivalents 1,188,972 412,311
Securities available for sale, at fair value 583,737 813,085
Securities held to maturity 251,960 58,299
Mortgage-backed securities available for sale, at fair value 11,502,002 5,076,598
Mortgage-backed securities held to maturity 2,950,503 1,337,877
Loans held for sale, net 1,479,686 1,483,466
Loans receivable, net 30,763,348 19,424,410
Investment in Federal Home Loan Bank ("FHLB") System 787,072 468,191
Office premises and equipment, net 309,919 159,349
Foreclosed real estate, net 91,690 76,997
Accrued interest receivable 309,956 188,203
Intangible assets (net of accumulated amortization of
$96,674 in 1998 and $60,294 in 1997) 940,731 675,927
Mortgage servicing rights 889,253 536,703
Other assets 952,841 635,663
----------- -----------
Total assets $53,001,670 $31,347,079
=========== ===========
Liabilities, Minority Interest and Stockholder's Equity
-------------------------------------------------------
Deposits 25,342,039 $16,202,605
Securities sold under agreements to repurchase 3,757,060 1,842,442
Borrowings 19,720,963 10,769,594
Other liabilities 1,140,180 702,475
----------- -----------
Total liabilities 49,960,242 29,517,116
----------- -----------
Commitments and contingencies -- --
Minority interest 775,529 986,456
Stockholder's equity:
Floating rate cumulative perpetual Preferred Stock, $1.00 par
value, liquidation value of $15,000 per share, 24,000 shares
authorized, 0 shares and 1,712 shares issued and outstanding
at September 30, 1998 and December 31, 1997, respectively -- 25,680
Common stock, $1.00 par value, 1,000 shares, authorized,
issued and outstanding 1 1
Additional paid-in capital 1,511,907 31,890
Accumulated other comprehensive income 41,280 35,162
Retained earnings (substantially restricted) 712,711 750,774
----------- -----------
Total stockholder's equity 2,265,899 843,507
----------- -----------
Total liabilities, minority interest and stockholder's equity $53,001,670 $31,347,079
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 3
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Interest income:
Loans receivable $1,169,834 $1,166,028
Mortgage-backed securities available for sale 294,174 216,280
Mortgage-backed securities held to maturity 80,025 86,849
Loans held for sale 85,070 55,898
Securities available for sale 40,445 40,325
Securities held to maturity 2,727 1,672
Interest-bearing deposits in other banks 23,009 4,839
---------- ----------
Total interest income 1,695,284 1,571,891
---------- ----------
Interest expense:
Deposits 545,734 562,904
Securities sold under agreements to repurchase 106,386 104,863
Borrowings 541,397 404,154
---------- ----------
Total interest expense 1,193,517 1,071,921
---------- ----------
Net interest income 501,767 499,970
Provision for loan losses 30,000 59,850
---------- ----------
Net interest income after provision for loan losses 471,767 440,120
---------- ----------
Noninterest income:
Loan servicing fees, net 106,070 109,440
Customer banking fees and service charges 79,475 73,243
Management fees 1,746 5,309
Gain on sale of loans, net 49,989 16,123
Gain on sale of assets, net 235 14,845
Gain on sale of branches 108,825 1,069
Dividends on FHLB stock 22,463 18,367
Other income 15,257 17,737
---------- ----------
Total noninterest income 384,060 256,133
---------- ----------
Noninterest expense:
Compensation and employee benefits 200,679 190,370
Occupancy and equipment 65,114 61,423
Savings Association Insurance Fund deposit insurance premium 7,840 8,090
Loan expense 33,863 51,838
Marketing 12,009 10,378
Professional fees 30,811 33,467
Data processing 10,274 9,553
Foreclosed real estate operations, net (6,024) (2,081)
Amortization of intangible assets 36,380 36,805
Merger and integration costs 31,917 --
Other 74,381 78,919
---------- ----------
Total noninterest expense 497,244 478,762
---------- ----------
Income before income taxes, minority interest and extraordinary loss 358,583 217,491
Income tax (benefit) expense (143,106) 35,438
---------- ----------
Income before minority interest and extraordinary loss 501,689 182,053
Minority interest 82,020 66,169
---------- ----------
Income before extraordinary loss 419,669 115,884
Extraordinary loss - loss on early extinguishment of debt, net 80,007 --
---------- ----------
Net income 339,662 115,884
Preferred stock dividends 578 11,005
---------- ----------
Net income available to common stockholder $ 339,084 $ 104,879
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 4
<PAGE>
<TABLE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
(in thousands)
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Interest income:
Loans receivable $408,494 $386,365
Mortgage-backed securities available for sale 115,645 81,848
Mortgage-backed securities held to maturity 32,592 27,980
Loans held for sale 26,840 18,271
Securities available for sale 12,159 15,047
Securities held to maturity 1,155 743
Interest-bearing deposits in other banks 21,438 1,049
-------- --------
Total interest income 618,323 531,303
-------- --------
Interest expense:
Deposits 190,532 188,117
Securities sold under agreements to repurchase 49,337 32,077
Borrowings 201,052 145,671
-------- --------
Total interest expense 440,921 365,865
-------- --------
Net interest income 177,402 165,438
Provision for loan losses 10,000 19,950
-------- --------
Net interest income after provision for loan losses 167,402 145,488
-------- --------
Noninterest income:
Loan servicing fees, net 34,707 34,461
Customer banking fees and service charges 28,278 26,491
Management fees 442 1,220
Gain on sale of loans, net 13,865 4,765
Gain on sale of branches 108,911 --
Gain on sale of assets, net 416 15,059
Dividends on FHLB stock 7,901 6,392
Other income 4,806 6,458
-------- --------
Total noninterest income 199,326 94,846
-------- --------
Noninterest expense:
Compensation and employee benefits 73,105 62,868
Occupancy and equipment 23,785 20,579
Savings Association Insurance Fund deposit insurance premium 2,786 2,640
Loan expense 10,363 17,872
Marketing 2,142 2,694
Professional fees 11,242 11,269
Data processing 3,877 3,371
Foreclosed real estate operations, net (886) (1,224)
Amortization of intangible assets 13,151 12,210
Merger and integration costs 31,054 --
Other 24,929 22,008
-------- --------
Total noninterest expense 195,548 154,287
-------- --------
Income before income taxes, minority interest and extraordinary loss 171,180 86,047
Income tax expense 78,028 13,547
-------- --------
Income before minority interest and extraordinary loss 93,152 72,500
Minority interest 36,406 23,176
-------- --------
Income before extraordinary loss 56,746 49,324
Extraordinary loss - loss on early extinguishment of debt, net 80,007 --
-------- --------
Net (loss) income (23,261) 49,324
Preferred stock dividends -- 2,762
-------- --------
Net (loss) income available to common stockholder $(23,261) $46,562
======== ========
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
Page 5
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
(in thousands)
1998 1997
---- ----
Net (loss) income $339,662 $115,884
Other comprehensive income, net of tax:
Unrealized holding loss on securities available 6,654 14,924
for sale:
Unrealized holding gain arising during
the period
Less: reclassification adjustment for gains
included in net gain (536) (90)
-------- --------
Other comprehensive income 6,118 14,834
-------- --------
Comprehensive income $345,780 $130,718
======== ========
See accompanying notes to unaudited consolidated financial statements.
Page 6
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
(in thousands)
1998 1997
---- ----
Net (loss) income $(23,261) $49,324
Other comprehensive income, net of tax:
Unrealized holding loss on securities
available for sale:
Unrealized holding gain arising during the period 13,150 8,120
Less: reclassification adjustment for losses (gains)
included in net gain 29 (86)
-------- -------
Other comprehensive (loss) income 13,179 8,034
-------- -------
Comprehensive (loss) income $(10,082) $57,358
======== =======
See accompanying notes to unaudited consolidated financial statements.
Page 7
<PAGE>
<TABLE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
(in thousands)
<CAPTION>
Accumulated
Additional Other Total
Preferred Common Paid-in Comprehensive Retained Stockholder's
Stock Stock Capital Income Earnings Equity
----- ----- ------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 25,680 $1 $ 31,890 $ 35,162 $750,774 $ 843,507
Net income -- -- -- -- 339,662 339,662
Redemption of FN Holdings
Preferred Stock (25,787) -- 787 -- -- (25,000)
Golden State Acquisition -- -- 1,482,765 -- -- 1,482,765
GS Escrow Merger -- -- (3,535) -- -- (3,535)
Change in net unrealized holding
gains on securities available
for sale -- -- -- 6,118 6,118
Stock dividends 107 -- -- -- (107) --
Dividends on common stock -- -- -- -- (377,147) (377,147)
Cash dividends on FN Holdings
Preferred Stock -- -- -- -- (471) (471)
-------- --- ---------- -------- -------- ----------
Balance at September 30, 1998 $ -- $1 $1,511,907 $ 41,280 $712,711 $2,265,899
======== === ========== ======== ======== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
Page 8
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $339,662 $115,884
Adjustments to reconcile net income to net cash (used in) provided
by operating activities:
Amortization of intangible assets 36,380 36,805
Accretion of premiums and discounts, net (7,633) (15,263)
Amortization of mortgage servicing rights 92,003 81,418
Provision for loan losses 30,000 59,850
Gain on sales of assets, net (235) (14,845)
Gain on sale of branches (108,825) (1,069)
Gain on sales of foreclosed real estate, net (11,331) (10,302)
Loss on sale of loans, net 88,514 72,917
Extraordinary loss - loss on early extinguishment of debt, net 80,007 --
Depreciation and amortization of office premises and equipment 17,364 11,755
Amortization of deferred debt issuance costs 5,340 4,124
FHLB stock dividends (22,463) (18,367)
Capitalization of originated mortgage servicing rights (138,503) (89,040)
Purchases and originations of loans held for sale (6,391,601) (4,458,632)
Proceeds from the sale of loans held for sale 6,354,361 4,205,318
(Increase) decrease in other assets (161,187) 113,135
Increase in accrued interest receivable (10,131) (11,967)
Decrease in other liabilities (300,358) (85,534)
Minority interest 82,020 66,169
---------- ----------
Net cash (used in) provided by operating activities (26,616) 62,356
---------- ----------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
(Continued)
Page 9
<PAGE>
<TABLE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
(in thousands)
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from investing activities:
Acquisitions:
Golden State Acquisition $ 792,132 $ --
Cal Fed Acquisition 58,386 (161,196)
GSAC Acquisition (123,718) --
Auto One Acquisition -- (2,845)
Mortgage loan servicing rights and operations -- (34,260)
Purchases of securities available for sale (531,774) (916,571)
Proceeds from maturities of securities available for sale 803,296 490,797
Purchases of securities held to maturity (897) (58,833)
Proceeds from maturities of securities held to maturity 2,263 4,938
Purchases of mortgage-backed securities available for sale (6,099,674) (2,295,151)
Principal payments on mortgage-backed securities available for sale 1,933,451 670,837
Proceeds from sales of mortgage-backed securities available for sale 5,664 71,914
Principal payments on mortgage-backed securities held to maturity 289,026 208,467
Proceeds from sale of loans 8,433 17,909
Net decrease in loans receivable 1,365,571 805,915
Purchases of FHLB stock, net (79,459) --
Purchases of office premises and equipment (51,223) (45,350)
Proceeds from disposal of office premises and equipment 19,228 18,095
Proceeds from sales of foreclosed real estate 121,785 112,812
Purchases of mortgage servicing rights (68,203) (27,507)
Proceeds from sales of mortgage servicing rights -- 8,620
----------- -----------
Net cash flows used in investing activities (1,555,713) (1,131,409)
----------- ------------
Cash flows from financing activities:
Branch Sales (1,267,517) (21,683)
Net decrease in deposits (735,108) (803,685)
Proceeds from additional borrowings 17,098,354 13,040,268
Principal payments on borrowings (14,845,668) (12,578,053)
Net increase in securities sold under agreements to repurchase 1,464,311 684,212
Proceeds from GS Escrow Merger 1,970,285 --
Bank Preferred Stock Tender Offers (227,345) --
Debt Tender Offers (879,879) --
Proceeds from FN Escrow Merger -- 603,313
Issuance of FN Holdings Preferred Stock, net -- (650)
Issuance of REIT Preferred Stock, net -- 482,449
Redemption of FN Holdings/FN Escrow Preferred Stock -- (17,250)
Redemption of FN Holdings Preferred Stock (25,000) (93,750)
Dividends on common stock (109,247) (35,547)
Dividends on Preferred Stock (471) (9,103)
Dividends paid to minority stockholders, net of taxes (83,725) (70,904)
----------- -----------
Net cash flows provided by financing activities 2,358,990 1,179,617
----------- -----------
Net change in cash and cash equivalents 776,661 110,564
Cash and cash equivalents at beginning of period 412,311 269,869
----------- -----------
Cash and cash equivalents at end of period $1,188,972 $ 380,433
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 10
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(1) Basis of Presentation
The accompanying consolidated financial statements were prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions for meeting the requirements of
Regulation S-X, Article 10 and therefore do not include all disclosures
necessary for complete financial statements. In the opinion of management, all
adjustments have been made that are necessary for a fair presentation of the
financial position and results of operations and cash flows as of and for the
periods presented. All such adjustments are of a normal recurring nature. The
results of operations for the three and nine months ended September 30, 1998
are not necessarily indicative of the results that may be expected for the
entire fiscal year or any other interim period. Certain amounts for the three
and nine month periods in the prior year have been reclassified to conform to
the current period's presentation.
Golden State Holdings Inc. ("GS Holdings") is a newly formed subsidiary
of First Nationwide Holdings Inc. ("FN Holdings"), which was formed to acquire
all of the assets of FN Holdings (including all of the common stock of the
Bank) as part of the Golden State Acquisition (as defined herein). GS Holdings
is a holding company whose only significant asset is all of the common stock of
the Bank.
The accompanying consolidated financial statements include the accounts of
GS Holdings or the "Company", California Federal Bank, A Federal Savings Bank
("California Federal" or "Bank") and its subsidiaries. Unless the context
otherwise indicates, "GS Holdings" or "Company" refers to Golden State Holdings
Inc. as the surviving entity after the consummation of the Golden State
Acquisition, and as the surviving corporation in the GS Escrow Merger (as
defined herein) for periods after the GS Escrow Merger. On September 11, 1998,
Glendale Federal Bank, Federal Savings Bank ("Glendale Federal") merged with and
into California Federal Bank, A Federal Savings Bank pursuant to the Golden
State Merger (as defined herein). Unless the context otherwise indicates,
"California Federal" or "Bank" refers to California Federal Bank, A Federal
Savings Bank, as the surviving entity after the consummation of the Golden State
Merger. On January 3, 1997, First Nationwide Bank, A Federal Savings Bank merged
with and into California Federal Bank, A Federal Savings Bank (the "Cal Fed
Acquisition"). Unless the context otherwise indicates, (i) "Old California
Federal" refers to California Federal Bank, A Federal Savings Bank prior to the
consummation of the Cal Fed Acquisition and (ii) "California Federal" or "Bank"
refers to California Federal Bank, A Federal Savings Bank, as the surviving
entity after the consummation of the Cal Fed Acquisition, and to First
Nationwide and its predecessors for periods prior to the Cal Fed Acquisition.
All significant intercompany balances and transactions have been eliminated in
consolidation. These financial statements should be read in conjunction with the
consolidated financial statements of FN Holdings included in the Company's
Current Report on Form 8-K (dated September 11, 1998). All terms used but not
defined elsewhere herein have meanings ascribed to them in the Company's Current
Report on Form 8-K.
Minority interest represents amounts attributable to the Bank Preferred
Stock, the Preferred Stock ("REIT Preferred Stock") of California Federal
Preferred Capital Corporation, whose common stock is wholly owned by the Bank,
and that portion of stockholders' equity of Auto One Acceptance Corporation, a
subsidiary of the Bank ("Auto One"), attributable to 20% of its common stock.
As GS Holdings' common stock is wholly owned by Golden State, earnings per
share data is not presented. All activities for the consolidated entity are
carried out by the Bank and its operating subsidiaries.
(2) Golden State Acquisition
On September 11, 1998, First Nationwide (Parent) Holdings Inc. ("Parent
Holdings"), parent company of FN Holdings and the Bank, and Hunter's Glen/Ford
Ltd. ("Hunter's Glen"), a 20% minority shareholder of FN Holdings, completed
the merger with Golden State Bancorp Inc. ("Golden State"), the publicly traded
parent company of Glendale Federal, in a tax-free exchange of shares (the
"Golden State Merger"), accounted for under the purchase method of accounting.
Pursuant to the Golden State Merger agreement, (i) FN Holdings, parent company
of the Bank, contributed all of its assets (including all of the common stock
of California Federal) to GS Holdings (the "FN Holdings Asset Transfer"), (ii)
Parent Holdings, which then owned all of the common stock of FN Holdings,
merged with and into Golden State, which indirectly owned 100% of the common
stock of Glendale Federal, (iii) FN Holdings merged with
Page 11
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
and into Golden State Financial Corporation ("GS Financial"), which owned all
of the common stock of Glendale Federal (the "FN Holdings Merger", and together
with the Golden State Merger, the "Holding Company Mergers"), and (iv) Glendale
Federal merged with and into California Federal (the "Glen Fed Merger"). The FN
Holdings Asset Transfer, the Holding Company Mergers and the Glen Fed Merger
are referred to collectively as the "Golden State Acquisition."
Following the Golden State Merger on September 30, 1998, the combined
parent company, Golden State, has approximately 128.5 million common shares
outstanding and continues to be a publicly traded company. At September 11,
1998, Glendale Federal had total assets of approximately $18.9 billion and
deposits of $11.3 billion and operated 181 branches and 26 loan offices in
California.
The following is a summary of assets acquired and liabilities assumed in
connection with the Golden State Acquisition at September 11, 1998.
<TABLE>
<CAPTION>
Estimated
Remaining
Carrying Fair Value Fair Lives
Value Adjustments Value (in years)
----- ----------- ----- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 782,233 $ -- $ 782,233 --
Securities and mortgage-backed securities 2,354,263 16,015 2,370,278 1
Loans receivable, net 14,432,389 114,510 14,546,899 2-12
Office premises and equipment, net 158,446 (9,692) 148,754 3-10
Investment in FHLB System 314,591 -- 314,591 --
Foreclosed real estate, net 47,504 -- 47,504 --
Accrued interest receivable 115,165 -- 115,165 --
Mortgage servicing rights 230,764 (17,831) 212,933 --
Goodwill 271,743 (271,743) -- --
Other assets 204,372 62,972 267,344 2-5
Deposits (11,293,173) (10,547) (11,303,720) 1-8
Borrowings (5,877,574) (45,310) (5,922,884) 1-5
Other liabilities (399,737) (71,350) (471,087) 1-10
------------ --------- -----------
$ 1,340,986 $(232,976) 1,108,010
============ =========
Purchase price 1,464,361
-----------
Excess cost over fair value of net
assets acquired $ 356,351 15
===========
</TABLE>
The Golden State Acquisition was accounted for as a purchase and
accordingly, the purchase price was allocated to the assets and liabilities
assumed in the transaction based on estimates of fair value at the date of
purchase. Since the date of purchase, the results of operations related to such
assets and liabilities have been included in the Company's consolidated
statements of income for the three and nine months ended September 30, 1998.
