<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from N/A to N/A
----------- ----------
Commission File Number: 333 - 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.)
incoration or organization)
135 Main Street, San Francisco, CA 94105
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
415-904-1100
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
--- ---
The number of shares outstanding of registrant's $1.00 par value common
stock, as of the close of business on July 31, 1999: 1,000 shares.
Page 1 of 43 pages
Exhibit index on page: 42
<PAGE>
GOLDEN STATE HOLDINGS INC.
SECOND QUARTER 1999 REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
PART I. FINANCIAL INFORMATION
---------------------
<S> <C> <C>
Item 1. Consolidated Financial Statements
Unaudited Consolidated Balance Sheets
June 30, 1999 and December 31, 1998....................................................3
Unaudited Consolidated Statements of Income
Six months ended June 30, 1999 and 1998................................................4
Unaudited Consolidated Statements of Income
Three months ended June 30, 1999 and 1998..............................................5
Unaudited Consolidated Statements of Comprehensive Income
Six months ended June 30, 1999 and 1998................................................6
Unaudited Consolidated Statements of Comprehensive Income
Three months ended June 30, 1999 and 1998..............................................7
Unaudited Consolidated Statement of Stockholder's Equity
Six months ended June 30, 1999.........................................................8
Unaudited Consolidated Statements of Cash Flows
Six months ended June 30, 1999 and 1998................................................9
Notes to Unaudited Consolidated Financial Statements..................................11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................................16
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................40
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings.....................................................................41
Item 2. Changes in Securities.................................................................41
Item 3. Defaults Upon Senior Securities.......................................................41
Item 4. Submission of Matters to a Vote of Security Holders...................................41
Item 5. Other Information.....................................................................41
Item 6. Exhibits and Reports on Form 8-K......................................................42
Signatures.....................................................................................43
</TABLE>
Page 2
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(Unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
Assets
------
<S> <C> <C>
Cash and amounts due from banks $ 548,395 $ 854,954
Interest-bearing deposits in other banks 23 52,671
Short-term investment securities 73,951 60,325
----------- -----------
Cash and cash equivalents 622,369 967,950
Securities available for sale, at fair value 1,163,754 770,747
Securities held to maturity 253,026 250,964
Mortgage-backed securities available for sale, at fair value 13,912,271 12,947,992
Mortgage-backed securities held to maturity 2,402,271 2,770,913
Loans held for sale, net 2,143,127 2,366,583
Loans receivable, net 31,580,570 30,280,944
Investment in Federal Home Loan Bank ("FHLB") System 1,125,055 1,000,147
Premises and equipment, net 309,241 310,572
Foreclosed real estate, net 68,406 80,068
Accrued interest receivable 324,558 317,455
Intangible assets (net of accumulated amortization of $148,877
at June 30, 1999 and $113,709 at December 31, 1998) 939,197 923,598
Mortgage servicing rights 1,151,581 943,581
Other assets 772,674 866,422
----------- -----------
Total assets $56,768,100 $54,797,936
=========== ===========
Liabilities, Minority Interest and Stockholder's Equity
-------------------------------------------------------
Deposits $24,020,790 $24,647,488
Securities sold under agreements to repurchase 5,347,435 4,238,395
Borrowings 24,229,617 22,375,557
Other liabilities 960,333 1,210,802
----------- -----------
Total liabilities 54,558,175 52,472,242
----------- -----------
Commitments and contingencies -- --
Minority interest 532,749 593,438
Stockholder's equity:
Common stock, $1.00 par value, 1,000 shares authorized,
issued and outstanding 1 1
Additional paid-in capital 1,513,829 1,512,061
Accumulated other comprehensive (loss) income (155,378) 6,151
Retained earnings (substantially restricted) 318,724 214,043
----------- -----------
Total stockholder's equity 1,677,176 1,732,256
----------- -----------
Total liabilities, minority interest and stockholder's equity $56,768,100 $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
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
Interest income:
Loans receivable $1,134,778 $ 761,340
Mortgage-backed securities available for sale 423,616 178,529
Mortgage-backed securities held to maturity 95,900 47,433
Loans held for sale 67,692 58,230
Securities available for sale 38,067 28,286
Securities held to maturity 6,303 1,572
Interest-bearing deposits in other banks 2,300 1,571
Dividends on FHLB stock 28,184 14,562
---------- ----------
Total interest income 1,796,840 1,091,523
---------- ----------
Interest expense:
Deposits 444,058 355,202
Securities sold under agreements to repurchase 107,610 57,049
Borrowings 640,160 340,345
---------- ----------
Total interest expense 1,191,828 752,596
---------- ----------
Net interest income 605,012 338,927
Provision for loan losses 10,000 20,000
---------- ----------
Net interest income after provision for loan losses 595,012 318,927
---------- ----------
Noninterest income:
Loan servicing fees, net 70,290 71,363
Customer banking fees and service charges 91,367 51,197
Gain on sale of loans, net 20,453 36,124
Gain (loss) on sale of assets, net 15,109 (181)
Other income 16,819 11,669
---------- ----------
Total noninterest income 214,038 170,172
---------- ----------
Noninterest expense:
Compensation and employee benefits 201,785 127,574
Occupancy and equipment 68,044 41,329
Loan expense 22,140 23,500
Professional fees 27,164 19,569
Marketing 17,194 9,867
Data processing 11,982 6,397
Savings Association Insurance Fund ("SAIF") deposit insurance 7,433 5,054
Foreclosed real estate operations, net (2,068) (5,138)
Merger and integration costs 7,747 863
Amortization of intangible assets 35,168 23,229
Other expense 78,159 49,452
---------- ----------
Total noninterest expense 474,748 301,696
---------- ----------
Income before income taxes and minority interest 334,302 187,403
Income tax expense (benefit) 154.714 (221,134)
---------- ----------
Income before minority interest 179,588 408,537
Minority interest 19,907 45,614
---------- ----------
Net income 159,681 362,923
Preferred stock dividends -- 578
---------- ----------
Net income available to common stockholder $ 159,681 $ 362,345
========== ==========
</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 JUNE 30, 1999 AND 1998
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Interest income:
Loans receivable $567,505 $ 376,620
Mortgage-backed securities available for sale 219,562 97,027
Mortgage-backed securities held to maturity 45,471 22,576
Loans held for sale 33,044 30,894
Securities available for sale 19,689 14,563
Securities held to maturity 2,843 698
Interest-bearing deposits in other banks 1,261 1,161
Dividends on FHLB stock 14,628 7,555
-------- ---------
Total interest income 904,003 551,094
-------- ---------
Interest expense:
Deposits 222,062 177,027
Securities sold under agreements to repurchase 53,562 30,521
Borrowings 331,337 176,585
-------- ---------
Total interest expense 606,961 384,133
-------- ---------
Net interest income 297,042 166,961
Provision for loan losses 5,000 10,000
-------- ---------
Net interest income after provision for loan losses 292,042 156,961
-------- ---------
Noninterest income:
Loan servicing fees, net 34,322 34,401
Customer banking fees and service charges 46,621 25,851
Gain on sale of loans, net 4,864 21,619
Gain on sale of assets, net 14,935 198
Other income 7,213 5,332
-------- ---------
Total noninterest income 107,955 87,401
-------- ---------
Noninterest expense:
Compensation and employee benefits 99,200 64,593
Occupancy and equipment 30,089 19,846
Loan expense 9,962 13,905
Professional fees 13,211 10,859
Marketing 8,432 6,362
Data processing 6,270 3,557
Savings Association Insurance Fund ("SAIF") deposit insurance premium 3,577 2,481
Foreclosed real estate operations, net (1,395) (3,418)
Merger and integration costs 1,665 863
Amortization of intangible assets 18,010 12,140
Other expense 32,156 25,756
-------- ---------
Total noninterest expense 221,177 156,944
-------- ---------
Income before income taxes and minority interest 178,820 87,418
Income tax expense (benefit) 82,296 (236,366)
-------- ---------
Income before minority interest 96,524 323,784
Minority interest 10,740 22,662
-------- ---------
Net income 85,784 301,122
Preferred stock dividends -- --
-------- ---------
Net income available to common stockholder $ 85,784 $ 301,122
======== =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 5
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Net income $ 159,681 $ 362,923
Other comprehensive loss, net of tax:
Unrealized holding loss on securities available for sale:
Unrealized holding loss arising during the period (161,335) (6,496)
Less: reclassification adjustment for gain included
in net income (194) (565)
--------- ---------
Other comprehensive loss (161,529) (7,061)
--------- ---------
Comprehensive (loss) income $ (1,848) $ 355,862
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 6
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Net income $ 85,784 $ 301,122
Other comprehensive loss, net of tax:
Unrealized holding loss on securities available for sale:
Unrealized holding loss arising during the period (145,356) (2,641)
Less: reclassification adjustment for gain included
in net income (22) (417)
--------- ---------
Other comprehensive loss (145,378) (3,058)
--------- ---------
Comprehensive (loss) income $ (59,594) $ 298,064
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 7
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
SIX MONTHS ENDED JUNE 30, 1999
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Accumulated Retained
Additional Other Earnings Total
Common Paid-in Comprehensive (Substantially Stockholder's
Stock Capital Income 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 -- -- -- 159,681 159,681
Change in net unrealized holding
gain/(loss) on securities available
for sale -- -- (161,529) -- (161,529)
Dividends to parent (55,000) (55,000)
Tax benefit on exercise of stock -- 1,768 -- -- 1,768
--- ---------- --------- -------- -----------
Balance at June 30, 1999 $ 1 $1,513,829 $(155,378) $318,724 $ 1,677,176
=== =========== ========= ======== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 8
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 159,681 $ 362,923
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization of intangible assets 35,168 23,229
Amortization (accretion) of purchase accounting premiums
and discounts, net 8,427 (3,675)
Accretion of discount on borrowings 501 --
Amortization of mortgage servicing rights 104,981 57,074
Provision for loan losses 10,000 20,000
(Gain) loss on sale of assets, net (15,109) 181
Loss on sale of branches -- 86
Gain on sale of foreclosed real estate, net (5,906) (8,403)
Loss on sale of loans, net 89,030 65,491
Capitalization of originated mortgage servicing rights (109,483) (101,615)
Depreciation and amortization of premises and equipment 17,590 11,225
Amortization of deferred debt issuance costs 3,619 3,342
FHLB stock dividends (28,184) (14,562)
Purchases and originations of loans held for sale (5,570,641) (4,847,904)
Net proceeds from the sale of loans held for sale 5,704,949 4,537,939
Decrease (increase) in other assets 98,939 (335,037)
Increase in accrued interest receivable (7,103) (18,649)
(Decrease) increase in other liabilities (131,165) 31,378
Minority interest 19,907 45,614
----------- -----------
Net cash provided by (used in) operating activities $ 385,201 $ (171,363)
----------- ------------
See accompanying notes to unaudited consolidated financial statements.
(Continued)
</TABLE>
Page 9
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 1999
---- ----
<S> <C> <C>
Cash flows from investing activities:
Nevada Purchase $ 458,943 $ --
GSAC Acquisition -- (13,577)
Purchases of securities available for sale (791,189) (513,957)
Proceeds from maturities of securities available for sale 355,033 549,442
Purchases of securities held to maturity (3,066) (615)
Proceeds from maturities of securities held to maturity 1,173 357
Purchases of mortgage-backed securities available for sale (3,469,570) (4,080,424)
Principal payments on mortgage-backed securities available for sale 2,295,935 1,102,442
Proceeds from sales of mortgage-backed securities available for sale 193,732 4,686
Principal payments on mortgage-backed securities held to maturity 368,537 194,445
Proceeds from sale of loans 10,450 346
Net (increase) decrease in loans receivable (1,586,872) 728,254
Purchases of FHLB stock, net (98,517) (71,936)
Purchases of premises and equipment (62,710) (37,221)
Proceeds from disposal of premises and equipment 46,218 5,840
Proceeds from sales of foreclosed real estate 79,116 76,424
Purchases of mortgage servicing rights (245,711) (63,628)
Proceeds from sales of mortgage servicing rights 57,367 --
------------ -------------
Net cash flows used in investing activities (2,391,131) (2,119,122)
------------ -------------
Cash flows from financing activities:
Net decrease in deposits (1,169,207) (157,876)
Proceeds from additional borrowings 17,477,254 11,829,493
Principal payments on borrowings (15,614,925) (10,321,926)
Net increase in securities sold under agreements to repurchase 1,109,040 1,019,260
Bank Preferred Stock Tender Offers (63,957) --
Debt Tender Offers (253) --
Redemption of FN Holdings Preferred Stock -- (25,000)
Dividends on common stock (55,000) (35,547)
Dividends on preferred stock -- (471)
Dividends paid to minority stockholders, net of taxes (24,371) (46,353)
Tax benefit on exercise of stock options 1,768 --
------------ -------------
Net cash flows provided by financing activities 1,660,349 2,261,580
------------ -------------
Net change in cash and cash equivalents (345,581) (28,905)
Cash and cash equivalents at beginning of period 967,950 412,311
------------ -------------
Cash and cash equivalents at end of period $ 622,369 $ 383,406
============ =============
</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 six months ended June 30, 1999 are not necessarily indicative of the
results that may be expected for the entire fiscal year or any other interim
period. Certain amounts for the three and six month periods in the prior year
have been reclassified to conform with the current period's presentation.
