UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
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
incorporation or organization) Identification No.)
135 MAIN STREET, SAN FRANCISCO, CALIFORNIA 94105
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 415-904-1100
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: N/A
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: N/A
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of the close of business on February 29, 2000: N/A.
The number of shares outstanding of the registrant's $1.00 par value common
stock, as of the close of business on February 29, 2000: 1,000 shares of common
stock.
DOCUMENTS INCORPORATED BY REFERENCE:
None
Page 1
GOLDEN STATE HOLDINGS INC.
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
PART I ----
ITEM 1. Business........................................................3
General..................................................3
Employees................................................5
Competition..............................................5
Regulation and Supervision...............................5
ITEM 2. Properties.....................................................10
ITEM 3. Legal Proceedings..............................................11
ITEM 4. Submission of Matters to a Vote of Security Holders............12
PART II
ITEM 5. Market for Registrant's Common Equity and
Related Stockholder Matters.............................13
ITEM 6. Selected Financial Data........................................14
ITEM 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations.............17
Results of Operations...................................17
Provision for Federal and State Income Taxes............27
Balance Sheet Analysis..................................29
Investment Activities...............................29
Sources of Funds....................................31
Mortgage Banking Activities.........................35
Loan Portfolio......................................36
Problem and Potential Problem Assets................43
Non-performing Assets...............................46
Allowance for Loan Losses...........................48
Risk Management.........................................52
Asset and Liability Management......................52
Mortgage Banking Risk Management....................55
Liquidity...........................................56
Other Activities....................................59
Capital Management..................................60
Impact of Inflation and Changing Prices.............63
Year 2000...........................................63
ITEM 7A. Quantitative and Qualitative Disclosures
about Market Risk............................................64
ITEM 8. Financial Statements and Supplementary Data....................65
ITEM 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......................65
PART III
ITEM 10. Directors and Executive Officers of the Registrant.............66
ITEM 11. Executive Compensation.........................................69
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management...............................................78
ITEM 13. Certain Relationships and Related Transactions.................79
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K..........................................81
Signatures..............................................................86
Audited Financial Statements............................................F-1
Page 2
FORWARD-LOOKING STATEMENTS. THE STATEMENTS CONTAINED IN THIS REPORT ON FORM
10-K 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
THE MD&A. 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 THE RISKS DISCUSSED IN THE "RISK FACTORS"
SECTION INCLUDED IN THE COMPANY'S REGISTRATION STATEMENT ON FORM S-1 FILED 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.
PART I
ITEM 1. BUSINESS
GENERAL
Golden State Holdings, Inc. ("GS Holdings" or the "Company") is a holding
company whose only significant asset is all of the voting common stock of
California Federal Bank, A Federal Savings Bank ("California Federal" or
"Bank"). GS Holdings was formed to acquire all of the assets of First Nationwide
Holdings Inc. ("FN Holdings") (including all of the voting common stock of the
Bank) as part of the Golden State Acquisition (as defined herein). FN Holdings
was a holding company whose only significant asset was all the common stock of
the Bank. As such, the principal business operations of FN Holdings were, and
the principal business operations of GS Holdings are, conducted by the Bank and
its subsidiaries.
The Company, which is headquartered in San Francisco, California, provides
diversified financial services to consumers and small businesses in California
and Nevada. The Company's principal business consists of operating retail
branches that provide deposit products such as demand, transaction and savings
accounts, and investment products such as mutual funds, annuities and insurance.
In addition, it engages in mortgage banking activities, including originating
and purchasing 1-4 unit residential loans for sale to various investors in the
secondary market or for retention in its own portfolio, and servicing loans for
itself and others. To a lesser extent, the Company originates and/or purchases
commercial real estate, commercial and consumer loans for investment. These
operating activities are financed principally with customer deposits, secured
short-term and long-term borrowings, including Federal Home Loan Bank ("FHLB")
advances, collections on loans, asset sales and retained earnings. Refer to note
22 of the Company's Notes to Consolidated Financial Statements for additional
information about the Company's business segments.
The Bank is chartered as a federal stock savings bank under the Home
Owners' Loan Act of 1933 ("HOLA"). It is regulated by the Office of Thrift
Supervision ("OTS") and the Federal Deposit Insurance Corporation ("FDIC"),
which insures the deposit accounts of the Bank up to applicable limits through
the Savings Association Insurance Fund ("SAIF"). The Bank is also a member of
the Federal Home Loan Bank System ("FHLB System"). The Bank has three principal
subsidiaries: (a) First Nationwide Mortgage Corporation ("FNMC"), its mortgage
banking subsidiary; (b) Auto One Acceptance Corporation ("Auto One"), which
primarily engages in indirect sub-prime auto financing activities; and (c) Cal
Fed Investments ("CFI"), which offers securities and insurance products to both
existing and prospective customers of the Company. CFI is subject to the
guidelines established by the OTS for broker-dealer subsidiaries of savings
associations, and is a member of the National Association of Securities Dealers.
In addition, CFI is registered as a broker-dealer with the Securities and
Exchange Commission and the Securities Investor Protection Insurance
Corporation. CFI receives commission revenue for acting as a broker-dealer on
behalf of its customers, but CFI does not maintain customer accounts or take
possession of customer securities.
Page 3
The Company's revenues are derived from interest earned on loans, interest
and dividends received on securities and mortgage-backed securities, gains on
sales of loans and other investments, fees received in connection with loan
servicing, transaction account deposits, securities brokerage, and other
customer service transactions. Expenses primarily consist of interest on
customer deposit accounts, interest on short-term and long-term borrowings,
compensation, occupancy and other general administrative expenses.
As of December 31, 1999, the Company had total assets of $57.0 billion,
deposits of $23.0 billion and operated 349 retail branch offices in California
and Nevada.
OWNERSHIP STRUCTURE
All of the common stock of the Company is held by Golden State. Prior to
the Golden State Acquisition (as defined herein), First Nationwide (Parent)
Holdings Inc. ("Parent Holdings") owned 80% of the common stock of FN Holdings
and Hunter's Glen/Ford Ltd. ("Hunter's Glen"), a limited partnership controlled
by Gerald J. Ford, Chairman of the Board, Chief Executive Officer and a Director
of the Company, owned 20% of the common stock of FN Holdings. Parent Holdings
was indirectly owned by Mafco Holdings Inc. ("Mafco Holdings"), a corporation
controlled by Ronald O. Perelman, a Director of the Company. Pursuant to the
Golden State Acquisition, Parent Holdings was merged into Golden State and FN
Holdings was merged into GS Holdings. In consideration thereof, Golden State
issued 41,067,270 shares of common stock to a subsidiary of Mafco Holdings that
directly owned Parent Holdings and 15,655,718 shares of common stock to Hunter's
Glen which, in the aggregate, constituted 47.9% of the common stock outstanding,
immediately after giving effect to the Golden State Acquisition. Subsequent to
the Golden State Acquisition, Mafco Holdings caused the 41,067,270 shares to be
transferred to another of its indirectly owned subsidiaries, GSB Investments
Inc. ("GSB Investments"). In addition, the Golden State Merger agreement
provided that Mafco Holdings and Hunter's Glen, or their successors, were
entitled to receive additional shares of common stock under certain
circumstances, which could cause the actual ownership percentages of Mafco
Holdings and Hunter's Glen to change.
In addition to its common stock ownership of the Bank, GS Holdings owns all
of the Bank Preferred Stock (as defined herein) with a total liquidation
preference of $473.2 million. Immediately prior to the consummation of the
Golden State Acquisition, the charter of the Bank was amended to provide that
each share of Bank Preferred Stock is entitled to one vote, and each CALGZ (as
defined herein) and each CALGL (as defined herein) has 1/5 of one vote with the
holders of the common stock of the Bank, the Bank Preferred Stock, the CALGZs
and the CALGLs voting together as a single class. In addition, after giving
effect to a stock split of the common stock of the Bank, GS Holdings' ownership
of 100% of the common stock represents approximately 90% of the total voting
power of voting securities of the Bank.
BUSINESS STRATEGY
Merger, acquisition, and divestiture activities have played a major role in
the Company's business strategy for the past several years. (Refer to note 3 of
the Company's Notes to Consolidated Financial Statements for specific
information about these mergers, acquisitions, and divestitures.) The Company's
business strategy has been executed through three types of transactions:
o Acquisitions which complemented the Company's geographic and business
line strategies;
o Divestitures of branches outside the Company's primary geographic region;
and
o Expansion of the Company's mortgage servicing operations.
These transactions have expanded and strengthened the Company's presence in
the West Coast, providing additional economies of scale and diversity of
operations within its target markets. The Company believes that its strategic
acquisition and divestiture activity has enhanced the value of its franchise and
improved its operating efficiency through the consolidation or elimination of
duplicative back office operations and administrative and management functions.
Further, because the Company had excess servicing capacity and existing
servicing expertise, it was able to accommodate the loan servicing portfolios
acquired in these transactions without the need for significant additional
investment.
Page 4
The Company's strategic plan for the year 2000 aims at achieving increased
profitability, revenue diversity and growth while preserving credit quality. Key
elements of the business plan include:
o California Federal intends to maintain its core competencies, including:
firm expense control and operating efficiency, risk management discipline
and effective capital management.
o The Company expects to continue to build franchise value by focusing on
customer service and cross-selling opportunities, enhanced product
offerings and improved channel delivery. The Company will seek to
maintain its mortgage banking efficiency while reducing the costs to
service each account. In addition, the Bank will continue its strong and
prudent growth of its core banking businesses including the sale of
mutual funds and insurance annuity products, commercial banking, and
auto, home equity and commercial retail estate lending.
o California Federal plans to continue to improve profitability as it
continues its transition to a more "bank-like" institution. This plan
contemplates an increase in demand deposit and transaction accounts, as
well as growth of various retail and commercial products. In addition,
the Bank will focus on increasing its percentage of non-single family
residential loans.
EMPLOYEES
GS Holdings has no employees. At December 31, 1999, California Federal and
its subsidiaries had 8,082 employees, compared with 8,215 employees at December
31, 1998. The Company's employees are not represented by any collective
bargaining group and management considers its relations with its employees to be
good. The Company provides a comprehensive employee benefits program including
health and welfare benefits, long and short-term disability insurance, and life
insurance. The Company also offers employees a defined contribution investment
plan which is a qualified plan under Section 401(a) of the Internal Revenue
Code.
COMPETITION
The Company experiences significant competition in both attracting and
retaining deposits and in originating real estate and consumer loans. The
Company, through the Bank, competes with other savings associations, commercial
banks, mortgage banking companies, finance companies, insurance companies,
credit unions, money market mutual funds and brokerage firms in attracting and
retaining deposits. Competition for deposits from large commercial banks and
savings associations is particularly strong. Many of the nation's savings
associations and commercial banks have a significant number of branch offices in
the areas in which the Company operates.
In addition, there is strong competition in originating and purchasing real
estate and consumer loans, principally from other savings and loan associations,
commercial banks, mortgage banking companies, insurance companies, consumer
finance companies, pension funds and commercial finance companies. The primary
factors in competing for loans are the quality and extent of service to
borrowers and brokers, economic factors such as interest rates, interest rate
caps, rate adjustment provisions, loan maturities, loan-to-value ("LTV") ratios,
loan fees and the amount of time it takes to process a loan from receipt of the
loan application to date of funding. The Company's future performance will
depend on its ability to originate a sufficient volume of mortgage loans in its
local market areas and through its wholesale network and, if it is unable to
originate a sufficient volume of mortgage loans, to purchase a sufficient
quantity of high-quality mortgage-backed securities or loans with adequate
yields. There can be no assurance that the Company will be able to effect such
actions on satisfactory terms.
REGULATION AND SUPERVISION
GENERAL
GS Holdings is a savings and loan holding company within the meaning of the
HOLA and, as such, is registered with the OTS and is subject to comprehensive
OTS regulation. The Bank is a federally chartered and insured stock savings bank
subject to extensive regulation and supervision by the OTS, as the primary
federal regulator of savings associations, and to a lesser degree, the FDIC.
Page 5
The federal banking laws contain numerous provisions affecting various
aspects of the business and operations of savings associations and savings and
loan holding companies. The primary purpose of the statutory and regulatory
scheme is to protect depositors, the financial institutions, and the financial
system as a whole. The following description is qualified in its entirety by
references to the particular statutory or regulatory provisions or proposals. It
is not intended to be a complete description of these provisions or their
effects on GS Holdings or the Bank.
REGULATION OF GS HOLDINGS
HOLDING COMPANY ACTIVITIES
GS Holdings is registered and qualified as a unitary savings and loan
holding company. As such, it is regularly examined by and files periodic reports
with the OTS. Generally, there are few restrictions on the activities of a
unitary savings and loan holding company and its non-savings association that is
not merged with the Bank subsidiaries. If GS Holdings ceases to be a unitary
savings and loan holding company, by, for example, acquiring another savings
association that is not merged with the Bank in a non-supervisory transaction,
the activities of GS Holdings and its non-savings association subsidiaries would
thereafter be subject to substantial restrictions.
HOLDING COMPANY ACQUISITIONS
The HOLA and OTS regulations generally require that a savings and loan
holding company obtain OTS approval before acquiring, directly or indirectly,
the ownership or control of any other savings association or savings and loan
holding company, or substantially all of the assets or more than 5% of the
voting shares thereof. These provisions also require OTS approval before any
director or officer of a savings and loan holding company, or any individual who
owns or controls more than 25% of the voting shares of such holding company,
acquires control of any savings association not a subsidiary of such savings and
loan holding company.
Under prior law, any company, regardless of the nature of the business in
which it was engaged, could qualify as a unitary savings and loan holding
company. Legislation enacted in 1999 provides that any company engaged in
activities not permitted for a financial holding company under the Bank Holding
Company Act may no longer qualify as a unitary savings and loan holding company.