(3) Issuance of Debt Securities
On August 6, 1998, GS Escrow Corp. ("GS Escrow"), an affiliate of GS
Holdings, issued $2 billion in debt securities consisting of (i) $250 million
aggregate principal amount of its Floating Rate Notes Due 2003 (the "Floating
Rate Notes"), (ii) $350 million aggregate principal amount of its 6-3/4% Senior
Notes due 2001 (the "2001 Notes"), (iii) $600 million aggregate principal
amount of its 7% Senior Notes Due 2003 (the "2003 Notes") and (iv) $800 million
aggregate principal amount of its 7-1/8% Senior Notes Due 2005 (the "2005
Notes" and, together with the 2001 Notes and the 2003 Notes, the "Fixed Rate
Notes" and, together with the Floating Rate Notes, the "GS Escrow Notes").
Interest on the Fixed Rate Notes is payable semi-annually in arrears on
February 1 and August 1 of each year, commencing on February 1, 1999. The
Floating Rate Notes bear interest at a rate equal to the three-month LIBOR plus
100 basis points per annum, except that the initial rate will be 6-3/4% per
annum, which is based on six-month LIBOR (which initial interest rate will be
reset on the first interest payment date, and, thereafter, reset on a quarterly
basis), and will mature on August 1, 2003. The first interest payment date for
the Floating Rate Notes will be February 1, 1999. Thereafter, interest will be
payable quarterly on each May 1, August 1, November 1 and February 1. The
2001 Notes will mature on August 1, 2001. The 2003 Notes will mature on
August 1, 2003. The 2005 Notes will mature on August 1, 2005.
Page 12
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
The GS Escrow Notes were issued to fund, in part, the Refinancing
Transactions (as defined herein) that occurred following the Golden State
Acquisition. Deferred issuance costs of $38.6 million related to the GS Escrow
Notes are included in GS Holdings' other assets and are being amortized over
the life of such notes.
(4) Refinancing Transactions
On August 17, 1998, FN Holdings commenced cash tender offers (the "Bank
Preferred Stock Tender Offers") for each of the Bank's two outstanding series
of Bank Preferred Stock, which together had a total aggregate liquidation
preference of $473.2 million. The Bank Preferred Stock Tender Offers expired on
September 14, 1998, at which time 222,721 shares of the 10-5/8% Preferred Stock
and 995,437 shares of the 11-1/2% Preferred Stock were purchased for an
aggregate purchase price of $135.8 million. During September 1998, GS Holdings
continued to purchase Bank Preferred Stock through privately negotiated
transactions. At September 30, 1998, 384,990 additional shares of the 10-5/8%
Preferred Stock and 437,500 shares of the 11-1/2% Preferred Stock had been
purchased for an aggregate purchase price of $91.5 million. The net tender
premiums and expenses paid in connection with the Bank Preferred Stock Tender
Offers totalled $19.5 million and are reflected as minority interest expense on
the Company's consolidated statements of income for the three and nine months
ended September 30, 1998.
On September 14, 1998, GS Holdings commenced cash tender offers (the "Debt
Tender Offers" and, together with the Bank Preferred Stock Tender Offers and
the Parent Holdings Defeasance (as defined herein), the "Refinancing
Transactions") for the FN Holdings 12-1/4% Senior Notes, the FN Holdings 9-1/8%
Senior Sub Notes and the FN Holdings 10-5/8% Notes (collectively, the "FN
Holdings Notes"), which together had a total aggregate principal amount of $915
million. On September 17, 1998, GS Holdings purchased $735.8 million aggregate
principal amount of the FN Holdings Notes for an aggregate purchase price,
including accrued interest payable, of $902.5 million. The after-tax tender
premiums and expenses paid in connection with the Debt Tender Offers totalled
$80.0 million and are reflected as an extraordinary loss, net of taxes, on the
Company's consolidated statements of income for the three and nine months ended
September 30, 1998.
Concurrently with the closings of the Debt Tender Offers, GS Financial, as
the successor obligor, gave a 30-day notice of redemption for all the
outstanding $455 million aggregate principal amount of 12-1/2% Senior Notes Due
2003 of Parent Holdings (the "Parent Holdings Notes"), and irrevocably
deposited in trust money or government obligations in an amount sufficient to
pay the redemption price therefor, together with any accrued and unpaid
interest to the date of redemption, for the purpose of defeasing the Parent
Holdings Notes (the "Parent Holdings Defeasance").
Since September 30, 1998, $178.7 million of the FN Holdings Notes have
been purchased in connection with the Debt Tender Offers, with related
premiums, fees and other expenses totalling $18.2 million on an after-tax
basis. At November 4, 1998, only $0.2 million of the FN Holdings 12-1/4% Notes
and $0.3 million of the FN Holdings 10-5/8% Notes remain outstanding. In
addition, $51 million of the 10-5/8% Preferred Stock of the Bank was purchased
by GS Holdings to date in the fourth quarter of 1998, with related expenses and
premiums of $4.8 million. Further, the Parent Holdings Defeasance was completed
on October 14, 1998. The Parent Holdings Defeasance will have no effect on the
financial condition or results of operations of GS Holdings.
GS Holdings expects to purchase any outstanding Bank Preferred Stock not
acquired in the Bank Preferred Stock Tender Offers once it becomes redeemable
(April 1, 1999 in the case of the 10-5/8% Preferred Stock and September 1, 1999
in the case of the 11-1/2% Preferred Stock).
(5) GS Escrow Merger
On September 11, 1998 and upon the consummation of the Golden State
Merger, GS Escrow was merged with and into GS Holdings, pursuant to a merger
agreement by and between GS Escrow and GS Holdings (the "GS Escrow Merger"). In
connection therewith, GS Holdings acquired the net proceeds from the
Refinancing Transactions and
Page 13
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GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
became successor obligor on the GS Escrow Notes. GS Escrow was a newly formed
subsidiary of First Gibraltar Holdings Inc., an indirect parent company of FN
Holdings, and had no significant assets. GS Escrow had not engaged in any
business operations, acquired any assets or incurred any liabilities, other
than in connection with the issuance of the GS Escrow Notes.
(6) Acquisitions and Divestitures
On February 4, 1998, Auto One acquired 100% of the partnership interests
in Gulf States Acceptance Company, a Delaware limited partnership ("GSAC") and
its general partner, Gulf States Financial Services, Inc., a Texas corporation.
GSAC was liquidated and its assets and liabilities were transferred to Auto One
(the "GSAC Acquisition"). The aggregate consideration paid in connection with
the GSAC Acquisition was approximately $13.6 million plus a 20% interest in the
common stock of Auto One.
On September 11, 1998, the Company consummated the sale of its Florida
bank franchise (consisting of 24 branches with deposits of $1.4 billion) to
Union Planters Bank of Florida, a wholly owned subsidiary of Union Planters
Corp. (the "Florida Branch Sale"). The Company recorded a pre-tax gain of
approximately $108.9 million in connection with the Florida Branch Sale,
representing a deposit premium of approximately 7.92%.
The following pro forma financial information combines the historical
results of the Company as if the Golden State Acquisition and the issuance of
the GS Escrow Notes had occurred as of the beginning of the first period
presented (in thousands):
Nine months ended September 30,
1998 1997
---- ----
Net interest income $784,095 $754,034
Net income 509,069 130,811
The pro forma results are not necessarily indicative of the results which
would have actually been obtained if the Golden State Acquisition or the
issuance of the GS Escrow Notes had been consummated in the past nor do they
project the results of operations in any future period.
(7) Cash, Cash Equivalents, and Statement of Cash Flows
The Company uses the indirect method to present cash flows from operating
activities. Cash paid for interest for the nine months ended September 30, 1998
and 1997 was $1.2 billion and $1.0 billion, respectively.
During the nine months ended September 30, 1998, noncash activity
consisted of transfers of $85.3 million from loans receivable to foreclosed
real estate, $5.9 million of loans made to facilitate sales of real estate
owned, transfers of $3.2 million from loans held for sale (at lower of cost or
market) to mortgage-backed securities classified as trading securities and $1.9
billion from loans receivable to mortgage-backed securities held to maturity
upon the securitization of certain of the Company's multi-family loans. Noncash
activity also includes a $267.9 million dividend related to the Company's
deconsolidation from its tax reporting group as a result of the Golden State
Acquisition, the retirement of Preferred Stock of $25.0 million and the
issuance of additional Preferred Stock through Preferred Stock dividends of $.6
million.
Page 14
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
During the nine months ended September 30, 1997, noncash activity
consisted of transfers of $143.8 million from loans receivable and $1.2 million
from loans held for sale (at lower of cost or market) to foreclosed real
estate, $22.2 million of loans made to facilitate sales of real estate owned,
the retirement of Preferred Stock of $1.5 million, the issuance of additional
Preferred Stock through Preferred Stock dividends of $1.9 million and the
forgiveness of a $19 million loan from an affiliate of FN Holdings in exchange
for the redemption of the FN Holdings/FN Escrow Preferred Stock.
(8) Income Taxes
In connection with the Golden State Merger, the Company deconsolidated
from the Mafco Group. As a result, only the amount of the net operating losses
("NOLs") of the Company not utilized by the Mafco Group on or before December
31, 1998 are available to offset taxable income of the Company thereafter. At
September 11, 1998, had the Company (i) been a party to the Tax Sharing
Agreement and (ii) filed a consolidated federal income tax return on behalf of
itself and its subsidiaries for each of the years since the formation of the
Company, it would have had regular NOL carryforwards for federal income tax
purposes of approximately $1.6 billion. Upon deconsolidation, the amount of the
Company's regular NOLs available to offset taxable income of the Company is
estimated to be reduced by $1.0 billion. This reduction of NOLs and other tax
attributes resulted in a $267.9 million reduction in retained earnings. This
amount may change depending upon the actual operating earnings of the Mafco
Group through December 31, 1998. Furthermore, the NOLs are subject to review
and potential disallowance, in whole or in part, by the Internal Revenue
Service.
(9) Minority Interest
In connection with the GSAC Acquisition, Auto One issued 250 shares of
its common stock, par value $1.00 per share, representing a 20% interest in
Auto One. The carrying value of Auto One's common stockholders' equity
attributable to the minority stockholders at September 30, 1998 is ($1.1)
million.
In connection with the Bank Preferred Stock Tender Offers, 607,711 shares
of the 10-5/8% Preferred Stock and 1,432,937 shares of the 11-1/2% Preferred
Stock were purchased by the Company during the quarter ended September 30,
1998. See Note 4.
(10) Stockholder's Equity
In connection with the Golden State Acquisition, the Company issued 1,000
shares of its common stock with par value of $1.00 per share in exchange for
800 shares of its class A common stock with par value of $1.00 per share.
Dividends on the FN Holdings Preferred Stock totalled $.6 million and
$11.0 million during the nine months ended September 30, 1998 and 1997,
respectively. Dividends on common stock totalled $377.1 million during the nine
months ended September 30, 1998 and include a $267.9 million dividend related
to the Company's deconsolidation from its tax reporting group as a result of
the Golden State Merger. See Note 8. Dividends on common stock totalled $35.5
million during the nine months ended September 30, 1997.
(11) Extraordinary Item
In connection with the Debt Tender Offers, the Company purchased $735.8
million aggregate principal amount of the FN Holdings Notes for an aggregate
purchase price, including accrued interest payable, of $902.5 million,
resulting in an extraordinary loss of $80.0 million, net of income taxes, on
the early extinguishment of such debt.
(12) Newly Issued Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued
Page 15
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
to shareholders. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
This statement supersedes FASB Statement No. 14, Financial Reporting for
Segments of a Business Enterprise, but retains the requirement to report
information about major customers. It amends FASB Statement No. 94,
Consolidation of All Majority-Owned Subsidiaries, to remove the special
disclosure requirements for previously unconsolidated subsidiaries. This
statement is effective for fiscal years beginning after December 15, 1997. In
the initial year of application, comparative information for earlier years is
to be restated. This statement need not be applied to interim financial
statements in the initial year of application, but comparative information for
interim periods in the initial year of application is to be reported in
financial statements for interim periods in the second year of application.
This statement has no impact on the financial condition or results of
operations of the Company, but will require changes in the Company's disclosure
requirements.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS No. 132"), an amendment of Statements of
Financial Accounting Standards No. 87, No. 88 and No. 106. SFAS No. 132 revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. It standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer
useful as they were when Statements No. 87, Employers' Accounting for Pensions,
No. 88, Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits, and No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions, were issued. SFAS
No. 132 is effective for fiscal years beginning after December 15, 1997 and
requires restatement of disclosures for earlier periods provided for
comparative purposes, if available. It is not expected that the Company will
experience any material revision in its disclosures when SFAS No. 132 is
adopted.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). SFAS No. 133 establishes standards for derivative instruments and
for hedging activities, and requires that an entity recognize all derivatives
as either assets or liabilities in the balance sheet and measure those
instruments at fair value. Under SFAS No. 133, an entity that elects to apply
hedge accounting is required to establish at the inception of the hedge the
method it will use for assessing the effectiveness of the hedging derivative
and the measurement approach for determining the ineffective aspect of the
hedge. SFAS No. 133 applies to all entities and amends FASB Statement No. 107,
Disclosures About Fair Values of Financial Instruments, to include in Statement
107 the disclosure provisions about concentrations of credit risk from
Statement 105. SFAS No. 133 supersedes FASB Statements No. 80, Accounting for
Futures Contracts, No. 105, Disclosure of Information about Financial
Instruments with Off-Balance Sheet Risk and Financial Instruments with
Concentrations of Credit Risk, and No. 119, Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments. SFAS No. 133
also nullifies or modifies the consensuses reached in a number of issues
addressed by the Emerging Issues Task Force. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Initial
application of this statement should be as of the beginning of an entity's
fiscal quarter; on that date, hedging relationships must be designated anew and
documented pursuant to the provisions of this statement. Earlier application of
all of the provisions of SFAS No. 133 is encouraged, but is permitted only as
of the beginning of any fiscal quarter that begins after issuance of this
statement. SFAS No. 133 should not be applied retroactively to financial
statements of prior periods. Management has not yet completed its analysis of
SFAS No. 133 and is unable to determine the effect, if any, implementation may
have on the Company's consolidated financial statements.
In October 1998, the FASB issued Statement of Financial Accounting
Standards No. 134, "Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise" ("SFAS No. 134"), an amendment of Statement of Financial Accounting
Standards No. 65. SFAS No. 65, as amended by SFAS No. 115, requires that after
the securitization of a mortgage loan held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed security as
a trading security. SFAS No. 134 further amends SFAS No. 65 to require that
after the securitization of mortgage loans held for sale, an entity engaged
Page 16
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
in mortgage banking activities classify the resulting mortgage-backed
securities or other retained interests based on its ability to sell or hold
those investments. SFAS No. 134 conforms the subsequent accounting for
securities retained after the securitization of mortgage loans by a mortgage
banking enterprise with the subsequent accounting for securities retained after
the securitization of other types of assets by a nonmortgage banking
enterprise. SFAS No. 134 is effective for the first fiscal quarter after
December 15, 1998. Early application is encouraged and is permitted as of the
issuance of this statement. Management does not expect that adoption of SFAS
No. 134 will have a material impact on the financial condition or results of
operations of the Company.
(13) Subsequent Event
On November 2, 1998, the Bank signed a definitive agreement to acquire
twelve retail branches located in Nevada (with deposits of approximately $637
million) from Norwest Bank Nevada, a subsidiary of Norwest Corporation, and
Wells Fargo Bank N.A. This transaction is subject to regulatory approvals and
is expected to close in April 1999.
Page 17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements contained in this Report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, intentions,
beliefs or strategies regarding the future. Forward-looking statements include
the Company's statements regarding liquidity, provision for loan losses,
capital resources and anticipated expense levels in "Management's Discussion
and Analysis of Financial Condition and Results of Operations." In addition, in
those and other portions of this document, the words "anticipate," "believe,"
"estimate," "expect," "intend," and other similar expressions, as they relate
to the Company or the Company's management, are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions. It is important to note that the Company's
actual results could differ materially from those described herein as
anticipated, believed, estimated or expected. Among the factors that could
cause results to differ materially are: (i) changes in levels of market
interest rates, (ii) changes in the California economy or California real
estate values, (iii) changes in the level of mortgage loan prepayments, (iv)
changes in federal banking laws and regulation, (v) difficulties, delays, or
unanticipated costs related to addressing Year 2000 issues, including those
arising from the Company's customers and suppliers, (vi) actions by the
Company's competitors, and (vii) the risks described in the "Risk Factors"
section included in the Company's Registration Statement on Form S-1 filed with
the Securities and Exchange Commission on 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 GS Holdings, through California Federal,
consists of (i) operating retail deposit branches to serve consumers in
California and, to a lesser extent, in Nevada, (ii) originating and/or
purchasing, on a nationwide basis, 1-4 unit residential loans and, to a lesser
extent, certain commercial real estate, commercial and consumer loans, for
investment and (iii) mortgage banking activities, including originating and
servicing 1-4 unit residential loans for others. Revenues are derived primarily
from interest earned on loans, interest received on government and agency
securities and mortgage-backed securities, gains on sales of loans and other
investments and fees received in connection with loan servicing, securities
brokerage and other customer service transactions. Expenses primarily consist
of interest on customer deposit accounts, interest on short-term and long-term
borrowings, provisions for losses, general and administrative expenses
consisting of compensation and benefits, advertising and marketing, premises
and equipment, loan expenses, deposit insurance assessments, data processing
and other general and administrative expenses.
Acquisitions and Sales
On February 4, 1998, Auto One consummated the GSAC Acquisition. The
aggregate consideration paid was approximately $13.6 million plus a 20%
interest in the common stock of Auto One.
On September 11, 1998, the Bank sold its Florida branch franchise to Union
Planters Bank for a pre-tax gain of $108.9 million representing a deposit
premium of 7.92%.
On September 11, 1998, the Golden State Acquisition was consummated. The
carrying value of assets acquired and liabilities assumed totalled $18.9
billion and $17.7 billion, respectively. The transaction was accounted for as a
purchase. The Company's results of operations reflect the impact of the Golden
State Acquisition for the period September 11, 1998 to September 30, 1998.
