<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
------------------- ---------------------------
Commission File Number: 333 - 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 October 31, 1999: 1,000 shares.
Page 1 of 47 pages
Exhibit index on page: 46
<PAGE>
GOLDEN STATE HOLDINGS INC.
THIRD QUARTER 1999 REPORT ON FORM 10-Q
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION --------
---------------------
Item 1. Consolidated Financial Statements
Unaudited Consolidated Balance Sheets
September 30, 1999 and December 31, 1998............................3
Unaudited Consolidated Statements of Income
Nine months ended September 30, 1999 and 1998.......................4
Unaudited Consolidated Statements of Income
Three months ended September 30, 1999 and 1998......................5
Unaudited Consolidated Statements of Comprehensive Income
Nine months ended September 30, 1999 and 1998.......................6
Unaudited Consolidated Statements of Comprehensive Income (Loss)
Three months ended September 30, 1999 and 1998......................7
Unaudited Consolidated Statement of Stockholder's Equity
Nine months ended September 30, 1999................................8
Unaudited Consolidated Statements of Cash Flows
Nine months ended September 30, 1999 and 1998.......................9
Notes to Unaudited Consolidated Financial Statements...............11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................18
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........44
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................45
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...................................46
Signatures..................................................................47
Page 2
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Balance Sheeets
September 30, 1999 and December 31, 1998
(Unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1999 1998
------ ---- ----
<S> <C> <C>
Cash and amounts due from banks $ 468,584 $ 854,954
Interest-bearing deposits in other banks 53 52,671
Short-term investment securities 73,947 60,325
------------ ------------
Cash and cash equivalents 542,584 967,950
Securities available for sale, at fair value 1,106,469 770,747
Securities held to maturity 213,892 250,964
Mortgage-backed securities available for sale, at fair value 13,735,096 12,947,992
Mortgage-backed securities held to maturity 2,265,838 2,770,913
Loans held for sale, net 819,383 2,366,583
Loans receivable, net 32,468,353 30,280,944
Investment in Federal Home Loan Bank ("FHLB") System 1,139,687 1,000,147
Premises and equipment, net 305,626 310,572
Foreclosed real estate, net 45,545 80,068
Accrued interest receivable 315,415 317,455
Intangible assets (net of accumulated amortization of $166,503
at September 30, 1999 and $113,709 at December 31, 1998) 874,418 923,598
Mortgage servicing rights 1,229,515 943,581
Other assets 684,318 866,422
----------- -----------
Total assets $55,746,139 $54,797,936
=========== ===========
Liabilities, Minority Interest and Stockholder's Equity
-------------------------------------------------------
Deposits $23,696,055 $24,647,488
Securities sold under agreements to repurchase 5,963,925 4,238,395
Borrowings 22,969,455 22,375,557
Other liabilities 882,003 1,210,802
----------- -----------
Total liabilities 53,511,438 52,472,242
----------- -----------
Commitments and contingencies -- --
Minority interest 500,000 593,438
Stockholder's equity:
Common stock, $1.00 par value, 1,000 shares authorized,
issued and outstanding 1 1
Additional paid-in capital 1,511,932 1,512,061
Accumulated other comprehensive (loss) income (199,498) 6,151
Retained earnings (substantially restricted) 422,266 214,043
----------- -----------
Total stockholder's equity 1,734,701 1,732,256
----------- -----------
Total liabilities, minority interest and stockholder's equity $55,746,139 $54,797,936
=========== ===========
</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, 1999 and 1998
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------
1999 1998
---- ----
<S> <C> <C>
Interest income:
Loans receivable $ 1,721,858 $ 1,169,834
Mortgage-backed securities available for sale 645,539 294,174
Mortgage-backed securities held to maturity 137,810 80,025
Loans held for sale 95,958 85,070
Securities available for sale 57,466 40,445
Securities held to maturity 9,053 2,727
Interest-bearing deposits in other banks 3,851 23,009
Dividends on FHLB stock 43,143 22,463
------------ -----------
Total interest income 2,714,678 1,717,747
------------ -----------
Interest expense:
Deposits 667,387 545,734
Securities sold under agreements to repurchase 188,085 106,386
Borrowings 967,102 541,397
------------ -----------
Total interest expense 1,822,574 1,193,517
------------ -----------
Net interest income 892,104 524,230
Provision for loan losses 10,000 30,000
------------ -----------
Net interest income after provision for loan losses 882,104 494,230
------------ -----------
Noninterest income:
Loan servicing fees, net 108,358 106,070
Customer banking fees and service charges 138,820 79,475
Gain on sale of loans, net 25,385 49,989
Gain on sale of assets, net 18,296 235
Gain on sale of branches, net 2,343 108,825
Other income 23,982 17,003
------------ -----------
Total noninterest income 317,184 361,597
------------ -----------
Noninterest expense:
Compensation and employee benefits 299,202 200,679
Occupancy and equipment 104,918 65,114
Loan expense 29,249 33,863
Professional fees 39,758 30,811
Marketing 24,081 12,009
Data processing 17,784 10,274
Savings Association Insurance Fund deposit insurance premium 10,817 7,840
Foreclosed real estate operations, net (5,068) (6,024)
Merger and integration costs 7,747 31,917
Amortization of intangible assets 52,794 36,380
Other expense 112,142 74,381
------------ -----------
Total noninterest expense 693,424 497,244
------------ -----------
Income before income taxes, minority interest and extraordinary item 505,864 358,583
Income tax expense (benefit) 151,681 (143,106)
Minority interest: provision in lieu of income tax expense 79,005 --
Minority interest: other 28,338 82,020
------------ -----------
Income before extraordinary item 246,840 419,669
Extraordinary item - loss on early extinguishment of debt, net of tax -- 80,007
------------ -----------
Net income 246,840 339,662
Preferred stock dividends -- 578
------------ -----------
Net income available to common stockholder $ 246,840 $ 339,084
============ ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 4
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended September 30, 1999 and 1998
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
Interest income:
Loans receivable $ 587,080 $ 408,494
Mortgage-backed securities available for sale 221,923 115,645
Mortgage-backed securities held to maturity 41,910 32,592
Loans held for sale 28,266 26,840
Securities available for sale 19,399 12,159
Securities held to maturity 2,750 1,155
Interest-bearing deposits in other banks 1,551 21,438
Dividends On FHLB Stock 14,959 7,901
------------ -----------
Total interest income 917,838 626,224
------------ -----------
Interest expense:
Deposits 223,329 190,532
Securities sold under agreements to repurchase 80,475 49,337
Borrowings 326,942 201,052
------------ -----------
Total interest expense 630,746 440,921
------------ -----------
Net interest income 287,092 185,303
Provision for loan losses -- 10,000
------------ -----------
Net interest income after provision for loan losses 287,092 175,303
------------ -----------
Noninterest income:
Loan servicing fees, net 38,068 34,707
Customer banking fees and service charges 47,453 28,278
Gain on sale of loans, net 4,932 13,865
Gain on sale of assets, net 3,187 416
Gain on sale of branches, net 2,343 108,911
Other income 7,163 5,248
------------ -----------
Total noninterest income 103,146 191,425
------------ -----------
Noninterest expense:
Compensation and employee benefits 97,417 73,105
Occupancy and equipment 36,874 23,785
Loan expense 7,109 10,363
Professional fees 12,594 11,242
Marketing 6,887 2,142
Data processing 5,802 3,877
Savings Association Insurance Fund deposit insurance premium 3,384 2,786
Foreclosed real estate operations, net (3,000) (886)
Merger and integration costs -- 31,054
Amortization of intangible assets 17,626 13,151
Other expense 33,983 24,929
------------ -----------
Total noninterest expense 218,676 195,548
------------ -----------
Income before income taxes, minority interest and extraordinary item 171,562 171,180
Income tax (benefit) expense (3,033) 78,028
Minority interest: provision in lieu of income tax expense 79,005 --
Minority interest: other 8,431 36,406
------------ -----------
Income before extraordinary item 87,159 56,746
Extraordinary item - loss on early extinguishment of debt, net of tax -- 80,007
------------ -----------
Net income (loss) available to common stockholder $ 87,159 $ (23,261)
============ ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 5
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Nine Months Ended September 30, 1999 and 1998
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------
1999 1998
---- ----
<S> <C> <C>
Net income $ 246,840 $ 339,662
Other comprehensive (loss) income, net of tax:
Unrealized holding (loss) gain on securities available for sale:
Unrealized holding (loss) gain arising during the period (204,906) 6,654
Less: reclassification adjustment for gain included
in net income (743) (536)
---------- ----------
Other comprehensive (loss) income (205,649) 6,118
---------- ----------
Comprehensive income $ 41,191 $ 345,780
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 6
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
Three Months Ended September 30, 1999 and 1998
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
Net income (loss) $ 87,159 $(23,261)
Other comprehensive (loss) income, net of tax:
Unrealized holding (loss) gain on securities available for sale:
Unrealized holding (loss) gain arising during the period (43,571) 13,150
Less: reclassification adjustment for (gain) loss included in
net income (549) 29
-------- --------
Other comprehensive (loss) income (44,120) 13,179
-------- --------
Comprehensive income (loss) $ 43,039 $(10,082)
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 7
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statement of Stockholder's Equity
Nine Months Ended September 30, 1999
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Accumulated Retained
Additional Other Earnings Total
Common Paid-in Comprehensive (Substantially Stockholder's
Stock Capital Income (loss) Restricted) Equity
----- ------- ------------ ---------- ------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ 1 $1,512,061 $ 6,151 $214,043 $1,732,256
Net income -- -- -- 246,840 246,840
Change in unrealized holding gain (loss)
on securities available for sale -- -- (205,649) -- (205,649)
Golden State Acquisition - see note 2 -- (12,380) -- -- (12,380)
Adjustment to initial dividend of tax
benefits to parent due to deconsolidation -- -- -- 66,383 66,383
Impact of Golden State restricted common
stock -- 238 -- -- 238
Dividends to parent -- -- -- (105,000) (105,000)
Contribution from parent -- 10,000 -- -- 10,000
Tax benefit on exercise of stock options -- 2,013 -- -- 2,013
--- ---------- --------- -------- ----------
Balance at September 30, 1999 $ 1 $1,511,932 $(199,498) $422,266 $1,734,701
=== ========== ========= ======== ==========
</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, 1999 and 1998
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 246,840 $ 339,662
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Amortization of intangible assets 52,794 36,380
Amortization (accretion) of purchase accounting premiums and
discounts, net 8,902 (7,633)
Accretion of discount on borrowings 756 --
Amortization of mortgage servicing rights 157,782 92,003
Provision for loan losses 10,000 30,000
Gain on sale of assets, net (18,296) (235)
Gain on sale of branches, net (2,343) (108,825)
Gain on sale of foreclosed real estate (10,494) (11,331)
Loss on sale of loans, net 147,013 88,514
Capitalization of originated mortgage servicing rights (172,398) (138,503)
Extraordinary loss on early extinguishment of debt, net -- 80,007
Depreciation and amortization of premises and equipment 27,324 17,364
Amortization of deferred debt issuance costs 5,456 5,340
FHLB stock dividends (43,143) (22,463)
Purchases and originations of loans held for sale (7,217,334) (6,391,601)
Net proceeds from the sale of loans held for sale 8,509,343 6,354,361
Decrease (increase) in other assets 235,332 (161,187)
Decrease (increase) in accrued interest receivable 2,040 (10,131)
Decrease in other liabilities (151,213) (300,358)
Amortization of deferred compensation expense-Golden State restricted stock 238 --
Minority interest 28,338 82,020
----------- -----------
Net cash provided by (used in) operating activities $ 1,816,937 $ (26,616)
----------- -----------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
(Continued)
Page 9
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
Nine Months Ended September 30, 1999 and 1998
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from investing activities:
Nevada Purchase $ 458,943 $ --
Golden State Acquisition -- 792,132
Cal Fed Acquisition -- 58,386
GSAC Acquisition -- (13,577)
Purchases of securities available for sale (791,952) (531,774)
Proceeds from maturities of securities available for sale 390,328 803,296
Purchases of securities held to maturity (27,527) (897)
Proceeds from maturities of securities held to maturity 64,855 2,263
Purchases of mortgage-backed securities available for sale (4,140,171) (6,096,235)
Principal payments on mortgage-backed securities available for sale 3,088,120 1,921,973
Proceeds from sales of mortgage-backed securities available for sale 193,732 13,703
Principal payments on mortgage-backed securities held to maturity 504,968 289,026
Proceeds from sales of loans 16,820 8,433
Net (increase) decrease in loans receivable (2,386,785) 1,255,430
Purchases of FHLB stock, net (98,517) (79,459)
Purchases of premises and equipment (74,929) (51,223)
Proceeds from disposal of premises and equipment 47,002 19,228
Proceeds from sales of foreclosed real estate 114,938 121,785
Purchases of mortgage servicing rights (289,922) (68,203)
Proceeds from sales of mortgage servicing rights 30,616 --
----------- ------------
Net cash flows used in investing activities (2,899,481) (1,555,713)
----------- ------------
Cash flows from financing activities:
Branch Sales (69,340) (1,267,517)
Net decrease in deposits (1,420,256) (735,108)
Proceeds from additional borrowings 22,388,086 17,098,354
Principal payments on borrowings (21,751,828) (14,845,668)
Net increase in securities sold under agreements to repurchase 1,725,530 1,464,311
GS Escrow Merger -- 1,970,285
Bank Preferred Stock Tender Offers (97,621) (227,345)
Debt Tender Offers (253) (879,879)
Redemption of FN Holdings Preferred Stock -- (25,000)
Dividends on FN Holdings Preferred Stock -- (471)
Dividends on common stock (105,000) (109,247)
Dividends paid to minority stockholders, net of taxes (24,153) (83,725)
Tax benefit on exercise of stock options 2,013 --
Capital contribution from parent 10,000 --
----------- ------------
Net cash flows provided by financing activities 657,178 2,358,990
----------- ------------
Net change in cash and cash equivalents (425,366) 776,661
Cash and cash equivalents at beginning of period 967,950 412,311
----------- ------------
Cash and cash equivalents at end of period $ 542,584 $ 1,188,972
=========== ============
</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 unaudited consolidated financial statements were
prepared in accordance with generally accepted accounting principles for interim
financial information and the requirements of Regulation S-X, Article 10 and
therefore do not include all disclosures necessary for complete financial
statements. In the opinion of management, all adjustments have been made that
are necessary for a fair presentation of the financial position and results of
operations and cash flows as of and for the periods presented. All such
adjustments are of a normal recurring nature. The results of operations for the
three and nine months ended September 30, 1999 are not necessarily indicative of
the results that may be expected for the entire fiscal year or any other interim
period. Certain amounts for the three and nine month periods in the prior year
have been reclassified to conform with the current period's presentation.
Golden State Holdings Inc. ("GS Holdings" or the "Company") is a
subsidiary of Golden State Bancorp Inc. ("Golden State"). GS Holdings was 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
voting common stock of California Federal Bank, A Federal Savings Bank (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
voting stock of the Bank and, therefore, activities for the consolidated entity
are primarily carried out by the Bank and its operating subsidiaries.
The accompanying unaudited consolidated financial statements include the
accounts of GS Holdings, the Bank and the Bank's wholly owned 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 (as defined herein), and as the surviving corporation
in the GS Escrow Merger for periods after the GS Escrow Merger. On September 11,
1998, Glendale Federal Bank, Federal Savings Bank ("Glendale Federal") merged
with and into the Bank pursuant to the Glen Fed 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 Glen Fed Merger.
Minority interest represents amounts attributable to (i) the Bank
Preferred Stock that had not been acquired by GS Holdings, (ii) the Preferred
Stock ("REIT Preferred Stock") of California Federal Preferred Capital
Corporation, a wholly owned subsidiary of the Bank, and (iii) that portion of
stockholders' equity of Auto One Acceptance Corporation ("Auto One"), a
subsidiary of the Bank, attributable to 20% of its common stock.
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 GS Holdings included
in the Company's Annual Report on Form 10-K for the year ended December 31,
1998. All terms used but not defined elsewhere herein have meanings ascribed to
them in the Company's Annual Report on Form 10-K.
As GS Holdings' common stock is wholly owned by Golden State, earnings
per share data is not presented.