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 has not been acquired by GS Holdings, (ii) the Preferred Stock ("REIT
Preferred Stock") of California Federal Preferred Capital Corporation, a wholly
owned subsidiary of the Bank, and (iii) that portion of stockholders' equity of
Auto One Acceptance Corporation ("Auto One"), a subsidiary of the Bank,
attributable to 20% of its common stock.
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 are 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 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."
Page 11
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
At September 11, 1998, Glendale Federal had total assets of approximately
$18.9 billion and deposits of $11.3 billion and operated 181 branches and 26
loan offices in California.
The Golden State Acquisition was accounted for as a purchase of Golden
State by Parent Holdings and, accordingly, the purchase price was allocated to
the assets acquired and liabilities assumed in the transaction based on
estimates of fair value at the date of purchase. Since the date of purchase, the
results of operations related to such assets and liabilities have been included
in the Company's consolidated statements of income.
Merger and integration costs associated with the Golden State Acquisition
totalled $1.7 million and $7.7 million for the three and six months ended June
30, 1999, respectively, including severance for terminated California Federal
employees, expenses for California Federal branch closures, conversion and
consolidation costs, as well as transition expenses for duplicate personnel,
facilities and computer systems during the integration period.
In connection with the Golden State Acquisition, the Company recorded
liabilities resulting from (i) branch consolidations due to duplicate
facilities; (ii) employee severance and termination benefits due to a planned
reduction in force; and (iii) expenses incurred under a contractual obligation
to terminate services provided by outside service providers (principally
relating to data processing expenses). During the six and three months ended
June 30, 1999, the Company recorded $4.9 million and $2.6 million, respectively,
in additional liabilities related to branch closures. During the six months
ended June 30, 1999, $7.5 million, $3.6 million and $9.3 million, respectively,
were charged against these liabilities. During the three months ended June 30,
1999, $3.9 million and $.8 million were charged against the liabilities for
branch consolidations and contract terminations, respectively. No amount was
charged against the liability for severance and termination benefits during the
three months ended June 30, 1999. At June 30, 1999, the remaining liabilities
totalled $27.3 million, $29.9 million and $2.5 million, respectively.
Other Acquisitions and Divestitures
On February 4, 1998, Auto One acquired 100% of the partnership interests in
Gulf States Acceptance Company, a Delaware limited partnership ("GSAC") and its
general partner, Gulf States Financial Services, Inc., a Texas corporation. GSAC
was liquidated and its assets and liabilities were transferred to Auto One (the
"GSAC Acquisition"). The aggregate consideration paid in connection with the
GSAC Acquisition was approximately $13.6 million plus 250 shares of the common
stock of Auto One, par value $1.00 per share, representing a 20% interest in
Auto One. This interest is reflected in the Company's consolidated balance sheet
as minority interest.
On September 11, 1998, the Bank consummated the sale of its Florida bank
franchise (consisting of 24 branches with deposits of $1.4 billion) to Union
Planters Bank of Florida, a wholly owned subsidiary of Union Planters Corp. (the
"Florida Branch Sale").
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").
Page 12
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(3) Redemption of FN Holdings Notes
-------------------------------
On May 15, 1999, GS Holdings redeemed the remaining $225 thousand aggregate
principal amount of the FN Holdings 12 1/4% Senior Notes for an aggregate
redemption price, including accrued interest payable, of $252.6 thousand. The
premium paid in connection with such redemption was not material.
(4) Cash, Cash Equivalents, and Statements of Cash Flows
----------------------------------------------------
Cash paid for interest on deposits and other interest-bearing liabilities
during the six months ended June 30, 1999 and 1998 was $1.1 billion and $746.9
million, respectively.
During the six months ended June 30, 1999, noncash activity consisted of
transfers of $227.1 million from loans receivable to mortgage-backed securities
upon the securitization of certain of the Bank's single-family loans, transfers
of $63.1 million from loans receivable to foreclosed real estate and $1.7
million of loans made to facilitate sales of real estate owned.
During the six months ended June 30, 1998, noncash activity consisted of
transfers of $62.4 million from loans receivable to foreclosed real estate, $5.5
million of loans made to facilitate sales of real estate owned and transfers of
$3.2 million from loans held for sale (at lower of cost or market) to
mortgage-backed securities upon the securitization of certain of the Bank's
single-family loans. Noncash activity also includes the retirement of FN
Holdings Preferred Stock of $.8 million and the issuance of additional FN
Holdings Preferred Stock through preferred stock dividends of $.1 million.
(5) Segment Reporting
-----------------
Since the Company derives a significant portion of its revenues from
interest income, and interest expense is the most significant expense, the
segments are reported below using net interest income. Because the Company also
evaluates performance based on noninterest income and noninterest expense goals,
these measures of segment profit and loss are also presented. The Company does
not allocate income taxes to the segments.
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
-------------------------------------- ---------------------------------------
Community Mortgage Community Mortgage
Banking Banking Total Banking Banking Total
------- ------- ----- ------- ------- -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net interest income: (1)
1999 $ 638,381 $ 23,853 $ 662,234 $ 312,357 $ 12,257 $ 324,614
1998 361,904 22,680 384,584 180,747 11,685 192,432
Noninterest income: (2)
1999 $ 121,201 $ 117,977 $ 239,178 $ 61,546 $ 59,830 $ 121,376
1998 80,956 103,952 184,908 42,085 52,538 94,623
Noninterest expense: (3)
1999 $ 385,620 $ 91,448 $ 477,068 $ 180,267 $ 42,070 $ 222,337
1998 225,595 78,421 304,016 116,007 42,097 158,104
</TABLE>
Page 13
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- -------------
(1) Includes $57.2 million and $45.7 million for the six months ended June 30,
1999 and 1998, respectively, in earnings credit provided to FNMC by the
Bank, primarily for custodial bank account balances generated by FNMC.
Also includes $124.0 million and $94.2 million for the six months ended
June 30, 1999 and 1998, respectively, in interest income and expense on
intercompany loans. Includes $27.6 million and $25.5 million for the three
months ended June 30, 1999 and 1998, respectively, in earnings credit
provided to FNMC by the Bank, primarily for custodial bank account
balances generated by FNMC. Also includes $62.6 million and $51.2 million
for the three months ended June 30, 1999 and 1998, respectively, in
interest income and expense on intercompany loans.
(2) Includes $25.1 million and $14.7 million for the six months ended June 30,
1999 and 1998, respectively, in intercompany servicing fees. Includes
$13.4 million and $7.2 million for the three months ended June 30, 1999
and 1998, respectively, in intercompany servicing fees.
(3) Includes $2.3 million for each of the six month periods ended June 30,
1999 and 1998, in intercompany noninterest expense. Includes $1.2 million
for each of the three month periods ended June 30, 1999 and 1998, in
intercompany noninterest expense.
The following reconciles the above table to the amounts shown on the
consolidated financial statements for the six and three months ended June 30,
1999 and 1998, (in thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
--------------------------- ----------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net interest income:
Total net interest income for reportable segments $ 662,234 $ 384,584 $ 324,614 $ 192,432
Elimination of intersegment net interest income (57,222) (45,657) (27,572) (25,471)
----------- ----------- ----------- -----------
Total $ 605,012 $ 338,927 $ 297,042 $ 166,961
=========== =========== =========== ===========
Noninterest income:
Total noninterest income for reportable segments $ 239,178 $ 184,908 $ 121,376 $ 94,623
Elimination of intersegment servicing fees (25,140) (14,736) (13,421) (7,222)
----------- ----------- ----------- -----------
Total $ 214,038 $ 170,172 $ 107,955 $ 87,401
=========== =========== =========== ===========
Noninterest expense:
Total noninterest expense for reportable segments $ 477,068 $ 304,016 $ 222,337 $ 158,104
Elimination of intersegment expense (2,320) (2,320) (1,160) (1,160)
----------- ----------- ----------- -----------
Total $ 474,748 $ 301,696 $ 221,177 $ 156,944
=========== =========== =========== ===========
</TABLE>
(6) Minority Interest
-----------------
On April 1, 1999, GS Holdings redeemed all of the remaining 607,299
outstanding shares of the Bank's 10 5/8% Preferred Stock not already owned by it
for $105.313 per share, for a total redemption price of $63.9 million. This
transaction reduced minority interest by $60.7 million on the Company's balance
sheet and resulted in a charge of $3.2 million to minority interest expense.
(7) Stockholder's Equity
--------------------
Cash dividends on the FN Holdings Preferred Stock totalled $.5 million
during the six months ended June 30, 1998. As the FN Holdings Preferred Stock
was redeemed in 1998, there were no preferred dividends during the six months
ended June 30, 1999. Dividends on common stock totalled $55.0 million and $35.5
million during the six months ended June 30, 1999 and 1998, respectively.
(8) Executive and Stock Compensation
--------------------------------
In connection with the Golden State Acquisition, the Bank is administering
a stock option plan that provided for the granting of options of Golden State
Common Stock to employees and directors. Upon the consummation of the
Page 14
<PAGE>
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
merger on September 11, 1998, substantially all options outstanding became
exercisable. All these stock option plans have expired as to the granting of
additional options. During the three and six months ended June 30, 1999, a total
of 134,484 and 357,017 options, respectively, were exercised and 86,500 and
172,500 options, respectively, expired. At June 30, 1999, options to exercise an
equivalent of 1,464,270 shares remained outstanding under the plans.
On May 17, 1999, the Golden State Bancorp Inc. Omnibus Stock Plan (the
"Stock Plan") was approved, providing for the granting of stock options, stock
appreciation rights and restricted stock to employees of Golden State and its
subsidiaries, non-employee directors and to consultants who provide significant
services to Golden State. The total number of shares available for grant through
March 15, 2009 under the Stock Plan is 7,000,000 shares, which may be issued
from treasury or from authorized but unissued shares. During the second quarter
of 1999, non-qualified stock options equivalent to 1,293,000 shares of common
stock were issued at a price of $23.50 per share under the Stock Plan to
employees. These shares generally vest over three years in one-third increments
on the anniversary of the grant date. The options generally expire 10 years from
the date of grant. No compensation cost was recognized by the Company for these
stock options during the three and six months ended June 30, 1999, in accordance
with the intrinsic value accounting methodology prescribed in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
whereby compensation expense to employees is determined based upon the excess,
if any, of the market price of Golden State's common stock at the measurement
date over the exercise price of the award.
On May 17, 1999, the Golden State Bancorp Inc. Executive Compensation Plan
(ECP) was approved, providing for performance-based incentive awards to senior
executives of the Company. Awards may be paid in cash; however up to 50% may be
payable in restricted stock granted under the Stock Plan discussed above.
(9) Newly Issued Accounting Pronouncements
--------------------------------------
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes
standards for derivative instruments and for hedging activities, and requires
that an entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. Under SFAS No. 133,
an entity that elects to apply hedge accounting is required to establish at the
inception of the hedge the method it will use for assessing the effectiveness of
the hedging derivative and the measurement approach for determining the
ineffective aspect of the hedge.
SFAS No. 133 applies to all entities and amends SFAS No. 107, Disclosures
About Fair Values of Financial Instruments, to include in Statement 107 the
disclosure provisions about concentrations of credit risk from Statement 105.
SFAS No. 133 supersedes FASB Statements No. 80, Accounting for Futures
Contracts, No. 105, Disclosure of Information about Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, and No. 119, Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments. SFAS No. 133 also nullifies or modifies the
consensuses reached in a number of issues addressed by the Emerging Issues Task
Force.