Existing unitary savings and loan holding companies engaged in non-financial
related activities are "grandfathered" and may continue to engage in such
activities. However, such rights are not transferable to any other company not
otherwise qualified to own or control a savings association.
REGULATION OF THE BANK
REGULATORY SYSTEM
As a federal savings bank, lending activities and other investments of the
Bank must comply with various statutory and regulatory requirements. California
Federal is regularly examined by the OTS and must file periodic reports
concerning its activities and financial condition. Although the OTS is the
Bank's primary regulator, the FDIC has "backup enforcement authority" over the
Bank as the insurer (through the SAIF) of the Bank's deposit accounts.
LIQUID ASSETS
Under OTS regulations, for each calendar quarter, a savings association is
required to maintain an average daily balance of liquid assets (including cash,
certain time deposits and savings accounts, bankers' acceptances, certain
government obligations and certain other investments) not less than a specified
percentage of the average daily balance of its net withdrawable accounts plus
short-term borrowings (its liquidity base) during the preceding calendar month.
This liquidity requirement was lowered to 4% from 5% on November 24, 1997. The
liquidity requirement may be changed by the OTS to any amount between 4% and 10%
depending upon certain factors. The Bank has maintained liquid assets in
compliance with the regulations in effect throughout 1999, 1998 and 1997.
Page 6
REGULATORY CAPITAL REQUIREMENTS
OTS capital regulations require savings associations to satisfy minimum
capital standards: an 8% risk-based capital requirement, a 4% leverage capital
requirement and a 1.5% tangible capital requirement. Savings associations must
meet each of these standards in order to be deemed in compliance with OTS
capital requirements. In addition, the OTS may require a savings association to
maintain capital above the minimum capital levels. A savings association's
failure to maintain capital at or above the minimum capital requirements may be
deemed an unsafe and unsound practice and may subject the savings association to
enforcement actions and other proceedings.
The Bank currently satisfies all applicable regulatory capital requirements
and is not presently subject to any enforcement action or other regulatory
proceeding with respect to its compliance with regulatory capital requirements.
For further information, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Capital Management."
PROMPT CORRECTIVE ACTION
The prompt corrective action regulation of the OTS, promulgated under the
Federal Deposit Insurance Corporation Improvement Act ("FDICIA"), requires that
the OTS take certain actions and authorizes other discretionary actions against
a savings association that falls within certain undercapitalized capital
categories specified in the regulation.
The regulation establishes five categories of capital classification: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Under the regulation, the
ratio of total capital to risk-weighted assets, core capital to risk-weighted
assets and the leverage capital ratio are used to determine an association's
capital classification. A "well capitalized" institution must maintain a ratio
of total capital to risk-based assets of 10%, a ratio of core capital to
risk-weighted assets of 6%, a leverage capital ratio of 5%, and must not be
subject to an OTS order or directive to meet a specific higher capital level.
In general, the prompt corrective action regulation prohibits an insured
depository institution from declaring any dividends, making any other capital
distribution, or paying a management fee to a controlling person if, following
the distribution or payment, the institution would be within any of the three
undercapitalized categories. In addition, adequately capitalized institutions
must obtain an FDIC waiver before accepting Brokered Deposits (as defined
herein) and are subject to restrictions on the interest rates that may be paid
on such deposits. Institutions that are considered "undercapitalized," "severely
undercapitalized," or "critically undercapitalized" become subject to
increasingly serious supervisory actions (as capital levels deteriorate)
including increased monitoring, mandatory capital restoration plans, limitations
on business activities, and ultimately, the placement of a "critically
undercapitalized" association into conservatorship or receivership.
The Bank met the capital requirements of a "well capitalized" institution
under the FDICIA prompt corrective action regulation as of December 31, 1999 and
is not subject to any enforcement action or other regulatory proceeding with
respect to the prompt corrective action regulation. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Capital
Management."
ENFORCEMENT POWERS
The OTS and, under certain circumstances, the FDIC, have substantial
enforcement authority with respect to savings associations, including authority
to bring various enforcement actions against a savings association and any of
its institution-affiliated parties. The Bank is not subject to any OTS or FDIC
enforcement proceedings.
CAPITAL DISTRIBUTION REGULATION
In addition to the prompt corrective action restrictions, OTS regulations
limit "capital distributions" by savings associations. Capital distributions
include dividends and payments for stock repurchases and cash-out mergers.
Page 7
Under OTS regulations in effect prior to April 1, 1999, a Tier 1
association that was a subsidiary of a savings and loan holding company was
permitted to make a capital distribution with 30 days prior notice to the OTS in
an amount not exceeding (a) the sum of the association's current year net
earnings plus the amount that would reduce by one-half its surplus capital ratio
at the beginning of the calendar year or (b) 75% of its net income over the most
recent four quarter period. A capital distribution in a greater amount required
an application to and prior OTS approval. Under this regulation, an association
qualified as a Tier 1 association if it met its capital requirements both before
and after a proposed distribution and had not been notified by the OTS that it
was in need of more than normal supervision. The Bank qualified as a Tier 1
institution during the quarter ended March 31, 1999. The OTS could also prohibit
a proposed capital distribution that would otherwise be permitted if it
determined that the distribution would constitute an unsafe or unsound practice.
Effective on April 1, 1999, the OTS revised its capital distribution rules.
Under the revised rules, a savings institution that is a subsidiary of a savings
and loan holding company must notify the OTS of a capital distribution at least
30 days prior to the declaration of a capital distribution, provided the total
of all capital distributions made during that calendar year (including the
proposed distribution) does not exceed the sum of the institution's year-to-date
net income and its retained income for the preceding two years. A capital
distribution in a greater amount requires an application to the OTS and OTS
approval prior to the distribution. The OTS may disapprove a capital
distribution notice or application if the institution is undercapitalized or if
the distribution would raise other safety and soundness concerns.
The Bank's capital distributions have complied with the capital distribution
rule.
DIVIDEND POLICY
The dividend policy of the Bank complies with applicable legal and
regulatory restrictions. Before declaring any dividend, the directors of the
Bank consider the following factors:
(a) the quality and stability of the Bank's net income,
(b) the availability of liquid assets to make dividend payments,
(c) the level of earnings retention as it impacts the Bank's capital
needs and projected growth and funding levels, both internal and
external, and
(d) the adequacy of capital after the payment of a dividend.
Under the Bank's dividend policy, a dividend will not be declared or paid
which would:
(a) cause the capital level of the Bank to be reduced below "adequately
capitalized" levels, or
(b) together with any other dividends declared during the same calendar
year, exceed 100% of the net income to date for that calendar
year plus retained net income for the preceding two years,
except as may be permitted by regulation in extraordinary
circumstances.
For further information regarding dividend payments, refer to note 25 of
the Notes to Consolidated Financial Statements.
TAX EFFECTS OF DIVIDEND PAYMENTS BY THE BANK
Dividend distributions made to GS Holdings, as the sole owner of the Bank's
common and preferred stock, in each case in excess of the greater of the Bank's
current or accumulated earnings and profits, as well as any distributions in
dissolution or in redemption or liquidation of stock, excluding preferred stock
meeting certain conditions, may cause the Bank to recognize a portion of its tax
bad debt reserves as income. Accordingly, this could cause the Bank to make
payments to GS Holdings under the Tax Sharing Agreement (as defined herein). As
a result, GS Holdings may be required to make payments to Golden State and, for
tax periods prior to the September 11, 1998 deconsolidation from the Mafco
Holdings group, the Company may be required to make tax payments to Mafco
Holdings, under the Tax Sharing Agreement.
Page 8
QUALIFIED THRIFT LENDER TEST
In general, savings associations are required to maintain at least 65% of
their portfolio assets in certain qualified thrift investments, primarily loans
and other investments related to residential real estate and certain other
assets (the "QTL test"). A savings association that fails the QTL test is
subject to substantial restrictions on activities and to other significant
penalties.
Legislation enacted in 1996 expanded the QTL test to provide savings
associations with greater authority to lend and diversify their portfolios. In
particular, credit card and educational loans may now be made by savings
associations without regard to any percentage-of-assets limit, and commercial
loans may now be made in an amount up to 10 percent of total assets, plus an
additional 10 percent for small business loans. Loans for personal, family, and
household purposes (other than credit card, small business, and educational
loans) are now included without limit with other assets that, in the aggregate,
may account for up to 20% of total assets. At December 31, 1999, approximately
93.29% of the Bank's portfolio assets were qualified thrift investments,
satisfying the QTL test.
Applicable law also permits a savings association to qualify as a qualified
thrift lender by meeting the asset composition test under the Internal Revenue
Code for a "domestic building and loan association." The Bank currently is a
domestic building and loan association as defined in the Internal Revenue Code
and, accordingly, also qualifies under this alternative test.
FDIC ASSESSMENTS
The deposits of the Bank are insured by the SAIF of the FDIC, up to
applicable limits, and are subject to deposit premium assessments by the SAIF.
Under the FDIC's risk-based insurance system, SAIF-assessed deposits are
currently subject to insurance premiums of between 0 and 27 basis points,
depending upon the institution's capital position and other supervisory factors.
The rate applicable to the Bank at December 31, 1999 was 0 basis points.
Since January 1997, institutions with Bank Insurance Fund ("BIF") deposits
have been required to share the cost of funding debt obligations issued by the
Financing Corporation ("FICO"), a corporation established by the federal
government in 1987 to finance the recapitalization of the Federal Savings and
Loan Insurance Corporation ("FSLIC"). Until December 31, 1999, the FICO
assessment rate for BIF deposits was only one-fifth of the rate applicable to
SAIF deposits. Consequently, the annual FICO assessments added to deposit
insurance premiums were 5.0 basis points for SAIF deposits during 1999. Since
January 1, 1997, FICO payments have been paid directly by SAIF and BIF
institutions in addition to deposit insurance assessments. Effective January 1,
2000, the FICO assessment rate is equal for SAIF and BIF deposits. The Bank's
SAIF plus FICO assessment for the first quarter of 2000 was approximately 2.1
basis points (annualized).
AFFILIATE RESTRICTIONS
Transactions between a savings association and its "affiliates" are subject
to quantitative and qualitative restrictions under Sections 23A and 23B of the
Federal Reserve Act. Affiliates of a savings association include the savings
association's holding companies and companies under common control with the
savings association, but generally exclude the association's subsidiaries.
Sections 23A and 23B require generally that all transactions between a
savings association and its affiliates be on terms and conditions and under
circumstances that are at least as favorable to the savings association as those
prevailing at the time for comparable transactions with non-affiliated
companies. Section 23A also limits the extent to which a savings association or
its subsidiaries may engage in certain "covered transactions" with its
affiliates. A "covered transaction" is defined to include a loan or extension of
credit to an affiliate; a purchase of investment securities issued by an
affiliate; with certain exceptions, a purchase of assets from an affiliate; the
acceptance of securities issued by an affiliate as collateral for a loan or
extension of credit to any party; or the issuance of a guarantee, acceptance or
letter of credit on behalf of an affiliate. During 1999, 1998, and 1997, the
Bank had no covered transactions.
Page 9
NON-INVESTMENT GRADE DEBT SECURITIES
Savings associations and their subsidiaries are prohibited from investing
in any corporate debt security that, at the time of acquisition, is not rated in
one of the four highest rating categories by at least one nationally recognized
statistical rating organization. The Bank does not own any non-investment grade
corporate debt securities.
COMMUNITY REINVESTMENT ACT AND THE FAIR LENDING LAWS
Savings associations have a responsibility under the Community Reinvestment
Act ("CRA") and related OTS regulations to help meet the credit needs of their
communities, including low- and moderate-income neighborhoods. In addition, the
Equal Credit Opportunity Act and the Fair Housing Act (together, the "Fair
Lending Laws") prohibit lenders from discriminating in their lending practices
on the basis of characteristics specified in those statutes. An association's
failure to comply with the Fair Lending Laws could result in enforcement actions
by the OTS, as well as other federal regulatory agencies and the Department of
Justice. The Bank received an "Outstanding" rating in its most recently
completed July 1998 CRA examination.
PROPOSED REGULATORY LEGISLATION
From time to time, Congress has considered proposed legislation that could
substantially alter the regulation of the Bank and the Company. These proposals
have included the merger of the BIF and SAIF, the merger of the OTS with the
Office of the Comptroller of the Currency, and the conversion of savings
associations to national bank charters. The Company cannot determine whether, or
in what form, such legislation may eventually be enacted and there can be no
assurance that any legislation that is enacted would contain adequate
grandfather rights for the Bank and its parent holding companies.
ITEM 2. PROPERTIES
The Company neither owns nor leases any properties directly. The executive
offices of the Bank and of the Company are located at 135 Main Street, San
Francisco, California, 94105, and its telephone number is (415) 904-1100. The
Bank leases approximately 97,000 square feet in the building in which its
executive offices are located, under a ten-year lease expiring in 2001. In
addition, the Bank leases two facilities near Sacramento, California including
approximately 216,000 square feet in a multiple-building administrative facility
under a ten-year lease expiring in 2001 and approximately 46,000 square feet in
another administrative facility under a lease expiring in 2004. The Company and
its subsidiaries lease additional executive and administrative office space in
Dallas which includes approximately 128,000 square feet of space under leases
expiring in 2000, 2002, 2005 and 2007.
As part of its 1997 acquisition of the former California Federal Bank ("Cal
Fed Acquisition"), the Bank assumed the lease on executive offices and an office
building in Los Angeles of approximately 513,000 square feet. The Bank vacated
all but 44,000 square feet of this facility during the first half of 1997. The
office lease was to expire in 2007, however, the Bank terminated its remaining
liability on all space other than approximately 44,000 square feet by payment of
approximately $28 million. The lease on the remaining 44,000 square feet
terminates in 2003. In addition, Cal Fed Bancorp Inc., prior to the consummation
of the Cal Fed Acquisition ("Old California Federal"), had certain operating and
administrative departments in a leased facility containing approximately 225,000
square feet located in Rosemead, California. The Bank vacated and subleased the
Rosemead facility during the first half of 1997. The Rosemead lease expires in
2008.