(2) ACQUISITIONS AND DIVESTITURES
GOLDEN STATE ACQUISITION
On September 11, 1998, First Nationwide (Parent) Holdings Inc. ("Parent
Holdings") and Hunter's Glen/Ford Ltd. ("Hunter's Glen") completed the merger
with Golden State, the publicly traded parent company of Glendale Federal, in a
tax-free exchange of shares (the "Golden State Merger"), accounted for under the
purchase method of accounting. Pursuant to the Golden State Merger agreement,
(i) FN Holdings contributed all of its assets (including all of the voting
common stock of California Federal) to GS Holdings (the "FN Holdings Asset
Transfer"), (ii) Parent Holdings, which then owned all of the common stock of FN
Holdings as a result of the extinguishment of the Hunter's Glen minority
interest, merged with and into Golden State, which indirectly owned 100% of the
common stock of Glendale Federal, (iii) FN Holdings merged with and into Golden
State Financial Corporation, which owned all of the common stock of Glendale
Federal (the "FN Holdings Merger", and together with the Golden
Page 11
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
State Merger, the "Holding Company Mergers"), and (iv) Glendale Federal merged
with and into California Federal (the "Glen Fed Merger"). The FN Holdings Asset
Transfer, the Holding Company Mergers and the Glen Fed Merger are referred to
collectively as the "Golden State Acquisition."
At September 11, 1998, Glendale Federal had total assets of approximately
$18.9 billion and deposits of $11.3 billion and operated 181 branches and 26
loan offices in California.
The Golden State Acquisition was accounted for as a purchase of Golden
State by Parent Holdings and, accordingly, the purchase price was allocated to
the assets acquired and liabilities assumed in the transaction based on
estimates of fair value at the date of purchase. Since the date of purchase, the
results of operations related to such assets and liabilities have been included
in the Company's consolidated statements of income.
Merger and integration costs associated with the Golden State Acquisition
totalled $7.7 million for the nine months ended September 30, 1999, including
severance for terminated California Federal employees, expenses for California
Federal branch closures, and conversion and consolidation costs, as well as
transition expenses for duplicate personnel, facilities and computer systems
during the integration period. No such expenses were incurred during the third
quarter of 1999.
During the third quarter of 1999, the Company recorded fair value and
other adjustments to reduce intangible assets in the Golden State Acquisition by
$16.6 million, $18.1 million and $12.4 million related to (i) previously accrued
severance and contract termination costs (which had not been utilized upon
completion of the integration plan), (ii) a "true-up" adjustment of the deferred
tax asset and (iii) the purchase price, respectively.
OTHER ACQUISITIONS AND DIVESTITURES
On February 4, 1998, Auto One acquired 100% of the partnership interests
in Gulf States Acceptance Company, a Delaware limited partnership ("GSAC") and
its general partner, Gulf States Financial Services, Inc., a Texas corporation.
GSAC was liquidated and its assets and liabilities were transferred to Auto One
(the "GSAC Acquisition"). The aggregate consideration paid in connection with
the GSAC Acquisition was approximately $13.6 million plus 250 shares of the
common stock of Auto One, par value $1.00 per share, representing a 20% interest
in Auto One. This interest is reflected in the Company's consolidated balance
sheet as minority interest.
On September 11, 1998, the Bank consummated the sale of its Florida bank
franchise (consisting of 24 branches with deposits of $1.4 billion) to Union
Planters Bank of Florida, a wholly owned subsidiary of Union Planters Corp. (the
"Florida Branch Sale").
On April 16, 1999, the Bank acquired twelve retail branches located in
Nevada with deposits of approximately $543 million from Norwest Bank, Nevada, a
subsidiary of Norwest Corporation, and Wells Fargo Bank, N.A. (the "Nevada
Purchase"). Intangible assets of $50.7 million were recorded in connection with
this acquisition, principally representing the deposit premium paid in the
transaction.
During April 1999, First Nationwide Mortgage Corporation ("FNMC") sold
servicing rights for approximately 49,000 loans with an unpaid principal balance
of approximately $2.0 billion, recognizing a pre-tax gain of $16.3 million (the
"Servicing Sale").
(3) CASH, CASH EQUIVALENTS, AND STATEMENTS OF CASH FLOWS
Cash paid for interest on deposits and other interest-bearing liabilities
during the nine months ended September 30, 1999 and 1998 was $1.7 billion and
$1.2 billion, respectively.
During the nine months ended September 30, 1999, noncash activity
consisted of transfers of $227.1 million from loans receivable to
mortgage-backed securities upon the securitization of certain of the Bank's
single-family loans, transfers of $108.1 million from loans held for sale (at
lower of cost or market) to loans receivable, transfers
Page 12
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
of $81.0 million from loans receivable and loans held for sale to foreclosed
real estate and $8.4 million of loans made to facilitate sales of real estate
owned.
Noncash activity during the nine months ended September 30, 1999 also
included (i) a reduction of $18.9 million in previously accrued severance and
contract termination costs, (ii) an $18.1 million "true-up" adjustment of the
deferred tax asset and $12.4 million in purchase price adjustments related to
the Golden State Acquisition, (iii) an increase of $238 thousand in additional
paid-in capital reflecting the impact of 56,908 shares of Golden State
restricted common stock issued during the quarter and (iv) an increase of $66.4
million in retained earnings related to an adjustment of the initial dividend of
tax benefits due to parent upon the Company's deconsolidation from its tax
reporting group as a result of the Golden State Acquisition.
During the nine months ended September 30, 1998, noncash activity
consisted of transfers of $85.3 million from loans receivable to foreclosed real
estate, $5.9 million of loans made to facilitate sales of real estate owned,
transfers of $3.2 million from loans held for sale (at lower of cost or market)
to mortgage-backed securities available for sale and $1.9 billion from loans
receivable to mortgage-backed securities held to maturity upon the
securitization of certain of the Company's multi-family loans. Noncash activity
also included a $267.9 million dividend related to the Company's deconsolidation
from its tax reporting group as a result of the Golden State Acquisition, the
issuance of additional FN Holdings Preferred Stock through Preferred Stock
dividends of $0.6 million, and the retirement of FN Holdings Preferred Stock of
$25.0 million.
(4) SEGMENT REPORTING
Since the Company derives a significant portion of its revenues from
interest income, and interest expense is the most significant expense, the
segments are reported below using net interest income. Because the Company also
evaluates performance based on noninterest income and noninterest expense goals,
these measures of segment profit and loss are also presented. The Company does
not allocate income taxes to the segments.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------- ------------------------------------
Community Mortgage Community Mortgage
Banking Banking Total Banking Banking Total
------- ------- ----- ------- ------- -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net interest income: (1)
1999 $ 936,198 $ 40,562 $ 976,760 $ 297,816 $ 16,710 $ 314,526
1998 559,624 36,286 595,910 197,720 13,606 211,326
Noninterest income: (2)
1999 $ 189,278 $ 164,678 $ 353,956 $ 68,077 $ 46,701 $ 114,778
1998 228,353 156,417 384,770 147,397 52,465 199,862
Noninterest expense: (3)
1999 $ 564,563 $ 132,341 $ 696,904 $ 178,943 $ 40,893 $ 219,836
1998 377,363 123,361 500,724 151,768 44,940 196,708
</TABLE>
- ----------------------
(1) Includes $84.7 million and $71.7 million for the nine months ended
September 30, 1999 and 1998, respectively, in earnings credit provided to
FNMC by the Bank, primarily for custodial bank account balances generated
by FNMC. Also includes $184.9 million and $140.5 million for the nine
months ended September 30, 1999 and 1998, respectively, in interest
income and expense on intercompany loans. Includes $27.4 million and
$26.0 million for the three months ended September 30, 1999 and 1998,
respectively, in earnings credit provided to FNMC by the Bank, primarily
for custodial bank account balances generated by FNMC. Also includes
$60.8 million and $46.4 million for the three months ended September 30,
1999 and 1998, respectively, in interest income and expense on
intercompany loans.
(Footnotes continued on next page)
Page 13
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(2) Includes $36.8 million and $23.2 million for the nine months ended
September 30, 1999 and 1998, respectively, in intercompany servicing
fees. Includes $11.6 million and $8.4 million for the three months ended
September 30, 1999 and 1998, respectively, in intercompany servicing
fees.
(3) Includes $3.5 million in each of the nine-month periods ended September
30, 1999 and 1998 in intercompany noninterest expense. Includes $1.2
million in each of the three-month periods ended September 30, 1999 and
1998 in intercompany noninterest expense.
The following reconciles the above table to the amounts shown on the
consolidated financial statements for the nine and three months ended September
30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30,
------------------------------ -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net interest income:
Total net interest income for reportable
segments $ 976,760 $ 595,910 $ 314,526 $ 211,326
Elimination of intersegment net interest income (84,656) (71,680) (27,434) (26,023)
---------- ---------- ---------- ----------
Total $ 892,104 $ 524,230 $ 287,092 $ 185,303
========== ========== ========== ==========
Noninterest income:
Total noninterest income for reportable segments $ 353,956 $ 384,770 $ 114,778 $ 199,862
Elimination of intersegment servicing fees (36,772) (23,173) (11,632) (8,437)
---------- ---------- ---------- ----------
Total $ 317,184 $ 361,597 $ 103,146 $ 191,425
========== ========== ========== ==========
Noninterest expense:
Total noninterest expense for reportable
segments $ 696,904 $ 500,724 $ 219,836 $ 196,708
Elimination of intersegment expense (3,480) (3,480) (1,160) (1,160)
---------- ---------- ---------- ----------
Total $ 693,424 $ 497,244 $ 218,676 $ 195,548
========== ========== ========== ==========
</TABLE>
(5) REDEMPTION OF FN HOLDINGS NOTES
On May 15, 1999, GS Holdings redeemed the remaining $225 thousand
aggregate principal amount of the FN Holdings 12 1/4% Senior Notes for an
aggregate redemption price, including accrued interest payable, of $252.6
thousand. The premium paid in connection with such redemption was not material.
(6) REFINANCING TRANSACTIONS
On August 6, 1998, GS Escrow Corp. ("GS Escrow"), an affiliate of GS
Holdings, issued $2 billion in debt securities, referred to as the GS Escrow
Notes. The GS Escrow Notes were issued to fund, in part, the cash tender offers,
discussed below, that occurred following the Golden State Acquisition. Deferred
issuance costs of $38.6 million related to the GS Escrow Notes are included in
Golden State's other assets and are being amortized over the life of such notes.
On August 17, 1998, FN Holdings commenced cash tender offers (the "Bank
Preferred Stock Tender Offers") for each of the Bank's two outstanding series of
Bank Preferred Stock, which together had a total aggregate liquidation
preference of $473.2 million. During the third quarter of 1998, 607,711 shares
of the 10 5/8% Preferred Stock and 1,432,937 shares of the 11 1/2% Preferred
Stock were purchased for an aggregate purchase price of $227.3 million. The net
tender premiums and expenses paid in connection with the Bank Preferred Stock
Tender Offers 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 for the
FN Holdings Notes, which had an aggregate principal amount of $915 million. On
September 17, 1998, GS Holdings purchased $735.8 million aggregate principal
amount of the FN Holdings Notes for an aggregate purchase price, including
accrued interest payable, of $902.5 million. The after-tax tender premiums and
expenses paid in connection with the Debt Tender Offers totalled $80.0 million
and are reflected as an extraordinary loss, net of taxes, on the Company's
consolidated
Page 14
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
statements of income for the three and nine months ended September 30, 1998.
For additional information regarding the Refinancing Transactions, refer
to note 5 of the "Notes to Consolidated Financial Statements" in the Company's
1998 Form 10-K.
(7) ACCRUED TERMINATION AND FACILITIES COSTS
In connection with the Golden State Acquisition, the Company recorded
liabilities resulting from (i) branch consolidations due to duplicate
facilities; (ii) employee severance and termination benefits due to a planned
reduction in force; and (iii) expenses incurred under a contractual obligation
to terminate services provided by outside service providers (principally
relating to data processing expenses). The merger and integration plan relative
to the Golden State Acquisition was in place on September 11, 1998. Certain of
these costs were included in the allocation of purchase price and others were
recognized in net income. The table below reflects a summary of the activity in
the liability for the costs related to such plan since December 31, 1998 (in
thousands):
<TABLE>
<CAPTION>
Severance and
Branch Termination Contract
Consolidations Benefits Termination Total
-------------- -------- ----------- -----
<S> <C> <C> <C> <C>
Balance at December 31, 1998 $ 29,870 $ 33,480 $ 11,815 $ 75,165
Additional liabilities recorded 2,322 -- -- 2,322
Charges to liability account (3,648) (3,626) (8,499) (15,773)
-------- -------- -------- --------
Balance at March 31, 1999 28,544 29,854 3,316 61,714
Additional liabilities recorded 2,573 -- -- 2,573
Charges to liability account (3,873) -- (821) (4,694)
-------- -------- -------- --------
Balance at June 30, 1999 27,244 29,854 2,495 59,593
Additional liabilities recorded 4,356 56 -- 4,412
Charges to liability account (3,911) (458) (203) (4,572)
Reversal of accrual -- (16,641) (2,267) (18,908)
-------- -------- -------- --------
Balance at september 30, 1999 $ 27,689 $ 12,811 $ 25 $ 40,525
======== ======== ======== ========
</TABLE>
(8) INCOME TAXES
In connection with the Golden State Merger on September 11, 1998, the
Company deconsolidated from the Mafco Group. As a result, only the amount of the
net operating losses ("NOLs") of the Company not utilized by the Mafco Group on
or before December 31, 1998 are available to offset taxable income of the
Company thereafter.
Based upon the actual filing of the Mafco Group and GS Holdings 1998
consolidated federal income tax returns during the third quarter of 1999, tax
benefits of $79.0 million were recognized. The tax benefit is fully offset by an
increase in minority interest expense, since under the Golden State Merger
agreement, the tax benefits from any NOLs and other tax attributes of Parent
Holdings and its subsidiaries are retained by First Gibraltar and Hunter's Glen.
In addition, the Company recorded an adjustment of $66.4 million to
reduce the initial dividend of tax benefits to parent due to its deconsolidation
from the Mafco Group, which was recorded as an increase to retained earnings
during the third quarter of 1999.
(9) MINORITY INTEREST
On April 1, 1999, GS Holdings redeemed all of the remaining 607,299
outstanding shares of the Bank's 10 5/8% Preferred Stock not already owned by it
for $105.313 per share, for a total redemption price of $63.9 million. This
transaction reduced minority interest by $60.7 million on the Company's
consolidated balance sheet and resulted in a charge of $3.2 million to minority
interesst expense.
Page 15
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
On September 1, 1999, GS Holdings redeemed all of the remaining 318,341
outstanding shares of the Bank's 11 1/2% Preferred Stock not already owned by it
for $105.75 per share, for a total redemption price of $33.7 million. This
transaction reduced minority interest by $31.8 million on the Company's
consolidated balance sheet and resulted in a charge of $1.8 million to minority
interest expense.
During the third quarter of 1999, minority interest expense of $79.0
million was recorded based upon changes to estimated pre-merger tax benefits
retained by Parent Holdings. This amount was fully offset by an income tax
benefit in the same period. See note 8.
(10) STOCKHOLDER'S EQUITY
Cash dividends on the FN Holdings Preferred Stock totalled $0.5 million
during the nine months ended September 30, 1998. As the FN Holdings Preferred
Stock was redeemed in 1998, there were no preferred dividends during the nine
months ended September 30, 1999. Dividends on common stock totalled $105.0
million and $377.1 million during the nine months ended September 30, 1999 and
1998, respectively. The 1998 amount included $267.9 million related to the
Company's deconsolidation from its tax reporting group as a result of the Golden
State Merger.
During the third quarter of 1999, the Company received a capital
contribution from its parent of $10.0 million. In addition, the Company also
recorded an adjustment to the purchase price in the Golden State Acquisition of
$12.4 million. See note 2.
During the third quarter of 1999, the Company recorded a $66.4 million
increase in retained earnings representing an adjustment to reduce the initial
dividend of tax benefits to parent upon the Company's deconsolidation from its
tax reporting group on September 11, 1998. See note 8.