SFAS No. 133, as amended by SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133 - an amendment of FASB Statement No. 133, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. Initial
application of this statement should be as of the beginning of an entity's
fiscal quarter; on that date, hedging relationships must be designated anew and
documented pursuant to the provisions of this statement. Earlier application of
all of the provisions of SFAS No. 133 is encouraged, but is permitted only as of
the beginning of any fiscal quarter that begins after issuance of this
statement. SFAS No. 133 should not be applied retroactively to financial
statements of prior periods. Management has established a multi-disciplinary
task force to assess the statement's effect on the Company's consolidated
financial statements and to coordinate its implementation.
Page 15
<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 GS Holdings 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 six months ended June 30, 1999 of
$159.7 million compared with net income of $362.9 million for the corresponding
period in 1998. Net income for the six months ended June 30, 1999 includes a
$16.3 million pre-tax gain from the Servicing Sale and $3.2 million in minority
interest expense related to the redemption of the remaining $60.7 million of the
Bank's 10 5/8% Preferred Stock. Net income on a core basis, excluding these two
items, totalled $153.5 million for the six months ended June 30, 1999. Net
income for the six months ended June 30, 1999 also includes $7.7 million in
pre-tax merger and integration costs (including severance, conversion and
consolidation costs) incurred in connection with the Golden State Acquisition.
Net income for the six months ended June 30, 1998 includes a $250 million
reduction in the valuation allowance established against the Company's deferred
tax asset.
GS Holdings reported net income for the three months ended June 30, 1999 of
$85.8 million compared with net income of $301.1 million for the corresponding
period in 1998. Net income for the three months ended June 30, 1999 includes a
$16.3 million pre-tax gain from the Servicing Sale and $3.2 million in minority
interest expense related to the redemption of the remaining $60.7 million of the
Bank's 10 5/8% Preferred Stock. Net income on a core basis, excluding these two
items, totalled $79.6 million for the three months ended June 30, 1999. Net
income for the three months ended June 30, 1999 also includes $1.7 million in
pre-tax merger and integration costs (including severance, conversion and
consolidation costs) incurred in connection with the Golden State Acquisition.
Net income for the three months ended June 30, 1998 includes a $250 million
reduction in the valuation allowance established against the Company's deferred
tax asset.
Page 16
<PAGE>
Financial Condition
During the six months ended June 30, 1999, consolidated total assets
increased $2.0 billion, to $56.8 billion from December 31, 1998, and total
liabilities increased from $52.5 billion to $54.6 billion.
During the six months ended June 30, 1999, stockholder's equity
decreased $55.1 million to $1.7 billion. The decrease in stockholder's equity is
the net result of a $161.5 million net unrealized loss on securities available
for sale and $55.0 million in dividends to parent, partially offset by $159.7
million in net income for the period and $1.8 million from the exercise of stock
options. The unrealized loss on securities available for sale is primarily a
result of a decline in the value of the Company's mortgage-backed securities
available for sale due to an increase in Treasury yields and higher spreads on
private label collateralized mortgage obligations. This unrealized loss
represents a decline in the total mortgage-backed securities available for sale
portfolio of less than 2%.
GS Holdings' non-performing assets, consisting of non-performing loans, net
of purchase accounting adjustments, foreclosed real estate, net, and repossessed
assets, decreased to $260 million at June 30, 1999 compared with $310 million at
December 31, 1998. Total non-performing assets as a percentage of the Bank's
total assets decreased to 0.46% at June 30, 1999 from 0.57% at December 31,
1998.
Year 2000
The Year 2000 remediation process for existing mission-critical systems was
completed in the first quarter of 1999, as well as the testing and certification
of these systems and applications. In addition, during February and March of
1999, the Company participated in industry-wide Year 2000 integration testing
sponsored by the Mortgage Bankers Association. The Company has also assessed
risks related to the potential failure of material third parties to be ready for
the year 2000.
The contingency plan for the critical supply vendors was completed
mid-February 1999 and contingency plans were completed for all other material
service providers by June 30, 1999. The support plan for applications maintained
in-house will be completed by September 30, 1999. In addition, contingency plans
for critical business areas to address liquidity, customer communications,
operations issues and potential failures surrounding the Year 2000 event were
completed by June 30, 1999.
It is currently expected that costs related to making the Company's
computer systems, applications and facilities Year 2000 compliant will total
approximately $17.6 million over the years 1997 to 2000. Of this amount, $15.0
million has been incurred since the inception of the Year 2000 project through
June 30, 1999. Noninterest expense for the three and six months ended June 30,
1999 included approximately $2.3 million and $4.7 million, respectively, in
connection with the Company's Year 2000 efforts.
For additional information regarding the Year 2000 issue, refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Year 2000" in the Company's 1998 Form 10-K.
Page 17
<PAGE>
RESULTS OF OPERATIONS
Six months ended June 30, 1999 versus six months ended June 30, 1998
The following table sets forth information regarding the Company's
consolidated average balance sheets, together with the total dollar amounts of
interest income and interest expense and the weighted average interest rates for
the periods presented. Average balances are calculated on a daily basis. The
information presented represents the historical activity of the Company.
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999
-----------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
(dollars in millions)
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,545 $ 47 6.05%
Mortgage-backed securities available for sale 13,476 423 6.29
Mortgage-backed securities held to maturity 2,555 96 7.51
Loans held for sale, net 2,069 68 6.54
Loans receivable, net 30,967 1,135 7.33
FHLB stock 1,082 28 5.25
------- ------
Total interest-earning assets 51,694 1,797 6.95
------
Noninterest-earning assets 4,026
-------
Total assets $55,720
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits $24,126 444 3.71
Securities sold under agreements to repurchase (3) 4,311 108 4.97
Borrowings (3) 23,560 640 5.48
------- ------
Total interest-bearing liabilities 51,997 1,192 4.62
------
Noninterest-bearing liabilities 1,413
Minority interest 566
Stockholder's equity 1,744
-------
Total liabilities, minority interest
and stockholder's equity $55,720
=======
Net interest income $ 605
======
Interest rate spread 2.33%
=====
Net interest margin 2.30%
=====
Return on average assets 0.57%
=====
Return on average common equity 18.31%
=====
Return on average total equity 18.31%
=====
Average equity to average assets 3.13%
=====
</TABLE>
Page 18
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1998
---------------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
(dollars in millions)
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in
banks (2) $ 1,016 $ 32 6.18%
Mortgage-backed securities available for sale 5,716 178 6.25
Mortgage-backed securities held to maturity 1,236 47 7.67
Loans held for sale, net 1,641 58 7.10
Loans receivable, net 19,462 762 7.82
FHLB stock 494 15 5.95
------- ------
Total interest-earning assets 29,565 1,092 7.38
------
Noninterest-earning assets 2,714
-------
Total assets $32,279
=======
LIABILITIES, MINORITY INTEREST AND STOCKHOLDER'S
EQUITY
Interest-bearing liabilities:
Deposits $16,206 355 4.42
Securities sold under agreements to repurchase 2,028 57 5.59
Borrowings 11,039 341 6.22
------- ------
Total interest-bearing liabilities 29,273 753 5.18
------
Noninterest-bearing liabilities 1,068
Minority interest 985
Stockholder's equity 953
-------
Total liabilities, minority interest
and stockholder's equity $32,279
=======
Net interest income $ 339
======
Interest rate spread 2.20%
=====
Net interest margin 2.25%
=====
Return on average assets 2.25%
=====
Return on average common equity 76.84%
=====
Return on average total equity 76.20%
=====
Average equity to average assets 2.95%
=====
</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 19
<PAGE>
The following table presents certain information of the Company regarding
changes in interest income and interest expense during the periods indicated.
The dollar amount of interest income and interest expense fluctuates depending
upon changes in the respective interest rates and upon changes in the respective
amounts (volume) of the Company's interest-earning assets and interest-bearing
liabilities. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) volume
(changes in average outstanding balances multiplied by the prior period's rate)
and (ii) rate (changes in average interest rate multiplied by the prior period's
volume). Changes attributable to both volume and rate have been allocated
proportionately.
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999 vs. 1998
Increase (Decrease) Due to
--------------------------------------------
Volume Rate Net
------ ---- ---
(in millions)
<S> <C> <C> <C>
INTEREST INCOME:
Securities and interest-bearing deposits in banks $ 16 $ (1) $ 15
Mortgage-backed securities available for sale 244 1 245
Mortgage-backed securities held to maturity 50 (1) 49
Loans held for sale, net 15 (5) 10
Loans receivable, net 418 (45) 373
FHLB stock 15 (2) 13
---- ---- ----
Total 758 (53) 705
---- ---- ----
INTEREST EXPENSE:
Deposits 132 (43) 89
Securities sold under agreements to repurchase 56 (5) 51
Borrowings 333 (34) 299
---- ---- ----
Total 521 (82) 439
---- ---- ----
Change in net interest income $237 $ 29 $266
==== ==== ====
</TABLE>
The volume variances in total interest income and total interest
expense for the six months ended June 30, 1999 compared to the corresponding
period in 1998 are largely due to increased purchases of mortgage-backed
securities funded with FHLB advances, the additional volume related to the
Golden State Acquisition and the assumption of debt securities from the GS
Escrow Merger (the "GS Holdings Notes"), partially offset by $1.4 billion in
deposits sold in the Florida Branch Sale and borrowings repurchased as part of
the Refinancing Transactions. The positive total rate variance of $29 million is
primarily attributed to the lower cost of funds on deposits, the lower interest
rates paid on new borrowings (including the Refinancing Transactions) and the
lower costing liabilities assumed in the Golden State Acquisition, partially
offset by prepayments of higher rate interest-earning assets and repricing of
variable rate loans.
Interest Income. Total interest income was $1.8 billion for the six months
ended June 30, 1999, an increase of $705 million from the six months ended June
30, 1998. Total interest-earning assets for the six months ended June 30, 1999
averaged $51.7 billion, compared to $29.6 billion for the corresponding period
in 1998, primarily as a result of the Golden State Acquisition. The yield on
total interest-earning assets during the six months ended June 30, 1999
decreased to 6.95% from 7.38% for the six months ended June 30, 1998, primarily
due to prepayments of higher rate loans which were replaced with lower yielding
originations and the repricing of variable rate loans.
GS Holdings earned $1.1 billion of interest income on loans receivable for
the six months ended June 30, 1999, an increase of $373 million from the six
months ended June 30, 1998. The average balance of loans receivable was $31.0
billion for the six months ended June 30, 1999, compared to $19.5 billion for
the same period in 1998. The weighted average rate on loans receivable decreased
to 7.33% for the six months ended June 30, 1999 from 7.82% for the six months
ended June 30, 1998, primarily due to declining market rates. The increase in
the average volume is primarily due to the addition of $14.6 billion in loans
acquired in the Golden State Acquisition.
Page 20
<PAGE>
GS Holdings earned $68 million of interest income on loans held for sale
for the six months ended June 30, 1999, an increase of $10 million from the six
months ended June 30, 1998. The average balance of loans held for sale was $2.1
billion for the six months ended June 30, 1999, an increase of $428 million from
the comparable period in 1998, primarily due to increased originations and
longer holding periods for jumbo loans during the six months ended June 30,
1999. The weighted average rate on loans held for sale decreased to 6.54% for
the six months ended June 30, 1999 from 7.10% for the six months ended June 30,
1998, primarily due to declining market rates.
Interest income on mortgage-backed securities available for sale was $423
million for the six months ended June 30, 1999, an increase of $245 million from
the six months ended June 30, 1998. The average portfolio balances increased
$7.8 billion, to $13.5 billion, for the six months ended June 30, 1999 compared
to the same period in 1998. The weighted average yield on these assets increased
from 6.25% for the six months ended June 30, 1998 to 6.29% for the six months
ended June 30, 1999. The increase in the volume and the weighted average yield
is primarily due to purchases of mortgage-backed securities and additions of
$2.4 billion from the Golden State Acquisition with higher market yields.
Interest income on mortgage-backed securities held to maturity was $96
million for the six months ended June 30, 1999, an increase of $49 million from
the six months ended June 30, 1998. The average portfolio balance increased $1.3
billion, to $2.6 billion, for the six months ended June 30, 1999 compared to the
same period in 1998, primarily attributed to the addition of $1.9 billion of the
Bank's multi-family loans securitized with FNMA with a weighted average rate of
7.39% during the third quarter of 1998. The weighted average rates for the six
months ended June 30, 1999 and 1998 were 7.51% and 7.67%, respectively.