As part of the merger with Golden State Bancorp Inc. ("Golden State
Acquisition"), the Company acquired ten office buildings in southern California
containing approximately 310,000 square feet of space. As of December, 1999, the
Company plans to utilize 159,000 square feet of this space for its call center
and loan servicing operations, and to sell the remaining 151,000 square feet. In
addition, the Company assumed the leases on executive offices and branch office
buildings throughout California totalling approximately 330,000 square feet. As
of December 31, 1999, leases totalling 172,000 square feet had expired. Of the
remaining 158,000 square feet, the Company vacated all but approximately 43,000
square feet. It is the Company's intent to sublease all office space with leases
not expiring within the next year.
Page 10
At December 31, 1999, the Bank operated a total of 349 retail branches and
maintained 54 vacant branch facilities which were consolidated as a result of
certain branch purchases, the 1996 Acquisitions (as defined herein), the Cal Fed
Acquisition, the merger with Glendale Federal Bank ("Glen Fed Merger"), and
various consolidations of operations to West Sacramento. Of the 349 total
operating retail branches, 127 were owned and 222 were leased. Some of these
retail branches are multi-purpose facilities, housing loan production and
administrative facilities in addition to retail space. Of the 54 vacant
facilities (2 owned and 52 leased, all in California), 16 locations have been
subleased.
At December 31, 1999, there were 13 loan production offices, of which two
were owned and 11 were leased, and which included three offices housing
operations acquired in the 1995 and 1996 purchase of servicing portfolios from
Lomas Mortgage USA, Inc. (the "1995 LMUSA Purchase" and the "1996 LMUSA
Purchase," respectively, and collectively, the "LMUSA Purchases"). All offices
currently house wholesale lending operations.
In addition, the Bank operated 22 separate administrative facilities (6
owned and 16 leased) and maintained 13 vacant administrative facilities (all
leased). Of the 13 vacant administrative facilities, 5 were subleased. The
administrative facilities include a 230,000 square foot owned building and an
approximately 34,000 square foot leased building in Frederick, Maryland, which
house FNMC's operations, and two buildings in Dallas with approximately 73,000
square feet of leased space, one of which houses Auto One.
A state-by-state breakdown of all retail branches, administrative
facilities and loan production offices operated by the Bank at December 31, 1999
is shown in the following table:
Branches Administrative Facilities Loan Production Facilities
--------------------------- -------------------------- ---------------------------
Owned Leased Vacant Owned Leased Vacant Owned Leased Vacant
----- ------ ------ ----- ------ ------ ----- ------ ------
Arizona -- -- -- -- -- -- -- 1 --
California 120 213 53 6 12 12 1 6 --
Florida -- -- -- -- -- 1 -- -- --
Maryland -- -- -- -- -- -- 1 1 --
Montana -- -- -- -- -- -- -- 1 --
Nevada 7 9 1 -- -- -- -- 1 --
Pennsylvania -- -- -- -- -- -- -- 1 --
Texas -- -- -- -- 4 -- -- -- --
--- --- -- -- -- -- -- -- --
Total 127 222 54 6 16 13 2 11 --
=== === == == == == == == ==
ITEM 3. LEGAL PROCEEDINGS
CALIFORNIA FEDERAL GOODWILL LITIGATION
The Bank is the plaintiff in a lawsuit against the United States Government
(the "Government"), California Federal Bank v. United States, Civil Action
92-138 (the "California Federal Goodwill Litigation"). In the California Federal
Goodwill Litigation, the Bank alleged, among other things, that the Government
breached certain contractual commitments regarding the computation of its
regulatory capital for which the Bank sought damages and restitution. The Bank's
claims arose from changes, mandated by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA"), with respect to the rules for
computing Old California Federal's regulatory capital.
In late 1997, a United States Court of Federal Claims (the "Claims Court")
Judge ruled in favor of the Bank's motion for partial summary judgment as to the
Government's liability to the Bank for breach of contract, and a formal order in
that regard was subsequently issued. In late 1998, a second Claims Court Judge
ruled that California Federal could not meet its burden for proving lost profits
damages and ordered that the case proceed to trial on the damage issue of
restitution and reliance. The trial began in January 1999 and concluded in March
1999.
Page 11
On April 16, 1999, this second Claims Court Judge issued his decision on
the damages claim against the Government in the California Federal Goodwill
Litigation, ruling that the Government must compensate the Bank in the sum of
$23.0 million. The summary judgment liability decision by the first Claims Court
Judge has been appealed by the Government and the damage award by the second
Claims Court Judge has been appealed by the Bank. All appellate briefs have been
filed and it is anticipated that oral argument in the Federal Circuit Court of
Appeals will take place in conjunction with the appellate argument in the
Glendale Goodwill Litigation (as defined herein) in mid 2000.
GLENDALE GOODWILL LITIGATION
By virtue of the Glen Fed Merger, the Bank is also a plaintiff in a claim
against the United States in a second lawsuit, Glendale Federal Bank v. United
States, No.90-772C (the "Glendale Goodwill Litigation"). In the Glendale
Goodwill Litigation, Glendale Federal sued the Government contending that
FIRREA's treatment of supervisory goodwill constituted a breach by the
Government of its 1981 contract with the Bank, under which the Bank had merged
with a Florida thrift and was permitted to include the goodwill resulting from
the merger in its regulatory capital. In 1992, the Claims Court found in favor
of Glendale Federal's position, ruling that the Government breached its express
contractual commitment to permit Glendale Federal to include supervisory
goodwill in its regulatory capital and that Glendale Federal was entitled to
seek financial compensation.
The trial began in February 1997 and concluded in September 1998. On April
9, 1999, the Claims Court issued its decision in 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.
All appellate briefs have been filed by both the Government and the Bank and
oral argument on the appeal will be scheduled in conjunction with the argument
in the California Federal Goodwill Litigation in mid 2000.
OTHER LITIGATION
In addition to the California Federal Goodwill Litigation and the Glendale
Goodwill Litigation, GS Holdings and its subsidiaries are involved in other
legal proceedings on claims incidental to the normal conduct of its businesses.
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 GS
Holdings or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Page 12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
GS Holdings is a wholly owned subsidiary of Golden State. All of the
Company's common shares are owned by Golden State. There is no public trading
market for the Company's common stock.
Ronald O. Perelman, a Director of GS Holdings, 35 East 62nd Street, New
York, New York 10021, through MacAndrews & Forbes, beneficially owns 37.2% of
the Golden State common stock outstanding as of January 31, 2000. Hunter's Glen,
a limited partnership controlled by Gerald J. Ford, Chairman of the Board, Chief
Executive Officer and a Director of the Bank and GS Holdings, 200 Crescent
Court, Suite 1350, Dallas, Texas 75201, owns 14.5% of the Golden State common
stock outstanding as of January 31, 2000. The balance of the common stock of
Golden State is publicly held. In addition, pursuant to the Golden State Merger
agreement, GSB Investments and Hunter's Glen are entitled to receive additional
shares of Golden State common stock under certain circumstances, which could
cause the actual ownership percentages of GSB Investments and Hunter's Glen to
change.
DIVIDENDS
During 1999, 1998 and 1997, dividends on GS Holdings' common stock totalled
$225.5 million, $874.2 million and $71.1 million, respectively. See discussion
of dividend restrictions in note 25 of the Company's Notes to Consolidated
Financial Statements.
Page 13
ITEM 6. SELECTED FINANCIAL DATA
The data presented below represents selected financial data relative to the
Company for each of the years in the five-year period ended December 31, 1999.
Year Ended December 31,
-----------------------------------------------------------
1999 (1) 1998 (2) 1997 (3) 1996 (4) 1995
---- ---- ---- ---- ----
(dollars in millions, except per share data)
SELECTED OPERATING DATA
Interest income $3,652 $2,585 $2,128 $1,246 $1,083
Interest expense 2,466 1,774 1,441 808 735
Net interest income 1,186 811 687 438 348
Provision for loan losses 10 40 80 40 37
Noninterest income 422 441 339 642 144
Noninterest expense 911 761 649 491 333
Income before income taxes, minority interest
and extraordinary items 687 451 297 549 122
Income tax expense (benefit) (5) 234 (96) 47 (73) (58)
Minority interest: provision in lieu of
income tax expense 79 -- -- -- --
Minority interest: other (6) 35 110 89 43 35
Income before extraordinary items 339 437 161 579 145
Extraordinary items - gain (loss) on early
extinguishment of debt, net 2 (99) -- (2) 2
Net income available to common stockholders 341 338 161 577 147
SELECTED PERFORMANCE RATIOS
Return on average assets (7) 0.61% 0.86% 0.52% 3.37% 1.00%
Return on average common equity (8) 19.92 23.66 19.11 72.71 39.33
Average equity to average assets 3.05 3.64 2.83 4.85 2.54
Yield on interest-earning assets (9) 6.97 7.21 7.52 7.74 7.69
Cost of interest-bearing liabilities (10) 4.69 4.96 5.16 5.15 5.35
Net interest margin (11) 2.26 2.26 2.42 2.72 2.47
Efficiency ratio of the Bank (12) 48.25 50.32 51.16 54.88 63.47
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND MINORITY INTEREST (13)
Excluding interest on deposits 1.34x 1.31x 1.24x 2.13x 1.27x
Including interest on deposits 1.22 1.18 1.13 1.58 1.11
Page 14
December 31,
----------------------------------------------------------------
1999 (1) 1998 (2) 1997 (3) 1996 (4) 1995
---- ---- ---- ---- ----
(dollars in millions, except per share data)
SELECTED FINANCIAL DATA
Securities available for sale $ 1,076 $ 771 $ 813 $ 542 $ 349
Securities held to maturity 185 251 58 4 1
Mortgage-backed securities available for sale 13,765 12,948 5,077 1,599 1,478
Mortgage-backed securities held
to maturity 2,150 2,771 1,338 1,622 1,524
Loans receivable, net 33,953 30,281 19,424 10,213 8,830
Total assets 57,041 54,798 31,347 16,618 14,667
Deposits 23,041 24,647 16,203 8,502 10,242
Securities sold under agreements
to repurchase 5,482 4,238 1,842 1,583 970
Borrowings 25,669 22,376 10,770 4,903 2,393
Total liabilities 54,880 52,472 29,517 15,390 13,904
Minority interest 500 593 986 309 301
Stockholder's equity 1,661 1,732 844 919 462
REGULATORY CAPITAL RATIOS OF THE BANK
Tangible capital 5.81% 5.29% 5.65% 7.17% 5.84%
Core capital 5.81 5.29 5.65 7.17 5.84
Risk-based capital:
Core capital 11.36 10.27 10.14 11.50 9.14
Total capital 12.89 11.69 11.93 13.62 11.34
SELECTED OTHER DATA
Number of full service customer facilities 349 358 225 116 160
Loans serviced for others (14) $75,782 $68,803 $47,933 $44,034 $27,901
Full-time equivalent staff (FTE) 7,564 7,994 4,983 3,415 3,378
Non-performing assets as a
% of the Bank's total assets 0.35% 0.57% 0.87% 1.36% 1.50%
- -----------------
(1) On April 16, 1999, the Company acquired twelve retail branches with
deposits of $543 million from Norwest Bank, Nevada, a subsidiary of
Norwest Corporation and Wells Fargo Bank, N.A. (the "Nevada Purchase").
During April 1999, FNMC sold servicing rights on approximately 49,000 loans
with an unpaid principal balance of $2.0 billion (the "1999 Servicing
Sale"). In August 1999, the Company sold deposits totalling $70.1 million
to Humboldt Bank. Noninterest income for the year ended December 31, 1999
includes pre-tax gains of $16.3 million from the sale of mortgage
servicing rights ("MSRs") and $2.3 million on the sale of deposits. Non-
interest expense for the year ended December 31, 1999 includes a $5.1
million reduction in benefit expense based on receipt of the actuary's
valuation of the pension asset. During 1999, the Company redeemed the
remaining 925,640 shares of the Bank Preferred Stock for a total redemption
price of $97.6 million, resulting in $5.1 million of expenses and tender
premiums, reflected as minority interest on the Company's 1999 consolidated
statement of income.
(2) On September 11, 1998, the Company consummated the Glen Fed Merger,
acquiring assets with fair values totalling approximately $18.8 billion and
liabilities (including deposit liabilities) with fair values totalling
approximately $17.7 billion. In addition, on September 11, 1998, the
Company consummated the sale of its Florida deposit franchise to Union
Planters Bank (the "Florida Branch Sale"), with associated deposit accounts
totalling $1.4 billion, which resulted in a pre-tax gain of $108.9 million.
Noninterest expense for the year ended December 31, 1998 includes $59.2
million in merger and integration costs. During 1998, GS Escrow Corp.
issued $2 billion in debt securities to fund, in part, the Refinancing
Transactions (as defined herein). The Company purchased 3,806,660 shares
of the two outstanding series of Bank Preferred Stock in the Bank Preferred
Stock Tender Offers (as defined herein) for a total redemption price of
$423.0 million, resulting in $36.9 million of expenses and tender premiums,
reflected as minority interest expense on the Company's 1998 consolidated
statement of income. In addition, during 1998, the Company purchased the FN
Holdings Notes (as defined herein) in the Debt Tender Offers (as defined
herein) for an aggregate purchase price of $1.1 billion. The after-tax
premiums and expenses paid in connection with such purchase (which together
with the Bank Preferred Stock Tender Offers, are referred to as the
"Refinancing Transactions") totalled $98.7 million and are reflected as an
extraordinary loss on the Company's 1998 consolidated statement of income.