(11) EXECUTIVE AND STOCK COMPENSATION
In connection with the Golden State Acquisition, the Bank is
administering stock option plans that provided for the granting of options of
Golden State Common Stock to employees and directors. Upon the consummation of
the merger on September 11, 1998, substantially all options outstanding became
exercisable. All pre-merger stock option plans have expired as to the granting
of additional options. During the three and nine months ended September 30,
1999, a total of 149,226 and 506,243 options, respectively, were exercised and
57,500 and 230,000 options, respectively, expired under these plans.
On May 17, 1999, the Golden State Bancorp Inc. Omnibus Stock Plan (the
"Stock Plan") was approved, providing for the granting of stock options, stock
appreciation rights and restricted stock to employees of Golden State and its
subsidiaries, non-employee directors and to consultants who provide significant
services to Golden State. The total number of shares available for grant through
March 15, 2009 under the Stock Plan is 7,000,000 shares, which may be issued
from treasury or from authorized but unissued shares.
On May 18, 1999, Golden State granted to its employees non-qualified
stock options equivalent to 1,293,000 shares of its common stock at a price of
$23.50 per share under the Stock Plan. During the three month period ending
September 30, 1999, Golden State granted additional non-qualified stock options
equivalent to 59,000 shares of common stock at a price of $23.50 per share under
the Stock Plan. These shares generally vest over three years in one-third
increments on the anniversary of the grant date. The options generally expire 10
years from the date of grant. No compensation cost was recognized by the Company
for these stock options during the three and nine months ended September 30,
1999, in accordance with the intrinsic value accounting methodology prescribed
in Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, whereby compensation expense to employees is determined based upon
the excess, if any, of the market price of Golden State's common stock at the
measurement date over the exercise price of the award.
Page 16
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
At September 30, 1999, options to exercise an equivalent of 2,609,544
shares remained outstanding under all plans.
On May 17, 1999, the Golden State Bancorp Inc. Executive Compensation
Plan (ECP) was approved, providing for performance-based incentive awards to
senior executives of the Company. Awards may be paid in cash; however up to 50%
may be payable in restricted stock granted under the Stock Plan discussed above.
On July 19, 1999, the Company awarded to certain of its employees 56,908
shares of restricted stock. The market value on the date of the award was $22.38
per share. These shares generally vest over two years in one-half increments on
the anniversary of the grant date, based upon the continued service of the
employee. The compensation expense related to this award is recognized on a
straight line basis over the vesting period for each tranche of the award with a
corresponding increase to additional paid-in capital. During the three and nine
months ended September 30, 1999, $0.2 million in compensation expense was
recognized related to such award.
(12) NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS No. 133"). SFAS No. 133 establishes
standards for derivative instruments and for hedging activities, and requires
that an entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. Under SFAS No. 133,
an entity that elects to apply hedge accounting is required to establish at the
inception of the hedge the method it will use for assessing the effectiveness of
the hedging derivative and the measurement approach for determining the
ineffective aspect of the hedge.
SFAS No. 133 applies to all entries and amends SFAS No. 107, DISCLOSURES
ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS, to include in Statement 107 the
disclosure provisions about concentrations of credit risk from Statement 105.
SFAS No. 133 supersedes FASB Statements No. 80, ACCOUNTING FOR FUTURES
CONTRACTS, No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT
RISK, and No. 119, DISCLOSURE ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR
VALUE OF FINANCIAL INSTRUMENTS. SFAS No. 133 also nullifies or modifies the
consensuses reached in a number of issues addressed by the Emerging Issues Task
Force.
SFAS No. 133, as amended by SFAS No. 137, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES -- DEFERRAL OF THE EFFECTIVE DATE OF FASB
STATEMENT NO. 133 - AN AMENDMENT OF FASB STATEMENT NO. 133, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. Initial
application of this statement should be as of the beginning of an entity's
fiscal quarter; on that date, hedging relationships must be designated anew and
documented pursuant to the provisions of this statement. Earlier application of
all of the provisions of SFAS No. 133 is encouraged, but is permitted only as of
the beginning of any fiscal quarter that begins after issuance of this
statement. SFAS No. 133 should not be applied retroactively to financial
statements of prior periods. Management has established a multi-disciplinary
task force to assess the statement's effect on the Company's consolidated
financial statements and to coordinate its implementation.
Page 17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THE STATEMENTS CONTAINED IN THIS REPORT ON FORM 10-Q THAT ARE NOT PURELY
HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934, INCLUDING STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, INTENTIONS,
BELIEFS OR STRATEGIES REGARDING THE FUTURE. FORWARD-LOOKING STATEMENTS INCLUDE
THE COMPANY'S STATEMENTS REGARDING LIQUIDITY, PROVISION FOR LOAN LOSSES, CAPITAL
RESOURCES AND ANTICIPATED EXPENSE LEVELS IN "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS". IN ADDITION, IN
THOSE AND OTHER PORTIONS OF THIS DOCUMENT, THE WORDS "ANTICIPATE", "BELIEVE",
"ESTIMATE", "EXPECT", "INTEND", AND OTHER SIMILAR EXPRESSIONS, AS THEY RELATE TO
THE COMPANY OR THE COMPANY'S MANAGEMENT, ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT THE CURRENT VIEWS OF THE
COMPANY WITH RESPECT TO FUTURE EVENTS AND ARE SUBJECT TO CERTAIN RISKS,
UNCERTAINTIES AND ASSUMPTIONS. IT IS IMPORTANT TO NOTE THAT THE COMPANY'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE DESCRIBED HEREIN AS ANTICIPATED,
BELIEVED, ESTIMATED OR EXPECTED. AMONG THE FACTORS THAT COULD CAUSE RESULTS TO
DIFFER MATERIALLY ARE: (I) CHANGES IN LEVELS OF MARKET INTEREST RATES, (II)
CHANGES IN THE CALIFORNIA ECONOMY OR CALIFORNIA REAL ESTATE VALUES, (III)
CHANGES IN THE LEVEL OF MORTGAGE LOAN PREPAYMENTS, (IV) CHANGES IN FEDERAL
BANKING LAWS AND REGULATIONS, (V) DIFFICULTIES, DELAYS, OR UNANTICIPATED COSTS
RELATED TO ADDRESSING YEAR 2000 ISSUES, INCLUDING THOSE ARISING FROM THE
COMPANY'S CUSTOMERS AND SUPPLIERS, (VI) ACTIONS BY THE COMPANY'S COMPETITORS,
AND (VII) THE RISKS DESCRIBED IN THE "RISK FACTORS" SECTION INCLUDED IN THE
REGISTRATION STATEMENT ON FORM S-1 FILED BY THE COMPANY 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 that provide retail consumers
and small businesses with deposit products such as demand, transaction and
savings accounts; investment products such as mutual funds, annuities and
insurance; and (ii) mortgage banking activities, including originating and
purchasing 1-4 unit residential loans for sale to various investors in the
secondary market and servicing loans for itself and others. To a lesser extent,
the Company originates and/or purchases certain commercial real estate,
commercial and consumer loans for investment. Revenues are derived primarily
from interest earned on loans, interest received on government and agency
securities and mortgage-backed securities, gains on sales of loans and other
investments and fees received in connection with loan servicing, securities
brokerage and other customer service transactions. Expenses primarily consist of
interest on customer deposit accounts, interest on short-term and long-term
borrowings, general and administrative expenses consisting of compensation and
benefits, data processing, occupancy and equipment, communications, deposit
insurance assessments, advertising and marketing, professional fees and other
general and administrative expenses.
NET INCOME
GS Holdings reported net income for the nine months ended September 30,
1999 of $246.8 million compared with net income of $339.7 million for the
corresponding period in 1998. Net income for the nine months ended September 30,
1999 includes a $16.3 million pre-tax gain from the Servicing Sale, $5.0 million
in minority interest expense related to the redemption of the Bank Preferred
Stock and a $2.3 million pre-tax gain from the sale of branches. Net income on a
core basis, excluding these items, totalled $241.0 million for the nine months
ended September 30, 1999. Net income for the nine months ended September 30,
1998 includes (i) a $250 million reduction of the valuation allowance related to
the Company's deferred tax asset, (ii) a $108.9 million pre-tax gain from the
Florida Branch Sale, (iii) $31.9 million in merger and integration costs
(including severance, conversion and consolidation costs) incurred in connection
with the Golden State Acquisition, (iv) an $80 million extraordinary loss on
early extinguishment of debt, net and (v) $19.5 million in minority interest
expense related to the Bank Preferred Stock Tender Offers. Without consideration
of these items, net income for the nine months ended September 30, 1998 would
have been $144.7 million.
GS Holdings reported net income for the three months ended September 30,
1999 of $87.2 million compared with net loss of $23.3 million for the
corresponding period in 1998. Net income for the three months ended September
30, 1999 includes $1.8 million in minority interest expense related to the
redemption of the 11 1/2% Bank Preferred Stock and a $2.3 million pre-tax gain
from the sale of branches. Net income on a core basis, excluding
Page 18
<PAGE>
these two items, totalled $87.6 million for the three months ended September 30,
1999. The net loss for the three months ended September 30, 1998 includes (i) a
$108.9 million pre-tax gain from the Florida Branch Sale, (ii) $31.1 million in
merger and integration costs (including severance, conversion and consolidation
costs) incurred in connection with the Golden State Acquisition, (iii) an $80
million extraordinary loss on early extinguishment of debt, net and (iv) $19.5
million in minority interest expense related to the Bank Preferred Stock Tender
Offers. Without consideration of these items, net income for the three months
ended September 30, 1998 would have been $31.2 million.
FINANCIAL CONDITION
During the nine months ended September 30, 1999, consolidated total
assets increased $0.9 billion, to $55.7 billion from December 31, 1998, and
total liabilities increased from $52.5 billion to $53.5 billion.
During the nine months ended September 30, 1999, stockholder's equity
increased $2.4 million to $1.7 billion. The increase in stockholder's equity is
principally the net result of $246.8 million in net income for the period, a
$66.4 million adjustment to reduce the initial dividend of tax benefits to
parent due to deconsolidation, a $10.0 million contribution from parent and $2.0
million from the exercise of stock options, partially offset by a $205.6 net
unrealized loss on securities available for sale, $105.0 million in common stock
dividends and a $12.4 million reduction in the purchase price of the Golden
State Acquisition. See note 10.
The unrealized loss on securities available for sale is primarily a
result of a decline in the value of the Company's mortgage-backed securities
available for sale due to an increase in Treasury yields and wider spreads on
private label collateralized mortgage obligations. This unrealized loss reflects
general declines in the prices of fixed-rate instruments during the year as a
consequence of rising interest rates, which led to a slowing of prepayment
expectations and extended the expected lives of the mortgage-related securities
in the portfolio. This unrealized loss represents a decline in the total
mortgage-backed securities available for sale portfolio of less than 2%.
However, this adjustment does not take into account market changes in the value
of borrowings or deposits. At September 30, 1999, the market valuation
adjustment of the offsetting borrowings would have been a positive $197.5
million. This does not include any increase in the value of deposits.
GS Holdings' non-performing assets, consisting of non-performing loans,
net of purchase accounting adjustments, foreclosed real estate, net, and
repossessed assets, decreased to $219 million at September 30, 1999 compared
with $310 million at December 31, 1998. Total non-performing assets as a
percentage of the Bank's total assets decreased to 0.39% at September 30, 1999
from 0.57% at December 31, 1998.
YEAR 2000
The Year 2000 remediation process for existing mission-critical systems
was completed in the first quarter of 1999, as well as the testing and
certification of these systems and applications. In addition, during February
and March of 1999, the Company participated in industry-wide Year 2000
integration testing sponsored by the Mortgage Bankers Association. The Company
has also assessed risks related to the potential failure of material third
parties to be ready for the year 2000.
The contingency plan for the critical supply vendors was completed in
mid-February 1999 and contingency plans were completed for all other material
service providers by June 30, 1999. The Y2K weekend (January 1 and 2, 2000)
support plan for applications maintained in-house was completed by September 30,
1999. In addition, contingency plans for critical business areas to address
liquidity, customer communications, operations issues and potential failures
surrounding the Year 2000 event were completed by September 30, 1999.
It is currently expected that costs related to making the Company's
computer systems, applications and facilities Year 2000 compliant will total
approximately $17.6 million over the years 1997 to 2000. Of this amount, $15.9
million has been incurred since the inception of the Year 2000 project through
September 30, 1999. Noninterest expense for the three and nine months ended
September 30, 1999 included approximately $1.5 million and $6.1 million,
respectively, in connection with the Company's Year 2000 efforts.
Page 19
<PAGE>
For additional information regarding the Year 2000 issue, refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Year 2000" in the Company's 1998 Form 10-K.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 VERSUS NINE MONTHS ENDED SEPTEMBER
30, 1998
The following table sets forth information regarding the Company's
consolidated average balance sheets, together with the total dollar amounts of
interest income and interest expense and the weighted average interest rates for
the periods presented. Average balances are calculated on a daily basis. The
information presented represents the historical activity of the Company.
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
(dollars in millions)
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,571 $ 70 5.97%
Mortgage-backed securities available for sale 13,623 645 6.32
Mortgage-backed securities held to maturity 2,471 138 7.44
Loans held for sale, net 1,939 96 6.60
Loans receivable, net 31,427 1,722 7.31
FHLB stock 1,100 43 5.24
------- ------
Total interest-earning assets 52,131 2,714 6.94
Noninterest-earning assets 3,748 ------
-------
Total assets $55,879
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits $24,104 667 3.70
Securities sold under agreements to repurchase (3) 4,826 188 5.14
Borrowings (3) 23,469 967 5.51
------- ------
Total interest-bearing liabilities 52,399 1,822 4.65
Noninterest-bearing liabilities 1,210 ------
Minority interest 551
Stockholder's equity 1,719
-------
Total liabilities, minority interest
and stockholder's equity $55,879
=======
Net interest income $ 892
======
Interest rate spread 2.29%
=====
Net interest margin 2.27%
=====
Return on average assets 0.59%
=====
Return on average common equity 19.14%
=====
Return on average total equity 19.14%
=====
Average equity to average assets 3.08%
=====
</TABLE>
Page 20
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998
--------------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
(dollars in millions)
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,180 $ 66 7.48%
Mortgage-backed securities available for sale 6,661 294 5.89
Mortgage-backed securities held to maturity 1,396 80 7.64
Loans held for sale, net 1,585 85 7.16
Loans receivable, net 20,089 1,170 7.77
FHLB Stock 519 22 5.78
------- ------
Total Interest-earning Assets 31,430 1,717 7.29
------
Noninterest-earning Assets 3,315
-------
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 $ 524
======
Interest rate spread 2.12%
=====
Net interest margin 2.21%
=====
Return on average assets 1.30%
=====
Return on average common equity 31.69%
=====
Return on average total equity 31.60%
=====
Average equity to average assets 4.12%
=====
</TABLE>
-------------------
(1) Non-performing assets are included in the average balances for the
periods indicated.
(2) The information presented includes securities held to maturity,
securities available for sale and interest-bearing deposits in other
banks.
(3) Interest and average rate include the impact of interest rate swaps.
Page 21
<PAGE>
The following table presents certain information of the Company regarding
changes in interest income and interest expense during the periods indicated.
The dollar amount of interest income and interest expense fluctuates depending
upon changes in the respective interest rates and upon changes in the respective
amounts (volume) of the Company's interest-earning assets and interest-bearing
liabilities. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) volume
(changes in average outstanding balances multiplied by the prior period's rate)
and (ii) rate (changes in average interest rate multiplied by the prior period's
volume). Changes attributable to both volume and rate have been allocated
proportionately.
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999 vs.1998
Increase (Decrease) Due To
--------------------------------------------
Volume Rate Net
------ ---- ---
(in millions)
<S> <C> <C> <C>
INTEREST INCOME:
Securities and interest-bearing deposits in banks $ 10 $ (6) $ 4
Mortgage-backed securities available for sale 327 24 351
Mortgage-backed securities held to maturity 60 (2) 58
Loans held for sale, net 17 (6) 11
Loans receivable, net 617 (65) 552
FHLB stock 23 (2) 21
------ ---- ----
Total 1,054 (57) 997
------ ---- ----
INTEREST EXPENSE:
Deposits 185 (64) 121
Securities sold under agreements to repurchase 90 (8) 82
Borrowings 479 (53) 426
------ ---- ----
Total 754 (125) 629
------ ---- ----
Change in net interest income $ 300 $ 68 $368
====== ==== ====
</TABLE>
The volume variances in total interest income and total interest expense
for the nine months ended September 30, 1999 compared to the corresponding
period in 1998 are largely due to the additional volume related to the Golden
State Acquisition, increased purchases of mortgage-backed securities funded with
FHLB advances and the assumption of debt securities from the GS Escrow Merger
(the "GS Holdings Notes"), partially offset by $1.4 billion in deposits sold in
the Florida Branch Sale and borrowings repurchased as part of the Refinancing
Transactions. The positive total rate variance of $68 million is primarily
attributed to the lower cost of funds on deposits, lower interest rates paid on
new borrowings (including the Refinancing Transactions), the lower costing
liabilities assumed in the Golden State Acquisition, premium amortization
associated with prepayments of variable-rate mortgage-backed securities in 1998
and higher market rates on mortgage-backed securities purchased in 1999 and
1998, partially offset by prepayments of higher rate interest-earning assets,
primarily loans, in 1999.