Interest income on securities and interest-bearing deposits in other banks
was $47 million for the six months ended June 30, 1999, an increase of $15
million from the six months ended June 30, 1998. The average portfolio balance
increased from $1.0 billion for the six months ended June 30, 1998 to $1.5
billion for the six months ended June 30, 1999. The decrease in the weighted
average rate from 6.18% for the six months ended June 30, 1998 to 6.05% for the
six months ended June 30, 1999 reflects the decline in market interest rates.
Dividends on FHLB stock were $28 million for the six months ended June
30, 1999, an increase of $13 million from the six months ended June 30, 1998,
due to an increase in the amount of such stock owned by the Company as a result
of an increase in borrowings under FHLB advances as well as the Golden State
Acquisition. The average balance outstanding during the six months ended June
30, 1999 and 1998 was $1.1 billion and $.5 billion, respectively. The weighted
average rate on FHLB stock decreased to 5.25% for the six months ended June 30,
1999 from 5.95% for the six months ended June 30, 1998, reflecting lower
dividends declared by the FHLB.
Interest Expense. Total interest expense was $1.2 billion for the six
months ended June 30, 1999, an increase of $439 million from the six months
ended June 30, 1998. The increase is primarily the result of additional
borrowings under FHLB advances, the additional deposits and borrowings assumed
in the Golden State Acquisition, deposits assumed in the Nevada Purchase and the
net impact of the Refinancing Transactions, including the assumption of the GS
Holdings Notes.
Interest expense on customer deposits, including brokered deposits, was
$444 million for the six months ended June 30, 1999, an increase of $89 million
from the six months ended June 30, 1998. The average balance of customer
deposits outstanding increased from $16.2 billion for the six months ended June
30, 1998 to $24.1 billion for the six months ended June 30, 1999. The increase
in the average balance is primarily a result of $11.3 billion in deposits
assumed in the Golden State Acquisition, partially offset by $1.4 billion in
deposits sold in the Florida Branch Sale, both of which occurred in the third
quarter of 1998. In addition, $543 million in deposits at an average cost of
3.71% were assumed in the Nevada Purchase, which was consummated in April 1999.
The overall weighted average cost of deposits declined to 3.71% for the six
months ended June 30, 1999 from 4.42% for the six months ended June 30, 1998,
primarily due to the higher average balances of lower rate custodial transaction
accounts in 1999 compared to 1998, the lower cost of funds on deposits assumed
in the Golden State Acquisition and the Nevada Purchase, lower market interest
rates and a change in the Bank's certificate of deposit pricing strategy.
Interest expense on securities sold under agreements to repurchase totalled
$108 million for the six months ended June 30, 1999, an increase of $51 million
from the six months ended June 30, 1998. The average balance of such borrowings
for the six months ended June 30, 1999 and 1998 was $4.3 billion and $2.0
billion, respectively;
Page 21
<PAGE>
such increase is primarily attributed to the Golden State Acquisition. The
weighted average interest rate on these instruments decreased to 4.97% for the
six months ended June 30, 1999 from 5.59% for the six months ended June 30,
1998, primarily due to a decrease in market rates on new borrowings in 1999
compared to 1998.
Interest expense on borrowings totalled $640 million for the six months
ended June 30, 1999, an increase of $299 million from the six months ended June
30, 1998. The average balance outstanding for the six months ended June 30, 1999
and 1998 was $23.6 billion and $11.0 billion, respectively. The weighted average
interest rate on these instruments decreased to 5.48% for the six months ended
June 30, 1999 from 6.22% for the six months ended June 30, 1998, primarily due
to lower prevailing market rates in 1999 and the net impact of the Refinancing
Transactions. The higher volume includes the net impact of the Refinancing
Transactions and the addition of $5.4 billion in FHLB advances assumed in the
Golden State Acquisition, as well as the increase in FHLB advances used to fund
the purchases of mortgage-backed securities and to fund the sale of deposits in
the Florida Branch Sale.
Net Interest Income. Net interest income was $605 million for the six
months ended June 30, 1999, an increase of $266 million from the six months
ended June 30, 1998, primarily due to an increase in net interest-earning assets
resulting from the Golden State Acquisition and an increase in the net interest
margin. The interest rate spread increased to 2.33% for the six months ended
June 30, 1999 from 2.20% for the six months ended June 30, 1998, primarily as a
result of maturities and repayments of higher rate interest-bearing liabilities
being replaced with interest-bearing liabilities having comparatively lower
rates. The effect of lower rates on liabilities was partially offset by lower
yielding assets replenishing asset run-off in a declining rate environment.
Noninterest Income. Total noninterest income, consisting primarily of loan
servicing fees, customer banking fees, gain on sales of loans and gain on sales
of assets, was $214.0 million for the six months ended June 30, 1999, an
increase of $43.9 million from the six months ended June 30, 1998.
Loan servicing fees, net of amortization of mortgage servicing rights, were
$70.3 million for the six months ended June 30, 1999, compared to $71.4 million
for the six months ended June 30, 1998. Although the single-family residential
loan servicing portfolio, excluding loans serviced for the Bank, increased from
$46.8 billion at June 30, 1998 to $69.2 billion at June 30, 1999, incremental
loan servicing fees were offset by amortization related to higher average MSR
(as defined herein) basis in the six months ended June 30, 1999. Servicing
rights purchased in bulk transactions in prior years with lower average MSR
basis are being replaced with current production which more closely approximates
market rates which, when combined with recent higher prepayment speeds, results
in a decline in the average yield on the portfolio.
Customer banking fees were $91.4 million for the six months ended June 30,
1999 compared to $51.2 million for the six months ended June 30, 1998. The
increase is primarily attributed to the impact of revenues from the retail
banking operations acquired in the Golden State Acquisition and deposits assumed
in the Nevada Purchase, partially offset by the impact of the Florida Branch
Sale. In addition, management has placed increased emphasis on transaction
account growth since the Golden State Acquisition, which has generated
additional fee income.
During the six months ended June 30, 1999, California Federal sold $5.8
billion in single-family mortgage loans originated for sale with servicing
rights retained as part of its ongoing mortgage banking operations compared to
$4.5 billion of such sales for the corresponding period in 1998. Gain on sale of
loans totalled $20.5 million for the six months ended June 30, 1999, a decrease
of $15.7 million from the six months ended June 30, 1998. The decrease includes
an $8.8 million adjustment recorded during the second quarter of 1999 to reflect
the lower of cost or market valuation on residential loans held for sale at June
30, 1999. In addition, gains attributed to early payoffs of commercial loans
with unamortized discounts were $6.8 million higher in 1998 compared to 1999.
Net gain on sale of assets totalled $15.1 million for the six months ended
June 30, 1999, an increase of $15.3 million from the six months ended June 30,
1998, primarily attributed to the Servicing Sale.
Other noninterest income was $16.8 million for the six months ended June
30, 1999 compared to $11.7 million for the six months ended June 30, 1998. The
increase in 1999 is primarily attributed to the receipt of a sales and use tax
refund and an increase in disbursement float income.
Noninterest Expense. Total noninterest expense was $474.7 million for the
six months ended June 30, 1999, an increase of $173.1 million compared to the
six months ended June 30, 1998. The variance between the two periods
Page 22
<PAGE>
is primarily attributed to the Golden State Acquisition. Noninterest expense for
the six months ended June 30, 1999 included increases of $74.2 million in
compensation, $26.7 million in occupancy and equipment, $6.9 million in merger
and integration costs incurred in connection with the Golden State Acquisition,
$11.9 million in goodwill amortization attributed to the Golden State
Acquisition and the Nevada Purchase, and an additional $28.7 million in other
noninterest expense, all primarily as a result of the Golden State Acquisition.
Compensation and employee benefits expense was $201.8 million for the six
months ended June 30, 1999, an increase of $74.2 million from the six months
ended June 30, 1998. The increase is primarily attributed to an additional 2,563
employees at June 30, 1999 compared to June 30, 1998, mainly due to the Golden
State Acquisition.
Occupancy and equipment was $68.0 million and $41.3 million for the six
months ended June 30, 1999 and 1998, respectively. This increase reflects the
effects of the Golden State Acquisition as well as $4.8 million of adjustments
to previously established accruals for vacant facilities that are not expected
to be recurring.
Merger and integration costs were $7.7 million for the six months ended
June 30, 1999, representing transition expenses, which include severance,
conversion and consolidation costs incurred in connection with the Golden State
Acquisition. Management does not expect to incur any significant additional
merger and integration costs from this transaction.
Amortization of intangible assets was $35.2 million for the six months
ended June 30, 1999, an increase of $11.9 million from the six months ended June
30, 1998, primarily attributed to the goodwill recorded in connection with the
Golden State Acquisition and the Nevada Purchase.
Other noninterest expense was $78.2 million in 1999 compared to $49.5
million in 1998, primarily attributed to increased operations as a result of the
Golden State Acquisition. In addition, results for the six months ended June 30,
1999 include $6.2 million in operating expenses related to back office support;
such charges are not expected to be recurring.
Provision for Income Tax. During the six months ended June 30, 1999 and
1998, GS Holdings recorded income tax expense of $154.7 million and an income
tax benefit of $221.1 million, respectively. GS Holdings' effective Federal tax
rate was 38% and (131)% during the six months ended June 30, 1999 and 1998,
respectively, while its statutory Federal tax rate was 35% during both periods.
The difference between the effective and statutory rates was primarily the
result of nondeductible goodwill amortization for both periods, which was more
than offset by a $250 million reduction in the deferred tax asset valuation
allowance for the period ended June 30, 1998. GS Holdings' effective state tax
rate was 8% and 13% during the six months ended June 30, 1999 and 1998,
respectively.
Minority Interest. Minority interest for the six months ended June 30, 1999
includes $3.2 million in net premium paid in connection with the redemption of
the Bank's 105/8% Preferred Stock. Dividends on the Bank Preferred Stock that
has not been acquired by GS Holdings and the REIT Preferred Stock totalling $1.8
million and $22.8 million, respectively, were recorded during the six months
ended June 30, 1999. Minority interest relative to the REIT Preferred Stock is
reflected net of related income tax benefit of $9.6 million which will inure to
the Company as a result of the deductibility of such dividends for income tax
purposes. The reduction in minority interest relative to the Bank Preferred
Stock reflects the impact of the $380.7 million in Bank Preferred Stock
purchased by GS Holdings in connection with the Refinancing Transactions in the
third and fourth quarters of 1998, as well as the $60.7 million redeemed on
April 1, 1999. Minority interest for the six months ended June 30, 1999 also
includes a $1.7 million benefit reversal representing that portion of Auto One's
loss attributable to the 20% interest in the common stock of Auto One that was
issued as part of the GSAC Acquisition.
During the six months ended June 30, 1998, minority interest includes
dividends on the Bank Preferred Stock, the FN Holdings Preferred Stock and the
REIT Preferred Stock of $26.5 million, $.6 million and $22.8 million,
respectively. Minority interest relative to the REIT Preferred Stock is
reflected net of related income tax benefit of $2.9 million which will inure to
the Company as a result of the deductibility of such dividends for income tax
purposes. Minority interest also includes a $.8 million benefit representing
that portion of Auto One's loss attributable to the 20% interest in the common
stock of Auto One that was issued as part of the GSAC Acquisition.
Page 23
<PAGE>
Three months ended June 30, 1999 versus three months ended June 30, 1998
The following table sets forth information regarding the Company's
consolidated average balance sheets, together with the total dollar amounts of
interest income and interest expense and the weighted average interest rates for
the periods presented. Average balances are calculated on a daily basis. The
information presented represents the historical activity of the Company.