Net Income
GS Holdings reported net income for the nine months ended September 30,
1998 of $339.7 million compared with net income of $115.9 million for the
corresponding period in 1997. Net income for the nine months ended September
30, 1998 includes (i) a $250 million reduction of the valuation allowance
related to the Company's deferred tax asset, (ii) a $108.9 million pre-tax gain
from the Florida Branch Sale, (iii) $31.9 million in merger and integration
costs (including severance, conversion and consolidation costs) incurred in
connection with the Golden State Acquisition, (iv)
Page 18
<PAGE>
an $80 million extraordinary loss on early extinguishment of debt, net and (v)
$19.5 million in minority interest expense related to the Bank Preferred Stock
Tender Offers. Without consideration of these items, net income for the nine
months ended September 30, 1998 would have been $144.7 million, a result that
is $28.8 million or 25%, higher than the same period in 1997.
Net interest income was $501.8 million for the nine months ended September
30, 1998, compared to $500.0 million during the same period in 1997. The
increase in 1998 over 1997 is primarily due to an increase in net
interest-earning assets resulting from the Golden State Acquisition, partially
offset by a reduction in the net interest margin, principally resulting from
prepayments of higher rate interest-earning assets being replaced with
interest-earning assets having comparatively lower rates, reflecting the
relatively low level of interest rates in 1997 and 1998.
GS Holdings reported a net loss for the three months ended September 30,
1998 of $23.3 million compared with net income of $49.3 million for the
corresponding period in 1997. The net loss for the three months ended September
30, 1998 includes (i) a $108.9 million pre-tax gain from the Florida Branch
Sale, (ii) $31.1 million in merger and integration costs (including severance,
conversion and consolidation costs) incurred in connection with the Golden
State Acquisition, (iii) an $80 million extraordinary loss on early
extinguishment of debt, net and (iv) $19.5 million in minority interest expense
related to the Bank Preferred Stock Tender Offers. Without consideration of
these items, the company would have recognized net income of $31.2 million for
the three months ended September 30, 1998.
Year 2000
During the year ended December 31, 1997, the Company finalized its plan to
address issues related to required changes in computer systems for the year
2000 ("Year 2000"). Issues arise because computer systems and related software
may have been designed to recognize only dates that relate to the 20th century.
Accordingly, if no changes are implemented, some computer systems would
interpret "1/1/00" as January 1, 1900 instead of January 1, 2000. Additionally,
some equipment, being controlled by microprocessor chips, may not deal
appropriately with a year "00."
The Company has developed and is currently executing a comprehensive plan
to make its computer systems, applications and facilities Year 2000 ready. The
plan covers four stages including (i) inventory, (ii) assessment, (iii)
remediation and (iv) testing and certification. At year end 1997, the Company
had completed virtually all of the inventory and assessment stages for its
Company owned systems and applications. The remediation process is currently
underway and the Company is utilizing both internal and external resources to
reprogram, or replace where necessary, and test the software for Year 2000
modifications. The remediation process is targeted to be substantially complete
by year end 1998 and to be complete by March 31, 1999, while testing and
certification of these systems and applications are currently targeted for
completion by March 31, 1999. The Company is currently assessing risks related
to the potential failure of material third parties to be ready for Year 2000.
The Company has completed its inventory and assessment of electrical and
electronic equipment which may be controlled by microprocessor chips, including
automatic teller machines, telecommunications systems, building management
systems, security equipment and systems, telecommunications equipment, vehicles
and office equipment. All such equipment and systems not certified as Year 2000
ready are planned to be upgraded, discarded or replaced by March 31, 1999. In
addition, the Company has completed its inventory of business forms to identify
those containing a preprinted "19__". All such forms have been redesigned and
replacement supplies have been ordered.
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<PAGE>
It is currently expected that costs related to Year 2000 will total
approximately $15.8 million over the years 1997 to 2000. Of this, $6.8 million
has been incurred since the inception of the Year 2000 project through
September 30, 1998. Historically, cost estimates and actuals by year for Year
2000 are as follows:
(Costs in $ millions)
1997 1998
---- ----
Estimates $1.2 $8.8 (full year)
Actual $1.2 $5.6 (September 30, 1998 year-to-date)
Of the total Year 2000 project costs, $6.4 million are incremental third
party expenses, which will be funded through operating cash flows. However, an
increase in reprogramming costs would adversely affect this cost estimate.
Expenditures in 1998 represent 17.9% of the total Information and Technology
Services ("ITS") budget. No ITS projects have been deferred as a result of the
Year 2000 efforts. Instead, incremental resources including consultants,
contractors, software utilities and hardware were obtained from outside the
Company to supplement existing staff. The Company is currently unaware of any
asserted or unasserted claims of breach of contract or warranty, and, at the
present time, does not anticipate any assertion of such claims in the future.
GS Holdings has initiated communications with its critical external
relationships to determine the extent to which the Company may be vulnerable to
such parties' failure to remediate their own Year 2000 issues. From its
critical service providers, the Company has obtained written statements
indicating they will be Year 2000-ready. However, through the testing and
certification stage, the Company will continue to assess and attempt to
mitigate its risks with respect to the failure of these entities to be Year
2000-ready. The effect, if any, on the Company's results of operations from the
failure of such parties to be Year 2000-ready is not reasonably estimable.
The Company has completed its risk assessment of each of its loan
portfolios and identified material borrowers which are most likely to
experience Year 2000 related problems. In an effort to educate borrowers and
further assess Year 2000 preparedness, material borrowers have been contacted
through questionnaires, surveys, or loan officer phone calls and visits.
Educational materials have been sent to the majority of borrowers not
categorized as material customers for Year 2000 purposes. Ongoing efforts to
mitigate potential Year 2000 problems in higher-risk portfolios include
incorporating Year 2000 compliance requirements in loan documents and assessing
Year 2000 readiness in the Company's underwriting process for new loans and
renewals.
Year 2000 is the highest priority project within the ITS unit of the
Company. Management believes there is no material risk that the Company will
fail to address Year 2000 issues in a timely manner, and little possibility of
material changes in its estimates of reserves, allowances for capitalized
software costs, litigation and deferred revenue. In light of normal ongoing
field visits by Bank regulatory examiners, there is little chance of
enforcement action on the Company's Year 2000 project. The Company does not
anticipate material loan losses or acceleration of prepayments due to Year
2000. However, the amount of potential liability and lost revenue, if any,
cannot be reasonably estimated at this time nor can the Company identify
specifically the most likely worst case scenario.
The Company is currently developing a contingency plan which will be
completed by December 31, 1998 to address a plan of action in the unlikely
event that the Company or its vendors and/or business partners are not ready
for Year 2000.
Financial Condition
During the nine months ended September 30, 1998, consolidated total
assets increased $21.7 billion, to $53.0 billion, from December 31, 1997, and
total liabilities increased from $29.5 billion to $50.0 billion, primarily as a
result of $18.9 billion in assets acquired and $17.7 billion in liabilities
assumed in the Golden State Acquisition and the issuance of the GS Escrow
Notes. In connection with the Golden State Acquisition, approximately $356.4
million in goodwill was recorded by the Company, which amount represents the
excess of purchase price over the fair value of net assets acquired.
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<PAGE>
During the nine months ended September 30, 1998, minority interest
decreased by $210.9 million, primarily as a result of $204.1 million of Bank
Preferred Stock that was tendered in the Bank Preferred Stock Tender Offers.
The Company recorded minority interest expense of $19.5 million representing
the net tender premiums paid in connection with the purchase of Bank Preferred
Stock.
During the nine months ended September 30, 1998, stockholder's equity
increased $1.4 billion. The increase in stockholder's equity is the net result
of $1.5 billion related to the Golden State Acquisition, $339.7 million in net
income for the period and a $6.1 million increase in the net unrealized gain on
securities available for sale, partially offset by $377.1 million in common
stock dividends, which include a $267.9 million dividend related to the
Company's deconsolidation from its tax reporting group as a result of the
Golden State Acquisition, a $25.0 million capital distribution related to the
redemption of the Company's Preferred Stock, a $3.5 million reduction in equity
resulting from the GS Escrow Merger and $0.6 million in dividends paid on the
Company's Preferred Stock.
GS Holdings' non-performing assets, consisting of non-performing loans,
net of purchase accounting adjustments and specific allowances for loan losses,
foreclosed real estate, net, and repossessed assets, increased to $323 million
at September 30, 1998 compared with $272 million at December 31, 1997,
primarily as a result of assets acquired in the Golden State Acquisition.
However, total non-performing assets as a percentage of the Bank's total assets
decreased to 0.62% at September 30, 1998 from 0.87% at December 31, 1997.
Page 21
<PAGE>
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1998 versus Nine Months Ended
September 30, 1997
The following table sets forth, for the periods and at the dates
indicated, information regarding the Company's consolidated average balance
sheets, together with the total dollar amounts of interest income and interest
expense and the weighted average interest rates for the periods presented.
Average balances are calculated on a daily basis. The information presented
represents the historical activity of the Company.
<TABLE>
<CAPTION>
Nine months ended
September 30, 1998
------------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
(dollars in millions)
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,180 $ 66 7.48%
Mortgage-backed securities available for sale 6,661 294 5.89
Mortgage-backed securities held to maturity 1,396 80 7.64
Loans held for sale, net 1,585 85 7.16
Loans receivable, net 20,089 1,170 7.77
-------- ------- ----
Total interest-earning assets 30,911 1,695 7.31%
------- ----
Noninterest-earning assets 3,834
--------
Total assets $ 34,745
========
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits $ 16,670 546 4.38%
Securities sold under agreements to repurchase 2,510 106 5.59
Borrowings (3) 11,669 541 6.20
-------- ------- ----
Total interest-bearing liabilities 30,849 1,193 5.17%
------- ----
Noninterest-bearing liabilities 1,497
Minority interest 966
Stockholder's equity 1,433
--------
Total liabilities, minority interest and
stockholder's equity $ 34,745
========
Net interest income $ 502
======
Interest rate spread 2.14%
====
Net interest margin 2.15%
====
Average equity to average assets 4.12%
====
</TABLE>
Page 22
<PAGE>
<TABLE>
<CAPTION>
Nine months ended
September 30, 1997
----------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
(dollars in millions)
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,025 $ 47 6.09%
Mortgage-backed securities available for sale 4,292 216 6.72
Mortgage-backed securities held to maturity 1,517 87 7.63
Loans held for sale, net 1,051 56 7.09
Loans receivable, net 19,900 1,166 7.81
------- ----- ----
Total interest-earning assets 27,785 1,572 7.54%
----- ----
Noninterest-earning assets 2,863
-------
Total assets $30,648
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits $16,832 563 4.47%
Securities sold under agreements to repurchase 2,442 105 5.66
Borrowings (3) 8,472 404 6.38
------- ----- ----
Total interest-bearing liabilities 27,746 1,072 5.17%
----- ----
Noninterest-bearing liabilities 1,092
Minority interest 920
Stockholder's equity 890
-------
Total liabilities, minority interest $30,648
and stockholder's equity
Net interest income $500
====
Interest rate spread 2.37%
====
Net interest margin 2.39%
====
Average equity to average assets 2.90%
====
</TABLE>
- ---------
(1) Non-performing assets are included in the average balances for the periods
indicated.
(2) The information presented includes securities held to maturity, securities
available for sale and interest-bearing deposits in other banks.
(3) Interest and average rate include the impact of interest rate swaps.
Page 23
<PAGE>
The following table presents certain information regarding changes in
interest income and interest expense of the Company during the periods
indicated. The dollar amount of interest income and interest expense fluctuates
depending upon changes in the respective interest rates and upon changes in the
respective amounts (volume) of the Company's interest-earning assets and
interest-bearing liabilities. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to (i) changes in volume (changes in average outstanding balances multiplied by
the prior period's rate) and (ii) changes in rate (changes in average interest
rate multiplied by the prior period's volume). Changes attributable to both
volume and rate have been allocated proportionately.
<TABLE>
<CAPTION>
Nine months ended September 30, 1998 vs. 1997
Increase (Decrease) Due to
---------------------------------------------
Volume Rate Net
------ ---- ---
(in millions)
<S> <C> <C> <C>
INTEREST INCOME:
Securities and interest-bearing deposits in banks $ 7 $ 12 $ 19
Mortgage-backed securities available for sale 101 (23) 78
Mortgage-backed securities held to maturity (7) -- (7)
Loans held for sale, net 28 1 29
Loans receivable, net 9 (5) 4
----- ----- ----
Total 138 (15) 123
----- ----- ----
INTEREST EXPENSE:
Deposits (5) (12) (17)
Securities sold under agreements to repurchase 2 (1) 1
Borrowings 148 (11) 137
----- ----- ----
Total 145 (24) 121
----- ----- ----
Change in net interest income $ (7) $ 9 $ 2
===== ===== ====
</TABLE>
The volume variances in total interest income and total interest expense
for the nine months ended September 30, 1998 compared to the corresponding
period in 1997 are largely due to increased purchases of mortgage-backed
securities funded with FHLB advances, the additional volume related to the
Golden State Acquisition and the net impact of the Refinancing Transactions,
partially offset by $1.4 billion in deposits sold in the Florida Branch Sale.
The positive total rate variance of $9 million is primarily attributed to the
lower cost of funds on deposits, lower interest rates paid on new borrowings
and the lower costing liabilities assumed in the Golden State Acquisition,
partially offset by the comparatively lower market rates on mortgage-backed
securities purchased in 1998 and 1997 and prepayments of higher rate
interest-earning assets.
Interest Income. Total interest income was $1.7 billion for the nine
months ended September 30, 1998, an increase of $123.4 million from the nine
months ended September 30, 1997. Total interest-earning assets for the nine
months ended September 30, 1998 averaged $30.9 billion, compared to $27.8
billion for the corresponding period in 1997. The yield on total
interest-earning assets during the nine months ended September 30, 1998
decreased to 7.31% from 7.54% for the nine months ended September 30, 1997,
primarily due to the lower market rates on new mortgage-backed securities
purchased in 1998 and 1997 and prepayments of higher rate interest-earning
assets.
GS Holdings earned $1.2 billion of interest income on loans receivable for
the nine months ended September 30, 1998, an increase of $3.8 million from the
nine months ended September 30, 1997. The average balance of loans receivable
was $20.1 billion for the nine months ended September 30, 1998, compared to
$19.9 billion for the same period in 1997. The weighted average rate on loans
receivable decreased to 7.77% for the nine months ended September 30, 1998 from
7.81% for the nine months ended September 30, 1997. The increase in the average
volume is primarily due to the addition of $14.5 billion in loans acquired in
the Golden State Acquisition.
GS Holdings earned $85.1 million of interest income on loans held for sale
for the nine months ended September 30, 1998, an increase of $29.2 million from
the nine months ended September 30, 1997. The average balance of loans held for
sale was $1.6 billion for the nine months ended September 30, 1998, an increase
of $534 million from the comparable period in 1997, primarily due to increased
originations and longer holding periods prior to sales of jumbo
Page 24
<PAGE>
loans during the nine months ended September 30, 1998. The weighted average
rate on loans held for sale increased to 7.16% for the nine months ended
September 30, 1998 from 7.09% for the nine months ended September 30, 1997,
primarily due to the higher percentage of comparatively higher fixed-rate held
for sale portfolio in 1998 compared to 1997.
Interest income on mortgage-backed securities available for sale was
$294.2 million for the nine months ended September 30, 1998, an increase of
$77.9 million from the nine months ended September 30, 1997. The average
portfolio balances increased $2.4 billion, to $6.7 billion, during the nine
months ended September 30, 1998 compared to the same period in 1997. The
weighted average yield on these assets decreased from 6.72% for the nine months
ended September 30, 1997 to 5.89% for the nine months ended September 30, 1998.
The increase in the volume and decrease in the weighted average yield is
primarily due to purchases of $6.1 billion of mortgage-backed securities,
additions of $2.3 billion from the Golden State Acquisition and $316.8 million
purchased during the last three months of 1997 at comparatively lower market
rates, as well as prepayments of higher rate mortgage-backed securities since
September 30, 1997. Additionally, the Company recorded a $19.8 million
writedown to the carrying value of mortgage-backed securities determined to
have an other than temporary impairment.
Interest income on mortgage-backed securities held to maturity was $80.0
million for the nine months ended September 30, 1998, a decrease of $6.8
million from the nine months ended September 30, 1997. The average portfolio
balance decreased $121 million, to $1.4 billion, during the nine months ended
September 30, 1998, primarily attributed to an increase in principal payments.
The weighted average rates for the nine months ended September 30, 1998 and
1997 were 7.64% and 7.63%, respectively.
Interest income on securities and interest-bearing deposits in other banks
was $66.2 million for the period ended September 30, 1998, an increase of $19.4
million from the period ended September 30, 1997. The average portfolio balance
increased from $1.0 billion for the period ended September 30, 1997 to $1.2
billion for the period ended September 30, 1998, primarily due to the proceeds
received from the GS Escrow Notes, used to fund the Refinancing Transactions
during the third and fourth quarters of 1998. The increase in the weighted
average rate from 6.09% for the nine months ended September 30, 1997 to 7.48%
for the nine months ended September 30, 1998 is primarily due to $19.8 million
in interest income received on a $193.0 million federal income tax refund
related to Old California Federal.
Interest Expense. Total interest expense was $1.2 billion for the nine
months ended September 30, 1998, an increase of $121.6 million from the nine
months ended September 30, 1997. The increase is primarily the result of
additional borrowings related to the GS Escrow Notes, $5.4 billion in
additional FHLB advances and deposits of $11.3 billion assumed in the Golden
State Acquisition and other new borrowings, partially offset by $1.4 billion in
deposits sold in the Florida Branch Sale.
Interest expense on customer deposits, including Brokered Deposits, was
$545.7 million for the nine months ended September 30, 1998, a decrease of
$17.2 million from the nine months ended September 30, 1997. The average
balance of customer deposits outstanding decreased from $16.8 billion to $16.7
billion for the nine months ended September 30, 1997 and 1998, respectively.
The decrease in the average balance is a result of net deposit run-off,
anticipated following the Cal Fed Acquisition. The overall weighted average
cost of deposits was 4.38% for the nine months ended September 30, 1998 and
4.47% for the nine months ended September 30, 1997, primarily due to the higher
average balances of lower rate custodial transaction accounts in 1998 and lower
cost of funds on deposits assumed in the Golden State Acquisition.