INTEREST INCOME. Total interest income was $2.7 billion for the nine
months ended September 30, 1999, an increase of $996.9 million from the nine
months ended September 30, 1998. Total interest-earning assets for the nine
months ended September 30, 1999 averaged $52.1 billion, compared to $31.4
billion for the corresponding period in 1998, primarily as a result of the
Golden State Acquisition. The yield on total interest-earning assets during the
nine months ended September 30, 1999 decreased to 6.94% from 7.29% for the nine
months ended September 30, 1998, primarily due to prepayments of higher rate
loans which were replaced with lower yielding originations and the repricing of
variable-rate loans, partially offset by purchases of mortgage-backed securities
and additions from the Golden State Acquisition of mortgage-backed securities
with higher market yields.
GS Holdings earned $1.7 billion of interest income on loans receivable
for the nine months ended September 30, 1999, an increase of $552.0 million from
the nine months ended September 30, 1998. The average balance of loans
receivable was $31.4 billion for the nine months ended September 30, 1999,
compared to $20.1 billion for the same period in 1998. The weighted average rate
on loans receivable decreased to 7.31% for the nine months ended September 30,
1999 from 7.77% for the nine months ended September 30, 1998, primarily due to
comparatively
Page 22
<PAGE>
lower market rates in 1999. The increase in the average volume is primarily due
to the addition of $14.6 billion in loans acquired in the Golden State
Acquisition.
GS Holdings earned $96.0 million of interest income on loans held for
sale for the nine months ended September 30, 1999, an increase of $10.9 million
from the nine months ended September 30, 1998. The average balance of loans held
for sale was $1.9 billion for the nine months ended September 30, 1999, an
increase of $354 million from the comparable period in 1998, primarily due to
increased originations and longer holding periods for jumbo loans during the
nine months ended September 30, 1999. The weighted average rate on loans held
for sale decreased to 6.60% for the nine months ended September 30, 1999 from
7.16% for the nine months ended September 30, 1998, primarily due to declining
market rates.
Interest income on mortgage-backed securities available for sale was
$645.5 million for the nine months ended September 30, 1999, an increase of
$351.4 million from the nine months ended September 30, 1998. The average
portfolio balances increased $7.0 billion, to $13.6 billion, for the nine months
ended September 30, 1999 compared to the same period in 1998. The weighted
average yield on these assets increased from 5.89% for the nine months ended
September 30, 1998 to 6.32% for the nine months ended September 30, 1999. The
increase in the volume and the weighted average yield is primarily due to
premium amortization associated with prepayments of variable-rate securities in
1998, purchases of mortgage-backed securities and additions of $2.4 billion from
the Golden State Acquisition with higher market yields.
Interest income on mortgage-backed securities held to maturity was $137.8
million for the nine months ended September 30, 1999, an increase of $57.8
million from the nine months ended September 30, 1998. The average portfolio
balance increased $1.1 billion, to $2.5 billion, for the nine months ended
September 30, 1999 compared to the same period in 1998, primarily attributed to
the addition of $1.9 billion of the Bank's multi-family loans securitized with
FNMA with a weighted average rate of 7.39% during September of 1998. The
weighted average rates for the nine months ended September 30, 1999 and 1998
were 7.44% and 7.64%, respectively.
Interest income on securities and interest-bearing deposits in other
banks was $70.4 million for the nine months ended September 30, 1999, an
increase of $4.2 million from the nine months ended September 30, 1998. The
average portfolio balance increased from $1.2 billion for the nine months ended
September 30, 1998 to $1.6 billion for the nine months ended September 30, 1999.
The decrease in the weighted average rate from 7.48% for the nine months ended
September 30, 1998 to 5.97% for the nine months ended September 30, 1999 is
primarily due to a decline in market interest rates, as well as $19.8 million in
interest income received in September 1998 on a $193.0 million federal income
tax refund related to Old California Federal.
Dividends on FHLB stock were $43.1 million for the nine months ended
September 30, 1999, an increase of $20.7 million from the nine months ended
September 30, 1998, due to an increase in the amount of such stock owned by the
Company as a result of an increase in borrowings under FHLB advances as well as
the Golden State Acquisition. The average balance outstanding during the nine
months ended September 30, 1999 and 1998 was $1.1 billion and $.5 billion,
respectively. The weighted average rate on FHLB stock decreased to 5.24% for the
nine months ended September 30, 1999 from 5.78% for the nine months ended
September 30, 1998, reflecting lower dividends declared by the FHLB.
INTEREST EXPENSE. Total interest expense was $1.8 billion for the nine
months ended September 30, 1999, an increase of $629.1 million from the nine
months ended September 30, 1998. The increase is primarily the result of
additional borrowings under FHLB advances, the additional deposits and
borrowings assumed in the Golden State Acquisition, deposits assumed in the
Nevada Purchase and the net impact of the Refinancing Transactions, including
the assumption of the GS Holdings Notes.
Interest expense on customer deposits, including brokered deposits, was
$667.4 million for the nine months ended September 30, 1999, an increase of
$121.7 million from the nine months ended September 30, 1998. The average
balance of customer deposits outstanding increased from $16.7 billion for the
nine months ended September 30, 1998 to $24.1 billion for the nine months ended
September 30, 1999. The increase in the average balance is primarily a result of
$11.3 billion in deposits assumed in the Golden State Acquisition, partially
offset by $1.4 billion in deposits sold in the Florida Branch Sale, both of
which occurred in the third quarter of 1998. In
Page 23
<PAGE>
addition, $543 million in deposits at an average cost of 3.71% were assumed in
the Nevada Purchase, which was consummated in April 1999. The overall weighted
average cost of deposits declined to 3.70% for the nine months ended September
30, 1999 from 4.38% for the nine months ended September 30, 1998, primarily due
to lower market interest rates and a change in the Bank's certificate of deposit
pricing strategy, as well as the higher average balances of lower rate
transaction accounts in 1999 compared to 1998 and the lower cost of funds on
deposits assumed in the Golden State Acquisition and the Nevada Purchase.
Interest expense on securities sold under agreements to repurchase
totalled $188.1 million for the nine months ended September 30, 1999, an
increase of $81.7 million from the nine months ended September 30, 1998. The
average balance of such borrowings for the nine months ended September 30, 1999
and 1998 was $4.8 billion and $2.5 billion, respectively; such increase is
primarily attributed to the Golden State Acquisition. The weighted average
interest rate on these instruments decreased to 5.14% for the nine months ended
September 30, 1999 from 5.59% for the nine months ended September 30, 1998,
primarily due to a decrease in market rates on new borrowings in 1999 compared
to 1998.
Interest expense on borrowings totalled $967.1 million for the nine
months ended September 30, 1999, an increase of $425.7 million from the nine
months ended September 30, 1998. The average balance outstanding for the nine
months ended September 30, 1999 and 1998 was $23.5 billion and $11.7 billion,
respectively. The weighted average interest rate on these instruments decreased
to 5.51% for the nine months ended September 30, 1999 from 6.20% for the nine
months ended September 30, 1998, primarily due to lower prevailing market rates
in 1999 and the net impact of the Refinancing Transactions. The higher volume
includes the net impact of the Refinancing Transactions and the addition of $5.4
billion in FHLB advances assumed in the Golden State Acquisition, as well as the
increase in FHLB advances used to fund the purchases of mortgage-backed
securities and to fund the sale of deposits in the Florida Branch Sale.
NET INTEREST INCOME. Net interest income was $892.1 million for the nine
months ended September 30, 1999, an increase of $367.9 million from the nine
months ended September 30, 1998, primarily due to an increase in net
interest-earning assets resulting from the Golden State Acquisition and an
increase in the net interest margin. The interest rate spread increased to 2.29%
for the nine months ended September 30, 1999 from 2.12% for the nine months
ended September 30, 1998, primarily as a result of maturities and repayments of
higher rate interest-bearing liabilities being replaced with interest-bearing
liabilities having comparatively lower rates. The effect of lower rates on
liabilities was partially offset by lower yielding assets replenishing asset
run-off in a declining rate environment.
NONINTEREST INCOME. Total noninterest income, consisting primarily of
loan servicing fees, customer banking fees, and gains on sales of assets, was
$317.2 million for the nine months ended September 30, 1999, representing an
increase of $62.1 million from the nine months ended September 30, 1998,
excluding non-recurring gains on the sale of branches in each of the periods.
Loan servicing fees, net of amortization of mortgage servicing rights,
were $108.4 million for the nine months ended September 30, 1999, compared to
$106.1 million for the nine months ended September 30, 1998. The single-family
residential loan servicing portfolio, excluding loans serviced for the Bank,
increased from $69.3 billion at September 30, 1998 to $72.3 billion at September
30, 1999. Incremental loan servicing fees were partially offset by amortization
related to higher average MSR (as defined herein) basis in the nine months ended
September 30, 1999. Servicing rights purchased in bulk transactions in prior
years with lower average MSR basis are being replaced with current production
which more closely approximates market rates which, when combined with recent
higher prepayment speeds, results in a decline in the average yield on the
portfolio.
Customer banking fees were $138.8 million for the nine months ended
September 30, 1999 compared to $79.5 million for the nine months ended September
30, 1998. The increase is primarily attributed to the impact of revenues from
the retail banking operations acquired in the Golden State Acquisition and
deposits assumed in the Nevada Purchase, partially offset by the impact of the
Florida Branch Sale. In addition, management has placed increased emphasis on
transaction account growth since the Golden State Acquisition, which has
generated additional fee income.
Page 24
<PAGE>
Gain on sale of loans totalled $25.4 million for the nine months ended
September 30, 1999, a decrease of $24.6 million from the nine months ended
September 30, 1998. The decrease includes adjustments of $11.4 million recorded
during the second and third quarters of 1999 to reflect the lower of cost or
market valuation on residential loans held for sale during the nine months ended
September 30, 1999. In addition, gains attributed to early payoffs of commercial
loans with unamortized discounts were $3.7 million higher in 1998 compared to
1999. During the nine months ended September 30, 1999, California Federal sold
$8.7 billion in single-family mortgage loans originated for sale with servicing
rights retained as part of its ongoing mortgage banking operations compared to
$6.3 billion of such sales for the corresponding period in 1998.
Net gain on sale of assets totalled $18.3 million for the nine months
ended September 30, 1999, an increase of $18.1 million from the nine months
ended September 30, 1998, primarily attributed to the Servicing Sale.
Net gain on sale of branches was $2.3 million for the nine months ended
September 30, 1999 compared to $108.8 million for the same period in 1998. The
gain in 1999 relates to the sale of the Eureka and Ukiah branches (with deposits
of $70.1 million) to Humboldt Bank. The gain in 1998 is primarily attributed to
the Florida Branch Sale in the third quarter.
Other noninterest income was $24.0 million for the nine months ended
September 30, 1999 compared to $17.0 million for the nine months ended September
30, 1998. The increase in 1999 is primarily attributed to the receipt of a sales
and use tax refund and an increase in disbursement float income.
NONINTEREST EXPENSE. Total noninterest expense was $693.4 million for the
nine months ended September 30, 1999, an increase of $196.2 million compared to
the nine months ended September 30, 1998. The variance between the two periods
is primarily attributed to the Golden State Acquisition. Noninterest expense for
the nine months ended September 30, 1999 included increases of $98.5 million in
compensation, $39.8 million in occupancy and equipment, $16.4 million in
goodwill amortization attributed to the Golden State Acquisition and the Nevada
Purchase, and an additional $37.8 million in other noninterest expense, all
primarily as a result of the Golden State Acquisition. These increases were
partially offset by a $24.2 million decrease in merger and integration costs
incurred in connection with the Golden State Acquisition, as the majority of
these costs were incurred in 1998.
Compensation and employee benefits expense was $299.2 million for the
nine months ended September 30, 1999, an increase of $98.5 million from the nine
months ended September 30, 1998. The increase is primarily attributed to the
Golden State Acquisition.
Occupancy and equipment expense was $104.9 million and $65.1 million for
the nine months ended September 30, 1999 and 1998, respectively. This increase
reflects the effects of the Golden State Acquisition as well as $8.6 million of
adjustments in 1999 to previously established accruals for vacant facilities
that are not expected to be recurring.
Loan expense was $29.2 million for the nine months ended September 30,
1999, a decrease of $4.6 million from the nine months ended September 30, 1998.
The decrease is primarily attributed to an increase in FAS 91 deferred
origination costs due to higher loan production activity during the nine months
ended September 30, 1999 compared to the same period in 1998.
Professional fees were $39.8 million and $30.8 million for the nine
months ended September 30, 1999 and 1998, respectively. The increase was
primarily a result of the Golden State Acquisition.
Marketing expense was $24.1 million and $12.0 million for the nine months
ended September 30, 1999 and 1998, respectively. The increase was primarily a
result of the Golden State Acquisition.
Data processing fees were $17.8 million for the nine months ended
September 30, 1999, an increase of $7.5 million from the nine months ended
September 30, 1998. The increase is primarily attributed to expenses incurred in
connection with the Year 2000 project.
Page 25
<PAGE>
Merger and integration costs were $7.7 million and $31.9 million for the
nine months ended September 30, 1999 and 1998, respectively, representing
transition expenses, which include severance, conversion and consolidation costs
incurred in connection with the Golden State Acquisition. The majority of such
costs were incurred in 1998 and management does not expect to incur any
significant additional merger and integration costs from this transaction.
Amortization of intangible assets was $52.8 million for the nine months
ended September 30, 1999, an increase of $16.4 million from the nine months
ended September 30, 1998, primarily attributed to the goodwill recorded in
connection with the Golden State Acquisition and the Nevada Purchase.
Other noninterest expense was $112.1 million in 1999 compared to $74.4
million in 1998, primarily attributed to increased operations as a result of the
Golden State Acquisition. In addition, results for the nine months ended
September 30, 1999 include $6.2 million in operating expenses related to back
office support; such charges are not expected to be recurring.
PROVISION FOR INCOME TAX. During the nine months ended September 30, 1999
and 1998, GS Holdings recorded income tax expense of $151.7 million and an
income tax benefit of $143.1 million, respectively. GS Holdings' effective
Federal tax rate was 22% and (51)% during the nine months ended September 30,
1999 and 1998, respectively, while its statutory Federal tax rate was 35% during
both periods. For the period ended September 30, 1999, the difference between
the effective and statutory rates was primarily the result of adjustments
related to pre-merger tax benefits, in the form of net operating loss carryovers
and other items, which are retained by the previous owners of FN Holdings. To
the extent these tax benefits are recognized, there is a reduction in income tax
expense, which is offset by an increase in minority interest: provision in lieu
of income tax expense. Accordingly, during the nine months ended September 30,
1999, a tax benefit of $79.0 million was recognized, and a corresponding
increase to minority interest was recorded. These adjustments resulted from 1998
tax filings late in the third quarter of 1999. For the nine month period ended
September 30, 1998, the difference between the effective and statutory rates was
primarily the result of a $250 million reduction in the deferred tax asset
valuation allowance. GS Holdings' effective state tax rate was 8% and 11% during
the nine months ended September 30, 1999 and 1998, respectively.