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999
--------------------------------------------
Average Average
Balance Interest Rate
------- -------- -------
(dollars in millions)
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,646 $ 23 5.78%
Mortgage-backed securities available for sale 13,960 220 6.29
Mortgage-backed securities held to maturity 2,466 45 7.37
Loans held for sale, net 1,977 33 6.69
Loans receivable, net 31,211 568 7.27
FHLB stock 1,120 15 5.24
------- ----
Total interest-earning assets 52,380 904 6.90
----
Noninterest-earning assets 3,895
-------
Total assets $56,275
=======
LIABILITIES, MINORITY INTEREST AND STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits $24,172 222 3.68
Securities sold under agreements to repurchase (3) 4,302 54 4.92
Borrowings (3) 24,238 331 5.48
------- ----
Total interest-bearing liabilities 52,712 607 4.62
----
Noninterest-bearing liabilities 1,312
Minority interest 533
Stockholder's equity 1,718
-------
Total liabilities, minority interest
and stockholder's equity $56,275
=======
Net interest income $297
====
Interest rate spread 2.28%
=====
Net interest margin 2.26%
=====
Return on average assets 0.61%
=====
Return on average common equity 19.97%
=====
Return on average total equity 19.97%
=====
Average equity to average assets 3.05%
=====
</TABLE>
Page 24
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998
---------------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
(dollars in millions)
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,079 $ 16 6.09%
Mortgage-backed securities available for sale 6,343 97 6.12
Mortgage-backed securities held to maturity 1,179 22 7.65
Loans held for sale, net 1,848 31 6.69
Loans receivable, net 19,131 377 7.87
FHLB stock 513 8 5.91
------- ---- ------
Total interest-earning assets 30,093 551 7.32
----
Noninterest-earning assets 3,229
-------
Total assets $33,322
=======
LIABILITIES, MINORITY INTEREST AND STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits $16,277 177 4.36
Securities sold under agreements to repurchase 2,192 30 5.51
Borrowings 11,416 177 6.20
------- ----
Total interest-bearing liabilities 29,885 384 5.16
----
Noninterest-bearing liabilities 1,444
Minority interest 986
Stockholder's equity 1,007
-------
Total liabilities, minority interest
and stockholder's equity $33,322
=======
Net interest income $167
====
Interest rate spread 2.16%
======
Net interest margin 2.12%
======
Return on average assets 3.61%
======
Return on average common equity 119.60%
======
Return on average total equity 119.60%
======
Average equity to average assets 3.02%
======
</TABLE>
(1) Non-performing assets are included in the average balances for the
periods indicated.
(2) The information presented includes securities held to maturity,
securities available for sale and interest-bearing deposits in other
banks.
(3) Interest and average rate include the impact of interest rate swaps.
Page 25
<PAGE>
The following table presents certain information of the Company regarding
changes in interest income and interest expense during the periods indicated.
The dollar amount of interest income and interest expense fluctuates depending
upon changes in the respective interest rates and upon changes in the respective
amounts (volume) of the Company's interest-earning assets and interest-bearing
liabilities. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) volume
(changes in average outstanding balances multiplied by the prior period's rate)
and (ii) rate (changes in average interest rate multiplied by the prior period's
volume). Changes attributable to both volume and rate have been allocated
proportionately.
<TABLE>
<CAPTION>
Three Months Ended June 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 $ 8 $ (1) $ 7
Mortgage-backed securities available for sale 120 3 123
Mortgage-backed securities held to maturity 24 (1) 23
Loans held for sale, net 2 -- 2
Loans receivable, net 218 (27) 191
FHLB stock 8 (1) 7
---- ---- ----
Total 380 (27) 353
---- ---- ----
INTEREST EXPENSE:
Deposits 66 (21) 45
Securities sold under agreements to repurchase 27 (3) 24
Borrowings 172 (18) 154
---- ---- ----
Total 265 (42) 223
---- ----- ---
Change in net interest income $115 $ 15 $130
==== ==== ====
</TABLE>
The volume variances in total interest income and total interest
expense for the three months ended June 30, 1999 compared to the corresponding
period in 1998 are largely due to increased purchases of mortgage-backed
securities funded with FHLB advances, the additional volume related to the
Golden State Acquisition, the deposits assumed in the Nevada Purchase and the
assumption of the GS Holdings Notes, partially offset by $1.4 billion in
deposits sold in the Florida Branch Sale and borrowings repurchased as part of
the Refinancing Transactions. The positive total rate variance of $15 million is
primarily attributed to the lower cost of funds on deposits, lower interest
rates paid on new borrowings (including the Refinancing Transactions) and the
lower costing liabilities assumed in the Golden State Acquisition, partially
offset by the comparatively lower market rates on mortgage-backed securities
purchased in 1999 and 1998, prepayments of higher rate interest-earning assets
and repricing of variable rate loans and mortgage-backed securities.
Interest Income. Total interest income was $904 million for the three
months ended June 30, 1999, an increase of $353 million from the three months
ended June 30, 1998. Total interest-earning assets for the three months ended
June 30, 1999 averaged $52.4 billion, compared to $30.1 billion for the
corresponding period in 1998, primarily as a result of the Golden State
Acquisition. The yield on total interest-earning assets during the three months
ended June 30, 1999 decreased to 6.90% from 7.32% for the three months ended
June 30, 1998, primarily due to prepayments of higher rate loans which were
replaced with lower yielding originations and the repricing of variable rate
loans.
GS Holdings earned $568 million of interest income on loans receivable for
the three months ended June 30, 1999, an increase of $191 million from the three
months ended June 30, 1998. The average balance of loans receivable was $31.2
billion for the three months ended June 30, 1999, compared to $19.1 billion for
the same period in 1998. The weighted average rate on loans receivable decreased
to 7.27% for the three months ended June 30, 1999 from 7.87% for the three
months ended June 30, 1998, primarily due to declining market rates. The
increase in the average volume is primarily due to the addition of $14.6 billion
in loans acquired in the Golden State Acquisition.
GS Holdings earned $33 million of interest income on loans held for sale
for the three months ended June 30, 1999, an increase of $2 million from the
three months ended June 30, 1998. The average balance of loans held for
Page 26
<PAGE>
sale was $2.0 billion for the three months ended June 30, 1999, an increase of
$129 million from the comparable period in 1998, primarily due to increased
originations and longer holding periods for jumbo loans during the three months
ended June 30, 1999. The weighted average rate on loans held for sale was 6.69%
for each of the three month periods ended June 30, 1999 and 1998.
Interest income on mortgage-backed securities available for sale was $220
million for the three months ended June 30, 1999, an increase of $123 million
from the three months ended June 30, 1998. The average portfolio balances
increased $7.6 billion, to $14.0 billion, for the three months ended June 30,
1999 compared to the same period in 1998. The weighted average yield on these
assets increased from 6.12% for the three months ended June 30, 1998 to 6.29%
for the three months ended June 30, 1999. The increase in the volume and the
weighted average yield is primarily due to purchases of mortgage-backed
securities and additions of $2.4 billion from the Golden State Acquisition with
higher market yields.
Interest income on mortgage-backed securities held to maturity was $45
million for the three months ended June 30, 1999, an increase of $23 million
from the three months ended June 30, 1998. The average portfolio balance
increased $1.3 billion, to $2.5 billion, for the three months ended June 30,
1999 compared to the same period in 1998, primarily attributed to the addition
of $1.9 billion of the Bank's multi-family loans securitized with FNMA with a
weighted average rate of 7.39% during the third quarter of 1998. The weighted
average rates for the three months ended June 30, 1999 and 1998 were 7.37% and
7.65%, respectively.
Interest income on securities and interest-bearing deposits in other banks
was $23 million for the three months ended June 30, 1999, an increase of $7
million from the three months ended June 30, 1998. The average portfolio balance
increased from $1.1 billion for the three months ended June 30, 1998 to $1.6
billion for the three months ended June 30, 1999. The decrease in the weighted
average rate from 6.09% for the three months ended June 30, 1998 to 5.78% for
the three months ended June 30, 1999 reflects the decline in market interest
rates.
Dividends on FHLB stock were $15 million for the three months ended June
30, 1999, an increase of $7 million from the three months ended June 30, 1998,
due to an increase in the amount of such stock owned by the Company as a result
of an increase in borrowings under FHLB advances as well as the Golden State
Acquisition. The average balance outstanding during the three months ended June
30, 1999 and 1998 was $1.1 billion and $.5 billion, respectively. The weighted
average rate on FHLB stock decreased to 5.24% for the three months ended June
30, 1999 from 5.91% for the three months ended June 30, 1998, reflecting lower
dividends declared by the FHLB.
Interest Expense. Total interest expense was $607 million for the three
months ended June 30, 1999, an increase of $223 million from the three months
ended June 30, 1998. The increase is primarily the result of additional
borrowings under FHLB advances, the additional deposits and borrowings assumed
in the Golden State Acquisition, deposits assumed in the Nevada Purchase and the
net impact of the Refinancing Transactions, including the assumption of the GS
Holdings Notes.
Interest expense on customer deposits, including brokered deposits, was
$222 million for the three months ended June 30, 1999, an increase of $45
million from the three months ended June 30, 1998. The average balance of
customer deposits outstanding increased from $16.3 billion for the three months
ended June 30, 1998 to $24.2 billion for the three months ended June 30, 1999.
The increase in the average balance is primarily a result of $11.3 billion in
deposits assumed in the Golden State Acquisition, partially offset by $1.4
billion in deposits sold in the Florida Branch Sale, both of which occurred in
the third quarter of 1998. In addition, $543 million in deposits at an average
cost of 3.71% were assumed in the Nevada Purchase, which was consummated in
April 1999. The overall weighted average cost of deposits declined to 3.68% for
the three months ended June 30, 1999 from 4.36% for the three months ended June
30, 1998, primarily due to the higher average balances of lower rate custodial
transaction accounts in 1999 compared to 1998, the lower cost of funds on
deposits assumed in the Golden State Acquisition, lower market interest rates
and a change in the Bank's certificate of deposit pricing strategy.
Page 27
<PAGE>
Interest expense on securities sold under agreements to repurchase totalled
$54 million for the three months ended June 30, 1999, an increase of $24 million
from the three months ended June 30, 1998. The average balance of such
borrowings for the three months ended June 30, 1999 and 1998 was $4.3 billion
and $2.2 billion, respectively; such increase is primarily attributed to the
Golden State Acquisition. The weighted average interest rate on these
instruments decreased to 4.92% for the three months ended June 30, 1999 from
5.51% for the three months ended June 30, 1998, primarily due to a decrease in
market rates on new borrowings in 1999 compared to 1998.
Interest expense on borrowings totalled $331 million for the three months
ended June 30, 1999, an increase of $154 million from the three months ended
June 30, 1998. The average balance outstanding for the three months ended June
30, 1999 and 1998 was $24.2 billion and $11.4 billion, respectively. The
weighted average interest rate on these instruments decreased to 5.48% for the
three months ended June 30, 1999 from 6.20% for the three months ended June 30,
1998, primarily due to lower prevailing market rates in 1999 and the net impact
of the Refinancing Transactions. The higher volume includes the net impact of
the Refinancing Transactions and the addition of $5.4 billion in FHLB advances
assumed in the Golden State Acquisition, as well as the increase in FHLB
advances used to fund the purchases of mortgage-backed securities and to fund
the sale of deposits in the Florida Branch Sale.
Net Interest Income. Net interest income was $297 million for the three
months ended June 30, 1999, an increase of $130 million from the three months
ended June 30, 1998. The interest rate spread increased to 2.28% for the three
months ended June 30, 1999 from 2.16% for the three months ended June 30, 1998,
primarily as a result of maturities and repayments of higher rate
interest-bearing liabilities being replaced with interest-bearing liabilities
having comparatively lower rates. The effect of lower rates on liabilities was
partially offset by lower yielding assets replenishing asset run-off in a
declining rate environment.
Noninterest Income. Total noninterest income, consisting primarily of loan
servicing fees, customer banking fees, gain on sales of loans and gain on sales
of assets, was $108 million for the three months ended June 30, 1999, an
increase of $21 million from the three months ended June 30, 1998.
Loan servicing fees, net of amortization of mortgage servicing rights, were
$34.3 million for the three months ended June 30, 1999, compared to $34.4
million for the three months ended June 30, 1998. Although the single-family
residential loan servicing portfolio, excluding loans serviced for the Bank,
increased from $46.8 billion at June 30, 1998 to $69.2 billion at June 30, 1999,
incremental loan servicing fees were offset by amortization related to higher
average MSR basis in the three months ended June 30, 1999. Servicing rights
purchased in bulk transactions in prior years with lower average MSR basis are
being replaced with current production, which more closely approximates market
rates which, when combined with recent higher prepayment speeds, results in a
decline in the average yield on the portfolio.
Customer banking fees were $46.6 million for the three months ended June
30, 1999 compared to $25.9 million for the three months ended June 30, 1998. The
increase is primarily attributed to the impact of revenues from the retail
banking operations acquired in the Golden State Acquisition and deposits assumed
in the Nevada Purchase, partially offset by the impact of the Florida Branch
Sale. In addition, management has placed increased emphasis on transaction
account growth since the Golden State Acquisition, which has generated
additional fee income.