(Footnotes continued on next page)
Page 15
(3) On January 3, 1997, the Company acquired assets with fair values totalling
approximately $14.2 billion and liabilities (including deposit liabilities)
with fair values totalling approximately $12.9 billion in the Cal Fed
Acquisition. In addition, on May 31, 1997, the Company acquired a $3.2
billion loan servicing portfolio (the "Weyerhaeuser Purchase"). Non-
interest income for the year ended December 31, 1997 includes pre-tax
gains of $14.0 million on the sale of MSRs (the "1997 Servicing Sale"), $25
million on the sale of Affiliated Computer Services ("ACS") stock, and $3.6
million on the sale of deposits. Noninterest expense for the year ended
December 31, 1997 includes a $29.0 million provision for professional fees
and unreimbursable costs related to the foreclosure of 1-4 unit residential
loans serviced for others.
(4) On January 31, 1996, FNMC consummated the 1996 LMUSA Purchase, acquiring
a $14.1 billion loan servicing portfolio. On February 1, 1996, the Company
acquired San Francisco Federal ("SFFed Acquisition"), with assets at fair
values totalling approximately $4 billion and liabilities (including
deposit liabilities) with fair values totalling approximately $3.8 billion.
During the year ended December 31, 1996, the Company closed the sale of
several of its branches, with associated deposit accounts totalling $4.6
billion ("Branch Sales"). Noninterest income for the year ended December
31, 1996 includes pre-tax gains of $363.3 million related to the Branch
Sales. Noninterest expense for the year ended December 31, 1996 includes a
pre-tax charge of $60.1 million related to a special SAIF assessment.
(5) Income tax benefit for 1996 and 1995 includes the recognition of a deferred
tax benefit of $125 million and $69 million, respectively, offset by
federal AMT tax reduced, to the extent of 90%, by net operating loss
carryovers and state tax generally at an assumed rate of 8%. Income tax
expense for 1997 and the first half of 1998 represents federal AMT reduced,
to the extent of 90%, by net operating loss carryovers, and state tax at an
assumed rate of 11%. On June 30, 1998, the Bank recorded a $250 million
reduction of the valuation allowance related to its deferred tax asset.
Income tax expense for the second half of 1998 and for 1999 represents an
effective tax rate of 42%. 1999 income tax expense includes a $79.0 million
tax benefit based on the actual filing of the Mafco Group (as defined
herein) and GS Holdings 1998 consolidated federal income tax returns. The
tax benefit is fully offset by an increase in minority interest expense.
(6) Represents dividends on the REIT Preferred Stock (as defined herein), net
of related tax benefit and the Bank Preferred Stock. The REIT Preferred
Stock was issued on January 31, 1997. Minority interest for the years
ended December 31, 1998 and 1999 also includes early redemption premiums on
the Bank Preferred Stock and a 20% minority interest in Auto One.
(7) Return on average assets represents net income as a percentage of average
assets for the periods presented.
(8) Return on average common equity represents net income as a percentage of
average common equity for the periods presented.
(9) Yield on interest-earning m assets represents interest income as a
percentage of average interest-earning assets.
(10) Cost of interest-bearing liabilities represents interest expense as a
percentage of average interest-bearing liabilities.
(11) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
(12) Efficiency ratio represents noninterest expense reduced by goodwill
amortization as a percentage of net interest income plus noninterest income
(each component adjusted for non-recurring items).
(13) Earnings used in computing the ratio of earnings to combined fixed
charges and minority interest consist of income before income taxes,
minority interest and extraordinary items. Fixed charges consist of
interest expense on borrowings, the interest component of lease expense
and, where indicated, interest expense on deposits.
(14) Includes loans serviced by the Bank and its subsidiaries, excluding loans
serviced for the Bank by FNMC.
Page 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Management's Discussion and Analysis ("MD&A") should be read in
conjunction with the Consolidated Financial Statements of GS Holdings and the
notes thereto included elsewhere in this Form 10-K. The following discussion
includes historical information relating to GS Holdings, including the effects
of the Golden State Acquisition and the Cal Fed Acquisition which were
consummated on September 11, 1998 and January 3, 1997, respectively. For
specific information regarding these acquisitions, see note 3 of the Company's
Notes to Consolidated Financial Statements.
For a discussion of the impact to the Company of recent accounting changes,
refer to note 2 of the Company's Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
Based in San Francisco, GS Holdings is the parent of California Federal, a
full-service, community oriented bank, that serves consumers and small
businesses in California and Nevada. At December 31, 1999, it was the second
largest thrift in the U.S. with $57.0 billion in assets and 349 branches.
In connection with the Golden State Acquisition, management pledged to
reduce, by December 31, 1999, operating expenses of the combined entity by
$160.2 million, representing a 44% reduction from historical levels of the
acquired entities' noninterest expense. This goal, which the Company exceeded by
$1.8 million, was achieved six months ahead of schedule, by the end of the
second quarter of 1999.
GS Holdings reported net income for 1999 of $341.1 million, compared with
net income of $338.0 million in 1998. Net income for 1999 included the following
non-recurring items, net of tax: a $9.4 million gain from the 1999 Servicing
Sale, a $2.9 million reduction in benefit expense based on receipt of the
actuary's valuation of the pension asset, $3.2 million in minority interest
expense related to the redemption of the Bank Preferred Stock and a $2.5 million
gain on early extinguishment of debt.
Net income for 1998 included the following items, net of tax: a $250
million reduction of the valuation allowance related to the Company's deferred
tax asset, gains of $63.0 million on the sale of branches, $98.7 million in
extraordinary loss related to expenses and tender premiums paid in connection
with the Debt Tender Offers, $34.2 million in merger and integration costs
related to the Golden State Acquisition and $36.9 million in minority interest
related to net premiums and expenses in connection with the Bank Preferred Stock
Tender Offers.
Excluding these non-recurring items, operating net income for 1999 was
$329.5 million, compared with operating net income for 1998 of $194.8 million.
Page 17
The following table shows GS Holdings' consolidated average balance sheet
for the past three years, with the related interest income, interest expense,
and the average interest rates for the periods presented. Average balances are
calculated on a daily basis. The year-to-year comparisons set forth below
include the effect of the Company's acquisitions and dispositions during the
periods involved.
Year Ended December 31,
------------------------------------------------------------------------------------
1999 1998 1997
------------------------- --------------------------- -------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
(dollars in millions)
ASSETS
Interest-earning assets (1):
Securities and interest-bearing
deposits in banks (2) $ 1,554 $ 100 6.44% $ 1,121 $ 77 6.84% $ 1,015 $ 62 6.11%
Mortgage-backed securities
available for sale 13,706 873 6.37 7,952 483 6.07 4,485 298 6.64
Mortgage-backed securities
held to maturity 2,392 178 7.43 1,753 134 7.67 1,482 113 7.65
Loans held for sale 1,659 110 6.60 1,652 116 7.01 1,068 77 7.15
Loans receivable, net 31,948 2,332 7.30 22,772 1,739 7.64 19,859 1,553 7.82
FHLB stock 1,113 60 5.36 623 36 5.78 403 25 6.16
------- ----- ------ ----- ------ -----
Total interest-earning assets 52,372 3,653 6.97% 35,873 2,585 7.21% 28,312 2,128 7.52%
----- ----- -----
Noninterest-earning assets 3,692 3,394 2,444
------- ------- -------
Total assets $56,064 $39,267 $30,756
======= ======= =======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits $23,948 $ 888 3.71% $18,866 $ 791 4.19% $16,728 $ 747 4.47%
Securities sold under
agreements to repurchase 5,057 266 5.18 2,805 154 5.40 2,512 141 5.52
Borrowings (3) 23,613 1,313 5.56 14,084 829 5.89 8,702 553 6.36
------- ------ ------- ------ ------- ------
Total interest-bearing
liabilities 52,615 2,467 4.69% 35,755 1,774 4.96% 27,942 1,441 5.16%
------ ------ ------
Noninterest-bearing
liabilities 1,194 1,204 1,011
Minority interest 540 878 932
Stockholder's equity 1,712 1,430 871
------- ------- -------
Total liabilities,
minority interest and
stockholder's equity $56,064 $39,267 $30,756
======= ======= =======
Net interest income $1,186 $ 811 $ 687
====== ====== ======
Interest rate spread 2.28% 2.25% 2.36%
==== ==== ====
Net interest margin 2.26% 2.26% 2.42%
==== ==== ====
Average equity to average assets 3.05% 3.64% 2.83%
==== ==== ====
- ------------------
(1) Non-performing assets are included in the average balances for the periods
indicated.
(2) Includes interest-bearing deposits in other banks and securities purchased
under agreements to resell.
(3) Interest and average rate include the impact of interest rate swaps.
Page 18
The following table shows what portion of the changes in interest income
and interest expense were due to changes in rate and volume. For each category
of interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to volume (change in average outstanding
balance multiplied by the prior year's rate) and rate (change in average
interest rate multiplied by the prior year's volume). Changes attributable to
both volume and rate have been allocated proportionately.
Year Ended December 31,
-------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
----------------------------- ----------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------ ----------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(in millions)
INTEREST INCOME:
Securities and interest-bearing deposits in $ 27 $ (4) $ 23 $ 7 $ 8 $ 15
banks
Mortgage-backed securities available for sale 365 25 390 209 (24) 185
Mortgage-backed securities held to maturity 48 (4) 44 21 -- 21
Loans held for sale -- (6) (6) 40 (1) 39
Loans receivable, net 666 (73) 593 221 (35) 186
FHLB stock 27 (3) 24 13 (2) 11
------ ----- ------ --- ---- ----
Total 1,133 (65) 1,068 511 (54) 457
------ ----- ------ --- ---- ----
INTEREST EXPENSE:
Deposits 169 (72) 97 84 (40) 44
Securities sold under agreements to repurchase 118 (6) 112 16 (3) 13
Borrowings 527 (43) 484 314 (38) 276
------ ----- ------ --- ---- ----
Total 814 (121) 693 414 (81) 333
------ ----- ------ --- ---- ----
Change in net interest income $ 319 $ 56 $ 375 $ 97 $ 27 $124
====== ===== ====== ==== ==== ====
YEAR ENDED DECEMBER 31, 1999 VERSUS YEAR ENDED DECEMBER 31, 1998
INTEREST INCOME. Total interest income was $3.7 billion for 1999, an
increase of $1.1 billion from 1998. Total interest-earning assets for 1999
averaged $52.4 billion, compared to $35.9 billion for the corresponding period
in 1998, primarily as a result of the Golden State Acquisition. The yield on
total interest-earning assets during 1999 decreased to 6.97% from 7.21% for
1998, primarily due to prepayments of higher rate loans which were replaced with
lower yielding originations, primarily during 1998, and the repricing of
variable-rate loans, partially offset by purchases of mortgage-backed securities
and additions from the Golden State Acquisition of mortgage-backed securities
with higher market yields.
GS Holdings earned $2.3 billion of interest income on loans receivable for
1999, an increase of $593.2 million from 1998. The average balance of loans
receivable was $31.9 billion for 1999, compared to $22.8 billion for 1998. The
weighted average rate on loans receivable decreased to 7.30% for 1999 from 7.64%
for 1998, primarily due to comparatively lower market rates in 1999. The
increase in the average volume is primarily due to the addition of $14.6 billion
in loans acquired in the Golden State Acquisition.
GS Holdings earned $109.5 million of interest income on loans held for sale
for 1999, a decrease of $6.2 million from 1998. The average balance of loans
held for sale was $1.7 billion for 1999, an increase of $7 million from 1998,
primarily due to increased originations and longer holding periods for jumbo
loans during the first half of 1999. The weighted average rate on loans held for
sale decreased to 6.60% for 1999 from 7.01% for 1998, primarily due to declining
market interest rates.
Interest income on mortgage-backed securities available for sale was $872.8
million in 1999, an increase of $390.3 million from 1998. The average portfolio
balances increased $5.8 billion, to $13.7 billion, for 1999 compared to 1998.
The weighted average yield on these assets increased from 6.07% for 1998 to
6.37% for 1999. The increase in the volume and the weighted average yield is
primarily due to premium amortization associated with prepayments of
variable-rate securities in 1998, purchases of mortgage-backed securities and
additions of $2.4 billion from the Golden State Acquisition with higher market
yields.
Page 19
Interest income on mortgage-backed securities held to maturity was $177.6
million for 1999, an increase of $43.1 million from 1998. The average portfolio
balance increased $639 million, to $2.4 billion, for 1999 compared to 1998,
primarily attributed to the addition of $1.9 billion of the Bank's multi-family
loans securitized with FNMA with a weighted average rate of 7.39% during
September of 1998. The weighted average rates for 1999 and 1998 were 7.43% and
7.67%, respectively.
Interest income on securities and interest-bearing deposits in other banks
was $100.1 million for 1999, an increase of $23.4 million from 1998. The average
portfolio balance increased from $1.1 billion for 1998 to $1.6 billion for 1999.
The decrease in the weighted average rate from 6.84% for 1998 to 6.44% for 1999
is primarily due to a decline in market interest rates. In addition, 1999
reflects $7.7 million in interest income related to a $50.8 million federal tax
refund, while 1998 reflects $17.5 million in interest income received on a $65.0
million federal income tax refund. These refunds were related to Old California
Federal and San Francisco Federal, and neither had a corresponding asset.
Dividends on FHLB stock were $59.6 million for 1999, an increase of $23.6
million from 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 of FHLB stock owned during
1999 and 1998 was $1.1 billion and $0.6 billion, respectively. The weighted
average dividend on FHLB stock decreased to 5.36% for 1999 from 5.78% for 1998.
INTEREST EXPENSE. Total interest expense was $2.5 billion for 1999, an
increase of $692.3 million from 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 (as defined herein).
Interest expense on customer deposits, including Brokered Deposits (as
defined herein), was $888.3 million for 1999, an increase of $97.2 million from
1998. The average balance of customer deposits outstanding increased from $18.9
billion for 1998 to $23.9 billion for 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 1999 from 4.19% for 1998, primarily due to
lower market interest rates and a change in the Bank's certificate of deposit
pricing strategy, as well as the higher average balances of lower rate
transaction accounts in 1999 compared to 1998 and the lower cost of funds on
deposits assumed in the Golden State Acquisition and the Nevada Purchase.