MINORITY INTEREST. Minority interest for the nine months ended September
30, 1999 includes a $79.0 million provision in lieu of income taxes,
representing pre-merger tax benefits retained by the previous owners of FN
Holdings (see note 8), and $5.0 million in net premiums paid in connection with
the redemption of the Bank Preferred Stock. Dividends on the Bank Preferred
Stock that had not been acquired by GS Holdings and the REIT Preferred Stock
totalling $1.8 million and $34.2 million, respectively, were also recorded
during the nine months ended September 30, 1999. Minority interest relative to
the REIT Preferred Stock is reflected net of related income tax benefit of $14.4
million, which will inure to the Company as a result of the deductibility of
such dividends for income tax purposes. The reduction in minority interest
relative to the Bank Preferred Stock reflects the impact of the $380.7 million
in Bank Preferred Stock purchased by GS Holdings in connection with the
Refinancing Transactions in the third and fourth quarters of 1998, as well as
the $60.7 million redeemed on April 1, 1999 and the $31.8 million redeemed on
September 1, 1999. Minority interest for the nine months ended September 30,
1999 also includes a $1.7 million benefit reversal representing that portion of
Auto One's loss attributable to the 20% interest in the common stock of Auto One
that was issued as part of the GSAC Acquisition.
Minority interest for the nine months ended September 30, 1998 includes
$19.5 million in net premiums and expenses paid in connection with the Bank
Preferred Stock Tender Offers. During the nine months ended September 30, 1998,
minority interest includes dividends on the Bank Preferred Stock, and the REIT
Preferred Stock of $37.7 million, and $34.2 million, respectively. Minority
interest relative to the REIT Preferred Stock is reflected net of related income
tax benefit of $7.7 million, which will inure to the Company as a result of the
deductibility of such dividends for income tax purposes. Minority interest also
includes a $1.7 million benefit representing that portion of Auto One's loss
attributable to the 20% interest in the common stock of Auto One that was issued
as part of the GSAC Acquisition.
Page 26
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 VERSUS THREE MONTHS ENDED SEPTEMBER
30, 1998
The following table sets forth information regarding the Company's
consolidated average balance sheets, together with the total dollar amounts of
interest income and interest expense and the weighted average interest rates for
the periods presented. Average balances are calculated on a daily basis. The
information presented represents the historical activity of the Company.
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999
-------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
(dollars in millions)
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,623 $ 24 5.84%
Mortgage-backed securities available for sale 13,918 222 6.38
Mortgage-backed securities held to maturity 2,303 42 7.28
Loans held for sale, net 1,635 28 6.91
Loans receivable, net 32,390 587 7.25
FHLB stock 1,137 15 5.22
------- ----
Total interest-earning assets 53,006 918 6.92
----
Noninterest-earning assets 3,245
-------
Total assets $56,251
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits $24,060 223 3.68
Securities sold under agreements to repurchase (3) 5,840 80 5.39
Borrowings (3) 23,292 328 5.57
------- ----
Total interest-bearing liabilities 53,192 631 4.70
----
Noninterest-bearing liabilities 1,091
Minority interest 518
Stockholder's equity 1,450
-------
Total liabilities, minority interest
and stockholder's equity $56,251
=======
Net interest income $287
====
Interest rate spread 2.22%
=====
Net interest margin 2.20%
=====
Return on average assets 0.62%
=====
Return on average common equity 20.99%
=====
Return on average total equity 20.99%
=====
Average equity to average assets 2.95%
=====
</TABLE>
Page 27
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30, 1998
------------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
(dollars in millions)
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,375 $ 35 10.11%
Mortgage-backed securities available for sale 8,554 116 5.41
Mortgage-backed securities held to maturity 1,713 32 7.60
Loans held for sale, net 1,455 27 7.38
Loans receivable, net 21,361 408 7.67
FHLB stock 569 8 5.50
------- ----
Total interest-earning assets 35,027 626 7.15
----
Noninterest-earning assets 5,265
-------
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 $185
====
Interest rate spread 2.06%
=====
Net interest margin 2.16%
=====
Return on average assets (0.23)%
=====
Return on average common equity (6.66)%
=====
Return on average total equity (6.66)%
=====
Average equity to average assets 3.47%
=====
</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 28
<PAGE>
The following table presents certain information of the Company regarding
changes in interest income and interest expense during the periods indicated.
The dollar amount of interest income and interest expense fluctuates depending
upon changes in the respective interest rates and upon changes in the respective
amounts (volume) of the Company's interest-earning assets and interest-bearing
liabilities. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) volume
(changes in average outstanding balances multiplied by the prior period's rate)
and (ii) rate (changes in average interest rate multiplied by the prior period's
volume). Changes attributable to both volume and rate have been allocated
proportionately.
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999 vs. 1998
Increase (Decrease) Due to
----------------------------------------------
Volume Rate Net
------ ---- ---
(in millions)
<S> <C> <C> <C>
INTEREST INCOME:
Securities and interest-bearing deposits in banks $ 7 $(18) $(11)
Mortgage-backed securities available for sale 82 24 106
Mortgage-backed securities held to maturity 11 (1) 10
Loans held for sale, net 3 (2) 1
Loans receivable, net 199 (20) 179
FHLB stock 7 -- 7
---- ---- ----
Total 309 (17) 292
---- ---- ----
INTEREST EXPENSE:
Deposits 52 (19) 33
Securities sold under agreements to repurchase 33 (2) 31
Borrowings 144 (18) 126
---- ---- ----
Total 229 (39) 190
---- ---- ----
Change in net interest income $ 80 $ 22 $102
==== ==== ====
</TABLE>
The volume variances in total interest income and total interest expense
for the three months ended September 30, 1999 compared to the corresponding
period in 1998 are largely due to the additional volume related to the Golden
State Acquisition, increased purchases of mortgage-backed securities funded with
FHLB advances, the deposits assumed in the Nevada Purchase and the assumption of
the GS Holdings Notes, partially offset by $1.4 billion in deposits sold in the
Florida Branch Sale and borrowings repurchased as part of the Refinancing
Transactions. The positive total rate variance of $22 million is primarily
attributed to lower interest rates paid on new borrowings (including the
Refinancing Transactions), the lower cost of funds on deposits, the lower
costing liabilities assumed in the Golden State Acquisition, higher market rates
on mortgage-backed securities purchased in 1999 and 1998, and premium
amortization associated with prepayments of variable-rate mortgage-backed
securities in 1998, partially offset by prepayments of higher rate
interest-earning assets, primarily loans, in 1999.
INTEREST INCOME. Total interest income was $917.8 million for the three
months ended September 30, 1999, an increase of $291.6 million from the three
months ended September 30, 1998. Total interest-earning assets for the three
months ended September 30, 1999 averaged $53.0 billion, compared to $35.0
billion for the corresponding period in 1998, primarily as a result of the
Golden State Acquisition. The yield on total interest-earning assets during the
three months ended September 30, 1999 decreased to 6.92% from 7.15% for the
three months ended September 30, 1998, primarily due to prepayments of higher
rate loans which were replaced with lower yielding originations and the
repricing of variable-rate loans, partially offset by purchases of
mortgage-backed securities and additions from the Golden State Acquisition of
mortgage-backed securities with higher market yields.
GS Holdings earned $587.1 million of interest income on loans receivable
for the three months ended September 30, 1999, an increase of $178.6 million
from the three months ended September 30, 1998. The average balance of loans
receivable was $32.4 billion for the three months ended September 30, 1999,
compared to $21.4 billion for the same period in 1998. The weighted average rate
on loans receivable decreased to 7.25% for the three months ended September 30,
1999 from 7.67% for the three months ended September 30, 1998, primarily due to
Page 29
<PAGE>
comparatively lower market rates in 1999. The increase in the average
volume is primarily due to the addition of $14.6 billion in loans acquired in
the Golden State Acquisition.
GS Holdings earned $28.3 million of interest income on loans held for
sale for the three months ended September 30, 1999, an increase of $1.4 million
from the three months ended September 30, 1998. The average balance of loans
held for sale was $1.6 billion for the three months ended September 30, 1999, an
increase of $180 million from the comparable period in 1998, primarily due to
increased originations and longer holding periods for jumbo loans during the
three months ended September 30, 1999. The weighted average rate on loans held
for sale decreased to 6.91% for the three months ended September 30, 1999 from
7.38% for the three months ended September 30, 1998.
Interest income on mortgage-backed securities available for sale was
$221.9 million for the three months ended September 30, 1999, an increase of
$106.3 million from the three months ended September 30, 1998. The average
portfolio balances increased $5.4 billion, to $13.9 billion, for the three
months ended September 30, 1999 compared to the same period in 1998. The
weighted average yield on these assets increased from 5.41% for the three months
ended September 30, 1998 to 6.38% for the three months ended September 30, 1999.
The increase in the volume and the weighted average yield is primarily due to
purchases of mortgage-backed securities and additions of $2.4 billion from the
Golden State Acquisition with higher market yields, and premium amortization
associated with prepayments of variable rate securities in 1998.
Interest income on mortgage-backed securities held to maturity was $41.9
million for the three months ended September 30, 1999, an increase of $9.3
million from the three months ended September 30, 1998. The average portfolio
balance increased $590 million, to $2.3 billion, for the three months ended
September 30, 1999 compared to the same period in 1998, primarily attributed to
the addition of $1.9 billion of the Bank's multi-family loans securitized with
FNMA with a weighted average rate of 7.39% during September 1998. The weighted
average rates for the three months ended September 30, 1999 and 1998 were 7.28%
and 7.60%, respectively.
Interest income on securities and interest-bearing deposits in other
banks was $23.7 million for the three months ended September 30, 1999, a
decrease of $11.1 million from the three months ended September 30, 1998. The
average portfolio balance increased from $1.4 billion for the three months ended
September 30, 1998 to $1.6 billion for the three months ended September 30,
1999. The decrease in the weighted average rate from 10.11% for the three months
ended September 30, 1998 to 5.84% for the three months ended September 30, 1999
is primarily due to $19.8 million in interest income received in September 1998
on a $193.0 million federal income tax refund related to Old California Federal.
Dividends on FHLB stock were $15.0 million for the three months ended
September 30, 1999, an increase of $7.1 million from the three months ended
September 30, 1998, due to an increase in the amount of such stock owned by the
Company as a result of an increase in borrowings under FHLB advances as well as
the Golden State Acquisition. The average balance outstanding during the three
months ended September 30, 1999 and 1998 was $1.1 billion and $.6 billion,
respectively. The weighted average rate on FHLB stock decreased to 5.22% for the
three months ended September 30, 1999 from 5.50% for the three months ended
September 30, 1998, reflecting lower dividends declared by the FHLB.
INTEREST EXPENSE. Total interest expense was $630.7 million for the three
months ended September 30, 1999, an increase of $189.8 million from the three
months ended September 30, 1998. The increase is primarily the result of
additional borrowings under FHLB advances, the additional deposits and
borrowings assumed in the Golden State Acquisition, deposits assumed in the
Nevada Purchase and the net impact of the Refinancing Transactions, including
the assumption of the GS Holdings Notes.
Interest expense on customer deposits, including brokered deposits, was
$223.3 million for the three months ended September 30, 1999, an increase of
$32.8 million from the three months ended September 30, 1998. The average
balance of customer deposits outstanding increased from $18.0 billion for the
three months ended September 30, 1998 to $24.0 billion for the three months
ended September 30, 1999. The increase in the average balance is primarily a
result of $11.3 billion in deposits assumed in the Golden State Acquisition,
partially offset by $1.4 billion in deposits sold in the Florida Branch Sale,
both of which occurred in the third quarter of 1998. In
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<PAGE>
addition, $543 million in deposits at an average cost of 3.71% were assumed in
the Nevada Purchase, which was consummated in April 1999. The overall weighted
average cost of deposits declined to 3.68% for the three months ended September
30, 1999 from 4.20% for the three months ended September 30, 1998, primarily due
to lower market interest rates and a change in the Bank's certificate of deposit
pricing strategy, as well as the higher average balances of lower rate
transaction accounts in 1999 compared to 1998 and the lower cost of funds on
deposits assumed in the Golden State Acquisition.
Interest expense on securities sold under agreements to repurchase
totalled $80.5 million for the three months ended September 30, 1999, an
increase of $31.1 million from the three months ended September 30, 1998. The
average balance of such borrowings for the three months ended September 30, 1999
and 1998 was $5.8 billion and $3.5 billion, respectively; such increase is
primarily attributed to the Golden State Acquisition. The weighted average
interest rate on these instruments decreased to 5.39% for the three months ended
September 30, 1999 from 5.58% for the three months ended September 30, 1998,
primarily due to a decrease in market rates on new borrowings in 1999 compared
to 1998.
Interest expense on borrowings totalled $326.9 million for the three
months ended September 30, 1999, an increase of $125.9 million from the three
months ended September 30, 1998. The average balance outstanding for the three
months ended September 30, 1999 and 1998 was $23.3 billion and $12.9 billion,
respectively. The weighted average interest rate on these instruments decreased
to 5.57% for the three months ended September 30, 1999 from 6.18% for the three
months ended September 30, 1998, primarily due to lower prevailing market rates
in 1999 and the net impact of the Refinancing Transactions. The higher volume
includes the net impact of the Refinancing Transactions and the addition of $5.4
billion in FHLB advances assumed in the Golden State Acquisition, as well as the
increase in FHLB advances used to fund the purchases of mortgage-backed
securities and to fund the sale of deposits in the Florida Branch Sale.
NET INTEREST INCOME. Net interest income was $287.1 million for the three
months ended September 30, 1999, an increase of $101.8 million from the three
months ended September 30, 1998. The interest rate spread increased to 2.22% for
the three months ended September 30, 1999 from 2.06% for the three months ended
September 30, 1998, primarily as a result of maturities and repayments of higher
rate interest-bearing liabilities being replaced with interest-bearing
liabilities having comparatively lower rates. The effect of lower rates on
liabilities was partially offset by lower yielding assets replenishing asset
run-off in a declining rate environment.
NONINTEREST INCOME. Total noninterest income, consisting primarily of
loan servicing fees, customer banking fees, and gains on sales of assets, was
$103.1 million for the three months ended September 30, 1999, representing an
increase of $18.3 million from the three months ended September 30, 1998,
excluding non-recurring gains on the sale of branches in each of the periods.
Loan servicing fees, net of amortization of mortgage servicing rights,
were $38.1 million for the three months ended September 30, 1999, compared to
$34.7 million for the three months ended September 30, 1998. The single-family
residential loan servicing portfolio, excluding loans serviced for the Bank,
increased from $69.3 billion at September 30, 1998 to $72.3 billion at September
30, 1999. Incremental loan servicing fees were partially offset by amortization
related to higher average MSR basis in the three months ended September 30,
1999. Servicing rights purchased in bulk transactions in prior years with lower
average MSR basis are being replaced with current production, which more closely
approximates market rates which, when combined with recent higher prepayment
speeds, results in a decline in the average yield on the portfolio.
Customer banking fees were $47.5 million for the three months ended
September 30, 1999 compared to $28.3 million for the three months ended
September 30, 1998. The increase is primarily attributed to the impact of
revenues from the retail banking operations acquired in the Golden State
Acquisition and deposits assumed in the Nevada Purchase, partially offset by the
impact of the Florida Branch Sale. In addition, management has placed increased
emphasis on transaction account growth since the Golden State Acquisition, which
has generated additional fee income.
Page 31
<PAGE>
Gain on sale of loans totalled $4.9 million for the three months ended
September 30, 1999, a decrease of $8.9 million from the three months ended
September 30, 1998. The decrease includes an adjustment of $2.6 million recorded
during the third quarter of 1999 to reflect the lower of cost or market
valuation on residential loans held for sale during the quarter ended September
30, 1999. In addition, gains attributed to early payoffs of commercial loans
with unamortized discounts were $3.1 million higher in 1999 compared to 1998.
During the three months ended September 30, 1999, California Federal sold $2.9
billion in single-family mortgage loans originated for sale with servicing
rights retained as part of its ongoing mortgage banking operations compared to
$1.8 billion of such sales for the corresponding period in 1998.
Net gain on sale of assets totalled $3.2 million for the three months
ended September 30, 1999, an increase of $2.8 million from the three months
ended September 30, 1998.
Net gain on sale of branches was $2.3 million for the three months ended
September 30, 1999 compared to $108.9 million for the same period in 1998. The
gain in 1999 relates to the sale of the Eureka and Ukiah branches (with deposits
of $70.1 million) to Humboldt Bank. The gain in 1998 is primarily attributed to
the Florida Branch Sale in the third quarter.