During the three months ended June 30, 1999, California Federal sold $2.6
billion in single-family mortgage loans originated for sale with servicing
rights retained as part of its ongoing mortgage banking operations compared to
$2.7 billion of such sales for the corresponding period in 1998. Gain on sale of
loans was $4.9 million for the three months ended June 30, 1999, a decrease of
$16.8 million from the three months ended June 30, 1998. The decrease includes
an $8.8 million adjustment recorded during the second quarter of 1999 to reflect
the lower of cost or market valuation on residential loans held for sale at June
30, 1999. In addition, gains attributed to early payoffs of commercial loans
with unamortized discounts were $4.0 million higher in 1998 compared to 1999.
Gain on sale of assets totalled $14.9 million for the three months ended
June 30, 1999, an increase of $14.7 million from the three months ended June 30,
1998, primarily attributed to the Servicing Sale.
Noninterest Expense. Total noninterest expense was $221.2 million for the
three months ended June 30, 1999, an increase of $64.2 million compared to the
three months ended June 30, 1998. The variance between the two periods is
primarily attributed to the Golden State Acquisition. Noninterest expense for
the three months ended June 30, 1999 included increases of $34.6 million in
compensation, $10.2 million in occupancy and equipment, $.8
Page 28
<PAGE>
million in merger and integration costs incurred in connection with the Golden
State Acquisition, $5.9 million in goodwill amortization attributed to the
Golden State Acquisition and the Nevada Purchase, and an additional $6.4 million
in other noninterest expense, all primarily as a result of the Golden State
Acquisition.
Compensation and employee benefits expense was $99.2 million for the three
months ended June 30, 1999, an increase of $34.6 million from the three months
ended June 30, 1998. The increase is primarily attributed to an additional 2,563
employees at June 30, 1999 compared to June 30, 1998, mainly due to the Golden
State Acquisition.
Occupancy and equipment was $30.1 million and $19.8 million for the three
months ended June 30, 1999 and 1998, respectively. This increase reflects the
effects of the Golden State Acquisition.
Merger and integration costs were $1.7 million for the three months ended
June 30, 1999, representing transition expenses, which include severance,
conversion and consolidation costs incurred in connection with the Golden State
Acquisition. Such costs are not expected to be incurred during the remainder of
1999.
Amortization of intangible assets was $18.0 million for the three months
ended June 30, 1999, an increase of $5.9 million from the three months ended
June 30, 1998, primarily attributed to the goodwill recorded in connection with
the Golden State Acquisition and the Nevada Purchase.
Other noninterest expense was $32.2 million in 1999 compared to $25.8
million in 1998, primarily attributed to increased operations as a result of the
Golden State Acquisition.
Provision for Income Tax. During the three months ended June 30, 1999 and
1998, GS Holdings recorded income tax expense of $82.3 million and an income tax
benefit of $236.4 million, respectively. GS Holdings' effective Federal tax rate
was 38% and (284)% during the three months ended June 30, 1999 and 1998,
respectively, while its statutory Federal tax rate was 35% during both periods.
The difference between the effective and statutory rates was primarily the
result of nondeductible goodwill amortization for both periods, which was more
than offset by a $250 million reduction in the deferred tax asset valuation
allowance for the period ended June 30, 1998. GS Holdings' effective state tax
rate was 8% and 14% during the three months ended June 30, 1999 and 1998,
respectively.
Minority Interest. Minority interest for the three months ended June 30,
1999 includes $3.2 million in net premium paid in connection with the redemption
of the Bank's 10 5/8% Preferred Stock. Dividends on the Bank Preferred Stock
that has not been acquired by GS Holdings and the REIT Preferred Stock totalling
$.9 million and $11.4 million, respectively, were recorded during the three
months ended June 30, 1999. Minority interest relative to the REIT Preferred
Stock is reflected net of related income tax benefit of $4.8 million which will
inure to the Company as a result of the deductibility of such dividends for
income tax purposes. The reduction in minority interest relative to the Bank
Preferred Stock reflects the impact of the $380.7 million in Bank Preferred
Stock purchased by GS Holdings in connection with the Refinancing Transactions
in the third and fourth quarters of 1998, as well as the $60.7 million redeemed
on April 1, 1999.
During the three months ended June 30, 1998, minority interest includes
dividends on the Bank Preferred Stock and the REIT Preferred Stock of $13.2
million and $11.4 million, respectively. Minority interest relative to the REIT
Preferred Stock is reflected net of related income tax benefit of $1.5 million
which will inure to the Company as a result of the deductibility of such
dividends for income tax purposes. Minority interest also includes a $.5 million
benefit representing that portion of Auto One's loss attributable to the 20%
interest in the common stock of Auto One that was issued as part of the GSAC
Acquisition.
Page 29
<PAGE>
PROVISION FOR LOAN LOSSES
The adequacy of the allowance for loan losses is periodically evaluated by
management in order to maintain the allowance at a level that is sufficient to
absorb losses inherent in the loan portfolio. The allowance for loan losses is
increased by provisions for loan losses as well as by balances acquired through
acquisitions and is decreased by charge-offs (net of recoveries). The Company
charges current earnings with a provision for estimated credit losses on loans
receivable. The provision considers both specifically identified problem loans
as well as credit risks not specifically identified in the loan portfolio. See
- --"Problem and Potential Problem Assets" for a discussion of the methodology
used in determining the adequacy of the allowance for loan losses. The Company
recorded provisions for loan losses of $10 million and $20 million during the
six months ended June 30, 1999 and 1998, respectively, and $5 million and $10
million during the three months ended June 30, 1999 and 1998, respectively.
The decrease in the provision for loan losses during the six and three
month periods ended June 30, 1999 compared to the same periods in 1998 is the
result of management's evaluation of the adequacy of the allowance based on,
among other things, past loan loss experience and known and inherent risks in
the portfolio, evidenced in part by the continued decline in the Company's level
of non-performing assets. In addition, management's periodic evaluation of the
adequacy of the allowance for loan losses considers potential adverse situations
that have occurred but are not yet known that may affect the borrower's ability
to repay, the estimated value of underlying collateral and economic conditions.
Activity in the allowance for loan losses is as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
------------------------- ---------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance - beginning of period $588,533 $418,674 $583,214 $419,130
Provision for loan losses 10,000 20,000 5,000 10,000
Charge-offs (21,483) (20,503) (11,179) (9,104)
Recoveries 1,989 2,494 1,334 639
Reclassification (670) -- -- --
-------- -------- -------- --------
Balance - end of period $578,369 $420,665 $578,369 $420,665
======== ======== ======== ========
</TABLE>
Although management believes that the allowance for loan losses is
adequate, it will continue to review its loan portfolio to determine the extent
to which any changes in economic conditions or loss experience may require
further provisions in the future.
ASSET AND LIABILITY MANAGEMENT
Banks and savings associations are subject to interest rate risk to the
degree that their interest-bearing liabilities, consisting principally of
deposits, securities sold under agreements to repurchase and FHLB advances,
mature or reprice more or less frequently, or on a different basis, than their
interest-earning assets. A key element of the banking business is the monitoring
and management of liquidity risk and interest rate risk. The process of planning
and controlling asset and liability mixes, volumes and maturities to influence
the net interest spread is referred to as asset and liability management. The
objective of the Company's asset and liability management is to maximize its net
interest income over changing interest rate cycles within the constraints
imposed by prudent lending and investing practices, liquidity needs and capital
planning.
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
Page 30
<PAGE>
reprice frequently and that on the whole adjust in accordance with the repricing
of its liabilities. At June 30, 1999, approximately 76% of the Company's loan
portfolio consisted of ARMs.
ARMs have, from time to time, been offered with low initial interest rates
as marketing inducements. In addition, most ARMs are subject to periodic
interest rate adjustment caps or floors. In a period of rising interest rates,
ARMs could reach a periodic adjustment cap while still at a rate below their
contractual margin over existing market rates. Since repricing liabilities are
typically not subject to such interest rate adjustment constraints, the
Company's net interest margin would most likely be negatively impacted in this
situation. Certain ARMs now offered by the Company have a fixed monthly payment
for a given period, with any changes as a result of market interest rates
reflected in the unpaid principal balance through negative amortization.
One of the most important sources of a financial institution's net income
is net interest income, which is the difference between the combined yield
earned on interest-earning assets and the combined rate paid on interest-bearing
liabilities. Net interest income is also dependent on the relative balances of
interest-earning assets and interest-bearing liabilities.
A traditional measure of interest rate risk within the savings industry is
the interest rate sensitivity gap, which is the sum of all interest-earning
assets minus the sum of all interest-bearing liabilities to be repriced within
the same period. A gap is considered positive when the amount of interest rate
sensitive assets exceed interest rate sensitive liabilities, while the opposite
results in a negative gap. During a period of rising interest rates, a negative
gap would tend to adversely affect net interest income, and a positive gap would
tend to result in an increase in net interest income, while the opposite would
tend to occur in a period of falling rates.
Page 31
<PAGE>
The following table sets forth the projected maturities based upon
contractual maturities as adjusted for projected prepayments and "repricing
mechanisms" (provisions for changes in the interest rates of assets and
liabilities). Prepayment rates are assumed in each period on substantially all
of the Company's loan portfolio based upon expected loan prepayments. Repricing
mechanisms on the Company's assets are subject to limitations such as caps on
the amount that interest rates and payments on its loans may adjust and,
accordingly, such assets may not respond in the same manner or to the same
extent to changes in interest rates as the Company's liabilities. In addition,
the interest rate sensitivity of the Company's assets and liabilities
illustrated in the table would vary substantially if different assumptions were
used or if actual experience differed from the assumptions set forth. The
Company's estimated interest rate sensitivity gap at June 30, 1999 is as
follows:
<TABLE>
<CAPTION>
Maturity/Rate Sensitivity
----------------------------------------------------------
Within 1-5 Over 5 Noninterest
1 Year Years Years Bearing Total
------ ----- ----- ------- -----
(dollars in millions)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Securities held to maturity, interest-bearing
deposits in other banks and short-term
investment securities(1)(2) $ 242 $ -- $ 85 $ -- $ 327
Securities available for sale (3) 1,164 -- -- -- 1,164
Mortgage-backed securities
available for sale (3) 13,912 -- -- -- 13,912
Mortgage-backed securities
held to maturity (1)(4) 2,364 23 12 -- 2,399
Loans held for sale, net (3)(5) 2,132 -- -- -- 2,132
Loans receivable, net (1)(6) 18,596 9,097 4,290 -- 31,983
Investment in FHLB 1,125 -- -- -- 1,125
------- ------- ------ ------ ------
Total interest-earning assets 39,535 9,120 4,387 -- 53,042
Noninterest-earning assets -- -- -- 3,726 3,726
------- ------- ------ ------ ------
$39,535 $ 9,120 $4,387 $3,726 $56,768
======= ======= ====== ====== =======
INTEREST-BEARING LIABILITIES:
Deposits (7) $21,477 $ 2,538 $ 6 $ -- $24,021
Securities sold under agreements to
repurchase (1) 5,347 -- -- -- 5,347
FHLB advances (1) 10,543 11,530 -- -- 22,073
Other borrowings (1) 51 1,207 899 -- 2,157
------- ------- ------ ------ -------
Total interest-bearing liabilities 37,418 15,275 905 -- 53,598
Noninterest-bearing liabilities -- -- -- 960 960
Minority interest -- -- -- 533 533
Stockholder's equity -- -- -- 1,677 1,677
------- ------- ------ ------ -------
$37,418 $15,275 $ 905 $3,170 $56,768
======= ======= ====== ====== =======
Gap before interest rate swap agreements $ 2,117 $(6,155) $3,482 $ (556)
Interest rate swap agreements (1,050) 1,050 -- --
------- ------- ------ ------
Gap $ 1,067 $(5,105) $3,482 $ (556)
======= ======= ====== ======
Cumulative gap $ 1,067 $(4,038) $ (556) $ (556)
======= ======= ====== ======
Gap as a percentage of total assets 1.88% (8.99)% 6.13% (0.98)%
==== ===== ==== =====
Cumulative gap as a percentage of total assets 1.88% (7.11)% (0.98)% (0.98)%
==== ===== ==== =====
- -------------
(Continued)
</TABLE>
Page 32
<PAGE>
(1) Based upon (a) contractual maturity, (b) instrument repricing date, if
applicable, and (c) projected repayments and prepayments of principal, if
applicable. Prepayments were estimated generally by using the prepayment
rates forecast by various large brokerage firms as of June 30, 1999. The
actual maturity and rate sensitivity of these assets could vary
substantially if future prepayments differ from prepayment estimates.