Interest expense on securities sold under agreements to repurchase totalled
$265.5 million for 1999, an increase of $111.8 million from 1998. The average
balance of such borrowings for 1999 and 1998 was $5.1 billion and $2.8 billion,
respectively; such increase is primarily attributed to the Golden State
Acquisition. The weighted average interest rate on these instruments decreased
to 5.18% for 1999 from 5.40% for the year ended December 31, 1998, primarily due
to a decrease in market interest rates on new borrowings in 1999 compared to
1998.
Interest expense on borrowings totalled $1.3 billion for 1999, an increase
of $483.3 million from 1998. The average balance outstanding for 1999 and 1998
was $23.6 billion and $14.1 billion, respectively. The weighted average interest
rate on these instruments decreased to 5.56% for 1999 from 5.89% for 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 $1.2 billion for 1999, an
increase of $375.1 million from 1998, primarily due to an increase in net
interest-earning assets resulting from the Golden State Acquisition. The
interest rate spread increased to 2.28% for 1999 from 2.25% for 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.
Page 20
NONINTEREST INCOME. Total noninterest income, consisting primarily of loan
servicing fees, customer banking fees and gains on sale and settlement of
assets, was $421.7 million in 1999, a decrease of $19.2 million from 1998.
Noninterest income included a $16.3 million pre-tax gain from the 1999 Servicing
Sale and a gain on sale of branches of $108.8 million in 1998 (primarily due to
the Florida Branch Sale). Excluding these non-recurring items, noninterest
income was $405.4 million in 1999 compared with $332.2 million in 1998.
Noninterest income includes the following components in each of the years ended
December 31, 1999, 1998 and 1997:
Year Ended December 31,
-------------------------------------------
1999 1998 1997
--------- --------- ---------
(in thousands)
Noninterest income:
Loan servicing fees, net $ 146,682 $ 132,543 $ 143,704
Customer banking fees and service charges 187,022 121,283 100,263
Gains on sale and settlement of assets, net 21,699 193 38,230
Gains on sale of branches, net 2,343 108,825 3,569
Gains on sale of loans, net 32,885 54,217 24,721
Other income 31,096 23,896 29,207
--------- --------- ---------
Total noninterest income $ 421,727 $ 440,957 $ 339,694
========= ========= =========
Loan servicing fees, net of amortization of MSR, were $146.7 million for
1999, compared with $132.5 million for 1998. The single-family residential loan
servicing portfolio, excluding loans serviced for the Bank, increased from $65.4
billion at December 31, 1998 to $72.9 billion at December 31, 1999. Incremental
loan servicing fees were partially offset by amortization related to higher
average MSR basis in 1999. Loan servicing fees benefited from the slowdown in
mortgage loan prepayments in 1999, with an average prepayment rate on loans
serviced of 17% in 1999 versus 23% in 1998.
Customer banking fees were $187.0 million for 1999 compared with $121.3
million for 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. Commission revenues from mutual fund, annuity and
investment sales through CFI included in fees and service charges totalled $53.9
million for 1999, an increase of $20.6 million from 1998, primarily a result of
an increase in the sales volume of such instruments. In addition, management's
increased emphasis on transaction account growth since the Golden State
Acquisition has generated additional fee income.
Net gain on sale of assets totalled $21.7 million in 1999, an increase of
$21.5 million from 1998, primarily due to the 1999 Servicing Sale.
Net gain on sale of branches was $2.3 million for 1999 compared with $108.8
million in 1998. The gain in 1999 relates to the sale of the Eureka and Ukiah
branches. The gain in 1998 is primarily attributed to the Florida Branch Sale.
Gain on sale and settlement of loans totalled $32.9 million for 1999, a
decrease of $21.3 million from 1998. The decrease is primarily attributed to
lower gains on residential loans held for sale during 1999. In addition, gains
attributed to early payoffs and settlement of commercial loans with unamortized
discounts were $3.9 million higher in 1998 compared with 1999. During 1999,
California Federal sold $9.7 billion in single-family mortgage loans originated
for sale with servicing rights retained as part of its ongoing mortgage banking
operations compared with $7.9 billion of such sales in 1998.
Other noninterest income was $31.1 million in 1999 compared with $23.9
million in 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.
Page 21
NONINTEREST EXPENSE. Total noninterest expense was $910.8 million in 1999,
an increase of $149.5 million from 1998. Noninterest expense in 1999 included
higher compensation, occupancy and equipment, goodwill amortization and other
noninterest expense attributed to the Golden State Acquisition and the Nevada
Purchase. These increases were partially offset by a $51.4 million decrease in
merger and integration costs incurred in connection with the Golden State
Acquisition, as the majority of these costs were incurred in 1998. Noninterest
expense includes the following components in each of the years ended December
31, 1999, 1998 and 1997:
Year Ended December 31,
-------------------------------------------
1999 1998 1997
--------- --------- ---------
(in thousands)
Noninterest expense:
Compensation and employee benefits $ 389,904 $ 293,573 $ 256,448
Occupancy and equipment 141,696 97,456 81,914
Professional fees 52,493 56,327 48,771
Loan expense 36,048 48,183 60,437
Foreclosed real estate operations, net (6,411) (6,152) (3,304)
Amortization of intangible assets 69,724 53,415 49,153
Merger and integration costs 7,747 59,162 --
Other expense 219,582 159,360 155,300
--------- --------- ---------
Total noninterest expense $ 910,783 $ 761,324 $ 648,719
========= ========= =========
Compensation and employee benefits expense was $389.9 million in 1999, an
increase of $96.3 million from 1998. The increase is primarily attributed to the
Golden State Acquisition.
Occupancy and equipment expense was $141.7 million and $97.5 million in
1999 and 1998, respectively. This increase reflects the effects of the Golden
State Acquisition as well as $9.0 million of adjustments in 1999 to previously
established accruals for vacant facilities.
Professional fees, which are primarily legal, audit, and consulting fees,
totalled $52.5 million and $56.3 million in 1999 and 1998, respectively. The
decrease was primarily due to a reduction in expenses related to goodwill
litigation.
Loan expense was $36.0 million in 1999, a decrease of $12.1 million from
1998. The decrease is primarily attributed to an increase in FAS 91 deferred
origination costs due to higher loan production activity during 1999 compared
with 1998. Also, 1998 included higher pass-through interest expense due to
higher prepayments in that period.
Amortization of intangible assets was $69.7 million in 1999, an increase of
$16.3 million from 1998, primarily due to the goodwill recorded in connection
with the Golden State Acquisition and the Nevada Purchase.
Merger and integration costs were $7.7 million and $59.2 million in 1999
and 1998, respectively, representing transition expenses, which include
severance, conversion and consolidation costs incurred in connection with the
Golden State Acquisition. The majority of such costs were incurred in 1998 and
management does not expect to incur any significant additional merger and
integration costs from this transaction.
Other noninterest expense was $219.6 million in 1999 compared with $159.4
million in 1998, primarily attributed to increased operations as a result of the
Golden State Acquisition. In addition, results for 1999 include $6.2 million in
operating expenses related to back office support. Such charges are not expected
to be recurring.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $10 million in
1999, down from $40 million in 1998. The decrease in 1999 reflects management's
evaluation of the adequacy of the allowance based on, among other things, past
loan loss experience and known and inherent risks in the portfolio, evidenced in
part by the continued decline in the Bank's level of non-performing assets.For
further information, refer to "- Balance Sheet Analysis - Allowance for Loan
Losses."
Page 22
PROVISION FOR INCOME TAX. In 1999, GS Holdings recorded gross income tax
expense of $313.3 million, less a benefit of $79.0 million, for a net income tax
expense of $234.3 million. The tax benefit of $79.0 million was offset by a
provision in lieu of taxes. In 1998, GS Holdings recorded an income tax benefit
of $96.3 million. GS Holdings' effective federal tax rate was 38% and (30)%
during 1999 and 1998, respectively, while its statutory federal tax rate was 35%
during both periods. In 1999, the difference between the effective and statutory
rates was primarily the result of non-deductible goodwill amortization. During
1999, a tax benefit of $79.0 million was recognized, and a corresponding
increase to minority interest: provision in lieu of income tax expense was
recorded, since the adjustment relates to pre-merger tax benefits which are
retained by the previous owners of FN Holdings. These adjustments resulted from
1998 tax filings in the third quarter of 1999. For the year ended December 31,
1998, the difference between the effective and statutory rates was primarily the
result of a $250 million reduction in the deferred tax asset valuation
allowance, partially offset by non-deductible goodwill amortization. GS
Holdings' effective state tax rate was 8% and 9% during 1999 and 1998,
respectively.
MINORITY INTEREST. Minority interest for 1999 includes a $79.0 million
provision in lieu of income taxes, representing pre-merger tax benefits retained
by the previous owners of FN Holdings (see note 24 of the Company's Notes to
Consolidated Financial Statements), and $5.0 million in net premiums paid in
connection with the redemption of the Bank Preferred Stock. Dividends on the
Bank Preferred Stock that had not been acquired by GS Holdings and the REIT
Preferred Stock totalling $1.8 million and $26.4 million, respectively, were
also recorded during 1999. Minority interest relative to the REIT Preferred
Stock is reflected net of related income tax benefit of $19.2 million, which
will inure to the Company as a result of the deductibility of such dividends for
income tax purposes. The reduction in minority interest relative to the Bank
Preferred Stock reflects the impact of the $380.7 million in Bank Preferred
Stock purchased by GS Holdings in connection with the Refinancing Transactions
in the third and fourth quarters of 1998, as well as the $60.7 million redeemed
on April 1, 1999 and the $31.8 million redeemed on September 1, 1999. Minority
interest for 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.
EXTRAORDINARY ITEMS. During the fourth quarter of 1999, the FHLB called and
the Bank prepaid $500 million in FHLB advances, resulting in an extraordinary
gain of $2.7 million, net of income taxes, on the early extinguishment of such
borrowings. In addition, on December 20, 1999, the Bank repurchased all of the
remaining $6.0 million outstanding principal amount of the 11.20% senior notes
due September 1, 2004 (the "11.20% Senior Notes") assumed in the SFFed
Acquisition, resulting in an extraordinary loss of $0.2 million, net of income
taxes, on the early extinguishment of debt. During 1998, the Company purchased
$914.5 million aggregate principal amount of the FN Holdings Notes (the "Debt
Tender Offers") for an aggregate purchase price, including accrued interest
payable, of $1.1 billion. The amount of expenses and tender premiums paid in
connection with such purchase totalled $98.7 million, net of income taxes, and
is reflected as an extraordinary loss on early extinguishment of debt on GS
Holdings' consolidated statement of income for 1998.
YEAR ENDED DECEMBER 31, 1998 VERSUS YEAR ENDED DECEMBER 31, 1997
INTEREST INCOME. Total interest income was $2.6 billion for the year ended
December 31, 1998, an increase of $457.4 million from the year ended December
31, 1997. Total interest-earning assets for the year ended December 31, 1998
averaged $35.9 billion, compared to $28.3 billion for the corresponding period
in 1997. The yield on total interest-earning assets during the year ended
December 31, 1998 decreased to 7.21% from 7.52% for the year ended December 31,
1997, primarily due to the lower market rates on mortgage-backed securities
purchased in 1998 and 1997 and prepayments of higher rate interest-earning
assets.
GS Holdings earned $1.7 billion of interest income on loans receivable for
the year ended December 31, 1998, an increase of $186.1 million from the year
ended December 31, 1997. The average balance of loans receivable was $22.8
billion for the year ended December 31, 1998, compared to $19.9 billion for the
same period in 1997. The weighted average rate on loans receivable decreased to
7.64% for the year ended December 31, 1998, from 7.82% for the year ended
December 31, 1997, 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 23
GS Holdings earned $115.7 million of interest income on loans held for sale
for the year ended December 31, 1998, an increase of $39.4 million from the year
ended December 31, 1997. The average balance of loans held for sale was $1.7
billion for the year ended December 31, 1998, an increase of $584 million from
1997, primarily due to increased originations and longer holding periods for
jumbo loans during the year ended December 31, 1998. The weighted average yield
on loans held for sale decreased to 7.01% for the year ended December 31, 1998,
from 7.15% for the year ended December 31, 1997, primarily due to declining
market rates.
Interest income on mortgage-backed securities available for sale was $482.6
million for the year ended December 31, 1998, an increase of $184.8 million from
the year ended December 31, 1997. The average portfolio balances increased $3.5
billion, to $8.0 billion, during the year ended December 31, 1998. The weighted
average yield on these assets decreased from 6.64% for the year ended December
31, 1997 to 6.07% for the year ended December 31, 1998. The increase in the
volume and decrease in the weighted average yield is primarily due to the 1998
purchases of $9.0 billion of mortgage-backed securities and additions of $2.4
billion from the Golden State Acquisition, offset by prepayments of higher rate
mortgage-backed securities since December 31, 1997. Additionally, the decline in
yield was affected by a $19.8 million writedown recorded in 1998 to the carrying
value of mortgage-backed securities available for sale determined to have an
other-than-temporary impairment.
Interest income on mortgage-backed securities held to maturity was $134.5
million for the year ended December 31, 1998, an increase of $21.2 million from
the year ended December 31, 1997. The average portfolio balance increased $271
million to $1.8 billion during the year ended December 31, 1998, primarily
attributed to the addition of $1.9 billion of the Company's multi-family loans
securitized with FNMA during September 1998, having a weighted average rate of
7.39%. The weighted average rates for the years ended December 31, 1998 and
1997, were 7.67% and 7.65%, respectively.