Interest expense on securities sold under agreements to repurchase
totalled $106.4 million for the nine months ended September 30, 1998, an
increase of $1.5 million from the nine months ended September 30, 1997. The
average balance of such borrowings for the nine months ended September 30, 1998
and 1997 was $2.5 billion and $2.4 billion, respectively. The weighted average
interest rate on these instruments decreased to 5.59% during the nine months
ended September 30, 1998 from 5.66% for the nine months ended September 30,
1997, primarily due to a decrease in rates on new borrowings compared to such
borrowings during 1997.
Interest expense on borrowings totalled $541.4 million for the nine months
ended September 30, 1998, an increase of $137.2 million from the nine months
ended September 30, 1997. The average balance outstanding for the nine months
ended September 30, 1998 and 1997 was $11.7 billion and $8.5 billion,
respectively. The weighted average interest rate
Page 25
<PAGE>
on these instruments decreased to 6.20% during the nine months ended September
30, 1998 from 6.38% for the nine months ended September 30, 1997, primarily due
to the lower rates and the net impact of the Refinancing Transactions. The
change in the volume includes the net impact of the Refinancing Transactions,
the addition of $5.4 billion in FHLB advances assumed in the Golden State
Acquisition and the increase in FHLB advances used to fund the purchases of
mortgage-backed securities and the Florida Branch Sale.
Net Interest Income. Net interest income was $501.8 million for the nine
months ended September 30, 1998, an increase of $1.8 million from the nine
months ended September 30, 1997. The interest rate spread decreased to 2.14%
for the nine months ended September 30, 1998 from 2.37% for the nine months
ended September 30, 1997, primarily as a result of prepayments of higher rate
interest-earning assets being replaced with interest-earning assets having
comparatively lower yields.
Noninterest Income. Total noninterest income, consisting primarily of loan
servicing fees, customer banking fees, gains on sales of loans and assets, gain
on sale of branches and dividends on FHLB stock, was $384.1 million for the
nine months ended September 30, 1998, an increase of $127.9 million from the
nine months ended September 30, 1997. Income for the nine months ended
September 30, 1998 reflects a $108.9 million gain on sales of branches
attributed to the Florida Branch Sale. Income for the nine months ended
September 30, 1997 includes a $14.0 million gain from the Servicing Sale.
Loan servicing fees, net of amortization of mortgage servicing rights,
were $106.1 million for the nine months ended September 30, 1998, compared to
$109.4 million for the nine months ended September 30, 1997. The single-family
residential loan servicing portfolio, excluding loans serviced for the Bank,
increased from $49.8 billion at September 30, 1997 to $69.3 billion at
September 30, 1998. During the nine months ended September 30, 1998, California
Federal sold $6.3 billion in single-family mortgage loans originated for sale
as part of its ongoing mortgage banking operations compared to $4.2 billion of
such sales for the corresponding period in 1997.
Customer banking fees were $79.5 million for the nine months ended
September 30, 1998 compared to $73.2 million for the nine months ended
September 30, 1997. The increase is primarily attributed to the impact of
increased revenues from the retail banking operations acquired in the Golden
State Acquisition, partially offset by the impact of the Florida Branch Sale.
Gain on sale of branches was $108.8 million for the nine months ended
September 30, 1998 compared to $1.1 million in 1997. The increase is primarily
attributed to the Florida Branch Sale.
Gain on sale of loans was $50.0 million for the nine months ended
September 30, 1998, compared to $16.1 million for the nine months ended
September 30, 1997. The increase in 1998 is primarily attributed to early
payoffs of commercial loans with unamortized discounts ($11.8 million) and
$22.1 million in additional gains from residential loan sales.
Gain on sale of assets was $.2 million for the nine months ended September
30, 1998, compared to a gain of $14.8 million for the nine months ended
September 30, 1997. The gain in 1997 is primarily attributed to a $14.0 million
gain related to the Servicing Sale.
Dividends on FHLB stock were $22.5 million for the nine months ended
September 30, 1998, an increase of $4.1 million from the nine months ended
September 30, 1997, representing an increase in the amount of such stock owned
by the Company, as a result of an increase in borrowings under FHLB advances.
There were no material variances between the nine months ended September
30, 1998 and the comparable period in 1997 with respect to management fees and
other noninterest income.
Page 26
<PAGE>
Noninterest Expense. Total noninterest expense was $497.2 million for the
nine months ended September 30, 1998, an increase of $18.5 million from the
nine months ended September 30, 1997. The variance between the two periods is
primarily attributed to $31.9 million in merger and integration costs incurred
in connection with the Golden State Acquisition, and increases of $10.3 million
in compensation, $3.7 million in occupancy and equipment, $1.7 million in
marketing costs, and $1.3 million in other net changes primarily as a result of
the Golden State Acquisition and the Auto One and GSAC Acquisitions, partially
offset by a $29.0 million provision for unreimbursable costs related to the
foreclosure of single-family loans serviced for others (reflected as loan
expense and professional fees) also recorded during the nine months ended
September 30, 1997.
Compensation and employee benefits expense was $200.7 million for the nine
months ended September 30, 1998, an increase of $10.3 million from the nine
months ended September 30, 1997. The increase is primarily attributed to 3,287
additional employees at September 30, 1998 compared to September 30, 1997,
primarily due to additional employees from the Auto One and GSAC Acquisitions,
and the Golden State Acquisition.
Loan expense was $33.9 million for the nine months ended September 30,
1998, a decrease of $18.0 million from the nine months ended September 30,
1997. The decrease is primarily attributed to a $25.0 million provision for
unreimbursable costs related to the foreclosure of single-family loans serviced
for others recorded during the nine months ended September 30, 1997.
Merger and integration costs were $31.9 million for the nine months ended
September 30, 1998, attributed to transition expenses, which include severance,
conversion and consolidation costs, incurred in connection with the Golden
State Acquisition.
There were no material variances between the nine months ended September
30, 1998 and the comparable period in 1997 with respect to occupancy and
equipment, professional fees, data processing and other noninterest expense.
Provision for Income Tax. During the nine months ended September 30, 1998
and 1997, GS Holdings recorded an income tax benefit of $143.1 million and
income tax expense of $35.4 million, respectively. Based on resolutions of
federal income tax audits and favorable future earnings expectations, during
the second quarter of 1998 management changed its judgment about the
realizability of GS Holdings' deferred tax asset and reduced its valuation
allowance by $250 million in addition to the amount used to offset income
during the period. For the nine months ended September 30, 1998 and 1997, GS
Holdings' valuation allowance was reduced by $288.0 million and $73.4 million,
respectively. GS Holdings' effective Federal tax rate was (51)% and 2% during
the nine months ended September 30, 1998 and 1997, respectively, while its
statutory Federal tax rate was 35% during both periods. The difference between
the effective and statutory rates was primarily the result of the reductions in
the deferred tax asset valuation allowance, partially offset by nondeductible
goodwill amortization. GS Holdings' effective state tax rate was 11% and 14%
during the nine months ended September 30, 1998 and 1997, respectively.
Effective July 1, 1998, the Company's marginal tax rate for future periods
increased to 42%.
Minority Interest. Minority interest for the nine months ended September
30, 1998 includes $19.5 million in net premiums and expenses paid in connection
with the Bank Preferred Stock Tender Offers. Dividends on the Bank Preferred
Stock of $37.7 million and $39.6 million were also recorded during the nine
months ended September 30, 1998 and 1997, respectively. Dividends on the REIT
Preferred Stock totalling $34.2 million and $30.5 million were declared and
paid during the nine months ended September 30, 1998 and 1997, respectively.
Minority interest relative to the REIT Preferred Stock is reflected net of the
income tax benefit of $7.7 million and $3.9 million for the nine months ended
September 30, 1998 and 1997, respectively, 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, 1998 also includes a benefit
of $1.7 million representing that portion of Auto One's loss (from February 4,
1998 through September 30, 1998) attributable to the 20% interest in the common
stock of Auto One that was issued as part of the GSAC Acquisition.
Extraordinary Item. During the nine months ended September 30, 1998, the
Company purchased $735.8 million aggregate principal amount of the FN Holdings
Notes in the Debt Tender Offers for an aggregate purchase price, including
accrued interest payable, of $902.5 million. The amount of expenses and tender
premiums paid in connection with such purchase totalled $80.0 million, net of
income taxes, and is reflected as an extraordinary loss on the early
Page 27
<PAGE>
extinguishment of debt on GS Holdings' consolidated statements of income for
the nine months ended September 30, 1998.
Three Months Ended September 30, 1998 versus Three Months Ended
September 30, 1997
The following table sets forth, for the periods and at the dates
indicated, information regarding the Company's consolidated average balance
sheets, together with the total dollar amounts of interest income and interest
expense and the weighted average interest rates for the periods presented.
Average balances are calculated on a daily basis. The information presented
represents the historical activity of the Company.
<TABLE>
<CAPTION>
Three months ended
September 30, 1998
-------------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
(dollars in millions)
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,375 $ 35 10.11%
Mortgage-backed securities available for sale 8,554 116 5.41
Mortgage-backed securities held to maturity 1,713 32 7.60
Loans held for sale, net 1,455 27 7.38
Loans receivable, net 21,361 408 7.67
------- ----- -----
Total interest-earning assets 34,458 618 7.19%
----- -----
Noninterest-earning assets 5,834
-------
Total assets $40,292
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits $17,999 190 4.20%
Securities sold under agreements to repurchase 3,459 49 5.58
Borrowings 12,913 202 6.18
------- ----- -----
Total interest-bearing liabilities 34,371 441 5.09%
----- -----
Noninterest-bearing liabilities 3,575
Minority interest 949
Stockholder's equity 1,397
-------
Total liabilities, minority interest and
stockholder's equity $40,292
=======
Net interest income $177
====
Interest rate spread 2.10%
====
Net interest margin 2.11%
====
Average equity to average assets 3.47%
====
</TABLE>
Page 28
<PAGE>
<TABLE>
<CAPTION>
Three months ended
September 30, 1997
------------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
(dollars in millions)
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,068 $ 17 6.31%
Mortgage-backed securities available for sale 4,970 82 6.59
Mortgage-backed securities held to maturity 1,452 28 7.71
Loans held for sale, net 1,021 18 7.16
Loans receivable, net 19 704 386 7.84
------- ---- ----
Total interest-earning assets 28,215 531 7.53%
---- ----
Noninterest-earning assets 2,721
-------
Total assets $30,936
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits $ 16,806 188 4.44%
Securities sold under agreements to repurchase 2,233 32 5.62
Borrowings (3) 9,137 146 6.32
------- ---- ----
Total interest-bearing liabilities 28,176 366 5.15%
---- ----
Noninterest-bearing liabilities 911
Minority interest 969
Stockholder's equity 880
-------
Total liabilities, minority interest
and stockholder's equity $30,936
=======
Net interest income $165
====
Interest rate spread 2.38%
====
Net interest margin 2.39%
====
Average equity to average assets 2.85%
====
</TABLE>
- ---------
(1) Non-performing assets are included in the average balances for the periods
indicated.
(2) The information presented includes securities held to maturity, securities
available for sale and interest-bearing deposits in other banks.
(3) Interest and average rate include the impact of interest rate swaps.
Page 29
<PAGE>
The following table presents certain information regarding changes in
interest income and interest expense of the Company during the periods
indicated. The dollar amount of interest income and interest expense fluctuates
depending upon changes in the respective interest rates and upon changes in the
respective amounts (volume) of the Company's interest-earning assets and
interest-bearing liabilities. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to (i) changes in volume (changes in average outstanding balances multiplied by
the prior period's rate) and (ii) changes in rate (changes in average interest
rate multiplied by the prior period's volume). Changes attributable to both
volume and rate have been allocated proportionately.
<TABLE>
<CAPTION>
Three months ended September 30, 1998 vs. 1997
Increase (Decrease) Due to
-------------------------------------------------
Volume Rate Net
------ ---- ---
(in millions)
<S> <C> <C> <C>
INTEREST INCOME:
Securities and interest-bearing deposits in
banks $ 6 $ 12 $ 18
Mortgage-backed securities available for sale 46 (12) 34
Mortgage-backed securities held to maturity 4 -- 4
Loans held for sale, net 8 1 9
Loans receivable, net 32 (10) 22
---- ---- ----
Total 96 (9) 87
---- ---- ----
INTEREST EXPENSE:
Deposits 3 (1) 2
Securities sold under agreements to repurchase 17 -- 17
Borrowings 61 (5) 56
---- ---- ----
Total 81 (6) 75
---- ---- ----
Change in net interest income $ 15 $ (3) $ 12
==== ==== ====
</TABLE>
The volume variances in total interest income and total interest expense
for the three months ended September 30, 1998 compared to the corresponding
period in 1997 are largely due to average balance increases of $5.6 billion in
interest-earning assets and $6.0 billion in interest-bearing liabilities
related to the Golden State Acquisition, the net impact of the Refinancing
Transactions and increased purchases of mortgage-backed securities funded with
FHLB advances. The positive total rate variance of $3 million is primarily
attributed to the lower cost of funds on deposits, lower interest rates paid on
new borrowings and the lower costing liabilities assumed in the Golden State
Acquisition, partially offset by comparatively lower market rates on
mortgage-backed securities purchased in 1998 and 1997 and prepayments of higher
rate interest-earning assets.
Interest Income. Total interest income was $618.3 million for the three
months ended September 30, 1998, an increase of $87.0 million from the three
months ended September 30, 1997. Total interest-earning assets for the three
months ended September 30, 1998 averaged $34.5 billion, compared to $28.2
billion for the corresponding period in 1997. The yield on total
interest-earning assets during the three months ended September 30, 1998
decreased to 7.19% compared to 7.53% for the three months ended September 30,
1997, primarily due to lower market rates on new mortgage-backed securities
purchased in 1998 and 1997, prepayments of higher rate interest-earning assets
and the addition of assets from the Golden State Acquisition generally having
lower yields.
GS Holdings earned $408.5 million of interest income on loans receivable
for the three months ended September 30, 1998, an increase of $22.1 million
from the three months ended September 30, 1997. The average balance of loans
receivable increased to $21.4 billion during the three months ended September
30, 1998 from $19.7 billion for the three months ended September 30, 1997. The
weighted average yield on loans receivable decreased to 7.67% for the three
months ended September 30, 1998 from 7.84% for the same period in 1997. The
increase in the average volume is mainly due to the addition of $14.5 billion
in loans related to the Golden State Acquisition.
GS Holdings earned $26.8 million of interest income on loans held for
sale for the three months ended September 30, 1998, an increase of $8.6 million
from the three months ended September 30, 1997. The average balance of loans
held for sale was $1.5 billion for the three months ended September 30, 1998,
an increase of $434 million from the same period in 1997, primarily due to
increased originations and longer holding periods before sale for jumbo loans
during the three months ended September 30, 1998. The weighted average rate on
loans held for sale increased to 7.38% for the three months ended September 30,
1998 from 7.16% for the three months ended September 30, 1997, primarily due
Page 30
<PAGE>
to the higher percentage of comparatively higher fixed-rate held for sale
portfolio in 1998 compared to 1997.
Interest income on mortgage-backed securities available for sale was
$115.6 million for the three months ended September 30, 1998, an increase of
$33.8 million from the three months ended September 30, 1997. The average
portfolio balance increased $3.6 billion, to $8.6 billion, during the three
months ended September 30, 1998 compared to the same period in 1997. The
weighted average yield on these assets decreased from 6.59% for the three
months ended September 30, 1997 to 5.41% for the three months ended September
30, 1998. The increase in the volume and decrease in the weighted average yield
is primarily due to the additions of $2.3 billion of mortgage-backed securities
acquired in the Golden State Acquisition, purchases of $3.9 billion lower rate
mortgage-backed securities during the three months ended September 30, 1998 and
$316.8 million during the last three months of 1997, as well as prepayments of
higher rate mortgage-backed securities since September 30, 1997. Additionally,
the Company recorded a $19.8 million writedown to the carrying value of
mortgage-backed securities determined to have an other than temporary
impairment.
Interest income on mortgage-backed securities held to maturity was $32.6
million for the three months ended September 30, 1998, an increase of $4.6
million from the three months ended September 30, 1997. The average portfolio
balance increased $262 million, to $1.7 billion, during the three months ended
September 30, 1998 compared to the same period in 1997. The weighted average
yield on these assets decreased from 7.71% for the three months ended September
30, 1997 to 7.60% for the three months ended September 30, 1998. The increase
in the volume is due to the addition of $1.9 billion of FNMA securitized
multi-family loans with a weighted average rate of 7.39% during September 1998.
The decrease in the weighted average yield is primarily due to downward rate
adjustments of adjustable-rate mortgage-backed securities.
Interest income on securities and interest-bearing deposits in banks was
$34.8 million for the three months ended September 30, 1998, an increase of
$17.9 million from the three months ended September 30, 1997. The average
portfolio balance increased $306 million, to $1.4 billion, during the three
months ended September 30, 1998 compared to the same period in 1997. The
weighted average yield on these assets increased from 6.31% for the three
months ended September 30, 1997 to 10.11% for the three months ended September
30, 1998. The increase in the weighted average yield is primarily due to $19.8
million in interest income received on a $193.0 million federal income tax
refund related to Old California Federal.
Interest Expense. Total interest expense was $440.9 million for the three
months ended September 30, 1998, an increase of $75.1 million from the three
months ended September 30, 1997. The increase is primarily the result of
increased borrowings under FHLB advances, the additional deposits and
borrowings assumed in the Golden State Acquisition and the issuance of the GS
Escrow Notes.
Interest expense on customer deposits, including Brokered Deposits, was
$190.5 million for the three months ended September 30, 1998, an increase of
$2.4 million from the three months ended September 30, 1997. The average
balance of customer deposits outstanding increased from $16.8 billion to $18.0
billion for the three months ended September 30, 1997 and 1998, respectively.
The increase in the average balance is primarily due to $11.3 billion in
deposits assumed in the Golden State Acquisition, partially offset by net
deposit run-off, anticipated following the Cal Fed Acquisition, and $1.4
billion in deposits sold in the Florida Branch Sale. The overall weighted
average cost of deposits decreased to 4.20% for the three months ended
September 30, 1998 from 4.44% for the three months ended September 30, 1997,
primarily due to higher average balances of lower rate custodial transaction
accounts and additions of lower-rate deposits acquired from Glendale Federal.
Interest expense on securities sold under agreements to repurchase
totalled $49.3 million for the three months ended September 30, 1998, an
increase of $17.3 million from the three months ended September 30, 1997. The
average balance of such borrowings for the three months ended September 30,
1998 and 1997 was $3.5 billion and $2.2 billion, respectively. The weighted
average interest rate on these instruments decreased to 5.58% during the three
months ended September 30, 1998 from 5.62% for the three months ended September
30, 1997, primarily due to a decrease in rates on new borrowings compared to
such borrowings during 1997.