(2) Consists of $253 million of securities held to maturity, $74 million of
short-term investment securities and less than $.1 million of
interest-bearing deposits in other banks.
(3) As securities and mortgage-backed securities available for sale and loans
held for sale may be sold within one year, they are considered to be
maturing within one year.
(4) Excludes underlying non-performing loans of $3 million. (5) Excludes
non-performing loans of $11 million.
(6) Excludes allowance for loan losses of $578 million and non-performing loans
of $176 million.
(7) Fixed rate deposits and deposits with a fixed pricing interval are
reflected as maturing in the year of contractual maturity or first
repricing date. Money market deposit accounts, demand deposit accounts and
passbook accounts are reflected as maturing within one year.
At June 30, 1999, interest-bearing liabilities of GS Holdings exceeded
interest-earning assets by $556 million. At December 31, 1998, interest-bearing
liabilities of GS Holdings exceeded interest-earning assets by approximately
$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 $622.4 million at June 30, 1999, the
Company has substantial additional borrowing capacity with the FHLB and other
sources.
Interest on the GS Holdings Notes approximates $138.9 million per year.
Although GS Holdings expects that distributions and tax sharing payments from
the Bank will be sufficient to pay interest when due and the principal amount of
its long-term debt at maturity, there can be no assurance that earnings from the
Bank will be sufficient to make such distributions to GS Holdings. In addition,
there can be no assurance that such distributions will be permitted by the terms
of any debt instruments of GS Holdings' subsidiaries then in effect, by the
terms of any class
Page 33
<PAGE>
of preferred stock issued by the Bank or its subsidiaries, including the REIT
Preferred Stock and the Bank Preferred Stock, or under applicable federal thrift
laws.
On a consolidated basis, a major source of the Company's funding is
expected to be the Bank's retail deposit branch network, which management
believes will be sufficient to meet its long-term liquidity needs. The ability
of the Company to retain and attract new deposits is dependent upon the variety
and effectiveness of its customer account products, customer service and
convenience, and rates paid to customers. The Company also obtains funds from
the repayment and maturities of loans and mortgage-backed securities, while
additional funds can be obtained from a variety of other sources including
customer and brokered deposits, loan sales, securities sold under agreements to
repurchase, FHLB advances, and other secured and unsecured borrowings. It is
anticipated that FHLB advances and securities sold under agreements to
repurchase will continue to be important sources of funding, and management
expects there to be adequate collateral for such funding requirements.
The consolidated Company's primary uses of funds are the origination or
purchase of loans, the purchase of mortgage-backed securities, the funding of
maturing certificates of deposit, demand deposit withdrawals and the repayment
of borrowings. Certificates of deposit scheduled to mature during the twelve
months ending June 30, 2000 aggregate $10.0 billion. The Company may renew these
certificates, attract new replacement deposits, replace such funds with other
borrowings, or it may elect to reduce the size of the balance sheet. In
addition, at June 30, 1999, the Company had FHLB advances, securities sold under
agreements to repurchase and other borrowings aggregating $15.9 billion maturing
or repricing within twelve months. The Company may elect to pay off such debt or
to replace such borrowings with additional FHLB advances, securities sold under
agreements to repurchase or other borrowings at prevailing rates.
As presented in the accompanying unaudited consolidated statements of cash
flows, the sources of liquidity vary between periods. The primary sources of
funds during the six months ended June 30, 1999 were $17.5 billion in proceeds
from additional borrowings, $5.7 billion in proceeds from sales of loans held
for sale, $2.7 billion from principal payments on mortgage backed securities
available for sale and held to maturity, a $1.1 billion net increase in
securities sold under agreements to repurchase, $459 million from the Nevada
Purchase, and $356 million from maturities of securities available for sale and
held to maturity. The primary uses of funds were $15.6 billion in principal
payments on borrowings, $5.6 billion in purchases and originations of loans held
for sale, $4.3 billion in purchases of securities and mortgage-backed securities
available for sale, a net increase in loans receivable of $1.6 billion, and $1.2
billion from a net decrease in deposits.
The standard measure of liquidity in the savings industry is the ratio of
cash and short-term U. S. Government securities and other specified securities
to deposits and borrowings due within one year. The OTS established a minimum
liquidity requirement for the Bank of 4.00%. California Federal has been in
compliance with the liquidity regulations during the six months ended June 30,
1999 and the year ended December 31, 1998.
PROBLEM AND POTENTIAL PROBLEM ASSETS
The Company considers a loan to be impaired when, based upon current
information and events, it is "probable" that it will be unable to collect all
amounts due (i.e., both principal and interest) according to the contractual
terms of the loan agreement. Any insignificant delay or insignificant shortfall
in amount of payments will not cause a loan to be considered impaired. In
determining impairment, the Company considers large non-homogeneous loans
including nonaccrual loans, troubled debt restructurings, and performing loans
that exhibit, among other characteristics, high LTV ratios, low debt-coverage
ratios or other indications that the borrowers are experiencing increased levels
of financial difficulty. In addition, loans collectively reviewed for impairment
by the Company include all single-family loans, business banking loans under
$100,000 and performing multi-family and commercial real estate loans under
$500,000, excluding loans which have entered the work-out process.
The measurement of impairment may be based on (i) the present value of the
expected future cash flows of the impaired loan discounted at the loan's
original effective interest rate, (ii) the observable market price of the
impaired loan, or (iii) the fair value of the collateral of a
collateral-dependent loan. The Company bases the measurement of
collateral-dependent impaired loans on the fair value of the loan's collateral.
The amount, if any, by which the recorded investment of the loan exceeds the
measure of the impaired loan's value is recognized by recording a valuation
allowance. Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment.
Page 34
<PAGE>
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 June 30, 1999, the carrying value of loans that were considered to be
impaired totalled $119.1 million (of which $20.9 million were on non-performing
status). The average recorded investment in impaired loans during the six and
three month periods ended June 30, 1999 was approximately $140.3 million and
$135.9 million, respectively. For the six and three month periods ended June 30,
1999, Golden State recognized interest income on those impaired loans of $4.3
million and $1.4 million, respectively, which included $.3 million and less than
$.1 million, respectively, of interest income recognized using the cash basis
method of income recognition. The following table presents the carrying amounts
of the Company's non-performing loans, foreclosed real estate, repossessed
assets, troubled debt restructurings and impaired loans as of the dates
indicated. These categories are not mutually exclusive; certain loans are
included in more than one classification. Purchased auto loans are reflected as
non-performing, impaired or restructured using each individual loan's
contractual unpaid principal balance.
<TABLE>
<CAPTION>
June 30, 1999
-----------------------------------------------
Non-performing Impaired Restructured
-------------- -------- ------------
(in millions)
<S> <C> <C> <C>
Real Estate:
1-4 unit residential $165 $ -- $ 3
5+ unit residential 8 39 8
Commercial and other 10 70 19
Land -- 1 --
Construction -- -- --
---- ---- ----
Total real estate 183 110 30
Non-real estate 7 9 --
---- ---- ----
Total loans 190(a) $119(b) $ 30
==== ====
Foreclosed real estate, net 68
Repossessed assets 2
----
Total non-performing assets $260
====
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------
Non-performing Impaired Restructured
-------------- -------- ------------
(in millions)
<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
====
(Continued)
</TABLE>
- -------------
(a) Includes loans securitized with recourse on non-performing status of $3.0
million and $6.0 million at June 30, 1999 and December 31, 1998,
respectively, and loans held for sale on non-performing status of $11.0
million and $17.0 million at June 30, 1999 and December 31, 1998,
respectively.
(b) Includes $20.9 million and $32.5 million of non-performing loans at June
30, 1999 and December 31, 1998, respectively. Also includes $15.2 million
and $16.4 million of loans classified as troubled debt restructurings at
June 30, 1999 and December 31, 1998, respectively.
Page 35
<PAGE>
There were no accruing loans contractually past due 90 days or more at
June 30, 1999 or December 31, 1998.
The Company's non-performing assets, consisting of nonaccrual loans,
repossessed assets and foreclosed real estate, net, decreased to $260 million at
June 30, 1999, from $310 million at December 31, 1998. Non-performing assets as
a percentage of the Bank's total assets decreased to 0.46% at June 30, 1999,
from 0.57% at December 31, 1998.
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 functions,
the Company has a specialized credit risk management group that is charged with
the development of credit policies and performing credit risk analyses for all
asset portfolios.
The following table presents non-performing real estate assets by
geographic region of the country as of June 30, 1999:
<TABLE>
<CAPTION>
Total
Non-performing Foreclosed Non-performing
Real Estate Real Estate, Real Estate Geographic
Loans, Net (2) Net (2) Assets Concentration
-------------- -------- ------ -------------
(dollars in millions)
<S> <C> <C> <C> <C>
Region:
California $ 21 $ 6 $ 27 11%
Northeast (1) 108 44 152 60
Other regions 54 18 72 29
----- ---- ----- ---
Total $183 $68 $251 100%
===== ==== ===== ===
</TABLE>
(1) Consists of Connecticut, Massachusetts, New Hampshire, New Jersey, New
York, Pennsylvania, Rhode Island, Delaware, Maine, and Vermont.
(2) Net of purchase accounting adjustments.
At June 30, 1999, the Company's largest non-performing asset was
approximately $6.1 million, and it had four non-performing assets over $2
million in size with balances averaging approximately $4.6 million. At June 30,
1999, the Company had 1,464 non-performing assets below $2 million in size,
including 1,367 non-performing 1-4 unit residential assets.
An allowance is maintained to absorb losses inherent in the loan portfolio.
The adequacy of the allowance is periodically evaluated and is based on past
loan loss experience, known and inherent risks in the loan portfolio, adverse
situations that have occurred but are not yet known that may affect the
borrower's ability to repay, the estimated value of underlying collateral and
economic conditions. Management's methodology for assessing the adequacy of the
allowance includes the evaluation of the following three key elements: the
formula allowance, specific allowances for identified problem loans and the
unallocated allowance.
The formula allowance is determined by applying loss factors against all
non-impaired loans. Loss factors may be adjusted for significant factors that,
in management's judgment, affect the collectibility of the portfolio as of the
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
Page 36
<PAGE>
that borrower cash flow is inadequate for debt repayment. The amount of specific
allowance is determined by an estimation of collateral deficiency, including
consideration of costs that will likely be incurred through the disposal of any
repossessed collateral.
The unallocated allowance is established for inherent losses which may not
have been identified through the more objective processes used to derive the
formula and specific portions of the allowance. The unallocated portion is
necessarily more subjective and requires a high degree of management judgment
and experience. Management has identified several factors that impact the
potential for credit losses that are not considered in either the formula or the
specific allowance segments. These factors consist of industry and geographic
loan concentrations, changes in the composition of loan portfolios through
acquisitions and new business strategies, changes in underwriting processes, and
trends in problem loan and loss recovery rates.
At June 30, 1999, the allowance for loan losses was $578 million,
consisting of a $378 million formula allowance, a $40 million specific allowance
and a $160 million unallocated allowance.
Although the loan loss allowance has been allocated by type of loan for
internal valuation purposes, all such allowance is available to support any
losses which may occur, regardless of type, in the Company's loan portfolio. A
summary of the activity in the total allowance for loan losses by loan type is
as follows:
<TABLE>
<CAPTION>
5+ Unit
Residential
1-4 Unit and Commercial Consumer
Residential Real Estate and Other Total
----------- -------------- --------- -----
(in millions)
<S> <C> <C> <C> <C>
Balance - December 31, 1998 $251 $278 $60 $589
Provision for loan losses -- 4 1 5
Charge-offs (5) (2) (4) (11)
Recoveries -- -- 1 1
Reclassification -- -- (1) (1)
---- ---- --- ----
Balance - March 31, 1999 246 280 57 583
Provision for loan losses 2 1 2 5
Charge-offs (5) (3) (3) (11)
Recoveries -- -- 1 1
---- ---- --- ----
Balance - June 30, 1999 $243 $378 $57 $578
==== ==== === ====
</TABLE>
The ratio of allowance for loan losses to non-performing loans at June 30,
1999 and December 31, 1998 was 304.8% and 256.8%, respectively.