Interest income on securities and interest-bearing deposits in other banks
was $76.7 million for the year ended December 31, 1998, an increase of $14.7
million from the year ended December 31, 1997. The average portfolio balance
increased from $1.0 billion for the year ended December 31, 1997 to $1.1 billion
for the year ended December 31, 1998, primarily due to the proceeds received
from the GS Holdings Notes, used to fund the Refinancing Transactions during the
third and fourth quarters of 1998. The increase in the weighted average rate
from 6.11% for the year ended December 31, 1997 to 6.84% for the year ended
December 31, 1998 is primarily due to $17.5 million in interest income received
on a $65 million federal income tax refund related to Old California Federal and
San Francisco Federal.
Dividends on FHLB stock were $36.0 million for 1998, an increase of $11.3
million from 1997, due to 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 of FHLB stock owned during 1998 and 1997
was $623 million and $403 million, respectively. The weighted average dividend
on FHLB stock decreased to 5.78% for 1998 from 6.16% for 1997.
INTEREST EXPENSe. Total interest expense was $1.8 billion for the year
ended December 31, 1998, an increase of $333.3 million from the year ended
December 31, 1997. The increase is primarily the result of increased borrowings
under FHLB advances, the additional deposits and borrowings assumed in the
Golden State Acquisition, and the issuance of the GS Holdings Notes.
Interest expense on customer deposits, including Brokered Deposits, was
$791.1 million for the year ended December 31, 1998, an increase of $44.1
million from the year ended December 31, 1997. The average balance of customer
deposits outstanding increased from $16.7 billion in 1997 to $18.9 billion
during 1998. The increase in the average balance is primarily due to $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
late in the third quarter of 1998. The overall weighted average cost of deposits
decreased to 4.19% for the year ended December 31, 1998 from 4.47% for the year
ended December 31, 1997, primarily due to the higher average balance of lower
rate custodial transaction accounts in 1998 and the lower cost of funds on
deposits assumed in the Golden State Acquisition.
Page 24
Interest expense on securities sold under agreements to repurchase totalled
$153.7 million for the year ended December 31, 1998, an increase of $13.2
million from the year ended December 31, 1997. The average balance of such
borrowings for the years ended December 31, 1998 and 1997 was $2.8 billion and
$2.5 billion, respectively. The weighted average interest rate on these
instruments decreased to 5.40% during the year ended December 31, 1998, from
5.52% for the year ended December 31, 1997, primarily due to a decrease in rates
on new borrowings compared to such borrowings during 1997.
Interest expense on borrowings totalled $829.3 million for the year ended
December 31, 1998, an increase of $276.0 million from the year ended December
31, 1997. The average balance outstanding for the years ended December 31, 1998
and 1997 was $14.1 billion and $8.7 billion, respectively. The weighted average
interest rate on these instruments decreased to 5.89% in 1998 from 6.36% in
1997, primarily due to declining market rates in 1998 and the net impact of the
Refinancing Transactions. The change in the 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 purchase of mortgage-backed securities and to fund the sale of
deposits in the Florida Branch Sale.
NET INTEREST INCOME. Net interest income was $810.7 million for the year
ended December 31, 1998, an increase of $124.0 million from the year ended
December 31, 1997. The interest rate spread decreased to 2.25% for the year
ended December 31, 1998 from 2.36% for the year ended December 31, 1997,
primarily as a result of prepayments of higher rate interest-earning assets that
were replaced with interest-earning assets having comparatively lower yields.
The effect of lower yielding assets was partially offset by lower rates on
interest-bearing liabilities in a declining rate environment.
NONINTEREST INCOME. Noninterest income consists primarily of loan servicing
fees, customer banking fees and gains on sale and settlement of loans and other
assets. In 1998, noninterest income was $441.0 million, an increase of $101.3
million from 1997. Noninterest income for 1998 included a $108.8 million gain on
sale of branches, primarily the Florida Branch Sale. Noninterest income for 1997
included gains of $14.0 million from the 1997 Servicing Sale and $25.0 million
from the sale of the Company's remaining ACS stock. Excluding these nonrecurring
items, noninterest income was $332.1 million in 1998, up $31.4 million from
1997. Increases in customer banking fees and gains on sale of loans were
partially offset by lower loan servicing fees.
Loan servicing fees, net of amortization of mortgage servicing rights, were
$132.5 million for 1998, compared to $143.7 million for 1997. Although the
single-family residential loan servicing portfolio, excluding loans serviced for
the Bank, increased from $44.9 billion at December 31, 1997 to $65.4 billion at
December 31, 1998, loan servicing fees included a $16.7 million increase in
amortization of residential servicing rights, primarily due to increased
prepayments. During 1998, California Federal sold $7.9 billion in single-family
mortgage loans originated for sale as part of its ongoing mortgage banking
operations compared to $5.5 billion of such sales for 1997.
Customer banking fees were $121.3 million for 1998, compared to $100.3
million for 1997. The increase is primarily attributed to the impact of
increased revenues from the retail banking operations acquired in the Golden
State Acquisition, partially offset by the impact of the Florida Branch Sale.
Gain on sale and settlement of loans was $54.2 million for 1998, compared
to $24.7 million for 1997. The increase in 1998 is primarily attributed to $19.2
million in additional gains from residential loan sales in 1998 and the effects
of early payoffs and settlment of commercial loans with unamortized discounts of
$10.3 million.
NONINTEREST EXPENSE. Total noninterest expense was $761.3 million for 1998,
an increase of $112.6 million from 1997, primarily due to merger and integration
costs as well as higher levels of operating expenses reflecting the Golden State
Acquisition.
Page 25
During 1998, the Company incurred $59.2 million in merger and integration
costs, primarily severance, conversion and consolidation costs, in connection
with the Golden State Acquisition. Compensation and employee benefits expense
was $293.6 million for 1998, an increase of $37.1 million from 1997, and was
primarily attributed to the Golden State Acquisition as well as the Auto One and
GSAC Acquisitions. Occupancy and equipment expense was $97.5 million in 1998, up
$15.5 million from 1998, reflecting the effects of the Golden State Acquisition,
partially offset by the Florida Branch Sale.
Loan expense was $48.2 million for 1998, a decrease of $12.3 million from
1997. The decrease was primarily attributed to a $25.0 million provision for
unreimbursable costs related to the foreclosure of single-family loans serviced
for others recorded during 1997, partially offset by additional expenses (such
as outside appraisal fees, inspection fees and pass-through interest expense)
associated with higher volume of loans serviced and higher prepayments during
1998.
PROVISION FOR LOAN LOSSES. The provision for loan losses decreased in 1998
reflecting 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 Bank's level of
non-performing assets. For further information, refer to the "- Balance Sheet
Analysis - Allowance for Loan Losses."
PROVISION FOR INCOME TAX. During the years 1998 and 1997, GS Holdings
recorded an income tax benefit of $96.3 million and income tax expense of $47.1
million, respectively. Based on resolutions of federal income tax audits and
favorable future earnings expectations, management changed its judgment about
the realizability of the Company's deferred tax asset. The Company reduced its
valuation allowance by $250 million in the second quarter of 1998 in addition to
the amount used to offset income during the period. GS Holdings' effective
federal tax rate was (30)% and 2% for the years 1998 and 1997, respectively,
while its statutory federal tax rate was 35% during both periods. The difference
between the effective and statutory rates was primarily the result of the
reductions in the deferred tax asset valuation allowance, partially offset by
non-deductible goodwill amortization. GS Holdings' effective state tax rate was
9% and 14% during 1998 and 1997, respectively. Effective July 1, 1998, the
Company's marginal tax rate for future periods increased to 42%. For further
information, see note 28 of the Company's Notes to Consolidated Financial
Statements.
MINORITY INTEREST. Minority interest for 1998 includes $36.9 million in net
premiums and expenses related to the Bank Preferred Stock Tender Offers.
Dividends on the Bank Preferred Stock (net of amounts paid to GS Holdings) and
the REIT Preferred Stock totalling $42.1 million and $33.1 million,
respectively, were also recorded during 1998. Minority interest relative to the
REIT Preferred Stock is reflected on the consolidated statements of income net
of the income tax benefit of $12.5 million for 1998, which will inure to the
Company as a result of the deductibility of such dividends for income tax
purposes. Minority interest for 1998 also includes $2.2 million representing
that portion of Auto One's loss attributable to the 20% interest in the common
stock of Auto One that was issued as part of the GSAC Acquisition.
Dividends on the Bank Preferred Stock and the REIT Preferred Stock
totalling $52.7 million and $36.6 million, respectively, were recorded during
1997. Minority interest relative to the REIT Preferred Stock is reflected on the
consolidated statements of income net of the income tax benefit of $5.3 million
for 1997, which will inure to the Company as a result of the deductibility of
such dividends for income tax purposes.
EXTRAORDINARY ITEMS. During 1998, the Company purchased $914.5 million
aggregate principal amount of the FN Holdings Notes in the Debt Tender Offers
for an aggregate purchase price, including accrued interest payable, of $1.1
billion. The amount of expenses and tender premiums paid in connection with such
purchase totalled $98.7 million, net of income taxes and is reflected as an
extraordinary loss on early extinguishment of debt on GS Holdings' consolidated
statement of income for 1998.
Page 26
PROVISION FOR FEDERAL AND STATE INCOME TAXES
During the years 1999, 1998 and 1997, GS Holdings recorded income tax
expense (benefit), excluding the tax effects associated with extraordinary items
and minority interest in 1999, 1998 and 1997, of $313.3 million, $(96.3)
million, and $47.1 million, respectively. Included in 1999 income tax expense is
a $79.0 million provision in lieu of taxes resulting from adjustments related to
pre-merger tax benefits, in the form of net operating loss carryovers and other
items, which are retained by the previous owners of FN Holdings. To the extent
these tax benefits are recognized, there is a reduction in income tax expense,
which is offset by an increase in minority interest: provision in lieu of income
tax expense. These adjustments resulted from 1998 tax filings in the third
quarter of 1999. The Company's effective federal income tax rates were 38%,
(30)% and 2% in 1999, 1998 and 1997, respectively. The Company's federal
statutory income tax rate was 35% in each of the years 1999, 1998 and 1997. For
the year ended December 31, 1999, the difference between the effective and
statutory rates was primarily the result of non-deductible goodwill
amortization. For the years ended December 31, 1998 and 1997, the difference
between the effective and statutory rates was primarily the result of a
reduction in the deferred tax asset valuation allowance, partially offset by
non-deductible goodwill amortization. During the years 1999, 1998 and 1997, GS
Holdings' effective state tax rate was 8%, 9% and 14%, respectively.
Prior to the Golden State Acquisition, for federal income tax purposes, the
Bank, FN Holdings and Mafco Holdings were parties to a tax sharing agreement
effective as of January 1, 1994 (the "Tax Sharing Agreement"), pursuant to
which:
(a) the Bank paid to FN Holdings amounts equal to the income taxes that the
Bank would be required to pay if it were to file a return separately
from the affiliated group of which Mafco Holdings is the common parent
(the "Mafco Group") and
(b) FN Holdings paid to Mafco Holdings amounts equal to the income taxes
that FN Holdings would be required to pay if it were to file a
consolidated return on behalf of itself and the Bank separately from
the Mafco Group.
The Tax Sharing Agreement allowed the Bank to take into account, in
determining its liability to FN Holdings, any net operating loss carryovers that
it would have been entitled to utilize if it had filed a consolidated return on
behalf of itself for each year since the formation of the Bank. The Tax Sharing
Agreement also allowed FN Holdings to take into account, in determining its
liability to Mafco Holdings, any net operating losses that it would have been
entitled to utilize if it had filed a consolidated return on behalf of itself
and the Bank for each year since the formation of the Bank. Accordingly,
pursuant to the Tax Sharing Agreement, the benefits of any net operating losses
generated by the Bank since its formation are retained by the Bank and FN
Holdings.
In connection with the Golden State Acquisition, for any taxable period
ending after September 11, 1998,
(a) the Company replaced Mafco Holdings and assumed all of the rights and
obligations of Mafco Holdings under the Tax Sharing Agreement with
respect to such taxable periods;
(b) GS Holdings replaced FN Holdings under the Tax Sharing Agreement and
assumed all of the rights and obligations of FN Holdings under the Tax
Sharing Agreement with respect to such taxable periods; and
(c) California Federal continued to be bound by the Tax Sharing Agreement.
Mafco Holdings continued to be bound for all obligations accruing for
taxable periods on or prior to September 11, 1998.
The Bank had generated significant federal income tax net operating losses
since it was organized in December 1988. This is due, in part, to the fact that,
under applicable federal income tax law, certain financial assistance received
by the Bank pursuant to an assistance agreement among the FSLIC, the Bank and
certain affiliates of the Bank, was excluded from the taxable income of the
Bank. In addition to such tax-free financial assistance, the Bank had been
entitled to its normal operating deductions, including interest expense and
certain losses relating to its loan portfolio. As a result, the Bank generated
significant net operating losses for federal income tax purposes even though its
operations were profitable. Furthermore, under the reorganization provisions of
the Code, the Bank succeeded to certain net operating loss carryovers of five
insolvent Texas savings and loan associations acquired in an FSLIC-assisted
transaction in 1988.
Page 27
Under federal tax law, Parent Holdings, FN Holdings and the Bank are
subject to several liability with respect to the consolidated federal income tax
liabilities of the Mafco Group for any taxable period during which Parent
Holdings, FN Holdings or the Bank is, as the case may be, a member of such group
("Consolidated Liabilities"). Therefore, Parent Holdings, FN Holdings or the
Bank may be required to pay the Mafco Holdings consolidated federal tax
liability notwithstanding prior payments made under the Tax Sharing Agreement by
FN Holdings or the Bank to Mafco Holdings. Mafco Holdings has agreed, however,
under the Tax Sharing Agreement, to indemnify FN Holdings and the Bank for any
such federal income tax liability (and certain state and local tax liabilities)
of Mafco Holdings or any of its subsidiaries (other than FN Holdings and the
Bank) that FN Holdings or the Bank is actually required to pay.