NONINTEREST EXPENSE. Total noninterest expense was $218.7 million for the
three months ended September 30, 1999, an increase of $23.1 million compared to
the three months ended September 30, 1998. The variance between the two periods
is primarily attributed to the Golden State Acquisition. Noninterest expense for
the three months ended September 30, 1999 included increases of $24.3 million in
compensation, $13.1 million in occupancy and equipment, $4.5 million in goodwill
amortization attributed to the Golden State Acquisition and the Nevada Purchase,
and an additional $9.1 million in other noninterest expense, all primarily as a
result of the Golden State Acquisition. This increase was partially offset by a
decline of $31.1 million in merger and integration costs incurred in 1998 in
connection with the Golden State Acquisition.
Compensation and employee benefits expense was $97.4 million for the
three months ended September 30, 1999, an increase of $24.3 million from the
three months ended September 30, 1998. The increase is primarily attributed to
the Golden State Acquisition.
Occupancy and equipment expense was $36.9 million and $23.8 million for
the three months ended September 30, 1999 and 1998, respectively. This increase
reflects the effects of the Golden State Acquisition, as well as $3.8 million of
adjustments in 1999 to previously established accruals for vacant facilities.
Merger and integration costs were $31.1 million for the three months
ended September 30, 1998, representing transition expenses, which include
severance, conversion and consolidation costs incurred in connection with the
Golden State Acquisition. Such costs were not incurred during the third quarter
of 1999.
Amortization of intangible assets was $17.6 million for the three months
ended September 30, 1999, an increase of $4.5 million from the three months
ended September 30, 1998, primarily attributed to the goodwill recorded in
connection with the Golden State Acquisition and the Nevada Purchase.
Other noninterest expense was $34.0 million in 1999 compared to $24.9
million in 1998, primarily attributed to increased operations as a result of the
Golden State Acquisition.
PROVISION FOR INCOME TAX. During the three months ended September 30,
1999 and 1998, GS Holdings recorded an income tax benefit of $3.0 million and
income tax expense of $78.0 million, respectively. GS Holdings' effective
Federal tax rate was (9)% and 38% during the three months ended September 30,
1999 and 1998, respectively, while its statutory Federal tax rate was 35% during
both periods. For the period ended September 30, 1999, the difference between
the effective and statutory rates was primarily the result of adjustments
related to pre-merger tax benefits, in the form of net operating loss carryovers
and other items, which are retained by the previous owners of FN Holdings. To
the extent these tax benefits are recognized, there is a reduction in income tax
expense, which is offset by an increase in minority interest: provision in lieu
of income tax expense. Accordingly, during the three months ended September 30,
1999, a tax benefit of $79.0 million was recognized, and a corresponding
increase to minority interest was recorded. These adjustments resulted from 1998
tax filings late in
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<PAGE>
the third quarter of 1999. For the period ended September 30, 1998, the
difference between the effective and statutory rates was primarily a result of
nondeductible goodwill amortization for both periods. GS Holdings' effective
state tax rate was 8% during the three months ended September 30, 1999 and 1998.
MINORITY INTEREST. Minority interest for the three months ended September
30, 1999 includes a $79.0 million provision in lieu of income taxes,
representing pre-merger tax benefits retained by the previous owners of FN
Holdings (see note 8), and $1.8 million in net premium paid in connection with
the redemption of the Bank's 11 1/2% Preferred Stock. Dividends on the REIT
Preferred Stock totalling $11.4 million were also recorded during the three
months ended September 30, 1999. Minority interest relative to the REIT
Preferred Stock is reflected net of related income tax benefit of $4.8 million,
which will inure to the Company as a result of the deductibility of such
dividends for income tax purposes. The reduction in minority interest relative
to the Bank Preferred Stock reflects the impact of the $380.7 million in Bank
Preferred Stock purchased by GS Holdings in connection with the Refinancing
Transactions in the third and fourth quarters of 1998, as well as the $60.7
million redeemed on April 1, 1999 and the $31.8 million redeemed on September 1,
1999.
Minority interest for the three months ended September 30, 1998 includes
$19.5 million in net premiums and expenses paid in connection with the Bank
Preferred Stock Tender Offers. During the three months ended September 30, 1998,
minority interest also includes dividends on the Bank Preferred Stock and the
REIT Preferred Stock totalling $11.2 million and $11.4 million, respectively.
Minority interest relative to the REIT Preferred Stock is reflected net of
related income tax benefit of $4.8 million, which will inure to the Company as a
result of the deductibility of such dividends for income tax purposes. Minority
interest also includes a $1.0 million benefit representing that portion of Auto
One's loss attributable to the 20% interest in the common stock of Auto One that
was issued as part of the GSAC Acquisition.
PROVISION FOR LOAN LOSSES
The adequacy of the allowance for loan losses is periodically evaluated
by management in order to maintain the allowance at a level that is sufficient
to absorb losses inherent in the loan portfolio. The allowance for loan losses
is increased by provisions for loan losses as well as by balances acquired
through acquisitions and is decreased by charge-offs (net of recoveries). The
Company charges current earnings with a provision for estimated credit losses on
loans receivable. The provision considers both specifically identified problem
loans as well as credit risks not specifically identified in the loan portfolio.
See --"Problem and Potential Problem Assets" for a discussion of the methodology
used in determining the adequacy of the allowance for loan losses. The Company
recorded provisions for loan losses of $10 million and $30 million during the
nine months ended September 30, 1999 and 1998, respectively, and $10 million
during the three months ended September 30, 1998. In light of continued strong
credit performance and the continued strength of the California real estate
market, the existing allowance for loan losses was considered adequate and no
loan loss provision was recorded in the third quarter of 1999.
The decrease in the provision for loan losses during the nine and three
month periods ended September 30, 1999 compared to the same periods in 1998 is
the result of management's evaluation of the adequacy of the allowance based on,
among other things, past loan loss experience and known and inherent risks in
the portfolio, evidenced in part by the continued decline in the Company's level
of non-performing assets. In addition, management's periodic evaluation of the
adequacy of the allowance for loan losses considers potential adverse situations
that have occurred but are not yet known that may affect the borrower's ability
to repay, the estimated value of underlying collateral and economic conditions.
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<PAGE>
Activity in the allowance for loan losses is as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------ -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance - beginning of period $588,533 $418,674 $578,369 $420,665
Purchases & acquisitions, net -- 169,454 -- 169,454
Provision for loan losses 10,000 30,000 -- 10,000
Charge-offs (30,919) (38,650) (9,436) (18,147)
Recoveries 3,839 3,304 1,850 810
Reclassifications (670) -- -- --
-------- -------- -------- --------
Balance - end of period $570,783 $582,782 $570,783 $582,782
======== ======== ======== ========
</TABLE>
Although management believes that the allowance for loan losses is
adequate, it will continue to review its loan portfolio to determine the extent
to which any changes in economic conditions or loss experience may require
further provisions in the future.
PROBLEM AND POTENTIAL PROBLEM ASSETS
The Company considers a loan to be impaired when, based upon current
information and events, it is "probable" that it will be unable to collect all
amounts due (I.E., both principal and interest) according to the contractual
terms of the loan agreement. Any insignificant delay or insignificant shortfall
in amount of payments will not cause a loan to be considered impaired. In
determining impairment, the Company considers large non-homogeneous loans
including nonaccrual loans, troubled debt restructurings, and performing loans
that exhibit, among other characteristics, high LTV ratios, low debt-coverage
ratios or other indications that the borrowers are experiencing increased levels
of financial difficulty. In addition, loans collectively reviewed for impairment
by the Company include all single-family loans, business banking loans under
$100,000 and performing multi-family and commercial real estate loans under
$500,000, excluding loans which have entered the work-out process.
The measurement of impairment may be based on (i) the present value of
the expected future cash flows of the impaired loan discounted at the loan's
original effective interest rate, (ii) the observable market price of the
impaired loan, or (iii) the fair value of the collateral of a
collateral-dependent loan. The Company bases the measurement of
collateral-dependent impaired loans on the fair value of the loan's collateral.
The amount, if any, by which the recorded investment of the loan exceeds the
measure of the impaired loan's value is recognized by recording a valuation
allowance. Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment.
Cash receipts on impaired loans not performing according to contractual
terms are generally used to reduce the carrying value of the loan, unless the
Company believes it will recover the remaining principal balance of the loan.
Impairment losses are included in the allowance for loan losses. Upon
disposition of an impaired loan, loss of principal, if any, is recorded through
a charge-off to the allowance for loan losses.
At September 30, 1999, the carrying value of loans that were considered
to be impaired totalled $126.2 million (of which $22.4 million were on
non-performing status). The average recorded investment in impaired loans during
the nine and three month periods ended September 30, 1999 was approximately
$141.0 million and $126.6 million, respectively. For the nine and three month
periods ended September 30, 1999, Golden State recognized interest income on
those impaired loans of $7.0 million and $2.2 million, respectively, which
included $1.6 million and $0.6 million, respectively, of interest income
recognized using the cash basis method of income recognition. The following
table presents the carrying amounts of the Company's non-performing loans,
foreclosed real estate, repossessed assets, troubled debt restructurings and
impaired loans as of the dates indicated. These categories are not mutually
exclusive; certain loans are included in more than one classification. Purchased
auto loans are reflected as non-performing, impaired or restructured using each
individual loan's contractual unpaid principal balance.
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<PAGE>
<TABLE>
<CAPTION>
September 30, 1999
-----------------------------------------------------
Non-performing Impaired Restructured
-------------- -------- ------------
(in millions)
<S> <C> <C> <C>
Real Estate:
1-4 unit residential $143 $ -- $ 3
5+ unit residential 7 36 5
Commercial and other 10 71 19
Land -- 1 --
Construction -- -- --
---- ---- ---
Total real estate 160 108 27
Non-real estate 11 18 --
---- ---- ---
Total loans 171 (a) $126 (b) $27
==== ===
Foreclosed real estate, net 45
Repossessed assets 3
----
Total non-performing assets $219
====
</TABLE>
<TABLE>
<CAPTION>
December 30, 1998
-----------------------------------------------------
Non-performing Impaired Restructured
-------------- -------- ------------
(in millions)
<S> <C> <C> <C>
Real Estate:
1-4 unit residential $190 $ -- $ 4
5+ unit residential 16 55 9
Commercial and other 10 78 19
Land -- 1 --
Construction 1 1 --
---- ---- ---
Total real estate 217 135 32
Non-real estate 9 -- --
---- ---- ---
Total loans 226 (a) $135 (b) $32
==== ===
Foreclosed real estate, net 80
Repossessed assets 4
----
Total non-performing assets $310
====
</TABLE>
--------------
(a) Includes loans securitized with recourse on non-performing status of $1.7
million and $6.0 million at September 30, 1999 and December 31, 1998,
respectively, and loans held for sale on non-performing status of $10.0
million and $17.0 million at September 30, 1999 and December 31, 1998,
respectively.
(b) Includes $22.4 million and $32.5 million of non-performing loans at
September 30, 1999 and December 31, 1998, respectively. Also includes
$17.0 million and $16.4 million of loans classified as troubled debt
restructurings at September 30, 1999 and December 31, 1998, respectively.
There were no accruing loans contractually past due 90 days or more at
September 30, 1999 or December 31, 1998.
The Company's non-performing assets, consisting of nonaccrual loans,
repossessed assets and foreclosed real estate, net, decreased to $219 million at
September 30, 1999, from $310 million at December 31, 1998. Non-performing
assets as a percentage of the Bank's total assets decreased to 0.39% at
September 30, 1999, from 0.57% at December 31, 1998.
GS Holdings, through the Bank, manages its credit risk by assessing the
current and estimated future performance of the real estate markets in which it
operates. The Company continues to place a high degree of emphasis on the
management of its asset portfolio. The Company has three distinct asset
management functions: performing loan asset management, problem loan asset
management and credit review. Each of these three functions is charged with the
responsibility of reducing the risk profile within the commercial, multi-family
and other asset portfolios by applying asset management and risk evaluation
techniques that are consistent with the Company's portfolio management strategy
and regulatory requirements. In addition to these asset management
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<PAGE>
functions, the Company has a specialized credit risk management group that is
charged with the development of credit policies and performing credit risk
analyses for all asset portfolios.
The following table presents non-performing real estate assets by
geographic region of the country as of September 30, 1999:
<TABLE>
<CAPTION>
Total
Non-performing Foreclosed Non-performing
Real Estate Real Estate, Real Estate Geographic
Loans, Net (2) Net (2) Assets Concentration
-------------- -------- ------ -------------
(dollars in millions)
<S> <C> <C> <C> <C>
Region:
California $ 18 $ 6 $ 24 11%
Northeast (1) 97 28 125 61
Other regions 45 11 56 28
---- --- ---- ---
Total $160 $45 $205 100%
==== === ==== ===
</TABLE>
-----------------
(1) Consists of Connecticut, Massachusetts, New Hampshire, New Jersey, New
York, Pennsylvania, Rhode Island, Delaware, Maine, and Vermont.
(2) Net of purchase accounting adjustments.
At September 30, 1999, the Company's largest non-performing asset was
approximately $4.0 million, and it had three non-performing assets over $2
million in size with balances averaging approximately $2.9 million. At September
30, 1999, the Company had 1,301 non-performing assets below $2 million in size,
including 1,223 non-performing 1-4 unit residential assets.
An allowance is maintained to absorb losses inherent in the loan
portfolio. The adequacy of the allowance is periodically evaluated and is based
on past loan loss experience, known and inherent risks in the loan portfolio,
adverse situations that have occurred but are not yet known that may affect the
borrower's ability to repay, the estimated value of underlying collateral and
economic conditions. Management's methodology for assessing the adequacy of the
allowance includes the evaluation of the following three key elements: the
formula allowance, specific allowances for identified problem loans and the
unallocated allowance.
The formula allowance is determined by applying loss factors against all
non-impaired loans. Loss factors may be adjusted for significant factors that,
in management's judgment, affect the collectibility of the portfolio as of the
evaluation date. Loss factors are calculated based on migration models that
estimate the probability that loans will become delinquent and ultimately result
in foreclosure, and the rates of loss that have been experienced on foreclosed
loans. The foreclosure migration and loss severity rates are then averaged over
the past eight years in order to capture experience across a period that
management believes approximates a business cycle. A contingency factor is then
added to provide for the modeling risk associated with imprecision in estimating
inherent loan losses.
The specific allowances are established against individual loans,
including impaired loans in accordance with SFAS No. 114, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN, for which management has performed analyses
and concluded that there is a high probability that loss will be incurred based
on delinquency status or determination that borrower cash flow is inadequate for
debt repayment. The amount of specific allowance is determined by an estimation
of collateral deficiency, including consideration of costs that will likely be
incurred through the disposal of any repossessed collateral.
The unallocated allowance is established for inherent losses which may
not have been identified through the more objective processes used to derive the
formula and specific portions of the allowance. The unallocated portion is
necessarily more subjective and requires a high degree of management judgment
and experience. Management has identified several factors that impact the
potential for credit losses that are not considered in either the formula or the
specific allowance segments. These factors consist of industry and geographic
loan concentrations, changes in the composition of loan portfolios through
acquisitions and new business strategies, changes in underwriting processes, and
trends in problem loan and loss recovery rates.
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<PAGE>
At September 30, 1999, the allowance for loan losses was $571 million,
consisting of a $371 million formula allowance, a $37 million specific allowance
and a $163 million unallocated allowance.
Although the loan loss allowance has been allocated by type of loan for
internal valuation purposes, all such allowance is available to support any
losses which may occur, regardless of type, in the Company's loan portfolio. A
summary of the activity in the total allowance for loan losses by loan type is
as follows:
<TABLE>
<CAPTION>
5+ Unit
Residential
1-4 Unit and Commercial Consumer
Residential Real Estate and Other Total
----------- ----------- --------- -----
(in millions)
<S> <C> <C> <C> <C>
Balance - December 31, 1998 $251 $278 $60 $589
Provision for loan losses -- 4 1 5
Charge-offs (5) (2) (4) (11)
Recoveries -- -- 1 1
Reclassification -- -- (1) (1)
---- ---- --- ----
Balance - March 31, 1999 246 280 57 583
Provision for loan losses 2 1 2 5
Charge-offs (5) (3) (3) (11)
Recoveries -- -- 1 1
---- ---- --- ----
Balance - June 30, 1999 243 278 57 578
Provision for loan losses -- -- -- --
Charge-offs (4) (1) (4) (9)
Recoveries -- 1 1 2
---- ---- --- ----
Balance - September 30, 1999 $239 $278 $54 $571
==== ==== === ====
</TABLE>
The ratio of allowance for loan losses to non-performing loans at
September 30, 1999 and December 31, 1998 was 333.8% and 256.8%, respectively.