Interest expense on borrowings totalled $201.1 million for the three
months ended September 30, 1998, an increase of $55.4 million from the three
months ended September 30, 1997. The average balance outstanding for the three
months ended September 30, 1998 and 1997 was $12.9 billion and $9.1 billion,
respectively. The weighted average interest rate on these instruments decreased
to 6.18% during the three months ended September 30, 1998 from 6.32% for the
three months ended September 30, 1997. The changes are attributed to the
Refinancing Transactions, additional FHLB
Page 31
<PAGE>
advances used to fund the purchases of mortgage-backed securities and the
Florida Branch Sale, as well as an additional $5.4 billion in advances assumed
in the Golden State Acquisition with a weighted average rate of 5.64%.
Net Interest Income. Net interest income was $177.4 million for the three
months ended September 30, 1998, an increase of $12.0 million from the three
months ended September 30, 1997. The interest rate spread decreased to 2.10%
for the three months ended September 30, 1998 from 2.38% for the three months
ended September 30, 1997, primarily as a result of prepayments of higher
interest-earning assets being replaced with interest-earning assets having
comparatively lower yields, reflecting the flattening of the yield curve during
the second half of 1997 and year to date in 1998.
Noninterest Income. Total noninterest income, consisting primarily of loan
servicing fees, customer banking fees, gains on sales of loans and assets, gain
on sale of branches, and dividends on FHLB stock, was $199.3 million for the
three months ended September 30, 1998, an increase of $104.5 million from the
three months ended September 30, 1997. Income for the three months ended
September 30, 1998 includes a $108.9 million gain from the Florida Branch Sale.
Income for the three months ended September 30, 1997 includes a $14.0 million
gain from the Servicing Sale.
Loan servicing fees, net of amortization of mortgage servicing rights,
were $34.7 million for the three months ended September 30, 1998, compared to
$34.5 million for the three months ended September 30, 1997. The single-family
residential loan servicing portfolio, excluding loans serviced for the Bank,
increased from $49.8 billion at September 30, 1997 to $69.3 billion at
September 30, 1998. During the three months ended September 30, 1998,
California Federal sold $1.8 billion in single-family mortgage loans originated
for sale as part of its ongoing mortgage banking operations compared to $1.2
billion of such sales for the corresponding period in 1997.
Gain on sale of branches was $108.9 million for the three months ended
September 30, 1998, attributed to the Florida Branch Sale.
Gain on sale of loans was $13.9 million for the three months ended
September 30, 1998, compared to $4.8 million for the three months ended
September 30, 1997. The increase is primarily attributed to early payoffs of
commercial loans with unamortized discounts ($1.0 million) and $8.1 million in
additional gains from residential loan sales during the third quarter of 1998.
Gain on sale of assets was $.4 million for the three months ended
September 30, 1998, compared to a gain of $15.1 million for the three months
ended September 30, 1997. The gain in 1997 is primarily attributed to a $14.0
million gain related to the Servicing Sale.
Dividends on FHLB stock were $7.9 million for the three months ended
September 30, 1998, an increase of $1.5 million from the three months ended
September 30, 1997, representing an increase in the volume of such stock owned
by the Company, as a result of an increase in borrowings under FHLB advances.
There were no material variances between the three months ended September
30, 1998 and the comparable period in 1997 with respect to customer banking
fees, management fees and other noninterest income.
Noninterest Expense. Total noninterest expense was $195.5 million for the
three months ended September 30, 1998, an increase of $41.3 million from the
three months ended September 30, 1997. The variance between the two periods is
primarily attributed to $31.1 million in merger and integration costs incurred
in connection with the Golden State Acquisition and $13.6 million in additional
operating expenses related to the Golden State Acquisition, partially offset by
the impact of the Florida Branch Sale.
Compensation and employee benefits expense was $73.1 million for the three
months ended September 30, 1998, an increase of $10.2 million from the three
months ended September 30, 1997. The increase in expense is primarily
attributed to 3,287 additional employees at September 30, 1998 compared to
September 30, 1997, primarily attributed to additional employees from the Auto
One and GSAC Acquisitions, and the Golden State Acquisition.
Loan expense was $10.4 million for the three months ended September 30,
1998, a decrease of $7.5 million from the three months ended September 30,
1997. The decrease is primarily attributed to an $8.9 million provision for
unreimbursable costs related to the foreclosure of single-family loans serviced
for recorded during the three months ended September 30, 1997.
Page 32
<PAGE>
Merger and integration costs were $31.1 million for the three months ended
September 30, 1998, attributed to transition expenses, which include severance,
conversion and consolidation costs incurred in connection with the Golden State
Acquisition.
There were no material variances between the three months ended September
30, 1998 and the comparable period in 1997 with respect to occupancy and
equipment, professional fees, data processing and other noninterest expense.
Provision for Income Tax. During the three months ended September 30, 1998
and 1997, GS Holdings recorded income tax expense of $78.0 million and $13.5
million, respectively. For the quarter ended September 30, 1997, GS Holdings'
valuation allowance was reduced by $28.5 million. GS Holdings' effective
Federal tax rates were 38% and 2% during the three months ended September 30,
1998 and 1997, respectively, while its statutory Federal tax rate was 35%
during both periods. The difference between the effective and statutory rates
was primarily the result of 1997 reductions in the deferred tax asset valuation
allowance and nondeductible goodwill amortization. GS Holdings' effective state
tax rate was 8% and 14% during the three months ended September 30, 1998 and
1997, respectively. Effective July 1, 1998, the Company's marginal tax rate for
future periods increased to 42%.
Minority Interest. Minority interest for the three months ended September
30, 1998 includes $19.5 million in net premiums and expenses related to the
Bank Preferred Stock Tender Offers. Dividends on the Bank Preferred Stock of
$11.2 million and $13.2 million were also recorded during the three months
ended September 30, 1998 and 1997, respectively. Dividends on the REIT
Preferred Stock totalling $11.4 million were declared and paid during each of
the three months ended September 30, 1998 and 1997. Minority interest relative
to the REIT Preferred Stock is reflected net of the income tax benefit of $4.8
million and $1.5 million, respectively, which will inure to the Company as a
result of the deductibility of such dividends for income tax purposes. Minority
interest for the three months ended September 30, 1998 also includes a benefit
of $1.0 million representing that portion of Auto One's loss attributable to
the 20% interest in the common stock of Auto One that was issued as part of the
GSAC Acquisition.
Extraordinary Item. During the three months ended September 30, 1998, the
Company purchased $735.8 million aggregate principal amount of the FN Holdings
Notes in the Debt Tender Offers for an aggregate purchase price, including
accrued interest payable, of $902.5 million. The amount of expenses and tender
premiums paid in connection with such purchase totalled $80.0 million, net of
income taxes, and is reflected as an extraordinary loss on the early
extinguishment of debt on GS Holdings' consolidated statements of income for
the three months ended September 30, 1998.
PROVISION FOR LOAN LOSSES
The adequacy of the allowance for loan losses is periodically evaluated by
management in order to maintain the allowance at a level that is sufficient to
absorb expected loan losses. The Company charges current earnings with a
provision for estimated credit losses on loans receivable. The provision
considers both specifically identified problem loans as well as credit risks
not specifically identified in the loan portfolio. The Company established
provisions for loan losses of $30.0 million and $59.9 million during the nine
months ended September 30, 1998 and 1997, respectively. The decrease in the
provision for loan losses during the nine months ended September 30, 1998
compared to the same period in 1997 is the result of management's evaluation of
the adequacy of the allowance based on, among other things, past loan loss
experience and known and inherent risks in the portfolio, evidenced in part by
the continued decline in the Company's level of non-performing assets. In
addition, management's periodic evaluation of the adequacy of the allowance for
loan losses considers potential adverse situations that have occurred but are
not yet known, the estimated value of underlying collateral, and economic
conditions. The allowance for loan losses is increased by provisions for loan
losses and allowances on acquired loans, while it is decreased by charge-offs
(net of recoveries).
Page 33
<PAGE>
Activity in the allowance for loan losses during the nine months ended
September 30, 1998 and 1997 is as follows (in thousands):
1998 1997
---- ----
Balance - January 1 $418,674 $246,556
Purchase - Cal Fed Acquisition -- 143,820
Purchase - Golden State Acquisition 169,454 --
Allowance on acquired loans -- 1,596
Provision for loan losses 30,000 59,850
Charge-offs (37,832) (43,283)
Recoveries 2,486 2,028
-------- --------
Balance - September 30 $582,782 $410,567
======== ========
Although management believes that the allowance for loan losses is
adequate for its current portfolios, it will continue to review its loan
portfolio to determine the extent to which any changes in economic conditions
or loss experience may require additional provisions in the future.
ASSET AND LIABILITY MANAGEMENT
Banks and savings associations are subject to interest rate risk to the
degree that their interest-bearing liabilities, consisting principally of
deposits, securities sold under agreements to repurchase and FHLB advances,
mature or reprice more or less frequently, or on a different basis, than their
interest-earning assets. The process of planning and controlling asset and
liability mixes, volumes and maturities to influence the net interest spread is
referred to as asset and liability management. The objective of the Company's
asset and liability management is to maximize its net interest income over
changing interest rate cycles within the constraints imposed by prudent lending
and investing practices, liquidity needs and capital planning.
GS Holdings, through the Bank, actively pursues investment and funding
strategies intended to minimize the sensitivity of its earnings to interest
rate fluctuations while maintaining the flexibility required to execute its
business strategies. The Company measures the interest rate sensitivity of the
balance sheet through gap and duration analysis, as well as net interest income
and market value simulation, and, after taking into consideration both the
variability of rates and the maturities of various instruments, evaluates
strategies which may reduce the sensitivity of its earnings to interest rate
and market value fluctuations. An important decision is the selection of
interest-bearing liabilities and the generation of interest-earning assets
which best match relative to interest rate changes. In order to reduce interest
rate risk by increasing the percentage of interest sensitive assets, the
Company has continued its emphasis on the origination of adjustable rate
mortgage ("ARM") products for its portfolio. The Company seeks to purchase
assets or originate real estate loans that reprice frequently or mature within
a relatively short period of time. At September 30, 1998, approximately 79% of
the Company's real estate loan portfolio consisted of ARMs.
Most ARMs are subject to periodic interest rate adjustment caps or floors.
In a period of rising interest rates, ARMs could reach a periodic adjustment
cap while still at a rate significantly below their contractual margin over
existing market rates. Since repricing liabilities are typically not subject to
such interest rate adjustment constraints, the Company's net interest margin
would most likely be negatively impacted in this situation. Certain ARMs
currently offered by the Company have a fixed monthly payment for a given
period, with any changes as a result of market interest rates reflected in the
unpaid principal balance through negative amortization. Alternatively, in a
period of declining interest rates, ARMs could reach a periodic adjustment
floor while still at a rate significantly higher than their contractual margin
over existing market rates, resulting in a positive impact to the Company's net
interest margin.
One of the most important sources of a financial institution's net income
is net interest income, which is the difference between the combined interest
earned on interest-earning assets and the combined interest paid on
interest-bearing liabilities. Net interest income is also dependent on the
relative balances of interest-earning assets and interest-bearing liabilities.
A traditional measure of interest rate risk within the savings industry is
the interest rate sensitivity gap, which is the sum of all interest-earning
assets minus the sum of all interest-bearing liabilities to be repriced within
given periods. A
Page 34
<PAGE>
gap is considered positive when the interest rate sensitive assets exceed
interest rate sensitive liabilities, while the opposite results in a negative
gap. During a period of rising interest rates, a negative gap would tend to
adversely affect net interest income, and a positive gap would tend to result
in an increase in net interest income, while the opposite would tend to occur
in a period of falling rates.
Page 35
<PAGE>
The following table sets forth the projected maturities based upon
contractual maturities as adjusted for projected prepayments and "repricing
mechanisms" (provisions for changes in the interest rates), as of September 30,
1998. Prepayment rates are assumed in each period on substantially all of the
Company's loan portfolio based upon expected loan prepayments. Repricing
mechanisms on the Company's assets are subject to limitations such as caps on
the amount that interest rates and payments on its loans may adjust and,
accordingly, such assets may not respond in the same manner or to the same
extent to changes in interest rates as the Company's liabilities. In addition,
the interest rate sensitivity of the Company's assets and liabilities
illustrated in the table would vary substantially if different assumptions were
used or if actual experience differed from the assumptions set forth. The
Company's estimated interest rate sensitivity gap at September 30, 1998 is as
follows:
<TABLE>
<CAPTION>
Maturity/Rate Sensitivity
---------------------------------------------------------------
Within 1-5 Over 5 Non-interest
1 Year Years Years Bearing Total
------ ----- ----- ------- -----
(dollars in millions)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Securities held to maturity, interest-bearing
deposits in other banks and short-term
investment securities(1)(2) $ 636 $ -- $ 252 $ -- $ 888
Securities available for sale (3) 584 -- -- -- 584
Mortgage-backed securities
available for sale (3) 11,502 -- -- -- 11,502
Mortgage-backed securities
held to maturity (1)(4) 2,919 28 1 -- 2,948
Loans held for sale, net (3)(5) 1,464 -- -- -- 1,464
Loans receivable, net (1)(6) 21,491 7,410 2,235 -- 31,136
Investment in FHLB 787 -- -- 787
------- ------ ------ ------ -------
--
Total interest-earning assets 39,383 7,438 2,488 -- 49,309
Non-interest-earning assets -- -- -- 3,693 3,693
------- ------ ------ ------ -------
$39,383 $7,438 $2,488 $3,693 $53,002
======= ====== ====== ====== =======
INTEREST-BEARING LIABILITIES:
Deposits (7) $23,047 $2,295 $ -- $ -- $25,342
Securities sold under agreements to
repurchase (1) 3,757 -- -- -- 3,757
FHLB advances (1) 9,141 4,307 3,899 -- 17,347
Other borrowings (1) 56 7 2,311 2,374
------- ------ ------ ------ -------
--
Total interest-bearing liabilities 36,001 6,609 6,210 -- 48,820
Non-interest-bearing liabilities -- -- -- 1,140 1,140
Minority interest -- -- -- 776 776
Stockholder's equity -- -- 2,266 2,266
------- ------ ------ ------ -------
--
$36,001 $6,609 $6,210 $4,182 $53,002
======= ====== ====== ====== =======
Gap $3,382 $829 $(3,722) $489
====== ==== ======= ====
Cumulative gap $3,382 $4,211 $489 $489
====== ====== ==== ====
Gap as a percentage of total assets 6.4% 1.5% (7.0)% 0.9%
=== === === ===
Cumulative gap as a percentage of total assets 6.4% 7.9% 0.9% 0.9%
=== === === ===
</TABLE>
Page 36
<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, 1998.
The actual maturity and rate sensitivity of these assets could vary
substantially if future prepayments differ from the Company's prepayment
estimates.
(2) Consists of $252 million of securities held to maturity, $44 million of
interest-bearing deposits in other banks and $592 million of short-term
investment securities.
(3) As loans held for sale and securities and mortgage-backed securities
available for sale may be sold within one year, they are considered to be
maturing within one year.
(4) Excludes underlying non-performing loans of $2 million.
(5) Excludes non-performing loans of $16 million.
(6) Excludes allowance for loan losses of $583 million and non-performing
loans of $210 million.
(7) Fixed rate deposits and deposits with a fixed pricing interval are
reflected as maturing in the year of contractual maturity or first
repricing date. Money market deposit accounts, demand deposit accounts and
passbook accounts are reflected as maturing within one year.
At September 30, 1998, interest-earning assets of the Company exceeded
interest-bearing liabilities by approximately $489 million. At December 31,
1997, interest-earning assets of the Company exceeded interest-bearing
liabilities by approximately $154 million.
The maturity/rate sensitivity analysis is a static view of the balance
sheet with assets and liabilities grouped into certain defined time periods,
and thus only partially depicts the dynamics of the Company's sensitivity to
interest rate changes. Since it is measured at a single point in time, this
analysis may not fully describe the complexity of relationships between product
features and pricing, market rates and future management of the balance sheet
mix. The Company utilizes computer modeling, under various interest rate
scenarios, to provide a dynamic view of the effects of the changes in rates,
spreads, and yield curve shifts on net interest income.
The Company's risk management policies are established by the
Asset/Liability Management Committee ("ALCO") of the Bank. ALCO meets monthly
to formulate the Bank's investment and risk management strategies. The basic
responsibilities of ALCO include management of net interest income and market
value of portfolio equity, management of liquidity to provide adequate funding,
and the establishment of asset product priorities by formulating performance
evaluation criteria, risk evaluation techniques and a system to standardize the
analysis and reporting of originations, competitive trends, profitability and
risk. On a quarterly basis, the Board of Directors of the Bank is apprised of
ALCO strategies adopted and their impact on operations, and, at least annually,
the Board of Directors of the Bank reviews the Bank's interest rate risk
management policy statements.
LIQUIDITY
The standard measure of liquidity in the savings industry is the ratio of
cash and short-term U. S. government securities and other specified securities
to deposits and borrowings due within one year. Effective November 24, 1997,
the OTS established a minimum liquidity requirement for the Bank of 4.00%, a
reduction from 5.00%, which had been in effect prior to that date in 1997.
California Federal has been in compliance with the liquidity regulations during
1998 and 1997.
A major source of the Company's funding is expected to be the Bank's
retail deposit branch network, which management believes will be sufficient to
meet its long-term liquidity needs. The ability of the Company to retain and
attract new deposits is dependent upon the variety and effectiveness of its
customer account products, customer service and convenience, and rates paid to
customers. The Company also obtains funds from the repayment and maturities of
loans and mortgage-backed securities, while additional funds can be obtained
from a variety of other sources including Brokered Deposits, loan sales,
securities sold under agreements to repurchase, FHLB advances, and other
secured and unsecured borrowings. It is anticipated that FHLB advances and
securities sold under agreements to repurchase will continue to be important
sources of funding, and management expects there to be adequate collateral for
such funding requirements.
Page 37
<PAGE>
The Company's primary uses of funds are the origination or purchase of
loans, the purchase of mortgage-backed securities, the funding of maturing
certificates of deposit, demand deposit withdrawals, the repayment of
borrowings, and the payment of dividends with respect to the REIT Preferred
Stock and the Bank Preferred Stock. Certificates of deposit scheduled to mature
during the twelve months ending September 30, 1999 aggregate $12.1 billion. The
Company may renew these certificates, attract new replacement deposits, replace
such funds with other borrowings, or it may elect to reduce the size of the
balance sheet. In addition, at September 30, 1998, GS Holdings had securities
sold under agreements to repurchase, FHLB advances and other borrowings
aggregating $13.0 billion maturing within twelve months. The Company may elect
to pay off such debt or to replace such borrowings with additional FHLB
advances or other borrowings at prevailing rates.