In connection with the Golden State Merger, the Company deconsolidated from
the Mafco Group. As a result, only the amount of the net operating losses
("NOLs") of the Company not utilized by the Mafco Group on or before December
31, 1998 are available to offset taxable income of the Company thereafter. At
September 11, 1998, had the Company filed a consolidated federal income tax
return on behalf of itself and its subsidiaries for each of the years since the
formation of the Company, it would have had regular NOL carryforwards, for
federal income tax purposes, of approximately $1.7 billion. Upon
deconsolidation, the NOLs available to offset taxable income of the Company were
initially estimated to be reduced by $757 million. This reduction of NOLs and
other tax attributes (the "Deconsolidation Adjustment") resulted in a $211.2
million reduction in retained earnings during 1998. The Deconsolidation
Adjustment was revised during 1999 based upon the actual filing of the Mafco
Group 1998 consolidated federal income tax return (including the Company's
operations through September 11, 1998) and may continue to change based upon the
results of Internal Revenue Service ("IRS") audits for all open years of Mafco
and the Company. Any change to the Deconsolidation Adjustment will be recorded
as an adjustment to the amounts due or distributions made to the previous owners
of FN Holdings. In addition, adjustments related to the valuation allowance as a
result of the Deconsolidation Adjustment will be recorded as an adjustment to
federal income tax expense. Such adjustment will be offset by minority interest
since under the merger agreement with Golden State the tax benefits from any
NOLs and other tax attributes of Parent Holdings and subsidiaries are retained
by the previous owners of FN Holdings. Accordingly, any change to the
Deconsolidation Adjustment should have no impact on GS Holdings' effective tax
rate. Changes are recorded in the period during which such change is determined.
During 1999, a tax benefit of $79.0 million was recognized, and a corresponding
increase to minority interest was recorded in accordance with the Golden State
Merger agreement. In addition, the Company recorded an adjustment of $66.4
million (which increased retained earnings) to reduce the Deconsolidation
Adjustment to $144.8 million. These adjustments resulted from 1998 tax filings
in the third quarter of 1999.
At December 31, 1999, the Company had regular NOL carryforwards for federal
income tax purposes of approximately $683 million, which are available to offset
future federal taxable income, if any, through 2009. In addition, the Company
had alternative minimum tax credit carryforwards of approximately $70 million
which are available to offset future federal regular income taxes, if any, over
an indefinite period. The IRS is examining the 1991 through 1995 federal income
tax returns of the Company and any NOL carryforwards are subject to review and
disallowance, in whole or in part, by the IRS.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
109, ACCOUNTING FOR INCOME TAXES, a deferred tax liability has not been
recognized for the base year reserves of the Bank. The base year reserves are
generally the balance of the tax bad debt reserve as of December 31, 1987
reduced proportionately for reductions in the Bank's loan portfolio since that
date. At December 31, 1999, the amount of those reserves was $305 million. The
amount of the unrecognized deferred tax liability at December 31, 1999 was $107
million. Circumstances that may require an accrual of this unrecorded tax
liability are a failure to meet the definition of a "bank" for federal income
tax purposes, dividend payments in excess of tax earnings and profits, and other
distributions, dissolution, liquidation or redemption of stock, excluding
preferred stock meeting certain conditions.
The Company is subject to taxation in certain states in which it operates,
including California. For California franchise tax purposes, savings
institutions are taxed as "financial corporations." Financial corporations are
taxed at the general corporate franchise tax rate plus an "in lieu" rate based
on their statutory exemption from local business and personal property taxes.
Page 28
BALANCE SHEET ANALYSIS
At December 31, 1999, GS Holdings' assets totalled $57.0 billion, up from
$54.8 billion at December 31, 1998. The increase was primarily due to growth in
loans receivable and the investment portfolio, primarily mortgage-backed
securities available for sale, partially offset by a reduction in loans held for
sale and mortgage-backed securities held to maturity. (For a discussion of the
loan portfolio, see "Loan Portfolio.") The growth in interest-earning assets was
largely funded by increased borrowings from the FHLB. For further information on
the Company's management of assets and liabilities, as well as information on
the Company's liquidity and capital, see --"Risk Management," --"Liquidity" and
- --"Capital Management."
INVESTMENT ACTIVITIES
The Bank is required by OTS regulations to maintain a specified minimum
amount of liquid assets which may be invested in specified securities. The Bank
is also permitted to invest in certain other types of securities. Securities
balances (including cash equivalent securities) exceeding minimum federal
requirements are subject to change over time based on the Bank's asset/liability
funding needs and interest rate risk management objectives. The Bank's liquidity
levels take into consideration anticipated future cash flows and all available
sources of credit. Liquidity is maintained at levels management believes are
appropriate to assure future flexibility in meeting anticipated funding needs,
including deposit withdrawal requests, loan funding commitments, and other
investment or restructuring requirements. For further information regarding
liquidity, refer to --"Liquidity."
CASH EQUIVALENTS
Cash equivalents totalled $592.9 million and $968.0 million at December 31,
1999 and 1998, respectively. The Company sells federal funds, purchases
securities under agreements to resell, and invests in interest-bearing deposits
in other banks to help meet the Bank's regulatory liquidity requirements and as
temporary holdings until the funds can be otherwise deployed or invested.
SECURITIES AVAILABLE FOR SALE
Securities available for sale totalled $1.1 billion and $770.7 million at
December 31, 1999 and 1998, respectively. They consist primarily of U.S.
government and agency obligations. At December 31, 1999 and 1998, marketable
equity securities include GS Holdings' investment in Precept Business Services,
Inc. of $0.7 million and $2.1 million, respectively, which was acquired by the
Bank in a distribution from ACS and distributed by the Bank to GS Holdings as a
dividend in kind during the second quarter of 1998. For further information,
refer to note 8 of the Company's Notes to Consolidated Financial Statements.
SECURITIES HELD TO MATURITY
Securities held to maturity totalled $185.4 million and $251.0 million at
December 31, 1999 and 1998, respectively. They consist of commercial paper and
municipal securities. For further information, refer to note 9 of the Company's
Notes to Consolidated Financial Statements.
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities available for sale totalled $13.8 billion and
$12.9 billion at December 31, 1999 and 1998, respectively. At December 31, 1999,
and 1998, mortgage-backed securities available for sale included securities
totalling $928.7 million and $1.1 billion, respectively, which resulted from the
securitization of certain qualifying mortgage loans from the Bank's portfolio.
Mortgage-backed securities available for sale included $4.3 billion, and $5.6
billion of variable-rate securities as of December 31, 1999, and 1998,
respectively.
Page 29
GS Holdings maintains a significant portfolio of mortgage-backed securities
as a means of investing in housing-related mortgage instruments without the
costs associated with originating mortgage loans for portfolio retention and the
credit risk of default which arises in holding a portfolio of loans to maturity.
By investing in mortgage-backed securities, management seeks to achieve a
positive spread over the cost of funds used to purchase these securities.
Mortgage-backed securities available for sale are carried at fair value, with
unrealized gains and losses excluded from earnings and reported in a separate
component of stockholder's equity. Premiums and discounts on the purchase of
mortgage-backed securities are amortized or accreted as a yield adjustment over
the life of the securities using the interest method, with the amortization or
accretion effect of prepayments being adjusted based on revised estimates of
future repayments.
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which reduce credit risk. In addition, mortgage-backed securities
are more liquid than individual mortgage loans and may be used to collateralize
borrowings. Mortgage-backed securities issued or guaranteed by the Government
National Mortgage Association ("GNMA") are generally weighted at 0% for
risk-based capital purposes. Mortgage-backed securities issued or guaranteed by
the Federal National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC") (except interest-only securities or the residual
interests in collateralized mortgage obligations ("CMOs")) are generally
weighted at 20% for risk-based capital purposes, compared to a weight of 50% to
100% for residential loans.
The Company held privately issued CMOs with an aggregate carrying value of
$9.2 billion at December 31, 1999. The following represents all such investments
with a carrying value in excess of 10% of stockholder's equity (in millions):
Aggregate Aggregate Fair
Issuer Amortized Cost Market Value
------ -------------- ------------
ABN AMRO Mortgage Corp. $ 233 $ 229
BA Mortgage Securities, Inc. 535 518
Cendant Mortgage Corporation 385 374
Chase Mortgage Finance Corporation 485 469
Citicorp Mortgage Securities, Inc. 222 214
Countrywide Home Loans 593 571
First Nationwide Trust 334 315
GE Capital Mortgage Services, Inc. 742 718
Nationsbanc Montgomery Funding Corp. 188 180
Norwest Asset Securities Corp. 779 748
PNC Mortgage Securities Corp. 302 292
Residential Funding Mortgage Securities 1,191 1,155
At December 31, 1999, all of the mortgage-backed securities held by the
Company had one of the two highest credit ratings from one or more of the
national rating agencies except for $271.4 million, of which $76.7 million are
non-rated CMO residual class securities formed by Old California Federal's and
Glendale Federal's originations of residential mortgages. Credit ratings,
however, may be subject to revision or withdrawal at anytime by such rating
agencies. The mortgage-backed securities which GS Holdings purchases and
maintains in its portfolio include certain CMOs. A CMO is a special type of
pay-through debt obligation in which the stream of principal and interest
payments on the underlying mortgages or mortgage-backed securities is used to
create classes with different maturities and, in some cases, amortization
schedules, and a residual class of the CMO security being sold, with each such
class possessing different risk characteristics. The residual interest sold
represents any residual cash flows which result from the excess of the monthly
receipts generated by principal and interest payments on the underlying mortgage
collateral and any reinvestment earnings thereon, less the cash payments to the
CMO holders and any administrative expenses. As a matter of policy, due to the
risk associated with residual interests, the Company does not invest in the
residual interests of CMOs.
For further information on mortgage-backed securities available for sale,
refer to note 10 of the Company's Notes to Consolidated Financial Statements.
Page 30
MORTGAGE-BACKED SECURITIES HELD TO MATURITY
At December 31, 1999 and 1998, mortgage-backed securities held to maturity
totalled $2.1 billion and $2.8 billion, respectively. Mortgage-backed securities
held to maturity are carried at amortized cost unless there is evidence of a
decline in value that is other than temporary. Other than temporary declines in
value are charged to income in the periods in which the declines are determined.
Premiums and discounts on the purchase of mortgage-backed securities are
amortized or accreted as a yield adjustment over the life of the securities
using the interest method, with the amortization or accretion effect of
prepayments being adjusted based on revised estimates of future repayments.
For further information on mortgage-backed securities held to maturity,
refer to note 11 of the Company's Notes to Consolidated Financial Statements.
SOURCES OF FUNDS
Deposits, sales of securities under agreements to repurchase, advances from
the FHLB of San Francisco, sales, maturities and principal repayments on loans
and mortgage-backed securities and issuances of debentures and preferred stock
have been the major sources of funds for use in the Company's lending and
investment activities and other general business purposes. Management closely
monitors rates and terms of competing sources of funds on a daily basis and
utilizes the source which is most cost-effective. The availability of funds from
sales of loans and securities is influenced by the levels of general interest
rates and other market conditions. For additional information regarding the
Company's sources of funds, see --"Liquidity" and the Company's Consolidated
Statements of Cash Flows in the Consolidated Financial Statements.
Loan principal and interest payments are a relatively stable source of
funds, while customer deposit inflows and outflows, and loan repayments and
prepayments are influenced significantly by the levels of general interest rates
and money market conditions, and may fluctuate widely. Borrowings may be used to
compensate for reductions in normal sources of funds such as customer deposits.
Deposits
The Company offers a variety of deposit accounts designed to attract both
short-term and long-term deposits. There are no rate limitations on any type of
deposit account presently offered by the Company. At December 31, 1999, deposits
totalled $23.0 billion, compared with $24.6 billion at December 31, 1998.
December 31,
---------------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- -----------------------
Percent Percent Percent
Amount of Deposits Amount of Deposits Amount of Deposits
------ ----------- ------ ----------- ------ -----------
(dollars in millions)
Transaction accounts:
Passbook accounts $ 3,666 16.0% $ 3,372 13.7% $ 2,162 13.4%
Demand deposits:
Interest-bearing 1,974 8.6 1,865 7.6 1,149 7.1
Noninterest bearing 2,203 9.6 3,029 12.3 1,179 7.3
Money market deposit accounts 3,144 13.6 3,255 13.2 1,270 7.9
------- ----- ------- ----- ------- -----
Total transaction accounts 10,987 47.8 11,521 46.8 5,760 35.7
Term accounts 11,990 52.2 13,080 53.2 10,390 64.3
------- ----- ------- ----- ------- -----
22,977 100.0% 24,601 100.0% 16,150 100.0%
===== ===== =====
Accrued interest payable 61 39 52
Purchase accounting adjustments 3 7 1
------- ------- -------
Total $23,041 $24,647 $16,203
======= ======= =======
Page 31
Total deposits at December 31, 1999 and 1998 included escrow balances for
loans serviced for others (custodial accounts) of $813.7 million, and $1.5
billion, respectively. Deposit balances averaged $23.9 billion and $18.9 billion
during 1999 and 1998, respectively, with average interest rates of 3.73% and
4.15%, respectively. The weighted average stated interest rates on deposits at
December 31, 1999 and 1998 were 3.71% and 4.19%, respectively.