ASSET AND LIABILITY MANAGEMENT
Banks and savings associations are subject to interest rate risk to the
degree that their interest-bearing liabilities, consisting principally of
deposits, securities sold under agreements to repurchase and FHLB advances,
mature or reprice more or less frequently, or on a different basis, than their
interest-earning assets. A key element of the banking business is the monitoring
and management of liquidity risk and interest rate risk. The process of planning
and controlling asset and liability mixes, volumes and maturities to influence
the net interest spread is referred to as asset and liability management. The
objective of the Company's asset and liability management is to maximize its net
interest income over changing interest rate cycles within the constraints
imposed by prudent lending and investing practices, liquidity needs and capital
planning.
GS Holdings, through the Bank, actively pursues investment and funding
strategies intended to minimize the sensitivity of its earnings to interest rate
fluctuations. The Company measures the interest rate sensitivity of its balance
sheet through gap and duration analysis, as well as net interest income and
market value simulation, and, after taking into consideration both the
variability of rates and the maturities of various instruments, evaluates
strategies which may reduce the sensitivity of its earnings to interest rate and
market value fluctuations. An important decision is the selection of
interest-bearing liabilities and the generation of interest-earning assets which
best match relative to interest rate changes. In order to reduce interest rate
risk by increasing the percentage of interest sensitive assets, the Company has
continued its emphasis on the origination of adjustable rate mortgage ("ARM")
products for its portfolio. Where possible, the Company seeks to originate real
estate and other loans that reprice frequently and that on the whole adjust in
accordance with the repricing of its liabilities. At September 30, 1999,
approximately 76% of the Company's loan portfolio consisted of ARMs.
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<PAGE>
ARMs have, from time to time, been offered with low initial interest
rates as marketing inducements. In addition, most ARMs are subject to periodic
interest rate adjustment caps or floors. In a period of rising interest rates,
ARMs could reach a periodic adjustment cap while still at a rate below their
contractual margin over existing market rates. Since repricing liabilities are
typically not subject to such interest rate adjustment constraints, the
Company's net interest margin would most likely be negatively impacted in this
situation. Certain ARMs now offered by the Company have a fixed monthly payment
for a given period, with any changes as a result of market interest rates
reflected in the unpaid principal balance through negative amortization.
One of the most important sources of the Bank's net income is net
interest income, which is the difference between the combined yield earned on
interest-earning assets and the combined rate paid on interest-bearing
liabilities. Net interest income is also dependent on the relative balances of
interest-earning assets and interest-bearing liabilities.
A traditional measure of interest rate risk within the savings industry
is the interest rate sensitivity gap, which is the sum of all interest-earning
assets minus the sum of all interest-bearing liabilities to be repriced within
the same period. A gap is considered positive when the amount of interest rate
sensitive assets exceed interest rate sensitive liabilities, while the opposite
results in a negative gap. During a period of rising interest rates, a negative
gap would tend to adversely affect net interest income, and a positive gap would
tend to result in an increase in net interest income, while the opposite would
tend to occur in a period of falling rates.
The following table sets forth the projected maturities based upon
contractual maturities as adjusted for projected prepayments and "repricing
mechanisms" (provisions for changes in the interest rates of assets and
liabilities). Prepayment rates are assumed in each period on substantially all
of the Company's loan portfolio based upon expected loan prepayments. Repricing
mechanisms on the Company's assets are subject to limitations such as caps on
the amount that interest rates and payments on its loans may adjust and,
accordingly, such assets may not respond in the same manner or to the same
extent to changes in interest rates as the Company's liabilities. In addition,
the interest rate sensitivity of the Company's assets and liabilities
illustrated in the table would vary substantially if different assumptions were
used or if actual experience differed from the assumptions set forth. The
Company's estimated interest rate sensitivity gap at September 30, 1999 is as
follows:
Page 38
<PAGE>
<TABLE>
<CAPTION>
Maturity/Rate Sensitivity
--------------------------------------------------------
Within 1-5 Over 5 Noninterest
1 Year Years Years Bearing Total
------ ----- ----- ------- -----
(dollars in millions)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Securities held to maturity, interest-bearing
deposits in other banks and short-term
investment securities (1)(2) $ 203 $ (1) $ 86 $ -- $ 288
Securities available for sale (3) 1,107 -- -- -- 1,107
Mortgage-backed securities
available for sale (3) 13,735 -- -- -- 13,735
Mortgage-backed securities
held to maturity (1)(4) 2,222 15 27 -- 2,264
Loans held for sale, net (3)(5) 809 -- -- -- 809
Loans receivable, net (1)(6) 18,156 10,510 4,214 -- 32,880
Investment in FHLB 1,140 -- -- -- 1,140
------- ------- ------ ------ -------
Total interest-earning assets 37,372 10,524 4,327 -- 52,223
Noninterest-earning assets -- -- -- 3,523 3,523
------- ------- ------ ------ -------
$37,372 $10,524 $4,327 $3,523 $55,746
======= ======= ====== ====== =======
INTEREST-BEARING LIABILITIES:
Deposits (7) $20,775 $ 2,911 $ 10 $ -- $23,696
Securities sold under agreements to
repurchase (1) 5,964 -- -- -- 5,964
FHLB advances (1) 9,274 11,477 -- -- 20,751
Other borrowings (1) 363 963 892 -- 2,218
------- ------- ------ ------ -------
Total interest-bearing liabilities 36,376 15,351 902 -- 52,629
Noninterest-bearing liabilities -- -- -- 882 882
Minority interest -- -- -- 500 500
Stockholder's equity -- -- -- 1,735 1,735
------- ------- ------ ------ -------
$36,376 $15,351 $ 902 $3,117 $55,746
======= ======= ====== ====== =======
Gap before interest rate swap agreements $ 996 $(4,827) $3,425 $ (406)
Interest rate swap agreements 2,100 (1,500) (600) --
------- ------- ------ -------
Gap $ 3,096 $(6,327) $2,825 $ (406)
======= ======= ====== =======
Cumulative gap $ 3,096 $(3,231) $ (406) $ (406)
======= ======= ====== =======
Gap as a percentage of total assets 5.55% (11.35)% 5.07% (0.73)%
==== ====== ==== =====
Cumulative gap as a percentage of total assets 5.55% (5.80)% (0.73)% (0.73)%
==== ====== ==== =====
</TABLE>
----------------
(1) Based upon (a) contractual maturity, (b) instrument repricing date, if
applicable, and (c) projected repayments and prepayments of principal, if
applicable. Prepayments were estimated generally by using the prepayment
rates forecast by various large brokerage firms as of September 30, 1999.
The actual maturity and rate sensitivity of these assets could vary
substantially if future prepayments differ from prepayment estimates.
(2) Consists of $214 million of securities held to maturity, $74 million of
short-term investment securities and less than $0.1 million of
interest-bearing deposits in other banks.
(3) As securities and mortgage-backed securities available for sale and loans
held for sale may be sold within one year, they are considered to be
maturing within one year.
(4) Excludes underlying non-performing loans of $2 million.
(5) Excludes non-performing loans of $10 million.
(Footnotes continued on next page)
Page 39
<PAGE>
(6) Excludes allowance for loan losses of $571 million and non-performing
loans of $159 million.
(7) Fixed rate deposits and deposits with fixed pricing intervals are
reflected as maturing in the year of contractual maturity or first
repricing date. Money market deposit accounts, demand deposit accounts
and passbook accounts are reflected as maturing within one year.
At September 30, 1999, interest-bearing liabilities of GS Holdings
exceeded interest-earning assets by $406 million. At December 31, 1998,
interest-bearing liabilities of GS Holdings exceeded interest-earning assets by
$400 million.
The maturity/rate sensitivity analysis is a static view of the balance
sheet with assets and liabilities grouped into certain defined time periods, and
thus only partially depicts the dynamics of the Company's sensitivity to
interest rate changes. Being at a point in time, this analysis may not fully
describe the complexity of relationships between product features and pricing,
market rates and future management of the balance sheet mix. The Company
utilizes computer modeling, under various interest rate scenarios, to provide a
dynamic view of the effects of the changes in rates, spreads, and yield curve
shifts on net interest income.
The Company's risk management policies are established by the
Asset/Liability Management Committee ("ALCO") of the Bank. ALCO meets monthly to
formulate the Bank's investment and risk management strategies. The basic
responsibilities of ALCO include management of net interest income and market
value of portfolio equity to measure the stability of earnings, management of
liquidity to provide adequate funding, and the establishment of asset product
priorities by formulating performance evaluation criteria, risk evaluation
techniques and a system to standardize the analysis and reporting of
originations, competitive trends, profitability and risk. On a quarterly basis,
the Board of Directors of the Bank is apprised of ALCO strategies adopted and
their impact on operations, and, at least annually, the Board of Directors of
the Bank reviews the Bank's interest rate risk management policy statements.
LIQUIDITY
The major sources of funding for GS Holdings on an unconsolidated basis
are distributions and tax sharing payments from the Bank, which the Company uses
to meet debt service requirements, pay any expenses it may incur, and make
distributions to Golden State, subject to certain restrictions. Net income
generated by the Bank is used to meet its cash flow needs, including paying
dividends on its preferred stock, and may be distributed, subject to certain
restrictions, to GS Holdings. For more information on dividend restrictions for
the Bank and GS Holdings, refer to "Business - Dividend Policy of the Bank,"
"Business - Regulation of the Bank" and note 27 of the "Notes to Consolidated
Financial Statements" in the Company's 1998 Form 10-K.
The Company anticipates that on a consolidated basis, cash and cash
equivalents on hand, the cash flow from assets as well as other sources of funds
will provide adequate liquidity for its operating, investing and financing needs
and the Bank's regulatory liquidity requirements for the foreseeable future. In
addition to cash and cash equivalents of $542.6 million at September 30, 1999,
the Company has substantial additional borrowing capacity with the FHLB and
other sources.
Interest on the GS Holdings Notes approximates $138.9 million per year.
Although GS Holdings expects that distributions and tax sharing payments from
the Bank will be sufficient to pay interest when due and the principal amount of
its long-term debt at maturity, there can be no assurance that earnings from the
Bank will be sufficient to make such distributions to GS Holdings. In addition,
there can be no assurance that such distributions will be permitted by the terms
of any debt instruments of GS Holdings' subsidiaries then in effect, by the
terms of any class of preferred stock issued by the Bank or its subsidiaries,
including the REIT Preferred Stock, or under applicable federal thrift laws.
On a consolidated basis, a major source of the Company's funding is
expected to be the Bank's retail deposit branch network, which management
believes will be sufficient to meet its long-term liquidity needs. The ability
of 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
Page 40
<PAGE>
from a variety of other sources including customer and brokered deposits, loan
sales, securities sold under agreements to repurchase, FHLB advances, and other
secured and unsecured borrowings. It is anticipated that FHLB advances and
securities sold under agreements to repurchase will continue to be important
sources of funding, and management expects there to be adequate collateral for
such funding requirements.
The consolidated Company's primary uses of funds are the origination or
purchase of loans, the purchase of mortgage-backed securities, the funding of
maturing certificates of deposit, demand deposit withdrawals and the repayment
of borrowings. Certificates of deposit scheduled to mature during the twelve
months ending September 30, 2000 aggregate $9.5 billion. The Company may renew
these certificates, attract new replacement deposits, replace such funds with
other borrowings, or it may elect to reduce the size of the balance sheet. In
addition, at September 30, 1999, the Company had FHLB advances, securities sold
under agreements to repurchase and other borrowings aggregating $15.6 billion
maturing or repricing within twelve months. The Company may elect to pay off
such debt or to replace such borrowings with additional FHLB advances,
securities sold under agreements to repurchase or other borrowings at prevailing
rates.
As presented in the accompanying unaudited consolidated statements of
cash flows, the sources of liquidity vary between periods. The primary sources
of funds during the nine months ended September 30, 1999 were $22.4 billion in
proceeds from additional borrowings, $8.5 billion in proceeds from sales of
loans held for sale, $3.6 billion from principal payments on mortgage-backed
securities available for sale and held to maturity, a $1.7 billion net increase
in securities sold under agreements to repurchase, $458.9 million from the
Nevada Purchase, and $455.2 million from maturities of securities available for
sale and held to maturity. The primary uses of funds were $21.8 billion in
principal payments on borrowings, $7.2 billion in purchases and originations of
loans held for sale, $4.9 billion in purchases of securities and mortgage-backed
securities available for sale, a net increase in loans receivable of $2.4
billion, and $1.4 billion from a net decrease in deposits.
The standard measure of liquidity in the savings industry is the ratio of
cash and short-term U. S. Government securities and other specified securities
to deposits and borrowings due within one year. The OTS established a minimum
liquidity requirement for the Bank of 4.00%. California Federal has been in
compliance with the liquidity regulations during the nine months ended September
30, 1999 and the year ended December 31, 1998.
Page 41
<PAGE>
MORTGAGE BANKING OPERATIONS
The Company, through the Bank's wholly owned mortgage bank subsidiary,
FNMC, has significantly expanded its mortgage banking operations. During the
nine months ended September 30, 1999 and 1998, FNMC acquired mortgage-servicing
rights on loan portfolios of $12.9 billion and $3.6 billion, respectively, as a
result of bulk servicing acquisitions and flow purchases, and sold servicing
rights during the nine months ended September 30, 1999 on a portfolio of
approximately $2.1 billion and 50,700 loans. With these acquisitions, the
acquisition of additional 1-4 unit residential loan servicing portfolios in the
Golden State Acquisition, the originated servicing and the Servicing Sale, the
1-4 unit residential loans serviced for others (including loans sub-serviced for
others and excluding loans serviced for the Bank) totalled $72.3 billion at
September 30, 1999, an increase of $6.9 billion and $3.0 billion from December
31, 1998 and September 30, 1998, respectively. During the nine months ended
September 30, 1999, the Bank, through FNMC, originated $12.9 billion and sold
(generally with servicing retained) $8.7 billion of 1-4 unit residential loans.
Gross revenues from mortgage loan servicing activities for the nine months ended
September 30, 1999 totalled $206.1 million, an increase of $54.3 million from
the nine months ended September 30, 1998. Gross loan servicing fees for the nine
months ended September 30, 1999 were reduced by $154.4 million of amortization
of servicing rights to arrive at net loan servicing fees of $51.7 million for
FNMC.
A decline in long-term interest rates generally results in an
acceleration of mortgage loan prepayments. Higher than anticipated levels of
prepayments generally cause the accelerated amortization of mortgage servicing
rights ("MSRs"), and generally will result in a reduction in the market value of
MSRs and in the Company's servicing fee income. To reduce the sensitivity of its
earnings to interest rate and market value fluctuations, the Company hedged the
change in value of its MSRs based on changes in interest rates ("MSR Hedge").
The Company owned several derivative instruments at September 30, 1999,
which were used to hedge against prepayment risk in its mortgage servicing
portfolio. These derivative instruments included Constant Maturity Swap interest
rate floor contracts, swaptions, principal only swaps, and prepayment-linked
swaps. The interest rate floor contracts had a notional amount of $485 million,
strike rates of 5.50% and 5.55%, mature in the year 2004 and had an estimated
fair value of $5.3 million at September 30, 1999. Premiums paid to
counter-parties in exchange for cash payments when the 10 year Constant Maturity
Swap rate falls below the strike rate are recorded as part of the MSR asset on
the balance sheet. The swaption contracts had notional amounts of $479 million,
a strike rate of 6.75%, expire in the year 2002 and had an estimated fair value
of $13.4 million at September 30, 1999. Premiums paid to counter-parties in
exchange for the right to enter into an interest rate swap are recorded as part
of the MSR asset on the balance sheet. Principal only swap agreements had
notional amounts of $133.0 million and an estimated fair value of $(7.3) million
at September 30, 1999. The prepayment-linked swaps had original notional amounts
of $203.3 million and an estimated fair value of $0.3 million at September 30,
1999.