Interest on the GS Escrow Notes approximates $140.9 million per year.
Although GS Holdings expects that distributions from the Bank will be
sufficient to pay interest when due and the principal amount of its long-term
debt at maturity, there can be no assurance that earnings from the Bank will be
sufficient to make such distributions to GS Holdings. In addition, there can be
no assurance that such distributions will be permitted by the terms of any debt
instruments of GS Holdings' subsidiaries then in effect, by the terms of any
class of Preferred Stock issued by the Bank or its subsidiaries, including the
REIT Preferred Stock and the Bank Preferred Stock, or under applicable federal
thrift laws.
Since September 30, 1998, $178.7 million of the FN Holdings Notes have
been purchased in connection with the Debt Tender Offers, with related
premiums, fees and other expenses totalling $18.2 million on an after-tax
basis. At November 4, 1998, only $0.2 million of the FN Holdings 12-1/4% Notes
and $0.3 million of the FN Holdings 10-5/8% Notes remain outstanding. In
addition, $51 million of the 10-5/8% Preferred Stock of the Bank was purchased
by GS Holdings to date in the fourth quarter of 1998, with related expenses and
premiums of $4.8 million. Further, the Parent Holdings Defeasance was completed
on October 14, 1998. The Parent Holdings Defeasance will have no effect on the
financial condition or results of operations of GS Holdings.
The Company anticipates that cash and cash equivalents on hand, the cash
flow from assets as well as other sources of funds will provide adequate
liquidity for its operating, investing and financing needs and the Bank's
regulatory liquidity requirements for the foreseeable future. In addition to
cash and cash equivalents of $1.2 billion at September 30, 1998, the Company
has substantial additional borrowing capacity with the FHLB and other sources.
As presented in the accompanying unaudited consolidated statements of cash
flows, the sources of liquidity vary between periods. The primary sources of
funds during the nine months ended September 30, 1998 were net loan repayments
of $1.4 billion, proceeds from sales of loans held for sale of $6.4 billion,
$17.1 billion in additional borrowings, $2.0 billion from the GS Escrow Merger,
a $1.5 billion net increase in securities sold under agreements to repurchase
and $3.0 billion in proceeds from principal payments and maturities of
securities and mortgage-backed securities available for sale and held to
maturity. The primary uses of funds were $14.8 billion in principal payments on
borrowings, $6.1 billion in purchases of securities and mortgage-backed
securities available for sale, $6.4 billion in originations of loans, $735.1
million from a net decrease in deposits, $227.3 million and $879.9 million for
the Bank Preferred Stock and Debt Tender Offers, respectively, and $193.4
million in dividend payments.
PROBLEM AND POTENTIAL PROBLEM ASSETS
The Company considers a loan to be impaired when, based upon current
information and events, it believes it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. Any insignificant delay (i.e., 60 days or less) or
insignificant shortfall in amount of payments will not cause a loan to be
considered impaired. In determining impairment, the Company considers large
non-homogeneous loans including non-performing loans, troubled debt
restructurings, and performing loans which exhibit, among other
characteristics, high LTV ratios, low debt-coverage ratios or other indications
that the borrowers are experiencing increased levels of financial difficulty.
The Company bases the measurement of collateral-dependent impaired loans on the
fair value of the loan's collateral. The amount, if any, by which the recorded
investment of the loan exceeds the measure of the impaired loan's value is
recognized by recording a valuation allowance.
At September 30, 1998, the carrying value of loans that were considered to
be impaired totalled $163.5 million (of which $28.6 million were on
non-performing status). The average recorded investment in impaired loans
during the nine months ended September 30, 1998 was approximately $165.3
million. For the nine months ended September 30, 1998,
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<PAGE>
GS Holdings recognized interest income on those impaired loans of $6.1 million,
which included $1.2 million of interest income recognized using the cash basis
method of income recognition.
The following table presents the amounts, net of specific allowances for
loan losses and purchase accounting adjustments, of the Company's
non-performing loans, foreclosed real estate, repossessed assets, troubled debt
restructurings and impaired loans as of the dates indicated. These categories
are not mutually exclusive; certain loans are included in more than one
classification.
<TABLE>
<CAPTION>
September 30, 1998
--------------------------------------------------
Non-performing Impaired Restructured
-------------- -------- ------------
(in millions)
<S> <C> <C> <C>
Real Estate:
1-4 unit residential $190 $ -- $ 4
5+ unit residential 19 77 11
Commercial and other 9 80 21
Construction 1 1 --
---- ---- ---
Total real estate 219 158 36
Non-real estate 9 5 --
---- ---- ---
Total loans, net 228 $163 (b) $36 (c)
==== ===
Foreclosed real estate, net 92
Repossessed assets 3
----
Total non-performing assets $323 (a)
====
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------
Non-performing Impaired Restructured
-------------- -------- ------------
(in millions)
<S> <C> <C> <C>
Real Estate:
1-4 unit residential $165 $ -- $ 2
5+ unit residential 12 43 43
Commercial and other 6 67 26
Construction 2 -- --
---- ---- ---
Total real estate 185 110 71
Non-real estate 7 -- --
---- ---- ---
Total loans 192 $110 (b) $71 (c)
==== ===
Foreclosed real estate, net 77
Repossessed assets 3
----
Total non-performing assets $272 (a)
====
</TABLE>
---------
(a) Includes loans securitized with recourse on non-performing status of
$2.3 million and $5.2 million at September 30, 1998 and December 31,
1997, respectively, and loans held for sale on non-performing status
of $16.1 million and $1.2 million at September 30, 1998 and December
31, 1997.
(b) Includes $28.6 million and $18.6 million of loans on non-performing
status at September 30, 1998 and December 31, 1997, respectively. Also
includes $38.3 million and $17.5 million of loans classified as
troubled debt restructurings at September 30, 1998 and December 31,
1997, respectively.
(c) Includes non-performing loans of $0.7 million and $2.1 million at
September 30, 1998 and December 31, 1997, respectively. At December
31, 1997, $1.7 million of these non-performing troubled debt
restructurings were also considered impaired.
There were no accruing loans contractually past due 90 days or more at
September 30, 1998 or December 31, 1997.
GS Holdings' non-performing assets, consisting of non-performing loans,
net of purchase accounting adjustments, foreclosed real estate, net, and
repossessed assets, increased to $323 million at September 30, 1998, from $272
million at December 31, 1997, primarily as a result of assets acquired in the
Golden State Acquisition. However, non-performing assets as a percentage of the
Bank's total assets decreased to 0.62% at September 30, 1998, from 0.87% at
December 31, 1997.
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<PAGE>
GS Holdings, through the Bank, manages its credit risk by regularly
assessing the current and estimated future performance of the real estate
markets in which it operates. The Company has three distinct asset management
functions: performing loan asset management, problem loan asset management and
credit review. These three functions are charged with the responsibility of
reducing the risk profile within the residential, commercial and multi-family
asset portfolios by applying asset management and risk evaluation techniques
that are consistent with the Company's portfolio management strategy and
regulatory requirements. In addition to these asset management functions, the
Company has a specialized credit risk management group that is charged with the
development of credit policies and performing credit risk analyses for all
asset portfolios.
The following table presents non-performing real estate assets by
geographic region of the country as of September 30, 1998:
<TABLE>
<CAPTION>
Total
Non-performing Foreclosed Non-performing
Real Estate Real Estate, Real Estate Geographic
Loans, Net (2) Net (2) Assets Concentration
-------------- -------- ------ -------------
(dollars in millions)
<S> <C> <C> <C> <C>
Region:
California $142 $63 $205 65.96%
Northeast (1) 27 9 36 11.42
Other regions 50 20 70 22.62
---- --- ---- ------
Total $219 $92 $311 100.00%
==== === ==== ======
</TABLE>
---------
(1) Includes Connecticut, Delaware, Maine, Maryland, Massachusetts, New
Hampshire, New Jersey, New York, Pennsylvania, Rhode Island and
Vermont.
(2) Net of purchase accounting adjustments and specific allowances for
losses.
At September 30, 1998, the Company's largest non-performing asset was
approximately $5.1 million, and it had four non-performing assets over $2
million in size with balances averaging approximately $3.4 million. The Company
has 1,815 non-performing assets below $2 million in size, including 1,677
non-performing 1-4 unit residential assets.
A summary of the activity in the allowance for loan losses by loan type is
as follows for the nine months ended September 30, 1998:
<TABLE>
<CAPTION>
5+ Unit
Residential
1-4 Unit and Commercial Consumer
Residential Real Estate and Other Total
----------- ----------- --------- -----
(dollars in millions)
<S> <C> <C> <C> <C>
Balance - December 31, 1997 $202 $198 $19 $419
Purchase - Golden State Acquisition 50 78 41 169
Provision for loan losses 19 7 4 30
Charge-offs (25) (7) (6) (38)
Recoveries 2 -- 1 3
---- ---- --- ----
Balance - September 30, 1998 $248 $276 $59 $583
==== ==== === ====
</TABLE>
The ratio of allowance for loan losses to non-performing loans at
September 30, 1998 and December 31, 1997 was 255.7% and 217.8%, respectively.
Page 40
<PAGE>
MORTGAGE BANKING OPERATIONS
Since 1994, the Bank, through its wholly owned mortgage bank subsidiary,
First Nationwide Mortgage Corporation ("FNMC"), has significantly expanded its
mortgage banking operations. During January 1998, FNMC acquired
mortgage-servicing assets of $3.6 billion, as a result of bulk servicing
acquisitions. With the consummation of the bulk servicing acquisitions, the
acquisition of additional 1-4 unit residential loan servicing portfolios in the
Golden State Acquisition and the originated servicing, the 1-4 unit residential
loans serviced for others totalled $69.3 billion at September 30, 1998, an
increase of $21.8 billion and $21.9 billion from December 31, 1997 and
September 30, 1997, respectively. During the nine months ended September 30,
1998, the Bank, through FNMC, originated $6.4 billion and sold (with servicing
retained) $6.3 billion of 1-4 unit residential loans. Gross revenues from
mortgage loan servicing activities for the nine months ended September 30, 1998
totalled $192.8 million, an increase of $7.7 million from the nine months ended
September 30, 1997.
A decline in long-term interest rates generally results in an acceleration
of mortgage loan prepayments. Higher than anticipated levels of prepayments
generally cause the accelerated amortization of mortgage servicing rights
("MSRs"), and generally will result in a reduction in the market value of MSRs
and in the Company's servicing fee income. To reduce the sensitivity of its
earnings to interest rate and market value fluctuations, the Company hedged the
change in value of its MSRs based on changes in interest rates ("MSR Hedge").
At September 30, 1998, FNMC was a party to several interest rate floor
contracts maturing from August 2001 through January 2003. The Company paid
counterparties a premium in exchange for cash payments in the event that the
10-year Constant Maturity Treasury rate falls below negotiated prices. At
September 30, 1998, the notional amount of the interest rate floors was $1.3
billion and the strike prices were between 5.5% and 6.5%. In addition, FNMC was
a party to swap agreements related to principal-only mortgage-backed securities
and prepayment-linked swap agreements with a remaining notional amount of
$110.7 million and $818.2 million, respectively. At September 30, 1998, the
Company was also a party to options on swap agreements ("swaptions") with a
notional amount of $300.0 million. The estimated market values of interest rate
floor contracts, swaps and swaptions designated as hedges against MSRs at
September 30, 1998 were $52.0 million, $24.0 million and $12.7 million,
respectively.
The following is a summary of activity in MSRs and the MSR Hedge for the
nine months ended September 30, 1998 (in thousands):
<TABLE>
<CAPTION>
MSR Total MSR
MSRs Hedge Balance
---- ----- -------
<S> <C> <C> <C>
Balance at December 31, 1997 $531,269 $ 5,434 $536,703
Additions - Glendale Federal 214,085 -- 214,085
Additions - bulk purchases 57,136 -- 57,136
Originated servicing 138,503 -- 138,503
Additions - other 40,338 -- 40,338
Additions to MSR Hedge -- 19,999 19,999
Sale of servicing rights (1,057 -- (1,057)
Payments received under interest rate floor contracts -- (6,296) (6,296)
Net payments made under principal-only agreements -- (19,809) (19,809)
Net payments made under futures contracts -- 1,654 1,654
Amortization (88,376) (3,627) (92,003)
-------- -------- --------
Balance at September 30, 1998 $891,898 $ (2,645) $889,253
======== ======== ========
</TABLE>
Capitalized mortgage servicing rights are amortized in proportion to, and
over the period of, estimated future net servicing income. SFAS No. 125
requires enterprises to measure the impairment of servicing rights based on the
difference between the carrying amount of the servicing rights and their
current fair value. At September 30, 1998 and December 31, 1997, no allowance
for impairment of the mortgage servicing rights was necessary.
Page 41
<PAGE>
CAPITAL RESOURCES
OTS capital regulations require savings associations to satisfy three
minimum capital requirements: tangible capital, core (leverage) capital and
risk-based capital. In general, an association's tangible capital, which must
be at least 1.5% of adjusted total assets, is the sum of common stockholders'
equity (including retained earnings), noncumulative perpetual preferred stock
and minority interest in equity accounts of fully consolidated subsidiaries,
less disallowed intangibles. An association's ratio of core capital to adjusted
total assets (the "core capital ratio") must be at least 4%, recently amended
from 3% which had been in effect prior to March 1998. Core capital generally is
the sum of tangible capital plus certain qualifying intangibles. Under the
risk-based capital requirement, a savings association must have total capital
(core capital plus supplementary capital) equal to at least 8% of risk-weighted
assets (which equals assets plus the credit risk equivalent of certain
off-balance sheet items, each multiplied by the appropriate risk weight).
Supplementary capital, which may not exceed 100% of core capital for purposes
of the risk-based requirements, includes, among other things, certain permanent
capital instruments such as qualifying cumulative perpetual preferred stock, as
well as some forms of term capital instruments, such as qualifying subordinated
debt. The capital requirements are viewed as minimum standards by the OTS, and
most associations are expected to maintain capital levels well above the
minimum. In addition, the OTS regulations provide that minimum capital levels
higher than those provided in the regulations may be established by the OTS for
individual savings associations, depending upon their particular circumstances.
The Bank is not subject to any such individual minimum regulatory capital
requirement. These capital requirements are applicable to the Bank but not to
GS Holdings.
At September 30, 1998, the Bank's regulatory capital levels exceeded the
minimum regulatory capital requirements, with tangible, core and risk-based
capital ratios of 5.37%, 5.37% and 11.57%, respectively. The following is a
reconciliation of the Bank's stockholders' equity to regulatory capital as of
September 30, 1998:
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
------- ------- -------
(dollars in millions)
<S> <C> <C> <C>
Stockholders' equity of the Bank at September 30, 1998 $3,607 $3,607 $3,607
Minority interest - REIT Preferred Stock 500 500 500
Unrealized (gain) loss on securities available for sale, net:
Debt securities (40) (40) (40)
Non-qualifying MSRs (89) (89) (89)
Non-allowable capital:
Intangible assets (941) (941) (941)
Goodwill Litigation Assets (160) (160) (160)
Investment in subsidiaries (69) (69) (69)
Excess deferred tax asset (68) (68) (68)
Supplemental capital:
Qualifying subordinated debt debentures -- -- 94
General loan loss allowance -- -- 342
Assets required to be deducted:
Low level recourse deduction -- -- (12)
Equity in subsidiaries -- -- (20)
Land loans with more than 80% LTV ratio -- -- (2)
------ ------ ------
Regulatory capital of the Bank 2,740 2,740 3,142
Minimum regulatory capital requirement 765 2,040 2,173
------ ------ ------
Excess above minimum capital requirement $1,975 $ 700 $ 969
====== ====== ======
Regulatory capital of the Bank 5.37% 5.37% 11.57%
Minimum regulatory capital requirement 1.50 4.00 8.00
---- ---- -----
Excess above minimum capital requirement 3.87% 1.37% 3.57%
==== ==== =====
</TABLE>
The amount of adjusted total assets used for the tangible and core capital
ratios is $51.0 billion. Risk-weighted assets used for the risk-based capital
ratio amounted to $27.2 billion.
The Bank is also subject to the "prompt corrective action" standards
prescribed in the FDICIA and related OTS regulations, which, among other
things, define specific capital categories based on an association's capital
ratios. The
Page 42
<PAGE>
capital categories, in declining order, are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." Associations categorized as "undercapitalized"
or worse are subject to certain restrictions, including the requirement to file
a capital plan with the OTS, prohibitions on the payment of dividends and
management fees, restrictions on executive compensation, and increased
supervisory monitoring, among other things. Other restrictions may be imposed
on the association either by the OTS or by the FDIC, including requirements to
raise additional capital, sell assets, or sell the entire association. Once an
association becomes "critically undercapitalized" it is generally placed in
receivership or conservatorship within 90 days.
To be considered "well capitalized," a savings association must generally
have a leverage capital ratio of at least 5.00%, a Tier 1 (core capital)
risk-based capital ratio of at least 6.00%, and a total risk-based capital
ratio of at least 10.00%. An association is deemed to be "critically
undercapitalized" if it has a tangible equity ratio of 2.00% or less. At
September 30, 1998, California Federal's capital levels were sufficient for it
to be considered "well capitalized:"
Risk-based
Leverage -----------------------
Capital Tier 1 Total Capital
------- ------ -------------
Regulatory capital of the Bank 5.37% 10.09% 11.57%
"Well capitalized" ratio 5.00 6.00 10.00
---- ---- -----
Excess above "well capitalized" ratio 0.37% 4.09% 1.57%
==== ==== =====
OTS capital regulations allow a savings association to include a net
deferred tax asset in regulatory capital, subject to certain limitations. To
the extent that the realization of a deferred tax asset depends on a savings
association's future taxable income, such deferred tax asset is limited for
regulatory capital purposes to the lesser of the amount that can be realized
within one year or 10 percent of core capital. At September 30, 1998, $68
million of the net tax benefit was determined to be attributable to the amount
of taxable income that may be realized in periods beyond one year. Accordingly,
such amount has been excluded from the Bank's regulatory capital at September
30, 1998.
DISCLOSURES ABOUT MARKET RISK
There have been no material changes in reported market risks faced by the
Company since the FN Holdings' report in Item 7A of its Form 10-K for the year
ended December 31, 1997.
Page 43
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
GS Holdings and California Federal are involved in legal proceedings on
claims incidental to the normal conduct of their business. Although it is
impossible to predict the outcome of any outstanding legal proceedings,
management believes that such legal proceedings and claims, individually or in
the aggregate, will not have a material effect on the financial condition or
results of operations of the Company.