MORTGAGE BANKING OPERATIONS
The Company, through the Bank's wholly owned mortgage bank subsidiary,
FNMC, has significantly expanded its mortgage banking operations. During the six
months ended June 30, 1999 and 1998, FNMC acquired mortgage-servicing rights on
loan portfolios of $9.3 billion and $3.6 billion, respectively, as a result of
bulk servicing acquisitions and flow purchases, and sold servicing rights during
the six months ended June 30, 1999 of $2.0 billion on approximately 49,000 loans
in the Servicing Sale. With these acquisitions, the acquisition of additional
1-4 unit residential loan servicing portfolios in the Golden State Acquisition,
the originated servicing and the Servicing Sale, the 1-4 unit residential loans
serviced for others (including loans subserviced for others and excluding loans
serviced for the Bank) totalled $69.2 billion at June 30, 1999, an increase of
$3.8 billion and $22.4 billion from December 31, 1998 and June 30, 1998,
respectively. During the six months ended June 30, 1999, the Bank, through FNMC,
originated $9.6 billion and sold (generally with servicing retained) $5.8
billion of 1-4 unit residential loans. Gross revenues from mortgage loan
servicing activities for the six months ended June 30, 1999 totalled $167.5
million, an increase of $42.5 million from the six months ended June 30, 1998.
Gross loan servicing fees for the six months
Page 37
<PAGE>
ended June 30, 1999 were reduced by $102.6 million of amortization of servicing
rights to arrive at net loan servicing fees of $64.9 million for FNMC.
A decline in long-term interest rates generally results in an acceleration
of mortgage loan prepayments. Higher than anticipated levels of prepayments
generally cause the accelerated amortization of mortgage servicing rights
("MSRs"), and generally will result in a reduction in the market value of MSRs
and in the Company's servicing fee income. To reduce the sensitivity of its
earnings to interest rate and market value fluctuations, the Company hedged the
change in value of its MSRs based on changes in interest rates ("MSR Hedge").
The Company owned several derivative instruments at June 30, 1999 which
were used to hedge against prepayment risk in its mortgage servicing portfolio.
These derivative instruments included Constant Maturity Swap interest rate floor
contracts, swaptions, principal only swaps, and prepayment-linked swaps. The
interest rate floor contracts had a notional amount of $590.0 million, a strike
rate of 5.5%, mature in the year 2004 and had an estimated fair value of $7.4
million at June 30, 1999. Premiums paid to counterparties in exchange for cash
payments when the 10 year Constant Maturity Swap rate falls below the strike
rate are recorded as part of the MSR asset on the balance sheet. The swaption
contracts had notional amounts of $2.3 billion, strike rates between 5.3% and
5.9%, expire between August and November 2001 and had an estimated fair value of
$23.0 million at June 30, 1999. Premiums paid to counterparties in exchange for
the right to enter into an interest rate swap are recorded as part of the MSR
asset on the balance sheet. Principal only swap agreements had notional amounts
of $150.9 million and an estimated fair value of $(.6) million at June 30, 1999.
The prepayment-linked swaps had original notional amounts of $213.3 million and
an estimated fair value of $.4 million at June 30, 1999.
The following is a summary of activity in MSRs and the MSR Hedge for
the six months ended June 30, 1999 (in millions):
<TABLE>
<CAPTION>
Total MSR
MSRs MSR Hedge Balance
---- --------- -------
<S> <C> <C> <C>
Balance at December 31, 1998 $ 922 $ 22 $ 944
Additions - bulk purchases 149 -- 149
Originated servicing 109 -- 109
Additions - other purchases 62 -- 62
Premiums paid -- 8 8
Servicing Sale (17) -- (17)
Interest rate floor sales -- (7) (7)
Payments made to counterparties, net -- 9 9
Amortization (91) (14) (105)
------ ---- ------
Balance at June 30, 1999 $1,134 $ 18 $1,152
====== ==== ======
</TABLE>
Page 38
<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 June 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 June 30, 1999, the Bank's regulatory capital levels exceeded the minimum
regulatory capital requirements, with tangible, core and risk-based capital
ratios of 5.18%, 5.18% and 11.63%, respectively. The following is a
reconciliation of the Bank's stockholders' equity to regulatory capital as of
June 30, 1999:
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
------- ------- -------
(dollars in millions)
<S> <C> <C> <C>
Stockholders' equity of the Bank $3,619 $3,619 $3,619
Minority interest - REIT Preferred Stock 500 500 500
Unrealized holding loss on securities available for sale, net 156 156 156
Non-qualifying MSRs (115) (115) (115)
Non-allowable capital:
Intangible assets (939) (939) (939)
Goodwill Litigation Assets (160) (160) (160)
Investment in non-includable subsidiaries (58) (58) (58)
Excess deferred tax asset (124) (124) (124)
Supplemental capital:
Qualifying subordinated debentures -- -- 93
General loan loss allowance -- -- 356
Assets required to be deducted:
Land loans with more than 80% LTV ratio -- -- (22)
Equity in subsidiaries -- -- (9)
Low-level recourse deduction -- -- (12)
------ ----- ------
Regulatory capital of the Bank 2,879 2,879 3,285
Minimum regulatory capital requirement 834 2,225 2,260
------ ----- ------
Excess above minimum capital requirement $2,045 $ 654 $1,025
====== ===== ======
Regulatory capital of the Bank 5.18% 5.18% 11.63%
Minimum regulatory capital requirement 1.50 4.00 8.00
------ ----- ------
Excess above minimum capital requirement 3.68% 1.18% 3.63%
====== ===== ======
</TABLE>
Page 39
<PAGE>
The amount of adjusted total assets used for the tangible and leverage
capital ratios is $55.6 billion. Risk-weighted assets used for the risk-based
capital ratio amounted to $28.2 billion.
The Bank is also subject to the "prompt corrective action" standards
prescribed in the FDICIA and related OTS regulations, which, among other things,
define specific capital categories based on an association's capital ratios. The
capital categories, in declining order, are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." Associations categorized as "undercapitalized" or
worse are subject to certain restrictions, including the requirement to file a
capital plan with the OTS, prohibitions on the payment of dividends and
management fees, restrictions on executive compensation, and increased
supervisory monitoring, among other things. Other restrictions may be imposed on
the association either by the OTS or by the FDIC, including requirements to
raise additional capital, sell assets, or sell the entire association. Once an
association becomes "critically undercapitalized" it is generally placed in
receivership or conservatorship within 90 days.
To be considered "well capitalized," a savings association must generally
have a leverage capital ratio of at least 5.00%, a Tier 1 (core capital)
risk-based capital ratio of at least 6.00%, and a total risk-based capital ratio
of at least 10.00%. An association is deemed to be "critically undercapitalized"
if it has a tangible equity ratio of 2.00% or less. At June 30, 1999, California
Federal's capital levels were sufficient for it to be considered "well
capitalized," as presented below.
<TABLE>
<CAPTION>
Risk-based
Leverage --------------------------
Capital Tier 1 Total Capital
------- ------ -------------
<S> <C> <C> <C>
Regulatory capital of the Bank 5.18% 10.15% 11.63%
"Well capitalized" ratio 5.00 6.00 10.00
---- ----- -----
Excess above "well capitalized" ratio 0.18% 4.15% 1.63%
==== ===== =====
</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 June 30, 1999, $124 million of
the net tax benefit was determined to be attributable to the amount of taxable
income that may be realized in periods beyond one year. Accordingly, such amount
has been excluded from the Bank's regulatory capital at June 30, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in reported market risks faced by GS
Holdings since the Company's report in Item 7A of its Form 10-K for the year
ended December 31, 1998.
Page 40
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Goodwill Litigation Against the Government
On April 9, 1999, the Claims Court issued its decision in a claim by the
Bank against the United States Government (the "Government") in the lawsuit,
Glendale Federal Bank, Federal Savings Bank v. United States, Civil Action No.
90-772-C (the "Glendale Goodwill Litigation"), ruling that the Government must
compensate the Bank in the sum of $908.9 million. This decision has been
appealed by the Government and the Bank.
On April 16, 1999, the Claims Court issued its decision in a claim by the
Bank against the Government in the lawsuit, California Federal Bank v. United
States, Civil Action No. 92-138C (the "California Federal Litigation"), ruling
that the Government must compensate the Bank in the sum of $23.0 million. This
decision has been appealed by the Government and the Bank.
In each of the Glendale Goodwill Litigation and the California Federal
Litigation, it is alleged, among other things, that the United States breached
certain contractual commitments regarding the computation of its regulatory
capital for which each of Glendale Federal and California Federal seek damages
and restitution. The claims arose from changes mandated by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") with
respect to the rules for computing regulatory capital.
Other Litigation
In addition to the matters described above, 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 41
<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 Amendment to Employment Agreement dated as of May 1, 1999
between California Federal Bank, A Federal Savings Bank, and
Christie S. Flanagan.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
Page 42
<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)
August 10, 1999
Page 43
<PAGE>
Exhibit 10.1
Amendment to Employment Agreement
AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment"), dated as of May 31,
1999, between California Federal Bank, A Federal Savings Bank, (the "Company")
successor by merger to First Nationwide Bank, A Federal Savings Bank, ("FNB")
and Christie S. Flanagan (the "Executive").
FNB and the Executive entered into an Employment Agreement dated as of
June 1, 1996 (the "Agreement"), which agreement was subsequently assumed by the
Company by operation of law in connection with the merger of FNB with and into
the Company on January 3, 1997.
The Company and the Executive do hereby wish to extend the term of the
Agreement on the terms and conditions set forth in this Amendment.
Accordingly, the Company and the Executive hereby agree as follows:
Agreements
1. Amendment. Paragraph 2.1 of the Agreement is amended in its entirety to
read as follows:
"2.1 The Term. The term of the Executive's employment under this
Agreement (the "Term") shall commence June 1, 1996 and shall end on
July 31, 1999."
2. No other Amendments. The balance of the provisions of the Agreements
are not altered by this Amendment and remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment to Employment
Agreement as of the date first above written.
CALIFORNIA FEDERAL BANK
A Federal Savings Bank
/s/ Gerald J. Ford
----------------------------
By: Gerald J. Ford
Chairman of the Board and
Chief Executive Officer
/s/ Christie S. Flanagan
----------------------------
Christie S. Flanagan
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and statements of income found on pages 3 and 4 of
the Company's unaudited financial statements for the six months ended June 30,
1999.
</LEGEND>
<RESTATED>
<CIK> 0001071000
<NAME> GOLDEN STATE HOLDINGS INC.
<MULTIPLIER> 1,000
<CURRENCY> US$
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 548,395
<INT-BEARING-DEPOSITS> 23
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 15,076,025
<INVESTMENTS-CARRYING> 2,655,297
<INVESTMENTS-MARKET> 2,685,827
<LOANS> 33,723,697<F1>
<ALLOWANCE> 578,369
<TOTAL-ASSETS> 56,768,100
<DEPOSITS> 24,020,790
<SHORT-TERM> 15,941,164
<LIABILITIES-OTHER> 960,333
<LONG-TERM> 13,635,888
0
0
<COMMON> 1
<OTHER-SE> 1,677,175
<TOTAL-LIABILITIES-AND-EQUITY> 56,768,100
<INTEREST-LOAN> 1,202,470
<INTEREST-INVEST> 594,370
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,796,840
<INTEREST-DEPOSIT> 444,058
<INTEREST-EXPENSE> 1,191,828
<INTEREST-INCOME-NET> 605,012
<LOAN-LOSSES> 10,000
<SECURITIES-GAINS> 335
<EXPENSE-OTHER> 474,748
<INCOME-PRETAX> 334,302
<INCOME-PRE-EXTRAORDINARY> 159,681
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 159,681<F2>
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
<YIELD-ACTUAL> 6.95
<LOANS-NON> 189,775
<LOANS-PAST> 0
<LOANS-TROUBLED> 29,838
<LOANS-PROBLEM> 86,048
<ALLOWANCE-OPEN> 588,533
<CHARGE-OFFS> 21,483
<RECOVERIES> 1,989
<ALLOWANCE-CLOSE> 578,369
<ALLOWANCE-DOMESTIC> 39,709
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 538,660
<FN>
<F1>Loans includes Loans held for sale of $2,143,127 and Allowance for loan losses
of $578,369.
<F2>Net income available to common stockholders: $159,681.
</FN>
</TABLE>