The following is a summary of activity in MSRs and the MSR Hedge for the
nine months ended September 30, 1999 (in millions):
<TABLE>
<CAPTION>
Total MSR
MSRs MSR Hedge Balance
---- --------- -------
<S> <C> <C> <C>
Balance at December 31, 1998 $ 922 $ 22 $ 944
Additions - bulk purchases 205 -- 205
Additions - other purchases 89 -- 89
Originated servicing 164 -- 164
Premiums paid -- 41 41
Servicing Sale (19) -- (19)
Swaption sales 29 (58) (29)
Interest rate floor sales 19 (32) (13)
Payments made to counterparties, net 6 -- 6
Amortization (142) (16) (158)
------ ---- ------
Balance at September 30, 1999 $1,273 $(43) $1,230
====== ==== ======
</TABLE>
Page 42
<PAGE>
Capitalized MSRs are amortized in proportion to, and over the period of,
estimated net servicing income. SFAS No. 125 requires enterprises to measure the
impairment of MSRs based on the difference between the carrying amount of the
MSRs and their current fair value. At September 30, 1999 and December 31, 1998,
no allowance for impairment of the MSRs was necessary.
CAPITAL RESOURCES
OTS capital regulations require savings associations to satisfy three
minimum capital requirements: tangible capital, core (leverage) capital and
risk-based capital. In general, an association's tangible capital, which must be
at least 1.5% of adjusted total assets, is the sum of common stockholders'
equity (including retained earnings), noncumulative perpetual preferred stock
and minority interest in equity accounts of fully consolidated subsidiaries,
less disallowed intangibles. An association's ratio of core capital to adjusted
total assets (the "core capital" or "leverage capital" ratio) must be at least
4%. Core capital generally is the sum of tangible capital plus certain
qualifying intangibles. Under the risk-based capital requirement, a savings
association must have total capital (core capital plus supplementary capital)
equal to at least 8% of risk-weighted assets (which equals assets plus the
credit risk equivalent of certain off-balance sheet items, each multiplied by
the appropriate risk weight). Supplementary capital, which may not exceed 100%
of core capital for purposes of the risk-based requirement, includes, among
other things, certain permanent capital instruments such as qualifying
cumulative perpetual preferred stock, as well as some forms of term capital
instruments, such as qualifying subordinated debt. The capital requirements are
viewed as minimum standards by the OTS, and most associations are expected to
maintain capital levels well above the minimum. In addition, the OTS regulations
provide that minimum capital levels higher than those provided in the
regulations may be established by the OTS for individual savings associations,
depending upon their particular circumstances. These capital requirements are
applicable to the Bank but not to GS Holdings. The Bank is not subject to any
such individual regulatory capital requirement that is higher than the minimum.
At September 30, 1999, the Bank's regulatory capital levels exceeded the
minimum regulatory capital requirements, with tangible, core and risk-based
capital ratios of 5.90%, 5.90% and 13.10%, respectively. The following is a
reconciliation of the Bank's stockholder's equity to regulatory capital as of
September 30, 1999:
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
------- ------- -------
(dollars in millions)
<S> <C> <C> <C>
Stockholder's equity of the Bank $3,644 $3,644 $3,644
Minority interest - REIT Preferred Stock 500 500 500
Unrealized holding loss on securities available for sale, net 200 200 200
Non-allowable capital:
Intangible assets (875) (875) (875)
Goodwill Litigation Assets (160) (160) (160)
Investment in non-includable subsidiaries (58) (58) (58)
Supplemental capital:
Qualifying subordinated debentures -- -- 93
General loan loss allowance -- -- 353
Assets required to be deducted:
Land loans with more than 80% LTV ratio -- -- (2)
Equity in subsidiaries -- -- (5)
Low-level recourse deduction -- -- (11)
------ ------ ------
Regulatory capital of the Bank 3,251 3,251 3,679
Minimum regulatory capital requirement 826 2,203 2,247
------ ------ ------
Excess above minimum capital requirement $2,425 $1,048 $1,432
====== ====== ======
Regulatory capital of the Bank 5.90% 5.90% 13.10%
Minimum regulatory capital requirement 1.50 4.00 8.00
---- ---- -----
Excess above minimum capital requirement 4.40% 1.90% 5.10%
==== ==== =====
</TABLE>
Page 43
<PAGE>
The amount of adjusted total assets used for the tangible and leverage
capital ratios is $55.1 billion. Risk-weighted assets used for the risk-based
capital ratio amounted to $28.1 billion.
The Bank is also subject to the "prompt corrective action" standards
prescribed in the FDICIA and related OTS regulations, which, among other things,
define specific capital categories based on an association's capital ratios. The
capital categories, in declining order, are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." Associations categorized as "undercapitalized" or
worse are subject to certain restrictions, including the requirement to file a
capital plan with the OTS, prohibitions on the payment of dividends and
management fees, restrictions on executive compensation, and increased
supervisory monitoring, among other things. Other restrictions may be imposed on
the association either by the OTS or by the FDIC, including requirements to
raise additional capital, sell assets, or sell the entire association. Once an
association becomes "critically undercapitalized" it is generally placed in
receivership or conservatorship within 90 days.
To be considered "well capitalized," a savings association must generally
have a leverage capital ratio of at least 5.00%, a Tier 1 (core capital)
risk-based capital ratio of at least 6.00%, and a total risk-based capital ratio
of at least 10.00%. An association is deemed to be "critically undercapitalized"
if it has a tangible equity ratio of 2.00% or less. At September 30, 1999,
California Federal's capital levels were sufficient for it to be considered
"well capitalized," as presented below.
<TABLE>
<CAPTION>
Risk-based
Leverage --------------------------
Capital Tier 1 Total Capital
------- ------ -------------
<S> <C> <C> <C>
Regulatory capital of the Bank 5.90% 11.54% 13.10%
"Well capitalized" ratio 5.00 6.00 10.00
---- ----- -----
Excess above "well capitalized" ratio 0.90% 5.54% 3.10%
==== ===== =====
</TABLE>
OTS capital regulations allow a savings association to include a net
deferred tax asset in regulatory capital, subject to certain limitations. To the
extent that the realization of a deferred tax asset depends on a savings
association's future taxable income, such deferred tax asset is limited for
regulatory capital purposes to the lesser of the amount that can be realized
within one year or 10 percent of core capital. At September 30, 1999, none of
the net tax benefit was determined to be attributable to the amount of taxable
income that may be realized in periods beyond one year. Accordingly, no amount
has been excluded from the Bank's regulatory capital at September 30, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in reported market risks faced by GS
Holdings since the Company's report in Item 7A of its Form 10-K for the year
ended December 31, 1998.
Page 44
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
GOODWILL LITIGATION AGAINST THE GOVERNMENT
On April 9, 1999, the Claims Court issued its decision on a claim by the
Bank against the United States Government (the "GOVERNMENT") in the lawsuit,
GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK V. UNITED STATES, Civil Action No.
90-772-C (the "Glendale Goodwill Litigation"), ruling that the Government must
compensate the Bank in the sum of $908.9 million. This decision has been
appealed by the Government and the Bank.
On April 16, 1999, the Claims Court issued its decision on a claim by the
Bank against the Government in the lawsuit, CALIFORNIA FEDERAL BANK V. UNITED
STATES, Civil Action No. 92-138C (the "California Federal Litigation"), ruling
that the Government must compensate the Bank in the sum of $23.0 million. This
decision has been appealed by the Government and the Bank.
In each of the Glendale Goodwill Litigation and the California Federal
Litigation, it is alleged, among other things, that the United States breached
certain contractual commitments regarding the computation of its regulatory
capital for which each of Glendale Federal and California Federal seek damages
and restitution. The claims arose from changes made by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 and its implementing
regulations ("FIRREA") with respect to the rules for computing regulatory
capital.
OTHER LITIGATION
In addition to the matters described above, GS Holdings and its
subsidiaries are involved in other legal proceedings on claims incidental to the
normal conduct of their business. Although it is impossible to predict the
outcome of any outstanding legal proceedings, management believes that such
legal proceedings and claims, individually or in the aggregate, will not have a
material effect on the financial condition or results of operations of GS
Holdings or the Bank.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
Page 45
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3.1 Certificate of Incorporation of the Registrant, as amended.
(Incorporated by reference to Exhibit 3.1 to the Registrant's Report
on Form 10-Q for the quarter ended September 30, 1998).
3.2 By-laws of the Registrant, as amended. (Incorporated by reference to
Exhibit 3.3 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998).
10.1 Employment Agreement dated as of August 1, 1999, between California
Federal Bank, A Federal Savings Bank, and Christie S. Flanagan.
10.2 Employment Agreement dated as of August 1, 1999, between California
Federal Bank, A Federal Savings Bank, and Scott A. Kisting.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
Page 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
(Principal Financial Officer)
/S/ RENEE NICHOLS TUCEI
---------------------------------------------------
By: Renee Nichols Tucei
Executive Vice President and Controller
(Principal Accounting Officer)
November 9, 1999
Page 47
<PAGE>
CHRISTIE S. FLANAGAN - EMPLOYMENT AGREEMENT SUMMARY
<TABLE>
<CAPTION>
- ------------------------------ -------------------------------------------------------------------------------------
SUBJECT PROVISION
- ------------------------------ -------------------------------------------------------------------------------------
<S> <C>
Term 8/1/99 through 7/31/02; automatic one year renewals (subject to 45 days notice).
- ------------------------------ -------------------------------------------------------------------------------------
Base Salary $700,000
- ------------------------------ -------------------------------------------------------------------------------------
Renewal Payment $60,000
- ------------------------------ -------------------------------------------------------------------------------------
Executive Compensation Participation in Executive Compensation Plan
(including stock options, restricted stock,
annual bonus, long term incentive compensation, and stock purchase).
- ------------------------------ -------------------------------------------------------------------------------------
Fringe Benefits Per company policies for an EVP.
Annual medical exam.
Five weeks PTO.
Luxury automobile.
One country club and one social club.
Split dollar life insurance ($1.4 million).
Benefits continue for executive and spouse for
three years following termination.
- ------------------------------ -------------------------------------------------------------------------------------
Location Dallas, TX, subject to reasonable travel requirements.
- ------------------------------ -------------------------------------------------------------------------------------
Termination for Cause Agreement terminates and company has no further
obligations.
- ------------------------------ -------------------------------------------------------------------------------------
Termination for Disability Disability means incapacitated for six consecutive months or 180 days in any 12
month period. Executive receives 60% of base salary for balance of term and
medical benefits until age 70.
- ------------------------------ -------------------------------------------------------------------------------------
Termination for Death Executive receives 60% of base salary for balance of term.
- ------------------------------ -------------------------------------------------------------------------------------
Termination w/o cause by Good reason means:
company or for "good reason" (a) change in duties responsibilities, or status w/o consent.
by Executive. (b) reduction in base salary.
(c) change in location, or failure to provide relocation
assistance if employee agrees to move.
(d) discontinuation of benefits or compensation plan.
(e) failure of successor company to assume agreement.
Executive receives:
(a) in a lump sum payment three times base plus
the higher of (i) current year target bonus or
(ii) the average of prior 3 years actual bonuses.
(b) use of automobile for three years (or until
reemployed).
(c) accelerated vesting of stock options and
restricted stock (per plans).
- ------------------------------ -------------------------------------------------------------------------------------
Termination upon a change of 24 month "reach in" period.
control.
Employee receives:
(a) lump sum payment of three times base salary plus the higher of (i) current
year target bonus or (ii) the average of prior 3
years actual bonuses - capped at 280(g) limit.
(b) outplacement services.
(c) cash in lieu of options.
- ------------------------------ -------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SCOTT A. KISTING - EMPLOYMENT AGREEMENT SUMMARY
<TABLE>
<CAPTION>
- ------------------------------ -------------------------------------------------------------------------------------
SUBJECT PROVISION
- ------------------------------ -------------------------------------------------------------------------------------
<S> <C>
Term 8/1/99 through 7/31/02; automatic one year renewals (subject to 45 days notice).
- ------------------------------ -------------------------------------------------------------------------------------
Base Salary $800,000
- ------------------------------ -------------------------------------------------------------------------------------
Executive Compensation Participation in Executive Compensation Plan, subject to the following:
Annual bonus - target at 50% of base salary.
Stock options - 100,000 GSB shares to be granted by 1/31/2000, 3 year vesting.
(Note: 100,000 options have previously been granted in 1999.)
Restricted stock - 43,500 restricted GSB shares to be issued upon approval of
restricted stock plan agreement, one half vesting on first anniversary of
the date of grant, balance on the fourth anniversary.
Long term incentive cash payment - $4 million to be paid on 3/31/2003,
based on company achieving targeted average ROE
and net income goals during 1998-2002.
- ------------------------------ -------------------------------------------------------------------------------------
Fringe Benefits Per company policies for an EVP.
Annual medical exam.
Five weeks PTO.
Luxury automobile.
One country club or social club.
Benefits continue for executive and spouse for
three years following termination.
- ------------------------------ -------------------------------------------------------------------------------------
Location San Francisco, CA, subject to reasonable travel requirements.
- ------------------------------ -------------------------------------------------------------------------------------
Termination for Cause Agreement terminates and company has no further
obligations.
- ------------------------------ -------------------------------------------------------------------------------------
Termination for Disability Disability means incapacitated for six consecutive months or 180 days in any 12
month period. Executive receives 60% of base salary for balance of term and
medical benefits until age 70.
- ------------------------------ -------------------------------------------------------------------------------------
Termination for Death Executive receives 60% of base salary for balance of term.
- ------------------------------ -------------------------------------------------------------------------------------
Termination w/o cause by Good reason means:
company or for "good reason" (a) change in duties responsibilities, or status w/o consent.
by Executive. (b) reduction in base salary.
(c) change in location, or failure to provide relocation
assistance if employee agrees to move.
(d) discontinuation of benefits or compensation plan.
(e) failure of successor company to assume agreement.
Executive receives:
(a) in a lump sum payment three times base plus
the higher of (i) current year target bonus or
(ii) the average of prior three years actual
bonuses.
(b) use of automobile for three years
(or until reemployed).
(c) accelerated vesting of stock options and
restricted stock (per plans).
- ------------------------------ -------------------------------------------------------------------------------------
Termination upon a change of 24 month "reach in" period.
control.
Employee receives:
(a) lump sum payment of three times base salary plus the higher of (i) current
year target bonus or (ii) the average of prior 3
years actual bonuses - capped at 280(g) limit.
(b) outplacement services.
(c) cash in lieu of options.
------------------------------ -------------------------------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and statements of income found on page 3 and 4 of
the Company's unaudited financial statements for the nine months ended September
30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 468,584
<INT-BEARING-DEPOSITS> 53
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,841,565
<INVESTMENTS-CARRYING> 2,479,730
<INVESTMENTS-MARKET> 2,488,610
<LOANS> 33,287,736 <F1>
<ALLOWANCE> 570,783
<TOTAL-ASSETS> 55,746,139
<DEPOSITS> 23,696,055
<SHORT-TERM> 15,600,998
<LIABILITIES-OTHER> 882,003
<LONG-TERM> 13,332,382
0
0
<COMMON> 1
<OTHER-SE> 1,734,700
<TOTAL-LIABILITIES-AND-EQUITY> 55,746,139
<INTEREST-LOAN> 1,817,816
<INTEREST-INVEST> 896,862
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,714,678
<INTEREST-DEPOSIT> 667,387
<INTEREST-EXPENSE> 1,822,574
<INTEREST-INCOME-NET> 892,104
<LOAN-LOSSES> 10,000
<SECURITIES-GAINS> 1,284
<EXPENSE-OTHER> 693,424
<INCOME-PRETAX> 505,864
<INCOME-PRE-EXTRAORDINARY> 246,840
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 246,840 <F2>
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
<YIELD-ACTUAL> 6.94
<LOANS-NON> 170,970
<LOANS-PAST> 0
<LOANS-TROUBLED> 26,933
<LOANS-PROBLEM> 86,788
<ALLOWANCE-OPEN> 588,533
<CHARGE-OFFS> 30,919
<RECOVERIES> 3,839
<ALLOWANCE-CLOSE> 570,783
<ALLOWANCE-DOMESTIC> 36,962
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 533,821
<FN>
<F1> Loans includes loans held for sale of $819,383 and allowance for loan
losses of $570,783.
<F2> Net income available to common stockholders: $246,840.
</FN>
</TABLE>