In addition to legal proceedings within the normal course of business, the
Bank is the plaintiff in a claim against the United States in the lawsuit,
California Federal Bank v. United States, Civil Action No. 92-138C (the
"California Federal Litigation"). In the California Federal Litigation, the
Bank alleges, among other things, that the United States breached certain
contractual commitments regarding the computation of its regulatory capital for
which the Bank seeks damages and restitution. The Bank's claims arose from
changes, mandated by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), with respect to the rules for computing Old
California Federal's regulatory capital.
On July 1, 1996, the United States Supreme Court issued its opinion for
United States v. Winstar Corporation, No. 95-865, which affirmed the decisions
of the United States Court of Appeals for the Federal Circuit and the United
States Court of Federal Claims in various consolidated cases (the "Winstar
Cases") granting summary judgment to the plaintiff thrift institutions on the
liability portion of their breach of contract claims against the United States.
The Supreme Court held that the government breached certain express contracts
when Congress enacted FIRREA, and the Supreme Court remanded the proceedings
for a determination of the appropriate measure and amount of damages, which to
date have not been awarded.
On October 30, 1996, Old California Federal filed a motion for partial
summary judgment as to the Federal government's liability to the Bank for
breach of contract, which was opposed by the Federal government. In addition,
the government filed a cross-motion for partial summary judgment as to certain
liability issues. A hearing on the motions for partial summary judgment on
liability was held on August 7, 1997. On December 22, 1997, a U.S. Claims Court
Judge ruled in favor of this motion to establish the government's liability,
and a formal order in that regard was subsequently issued on July 16, 1998. On
November 12, 1998, a U.S. Claims Court Judge ruled that California Federal
cannot meet its burden for proving expectancy damages and ordered that the case
will proceed to trial beginning December 7, 1998 on the damages issue of
restitution and reliance.
In connection with the Glen Fed Merger, the Bank is a plaintiff in a claim
against the United States in the lawsuit, Glendale Federal Bank, Federal
Savings Bank v. United States, No. 90-772C ("the Glendale Goodwill
Litigation"). In the Glendale Goodwill Litigation, Glendale Federal sued the
United States Government (the "Government") contending that FIRREA's treatment
of supervisory goodwill constituted a breach by the Government of its 1981
contract with the Bank, under which the Bank had merged with a Florida thrift
and was permitted to include the goodwill resulting from the merger in its
regulatory capital. In July 1992, the United States Court of Federal Claims
(the "Claims Court") found in favor of Glendale Federal's position, ruling that
the Government breached its express contractual commitment to permit Glendale
Federal to include supervisory goodwill in its regulatory capital and that
Glendale Federal is entitled to seek financial compensation.
The trial to determine damages commenced in the Claims Court on February
24, 1997 and the taking of testimony in the trial was completed on April 9,
1998. In lieu of traditional closing briefs, the Claims Court requested the
parties to respond to a series of written questions posed by the Court
regarding factual and legal issues raised in the damages trial. Responses to
those questions, as well as each party's reply to the other's responses, have
been filed with the Court and final oral arguments were held on September 11,
1998. California Federal anticipates a decision by early 1999.
In connection with the Cal Fed Acquisition, the Company recorded as an
asset part of the estimated after-tax cash recovery from the California Federal
Litigation that will inure to the Company, net of amounts payable to holders of
the Litigation Interests and the Secondary Litigation Interests in any such
recovery (the "Goodwill Litigation Asset"). In connection with the Golden State
Acquisition, the Company recorded a second Goodwill Litigation Asset related to
the estimated after-tax cash recovery from the Glendale Goodwill Litigation
that will inure to the Company, net of amounts payable to holders of the
Litigation Tracking Warrants. The Goodwill Litigation Asset related to the
California Federal Litigation was recorded at its estimated fair value of $100
million, net of estimated tax liabilities, as of January 3, 1997.
Page 44
<PAGE>
The Goodwill Litigation Asset related to the Glendale Goodwill Litigation was
recorded at its estimated fair value of $60 million, net of estimated tax
liabilities, as of September 11, 1998. Both Goodwill Litigation Assets are
included in the consolidated balance sheet as of September 30, 1998.
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Certificate of Incorporation of the Registrant, as amended.
3.2 By-laws of the Registrant, as amended.
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
During the quarter ended September 30, 1998, the Company made one
filing on Form 8-K:
1. Filing dated September 11, 1998, reporting on item 2,
"Acquisition or Disposition of Assets" and item 7, "Financial
Statements, Pro forma Financial Information and Exhibits." This
filing reported that Golden State Bancorp Inc. and its
subsidiaries consummated the transactions contemplated by the
Agreement and Plan of Reorganization, dated as of February 4,
1998, as amended (the "Agreement") by and among Golden State, GS
Financial, Parent Holdings, FN Holdings, First Gibraltar
Holdings, a Delaware corporation and the sole stockholder of
Parent Holdings ("FGH"), and Hunter's Glen. Pursuant to the
Agreement, FN Holdings merged with and into GS Financial, Parent
Holdings merged with and into Golden State, and Glendale Federal
merged with and into California Federal. This filing included the
following unaudited consolidated financial statements of the
Company:
Pro Forma Condensed Combined Statement of Financial Condition
as of June 30, 1998.
Pro Forma Condensed Combined Statement of Operations for the
six months ended June 30, 1998.
Pro Forma Condensed Combined Statement of Operations for the
year ended December 31, 1997.
Page 45
<PAGE>
The filing also included the following audited consolidated
financial statements of the acquired business (Glendale Federal)
as of June 30, 1998 and 1997 and for the three-year period ended
June 30, 1998:
Independent Auditors Report
Consolidated Statements of Financial Condition
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page 46
<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 Holdings Inc.
/s/ Richard H. Terzian
---------------------------------------------------
By: Richard H. Terzian
Executive Vice President and Chief Financial
Officer (Signing on behalf of the Registrant
and as the Principal Financial Officer)
/s/ Renee Nichols Tucei
---------------------------------------------------
By: Renee Nichols Tucei
Senior Vice President and Controller
(Signing as the Principal Accounting Officer)
November 12, 1998
Page 47
<PAGE>
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
NEW FIRST NATIONWIDE HOLDINGS INC.
---------------------------------
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
---------------------------------
New First Nationwide Holdings Inc., a Delaware corporation (hereinafter
called the "Corporation"), does hereby certify as follows:
FIRST: The Board of Directors of the Corporation duly approved and adopted
a resolution setting forth the following proposed amendment to the
Corporation's Certificate of Incorporation and directed that said amendment be
submitted to the sole stockholder of the Corporation for approval:
Article FIRST of the Corporation's Certificate of Incorporation is hereby
amended to read in its entirety as set forth below:
FIRST: The name of the corporation is Golden State Holdings Inc.
(hereinafter the "Corporation").
SECOND: The foregoing amendment was duly adopted in accordance with
Section 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be duly
executed in its corporate name this 11th day of September, 1998.
NEW FIRST NATIONWIDE HOLDINGS INC.
By: /s/ Carl B. Webb
--------------------------------------
Name: Carl B. Webb
Title: President
<PAGE>
State of Delaware
Office of the Secretary of State
---------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
INCORPORATION OF "NEW FIRST NATIONWIDE HOLDINGS INC.", FILED IN THIS OFFICE ON
THE SEVENTEENTH DAY OF FEBRUARY, A.D. 1998, AT 3:30 O'CLOCK P.M.
/s/ Edward J. Freel
------------------------------------------
Edward J. Freel, Secretary of State
<PAGE>
CERTIFICATE OF INCORPORATION
OF
NEW FIRST NATIONWIDE HOLDINGS INC.
FIRST: The name of the Corporation is New First Nationwide Holdings Inc.
(hereinafter the "Corporation").
SECOND: The address of the registered office of the Corporation in the
State of Delaware is 1013 Center Road, in the City of Wilmington, County of New
Castle. The name of its registered agent at that address is The Prentice-Hall
Corporation System, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware as set forth in Title 8 of the Delaware Code (the
"GCL").
FOURTH: The total number of shares of stock which the Corporation shall
have authority to issue is 1,000 shares of Common Stock, each having a par
value of one dollar ($1.00).
FIFTH: The name and mailing address of the Sole Incorporator is as
follows:
Deborah M. Reusch
P.O. Box 636
Wilmington, DE 19899
SIXTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
(1) The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors.
(2) The directors shall have concurrent power with the stockholders to
make, alter, amend, change, add to or repeal the By-Laws of the
Corporation.
(3) The number of directors of the Corporation shall be as from time to
time fixed by, or in the manner provided in, the By-Laws of the
Corporation. Election of directors need not be by written ballot unless the
By-Laws so provide.
(4) No director shall be personally liable to the Corporation or any of
its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) pursuant to Section 174 of the GCL or (iv) for any
transaction from which the director derived an improper personal benefit.
Any repeal or modification of this Article SIXTH by the stockholders of the
Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or
modification with respect to acts or omissions occurring prior to such
repeal or modification.
(5) In addition to the powers and authority hereinbefore or by statute
expressly conferred upon them, the directors are hereby empowered to
exercise all such powers and do all such acts and things as may be
exercised or done by the Corporation, subject, nevertheless, to the
provisions of the GCL, this Certificate of Incorporation, and any By-Laws
adopted by the stockholders; provided, however, that no By-Laws hereafter
adopted by the stockholders shall invalidate any prior act of the directors
which would have been valid if such By-Laws had not been adopted.
SEVENTH: Meetings of stockholders may be held within or without the State
of Delaware, as the By-Laws may provide. The books of the Corporation may be
kept (subject to any provision contained in the GCL) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the By-Laws of the Corporation.
<PAGE>
EIGHTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
I, THE UNDERSIGNED, being the Sole Incorporator hereinbefore named, for
the purpose of forming a corporation pursuant to the GCL, do make this
Certificate, hereby declaring and certifying that this is my act and deed and
the facts herein stated are true, and accordingly have hereunto set my hand
this 17th day of February, 1998.
/s/ Deborah M. Reusch
------------------------------------------
Deborah M. Reusch
Sole Incorporator
<PAGE>
BY-LAWS
OF
NEW FIRST NATIONWIDE HOLDINGS INC.
(hereinafter called the "Corporation")
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of the Corporation
shall be in the City of Wilmington, County of New Castle, State of Delaware.
Section 2. Other Offices. The Corporation may also have offices at
such other places both within and without the State of Delaware as the Board of
Directors may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. Meetings of the stockholders for the
election of directors or for any other purpose shall be held at such time and
place, either within or without the State of Delaware as shall be designated
from time to time by the Board of Directors and stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
<PAGE>
Section 2. Annual Meetings. The Annual Meetings of Stockholders shall
be held on such date and at such time as shall be designated from time to time
by the Board of Directors and stated in the notice of the meeting, at which
meetings the stockholders shall elect by a plurality vote a Board of Directors,
and transact such other business as may properly be brought before the meeting.
Written notice of the Annual Meeting stating the place, date and hour of the
meeting shall be given to each stockholder entitled to vote at such meeting not
less than ten nor more than sixty days before the date of the meeting.
Section 3. Special Meetings. Unless otherwise prescribed by law or by
the Certificate of Incorporation, Special Meetings of Stockholders, for any
purpose or purposes, may be called by either (i) the Chairman, if there be one,
or (ii) the President, (iii) any Vice President, if there be one, (iv) the
Secretary or (v) any Assistant Secretary, if there be one, and shall be called
by any such officer at the request in writing of a majority of the Board of
Directors or at the request in writing of stockholders owning a majority of the
capital stock of the Corporation issued and outstanding and entitled to vote.
Such request shall state the purpose
2
<PAGE>
or purposes of the proposed meeting. Written notice of a Special Meeting
stating the place, date and hour of the meeting and the purpose or purposes for
which the meeting is called shall be given not less than ten nor more than
sixty days before the date of the meeting to each stockholder entitled to vote
at such meeting.
Section 4. Quorum. Except as otherwise provided by law or by the
Certificate of Incorporation, the holders of a majority of the capital stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. If, however, such quorum shall
not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present
or represented. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally noticed. If the adjournment is for more than thirty
days, or if after the adjournment a new record date is fixed for the adjourned
3
<PAGE>
meeting, a notice of the adjourned meeting shall be given to each stockholder
entitled to vote at the meeting.
Section 5. Voting. Unless otherwise required by law, the Certificate
of Incorporation or these By-Laws, any question brought before any meeting of
stockholders shall be decided by the vote of the holders of a majority of the
stock represented and entitled to vote thereat. Each stockholder represented at
a meeting of stockholders shall be entitled to cast one vote for each share of
the capital stock entitled to vote thereat held by such stockholder. Such votes
may be cast in person or by proxy but no proxy shall be voted on or after three
years from its date, unless such proxy provides for a longer period. The Board
of Directors, in its discretion, or the officer of the Corporation presiding at
a meeting of stockholders, in his discretion, may require that any votes cast
at such meeting shall be cast by written ballot.
Section 6. Consent of Stockholders in Lieu of Meeting. Unless
otherwise provided in the Certificate of Incorporation, any action required or
permitted to be taken at any Annual or Special Meeting of Stockholders of the
Corporation, may be taken without a meeting, without
4
<PAGE>
prior notice and without a vote, if a consent in writing, setting forth the
action so taken, shall be signed by the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon were
present and voted. Prompt notice of the taking of the corporate action without
a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
Section 7. List of Stockholders Entitled to Vote. The officer of the
Corporation who has charge of the stock ledger of the Corporation shall prepare
and make, at least ten days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at
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the place where the meeting is to be held. The list shall also be produced and
kept at the time and place of the meeting during the whole time thereof, and
may be inspected by any stockholder of the Corporation who is present.
Section 8. Stock Ledger. The stock ledger of the Corporation shall be
the only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 7 of this Article II or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.
ARTICLE III
DIRECTORS
Section 1. Number and Election of Directors. The Board of Directors
shall consist of not less than one nor more than fifteen members, the exact
number of which shall initially be fixed by the Incorporator and thereafter
from time to time by the Board of Directors. Except as provided in Section 2 of
this Article, directors shall be elected by a plurality of the votes cast at
Annual Meetings of Stockholders, and each director so elected shall hold office
until the next Annual Meeting and until his successor is duly elected and
qualified, or until his
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earlier resignation or removal. Any director may resign at any time upon notice
to the Corporation. Directors need not be stockholders.
Section 2. Vacancies. Vacancies and newly created directorships
resulting from any increase in the authorized number of directors may be filled
by a majority of the directors then in office, though less than a quorum, or by
a sole remaining director, and the directors so chosen shall hold office until
the next annual election and until their successors are duly elected and
qualified, or until their earlier resignation or removal.
Section 3. Duties and Powers. The business of the Corporation shall be
managed by or under the direction of the Board of Directors which may exercise
all such powers of the Corporation and do all such lawful acts and things as
are not by statute or by the Certificate of Incorporation or by these By-Laws
directed or required to be exercised or done by the stockholders.
Section 4. Meetings. The Board of Directors of the Corporation may
hold meetings, both regular and special, either within or without the State of
Delaware. Regular meetings of the Board of Directors may be held without notice
at such time and at such place as may from time to time be determined by the
Board of Directors.
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Special meetings of the Board of Directors may be called by the Chairman, if
there be one, the President, or any directors. Notice thereof stating the
place, date and hour of the meeting shall be given to each director either by
mail not less than forty-eight (48) hours before the date of the meeting, by
telephone or telegram on twenty-four (24) hours' notice, or on such shorter
notice as the person or persons calling such meeting may deem necessary or
appropriate in the circumstances.
Section 5. Quorum. Except as may be otherwise specifically provided by
law, the Certificate of incorporation or these By-Laws, at all meetings of the
Board of Directors, a majority of the entire Board of Directors shall
constitute a quorum for the transaction of business and the act of a majority
of the directors present at any meeting at which there is a quorum shall be the
act of the Board of Directors. If a quorum shall not be present at any meeting
of the Board of Directors, the directors present thereat may adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
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Section 6. Actions of Board. Unless otherwise provided by the
Certificate of Incorporation or these By-Laws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee
thereof may be taken without a meeting, if all the members of the Board of
Directors or committee, as the case may be, consent thereto in writing, and the
writing or writings are filed with the minutes of proceedings of the Board of
Directors or committee.
Section 7. Meetings by Means of Conference Telephone. Unless otherwise
provided by the Certificate of Incorporation or these By-Laws, members of the
Board of Directors of the Corporation, or any committee designated by the Board
of Directors, may participate in a meeting of the Board of Directors or such
committee by means of a conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this Section 7 shall
constitute presence in person at such meeting.
Section 8. Committees. The Board of Directors may designate one or
more committees, each committee to consist of one or more of the directors of
the Corporation. The Board of Directors may designate one or more
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directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of any such committee. In the absence or
disqualification of a member of a committee, and in the absence of a
designation by the Board of Directors of an alternate member to replace the
absent or disqualified member, the member or members thereof present at any
meeting and not disqualified from voting, whether or not he or they constitute
a quorum, may unanimously appoint another member of the Board of Directors to
act at the meeting in the place of any absent or disqualified member. Any
committee, to the extent allowed by law and provided in the resolution
establishing such committee, shall have and may exercise all the powers and
authority of the Board of Directors in the management of the business and
affairs of the Corporation. Each committee shall keep regular minutes and
report to the Board of Directors when required.
Section 9. Compensation. The directors may be paid their expenses, if
any, of attendance at each meeting of the Board of Directors and may be paid a
fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. No such payment shall preclude any director from serving
the Corporation in any
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other capacity and receiving compensation therefor. Members of special or
standing committees may be allowed like compensation for attending committee
meetings.
Section 10. Interested Directors. No contract or transaction between
the Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof
which authorizes the contract or transaction, or solely because his or their
votes are counted for such purpose if (i) the material facts as to his or their
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board of Directors or the committee, and the Board of
Directors or committee in good faith authorizes the contract or transaction by
the affirmative votes of a majority of the disinterested directors, even though
the disinterested directors be less than a quorum; or (ii) the material facts
as to his or their relationship or interest and as to the contract or
transaction are dis-
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closed or are known to the stockholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by vote of the
stockholders; or (iii) the contract or transaction is fair as to the
Corporation as of the time it is authorized, approved or ratified, by the Board
of Directors, a committee thereof or the stockholders. Common or interested
directors may be counted in determining the presence of a quorum at a meeting
of the Board of Directors or of a committee which authorizes the contract or
transaction.
ARTICLE IV
OFFICERS
Section 1. General. The officers of the Corporation shall be chosen by
the Board of Directors and shall be a President, a Secretary and a Treasurer.
The Board of Directors, in its discretion, may also choose a Chairman of the
Board of Directors (who must be a director) and one or more Vice Presidents,
Assistant Secretaries, Assistant Treasurers and other officers. Any number of
offices may be held by the same person, unless otherwise prohibited by law, the
Certificate of Incorporation or these By-Laws. The officers of the Corporation
need not be stockholders of the Corporation nor, except in the
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case of the Chairman of the Board of Directors, need such officers be directors
of the Corporation.
Section 2. Election. The Board of Directors at its first meeting held
after each Annual Meeting of Stockholders shall elect the officers of the
Corporation who shall hold their offices for such terms and shall exercise such
powers and perform such duties as shall be determined from time to time by the
Board of Directors; and all officers of the Corporation shall hold office until
their successors are chosen and qualified, or until their earlier resignation
or removal. Any officer elected by the Board of Directors may be removed at any
time by the affirmative vote of a majority of the Board of Directors. Any
vacancy occurring in any office of the Corporation shall be filled by the Board
of Directors. The salaries of all officers of the Corporation shall be fixed by
the Board of Directors.
Section 3. Voting Securities Owned by the Corporation. Powers of
attorney, proxies, waivers of notice of meeting, consents and other instruments
relating to securities owned by the Corporation may be executed in the name of
and on behalf of the Corporation by the President or any Vice President and any
such officer may, in the name of and on behalf of the Corporation, take all
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such action as any such officer may deem advisable to vote in person or by
proxy at any meeting of security holders of any corporation in which the
Corporation may own securities and at any such meeting shall possess and may
exercise any and all rights and power incident to the ownership of such
securities and which, as the owner thereof, the Corporation might have
exercised and possessed if present. The Board of Directors may, by resolution,
from time to time confer like powers upon any other person or persons.
Section 4. Chairman of the Board of Directors. The Chairman of the
Board of Directors, if there be one, shall preside at all meetings of the
stockholders and of the Board of Directors. He shall be the Chief Executive
Officer of the Corporation, and except where by law the signature of the
President is required, the Chairman of the Board of Directors shall possess the
same power as the President to sign all contracts, certificates and other
instruments of the Corporation which may be authorized by the Board of
Directors. During the absence or disability of the President, the Chairman of
the Board of Directors shall exercise all the powers and discharge all the
duties of the President. The Chairman of the Board of Directors shall also
perform such other duties and may
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exercise such other powers as from time to time may be assigned to him by these
By-Laws or by the Board of Directors.
Section 5. President. The President shall, subject to the control of
the Board of Directors and, if there be one, the Chairman of the Board of
Directors, have general supervision of the business of the Corporation and
shall see that all orders and resolutions of the Board of Directors are carried
into effect. He shall execute all bonds, mortgages, contracts and other
instruments of the Corporation requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except that the other officers of the Corporation may sign and
execute documents when so authorized by these By-Laws, the Board of Directors
or the President. In the absence or disability of the Chairman of the Board of
Directors, or if there be none, the President shall preside at all meetings of
the stockholders and the Board of Directors. If there be no Chairman of the
Board of Directors, the President shall be the Chief Executive Officer of the
Corporation. The President shall also perform such other duties and may
exercise such other powers as from time to
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time may be assigned to him by these By-Laws or by the Board of Directors.
Section 6. Vice Presidents. At the request of the President or in his
absence or in the event of his inability or refusal to act (and if there be no
Chairman of the Board of Directors), the Vice President or the Vice Presidents
if there is more than one (in the order designated by the Board of Directors)
shall perform the duties of the President, and when so acting, shall have all
the powers of and be subject to all the restrictions upon the President. Each
Vice President shall perform such other duties and have such other powers as
the Board of Directors from time to time may prescribe. If there be no Chairman
of the Board of Directors and no Vice President, the Board of Directors shall
designate the officer of the Corporation who, in the absence of the President
or in the event of the inability or refusal of the President to act, shall
perform the duties of the President, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the President.
Section 7. Secretary. The Secretary shall attend all meetings of the
Board of Directors and all meetings of stockholders and record all the
proceedings
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thereat in a book or books to be kept for that purpose; the Secretary shall
also perform like duties for the standing committees when required. The
Secretary shall give, or cause to be given, notice of all meetings of the
stockholders and special meetings of the Board of Directors, and shall perform
such other duties as may be prescribed by the Board of Directors or President,
under whose supervision he shall be. If the Secretary shall be unable or shall
refuse to cause to be given notice of all meetings of the stockholders and
special meetings of the Board of Directors, and if there be no Assistant
Secretary, then either the Board of Directors or the President may choose
another officer to cause such notice to be given. The Secretary shall have
custody of the seal of the Corporation and the Secretary or any Assistant
Secretary, if there be one, shall have authority to affix the same to any
instrument requiring it and when so affixed, it may be attested by the
signature of the Secretary or by the signature of any such Assistant Secretary.
The Board of Directors may give general authority to any other officer to affix
the seal of the Corporation and to attest the affixing by his signature. The
Secretary shall see that all books, reports, statements, certificates and other
documents and records required by law to
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be kept or filed are properly kept or filed, as the case may be.
Section 8. Treasurer. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as Treasurer and of the financial condition of the
Corporation. If required by the Board of Directors, the Treasurer shall give
the Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the Corporation, in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and
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other property of whatever kind in his possession or under his control
belonging to the Corporation.
Section 9. Assistant Secretaries. Except as may be otherwise provided
in these By-Laws, Assistant Secretaries, if there be any, shall perform such
duties and have such powers as from time to time may be assigned to them by the
Board of Directors, the President, any Vice President, if there be one, or the
Secretary, and in the absence of the Secretary or in the event of his
disability or refusal to act, shall perform the duties of the Secretary, and
when so acting, shall have all the powers of and be subject to all the
restrictions upon the Secretary.
Section 10. Assistant Treasurers. Assistant Treasurers, if there be
any, shall perform such duties and have such powers as from time to time may be
assigned to them by the Board of Directors, the President, any Vice President,
if there be one, or the Treasurer, and in the absence of the Treasurer or in
the event of his disability or refusal to act, shall perform the duties of the
Treasurer, and when so acting, shall have all the powers of and be subject to
all the restrictions upon the Treasurer. If required by the Board of Directors,
an Assistant Treasurer shall give the Corporation a bond in
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such sum and with such surety or sureties as shall be satisfactory to the Board
of Directors for the faithful performance of the duties of his office and for
the restoration to the Corporation, in case of his death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in his possession or under his control
belonging to the Corporation.
Section 11. Other Officers. Such other officers as the Board of
Directors may choose shall perform such duties and have such powers as from
time to time may be assigned to them by the Board of Directors. The Board of
Directors may delegate to any other officer of the Corporation the power to
choose such other officers and to prescribe their respective duties and powers.
ARTICLE V
STOCK
Section 1. Form of Certificates. Every holder of stock in the
Corporation shall be entitled to have a certificate signed, in the name of the
Corporation (i) by the Chairman of the Board of Directors, the President or a
Vice President and (ii) by the Treasurer or an Assistant Treasurer, or the
Secretary or an Assistant Secre-
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tary of the Corporation, certifying the number of shares owned by him in the
Corporation.
Section 2. Signatures. Any or all of the signatures on a certificate
may be a facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
Section 3. Lost Certificates. The Board of Directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issue of a new certificate,
the Board of Directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or destroyed
certificate, or his legal representative, to advertise the same in such manner
as the Board of Directors shall require and/or to give the Corporation a bond
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in such sum as it may direct as indemnity against any claim that may be made
against the Corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.
Section 4. Transfers. Stock of the Corporation shall be transferable
in the manner prescribed by law and in these By-Laws. Transfers of stock shall
be made on the books of the Corporation only by the person named in the
certificate or by his attorney lawfully constituted in writing and upon the
surrender of the certificate therefor, which shall be cancelled before a new
certificate shall be issued.
Section 5. Record Date. In order that the Corporation may determine
the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or entitled to express consent to
corporate action in writing without a meeting, or entitled to receive payment
of any dividend or other distribution or allotment of any rights, or entitled
to exercise any rights in respect of any change, conversion or exchange of
stock, or for the purpose of any other lawful action, the Board of Directors
may fix, in advance, a record date, which shall not be more than sixty days nor
less than ten days before the date of such
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meeting, nor more than sixty days prior to any other action. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned
meeting.
Section 6. Beneficial Owners. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by law.
ARTICLE VI
NOTICES
Section 1. Notices. Whenever written notice is required by law, the
Certificate of Incorporation or these By-Laws, to be given to any director,
member of a committee or stockholder, such notice may be given by mail,
addressed to such director, member of a committee
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or stockholder, at his address as it appears on the records of the Corporation,
with postage thereon prepaid, and such notice shall be deemed to be given at
the time when the same shall be deposited in the United States mail. Written
notice may also be given personally or by telegram, telex or cable.
Section 2. Waivers of Notice. Whenever any notice is required by law,
the Certificate of Incorporation or these By-Laws, to be given to any director,
member of a committee or stockholder, a waiver thereof in writing, signed, by
the person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the
Corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, and may be paid in cash, in property, or in shares of the capital
stock. Before payment of any dividend, there may be set aside out of any funds
of the Corporation available for dividends such sum or sums as
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the Board of Directors from time to time, in its absolute discretion, deems
proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the Corporation, or
for any proper purpose, and the Board of Directors may modify or abolish any
such reserve.
Section 2. Disbursements. All checks or demands for money and notes of
the Corporation shall be signed by such officer or officers or such other
person or persons as the Board of Directors may from time to time designate.
Section 3. Fiscal Year. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors.
Section 4. Corporate Seal. The corporate seal shall have inscribed
thereon the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware". The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
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ARTICLE VIII
INDEMNIFICATION
Section 1. Power to Indemnify in Actions, Suits or Proceedings other
Than Those by or in the Right of the Corporation. Subject to Section 3 of this
Article VIII, the Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director or officer of the Corporation,
or is or was a director or officer of the Corporation serving at the request of
the Corporation as a director or officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
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The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had reasonable cause to believe that his conduct was unlawful.
Section 2. Power to Indemnify in Actions, Suits or Proceedings by or
in the Right of the Corporation. Subject to Section 3 of this Article VIII, the
Corporation shall indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action or suit by or
in the right of the Corporation to procure a judgment in its favor by reason of
the fact that he is or was a director or officer of the Corporation, or is or
was a director or officer of the Corporation serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred
by him in connection with the defense or settle-
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ment of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation; except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Section 3. Authorization of Indemnification. Any indemnification under
this Article VIII (unless ordered by a court) shall be made by the Corporation
only as authorized in the specific case upon a determination that
indemnification of the director or officer is proper in the circumstances
because he has met the applicable standard of conduct set forth in Section 1 or
Section 2 of this Article VIII, as the case may be. Such determination shall be
made (i) by a majority vote of the directors who are not parties to such
action, suit or proceeding, even though less than a quorum, or (ii) if
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there are no such directors, or if such directors so direct, by independent
legal counsel in a written opinion, or (iii) by the stockholders. To the
extent, however, that a director or officer of the Corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding described above, or in defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith, without the
necessity of authorization in the specific case.
Section 4. Good Faith Defined. For purposes of any determination under
Section 3 of this Article VIII, a person shall be deemed to have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation, or, with respect to any criminal action or
proceeding, to have had no reasonable cause to believe his conduct was
unlawful, if his action is based on the records or books of account of the
Corporation or another enterprise, or on information supplied to him by the
officers of the Corporation or another enterprise in the course of their
duties, or on the advice of legal counsel for the Corporation or another
enterprise or on information or records
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given or reports made to the Corporation or another enterprise by an
independent certified public accountant or by an appraiser or other expert
selected with reasonable care by the Corporation or another enterprise. The
term "another enterprise" as used in this Section 4 shall mean any other
corporation or any partnership, joint venture, trust, employee benefit plan or
other enterprise of which such person is or was serving at the request of the
Corporation as a director, officer, employee or agent. The provisions of this
Section 4 shall not be deemed to be exclusive or to limit in any way the
circumstances in which a person may be deemed to have met the applicable
standard of conduct set forth in Sections 1 or 2 of this Article VIII, as the
case may be.
Section 5. Indemnification by a Court. Notwithstanding any contrary
determination in the specific case under Section 3 of this Article VIII, and
notwithstanding the absence of any determination thereunder, any director or
officer may apply to any court of competent jurisdiction in the State of
Delaware for indemnification to the extent otherwise permissible under Sections
1 and 2 of this Article VIII. The basis of such indemnification by a court
shall be a determination by such court that indemnification of the director or
officer is proper
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in the circumstances because he has met the applicable standards of conduct set
forth in Sections 1 or 2 of this Article VIII, as the case may be. Neither a
contrary determination in the specific case under Section 3 of this Article
VIII nor the absence of any determination thereunder shall be a defense to such
application or create a presumption that the director or officer seeking
indemnification has not met any applicable standard of conduct. Notice of any
application for indemnification pursuant to this Section 5 shall be given to
the Corporation promptly upon the filing of such application. If successful, in
whole or in part, the director or officer seeking indemnification shall also be
entitled to be paid the expense of prosecuting such application.
Section 6. Expenses Payable in Advance. Expenses incurred by a
director or officer in defending or investigating a threatened or pending
action, suit or proceeding shall be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the Corporation as authorized in this Article VIII.
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Section 7. Nonexclusivity of Indemnification and Advancement of
Expenses. The indemnification and advancement of expenses provided by or
granted pursuant to this Article VIII shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of expenses
may be entitled under any By-Law, agreement, contract, vote of stockholders or
disinterested directors or pursuant to the direction (howsoever embodied) of
any court of competent jurisdiction or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, it being the policy of the Corporation that indemnification of the
persons specified in Sections 1 and 2 of this Article VIII shall be made to the
fullest extent permitted by law. The provisions of this Article VIII shall not
be deemed to preclude the indemnification of any person who is not specified in
Sections 1 or 2 of this Article VIII but whom the Corporation has the power or
obligation to indemnify under the provisions of the General Corporation Law of
the State of Delaware, or otherwise.
Section 8. Insurance. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director or officer of the
Corporation,
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or is or was a director or officer of the Corporation serving at the request of
the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise against any liability asserted against him and incurred by him in
any such capacity, or arising out of his status as such, whether or not the
Corporation would have the power or the obligation to indemnify him against
such liability under the provisions of this Article VIII.
Section 9. Certain Definitions. For purposes of this Article VIII,
references to "the Corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors or officers, so that any person who is or was a director or officer
of such constituent corporation, or is or was a director or officer of such
constituent corporation serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise, shall stand in
the same
33
<PAGE>
position under the provisions of this Article VIII with respect to the
resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued. For purposes
of this Article VIII, references to "fines" shall include any excise taxes
assessed on a person with respect to an employee benefit plan; and references
to "serving at the request of the Corporation" shall include any service as a
director, officer, employee or agent of the Corporation which imposes duties
on, or involves services by, such director or officer with respect to an
employee benefit plan, its participants or beneficiaries; and a person who
acted in good faith and in a manner he reasonably believed to be in the
interest of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interests of
the Corporation" as referred to in this Article VIII.
Section 10. Survival of Indemnification and Advancement of Expenses.
The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article VIII shall, unless otherwise provided when authorized
or ratified, continue as to a person who has ceased to be a director or officer
and shall inure to
34
<PAGE>
the benefit of the heirs, executors and administrators of such a person.
Section 11. Limitation on Indemnification. Notwithstanding anything
contained in this Article VIII to the contrary, except for proceedings to
enforce rights to indemnification (which shall be governed by Section 5
hereof), the Corporation shall not be obligated to indemnify any director or
officer in connection with a proceeding (or part thereof) initiated by such
person unless such proceeding (or part thereof) was authorized or consented to
by the Board of Directors of the Corporation.
Section 12. Indemnification of Employees and Agents. The Corporation
may, to the extent authorized from time to time by the Board of Directors,
provide rights to indemnification and to the advancement of expenses to
employees and agents of the Corporation similar to those conferred in this
Article VIII to directors and officers of the Corporation.
ARTICLE IX
AMENDMENTS
Section 1. Amendments. These By-Laws may be altered, amended or
repealed, in whole or in part, or new
35
<PAGE>
By-Laws may be adopted by the stockholders or by the Board of Directors,
provided, however, that notice of such alteration, amendment, repeal or
adoption of new By-Laws be contained in the notice of such meeting of
stockholders or Board of Directors as the case may be. All such amendments must
be approved by either the holders of a majority of the outstanding capital
stock entitled to vote thereon or by a majority of the entire Board of
Directors then in office.
Section 2. Entire Board of Directors. As used in this Article IX and
in these By-Laws generally, the term "entire Board of Directors" means the
total number of directors which the Corporation would have if there were no
vacancies.
36
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and statements of income found on pages 3 and 4 of
the Company's unaudited financial statements for the nine months ended September
30, 1998.
</LEGEND>
<RESTATED>
<CIK> 0001071000
<NAME> GOLDEN STATE HOLDINGS INC.
<MULTIPLIER> 1,000
<CURRENCY> US $
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 552,762
<INT-BEARING-DEPOSITS> 44,263
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,085,739
<INVESTMENTS-CARRYING> 3,202,463
<INVESTMENTS-MARKET> 3,202,463
<LOANS> 32,243,034 <F1>
<ALLOWANCE> 582,782
<TOTAL-ASSETS> 53,001,670
<DEPOSITS> 25,342,039
<SHORT-TERM> 11,207,642
<LIABILITIES-OTHER> 1,140,180
<LONG-TERM> 12,270,381
0
0
<COMMON> 1
<OTHER-SE> 2,265,898
<TOTAL-LIABILITIES-AND-EQUITY> 53,001,670
<INTEREST-LOAN> 1,254,904
<INTEREST-INVEST> 440,380
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,695,284
<INTEREST-DEPOSIT> 545,734
<INTEREST-EXPENSE> 1,193,517
<INTEREST-INCOME-NET> 501,767
<LOAN-LOSSES> 30,000
<SECURITIES-GAINS> 928
<EXPENSE-OTHER> 497,244
<INCOME-PRETAX> 358,583
<INCOME-PRE-EXTRAORDINARY> 419,669
<EXTRAORDINARY> 80,007
<CHANGES> 0
<NET-INCOME> 339,662 <F2>
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.31
<LOANS-NON> 227,895
<LOANS-PAST> 0
<LOANS-TROUBLED> 35,573
<LOANS-PROBLEM> 96,579
<ALLOWANCE-OPEN> 418,674
<CHARGE-OFFS> 37,832
<RECOVERIES> 2,486
<ALLOWANCE-CLOSE> 582,782
<ALLOWANCE-DOMESTIC> 16,597
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 566,185
<FN>
<F1> Loans include Loans held for sale of $1,479,686 and Allowance for loan
losses of $582,782
<F2> Net income available to common stockholders: $339,084
</TABLE>