The following table presents the average balance and weighted average rate
paid on each deposit type of the Bank for the periods indicated, excluding the
impact of purchase accounting adjustments:
December 31,
--------------------------------------------------------------------------
1999 1998 1997
--------------------- ------------------- ---------------------
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
------- --------- ------- --------- ------- ---------
(dollars in millions)
Transaction accounts:
Passbook accounts $ 3,652 3.41% $ 2,685 3.68% $ 1,874 3.65%
Demand deposits:
Interest-bearing 1,908 0.93 1,352 1.00 1,150 1.07
Noninterest bearing 2,711 -- 1,995 -- 1,280 --
Money market deposit accounts 3,196 3.89 1,680 3.61 1,408 3.56
Term accounts 12,476 5.02 11,151 5.46 11,008 5.73
------- ------- -------
Total $23,943 3.73% $18,863 4.15% $16,720 4.55%
======= ======= =======
The following table sets forth the scheduled maturities of the Company's
term accounts by stated interest rate at December 31, 1999 (in millions):
2000 2001 2002 2003 2004 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
3.00% or less $ -- $ -- $ -- $-- $-- $-- $ --
3.01 - 4.00% 601 60 31 -- -- -- 692
4.01 - 5.00% 3,570 196 3 10 19 -- 3,798
5.01 - 6.00% 4,273 2,500 94 64 25 1 6,957
6.01 - 7.00% 161 65 132 4 15 2 379
7.01 - 8.00% 75 42 3 -- 6 2 128
8.01 - 9.00% 35 -- -- -- -- -- 35
Over 10% 1 -- -- -- -- -- 1
------ ------ ---- --- --- -- -------
Total term accounts $8,716 $2,863 $263 $78 $65 $5 $11,990
====== ====== ==== === === == =======
The following table sets forth remaining maturities for the Company's term
deposits in amounts of $100,000 or more at December 31, 1999 (in millions):
3 months or less $ 768
Over 3 months but within 6 months 595
Over 6 months but within 12 months 627
Over 12 months 748
------
$2,738
At December 31, 1999, the aggregate amount outstanding of certificates of
deposit of $100,000 or larger at the Company was $2.7 billion, compared with
$2.9 billion at December 31, 1998. Deposits held by foreign investors at the
Bank totalled $92.3 million and $101.0 million at December 31, 1999 and 1998,
respectively.
Page 32
The Bank's deposit accounts are held primarily by individuals residing in
the vicinity of its retail branch offices located in California and Nevada. The
Bank has emphasized, and will continue to emphasize, a retail branch network for
attracting deposits. Key market areas, particularly the West Coast region, will
continue to be targeted for expansion of retail deposits and the cross-selling
of additional consumer products.
The Bank issues certificates of deposit through direct placement programs
and national investment banking firms ("Brokered Deposits"). These deposits are
usually in amounts less than $100,000 and are obtained from a diverse customer
base. These funds are generally more costly than traditional passbook and money
market deposits and are more volatile as a source of funds because of their
sensitivity to the rates offered. However, they are used to supplement retail
customer deposits in raising funds for financing and liquidity purposes. At
December 31, 1999, California Federal had $390 million of Brokered Deposits
outstanding, representing 1.70% of total deposits. For more information on
deposits, refer to note 18 of the Company's Notes to Consolidated Financial
Statements.
BORROWINGS
The Company and the Bank utilize various borrowings as alternative sources
of funds for their business needs. These sources have included securities sold
under agreements to repurchase, FHLB advances, senior and subordinated
debentures and the purchase of federal funds.
SHORT-TERM BORROWINGS. Short-term borrowings consist of securities sold
under agreements to repurchase, federal funds purchased, and short-term FHLB
advances. These instruments are discussed more fully in the subsequent sections.
The following table sets forth for the Company each category of borrowings
due within one year, including the average amount outstanding and the maximum
amount outstanding at the end of the period. Amounts and rates reflected in the
table exclude accrued interest payable and purchase accounting adjustments.
At or for the year ended December 31,
------------------------------------------
1999 1998 1997
---- ---- ----
(dollars in millions)
Securities sold under agreements to repurchase:
Average balance outstanding $ 4,959 $2,766 $2,275
Maximum amount outstanding at any
month end during the period 5,996 4,264 2,870
Balance outstanding at end of period 5,207 4,222 1,829
Average interest rate during the period 5.24% 5.56% 5.68%
Average interest rate at end of period 5.48 5.05 5.78
Federal funds purchased:
Average balance outstanding $ 54 $ 76 $ 95
Maximum amount outstanding at any
month end during the period 160 220 153
Balance outstanding at end of period 55 138 130
Average interest rate during the period 5.12% 5.26% 5.59%
Average interest rate at end of period 5.50 5.00 6.50
Short-term FHLB advances:
Average balance outstanding $ 8,107 $5,577 $5,561
Maximum amount outstanding at any
month end during the period 11,270 7,880 6,606
Balance outstanding at end of period 11,270 7,880 5,263
Average interest rate during the period 5.40% 5.68% 5.76%
Average interest rate at end of period 5.84 5.34 5.88
At December 31, 1999, the Company had an estimated additional secured
borrowing capacity of $3.8 billion with the FHLB and other sources.
Page 33
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. The Company enters into
reverse repurchase agreements whereby it sells marketable U.S. government and
mortgage-backed securities and CMOs with a commitment to repurchase the
securities at a specified price and on a specified date. These agreements are
recorded as financings, and the obligation to repurchase assets sold is
reflected as a liability on the consolidated balance sheet. The carrying value
of assets underlying the agreements is included in the asset accounts. The
securities underlying the agreements are delivered to the dealers who arranged
the transactions. The counterparty to the repurchase agreement may have loaned
the securities to other parties in the normal course of their operations;
however, all agreements require that the identical securities be resold to the
Company at the maturity of the agreements. In order to reduce possible risks
associated with these borrowing transactions, the reverse repurchase agreements
are generally entered into with national investment banking firms and major
commercial banks which are primary dealers in these securities.
FEDERAL FUNDS PURCHASED. California Federal must meet legal reserve
requirements on a daily basis by maintaining a specified total amount of
deposits at the Federal Reserve Bank and vault cash. Occasionally, the Bank may
borrow funds from another bank with excess reserves to meet its requirements for
the day. These borrowings are repaid with interest at maturity based on the
federal funds rate.
FHLB ADVANCES. The FHLB functions in a credit capacity for savings
institutions and certain other home financing institutions. California Federal
is a member of the FHLB System. Among other benefits, FHLB membership provides
the Bank with a central credit facility from which it may generally borrow from
its district FHLB through advances secured by its home mortgages and other
assets (principally securities which are obligations of, or guaranteed by, the
U.S. government). Such advances may be made pursuant to several different credit
programs made available from time to time by the FHLB to meet seasonal activity
and other withdrawals of deposit accounts and to expand lending, each of which
has its own interest rate and range of maturities. The FHLB prescribes the
acceptable uses, as well as limitations on the size of such advances. Depending
on the program, such limitations are based either on a fixed percentage of the
institution's net worth or on the FHLB's assessment of the institution's
creditworthiness.
The following table presents the carrying value and weighted average rate
paid on FHLB advances for the periods indicated, excluding accrued interest
payable and the impact of purchase accounting adjustments (dollars in millions):
1999 1998 1997
--------------------- --------------------- ---------------------
Carrying Average Carrying Average Carrying Average
Value Rate Value Rate Value Rate
----- ----- ----- ---- ----- ----
Fixed-rate borrowings $19,971 5.61% $15,427 5.38% $5,447 5.88%
Variable-rate borrowings 3,365 6.04 4,571 5.53 4,074 5.95
------- ------- ------
Total FHLB advances $23,336 5.67% $19,998 5.41% $9,521 5.91%
======= ======= ======
The Bank is required to own capital stock in the FHLB in an amount equal to
the greater of:
(a) 1% of the aggregate outstanding principal amount of its
residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each calendar year,
(b) 0.3% of total assets, or
(c) 5% of its FHLB advances.
The Bank currently complies with FHLB stock ownership requirements.
For further information, refer to note 20 of the Company's Notes to
Consolidated Financial Statements.
Page 34
INTEREST RATE SWAP AGREEMENTS. The Company has used interest rate swap
agreements to adjust its interest rate risk exposure on variable-rate reverse
repurchase agreements and FHLB advances. The Company had interest rate swap
agreements with a notional principal amount of $2.6 billion outstanding at
December 31, 1999. There were no interest rate swap agreements outstanding at
December 31, 1998. The notional amount does not represent amounts exchanged by
the parties and thus, is not a measure of the Company's exposure at that time.
The Company receives a variable rate based on the London Interbank Offered Rate
("LIBOR") and pays a fixed rate under these agreements. In order to reduce
possible counterparty nonperformance risk, the Company has entered into interest
rate swap agreements only with primary dealers in U.S. government securities and
the FHLB of San Francisco.
GS HOLDINGS NOTES. On August 6, 1998, GS Escrow, which subsequently merged
into GS Holdings, issued $2 billion principal amount of fixed and floating rate
notes (the "GS Holdings Notes"). The GS Holdings Notes are unsecured and
unsubordinated obligations of GS Holdings and rank in right of payment with all
other unsubordinated and unsecured indebtedness of GS Holdings. The terms and
conditions of the respective note indentures impose restrictions that affect,
among other things, the ability of GS Holdings to incur debt, pay dividends or
make distributions, engage in a business other than holding the common stock of
the Bank and similar banking institutions, make acquisitions, create liens, sell
assets and make certain investments. For additional information on the GS
Holdings Notes and other borrowings, refer to note 20 of the Company's Notes to
Consolidated Financial Statements.
MORTGAGE BANKING ACTIVITIES
Mortgage banking activities allow the generation of fee income without the
associated capital retention requirements attributable to traditional real
estate lending activities. Generally, the Company originates fixed-rate 1-4 unit
residential loans for sale in the secondary mortgage market. The Company employs
forward sale hedging techniques to minimize the interest rate and pricing risks
associated with the origination and sale of such loans. The Company has also
entered into one-year flow agreements with third party lenders whereby the
Company has committed to purchase newly originated mortgage loan servicing
rights for monthly or quarterly deliveries up to an agreed upon total principal
amount.
At the time of origination, management identifies 1-4 unit residential
loans that are expected to be sold in the foreseeable future. At December 31,
1999, management had identified $729.1 million of 1-4 unit residential loans as
held for sale. These loans have been classified as loans held for sale, net in
the consolidated balance sheet at December 31, 1999 and are recorded at the
lower of aggregate amortized cost or market value. At December 31, 1999, the
Company had forward and whole loan sale commitments to sell loans totalling
$903.5 million. In addition, FNMC had entered into commitments to originate and
purchase fixed- and variable-rate loans (mortgage loan pipeline) of $2.4
billion.
At December 31, 1999, the Company had $1.3 billion in mortgage servicing
rights, an increase of $328.8 million from December 31, 1998. The 1-4 unit
residential loans serviced for others (including loans sub-serviced for others
and excluding loans serviced for the Bank) totalled $72.9 billion in December
31, 1999, an increase of $7.5 billion from December 31, 1998. While the serviced
for others portfolio has grown 13% in unpaid principal balance ("UPB") since
December 31, 1998, the loan count has actually declined by 11,000 loans between
the two years, as the average loan balance serviced has increased from $82,000
in 1998 to $94,000 at the end of 1999. This is due in part to the 1999 Servicing
Sale of low UPB servicing (49,000 loans with $2.0 billion UPB) that FNMC
effected during the year.
The servicing portfolio of FNMC, including loans serviced for the Bank,
approximated $96.5 billion and 944,927 loans as of December 31, 1999.
Substantially all of FNMC loans are serviced in a 230,000 square foot facility
in Frederick, Maryland. Mortgage loan sales, primarily fixed-rate loans sold to
FNMA, FHLMC, GNMA and private investors, totalled $9.7 billion and $7.9 billion
in 1999 and 1998, respectively.
First Nationwide Bank, A Federal Savings Bank ("Old FNB"), Old California
Federal and Glendale Federal occasionally sold 1-4 unit residential loans under
recourse provisions; such liabilities were assumed by the Company in its 1994
acquisition of the assets and certain liabilities of Old FNB (the "FN
Acquisition"), in the Cal Fed Acquisition, and in the Glen Fed Merger. As of
December 31, 1999, the balance of 1-4 unit residential loans sold with certain
recourse provisions totalled $896.8 million.
Page 35
During 1999 and 1998, FNMC acquired mortgage-servicing rights on loan
portfolios of $14.5 billion and $31.2 billion, respectively. The Company sold
servicing rights on portfolios of approximately $2.1 billion and 50,700 loans in
1999, $144.2 million and 3,527 loans in 1998, and $2.3 billion and 52,000 loans
in 1997. Gains of $16.3 million, $0.3 million and $14.0 million were recognized
on these sales in 1999, 1998 and 1997, respectively.
During 1999, the Company, through FNMC, originated $8.4 billion and sold
$9.7 billion of 1-4 unit residential loans held for sale. Gross revenues from
mortgage loan servicing activities for 1999 totalled $281.8 million, an increase
of $61.2 million from 1998. Gross loan servicing fees for 1999 and 1998 were
reduced by $208.2 million and $156.2 million, respectively, of amortization of
servicing rights to arrive at net loan servicing fees of $73.6 million and $64.5
million, respectively, for FNMC.
The Company, through FNMC, has generally retained the right to service the
loans it has sold. FNMC collects payments of principal and interest from the
borrower and, after retaining a servicing fee, remits the balance to the
investors. When a loan is sold and MSRs are retained, a portion of the cost of
originating the mortgage loan is allocated to the MSR based on its relative fair
market value. The servicing asset is amortized in proportion to, and over the
period of, estimated net servicing income. The net gains on sales of 1-4 unit
residential loans during 1999, 1998 and 1997 totalled $14.9 million, $32.3
million and $13.1 million, respectively, and included amounts related to the
capitalization of originated and excess MSRs of $193.9 million, $170.0 million
and $120.5 million, respectively. The Company monitors the prepayments on the
loans serviced for investors and reduces the balance of the asset if the actual
prepayments are in excess of the estimated prepayment trends used to record the
original asset. The Company's assumptions relative to the prepayment speed,
discount and servicing fee rates are reviewed periodically to reflect current
market conditions and regulatory requirements. The Company measures the
impairment of MSRs based on the difference between the carrying amount of the
MSRs and their current fair value. At December 31, 1999 and 1998, the Company
believes that no allowance for impairment of the MSRs was necessary.
At December 31, 1999, the Company, through FNMC, owned rights to service
approximately $72.9 billion of whole loans, participation interests and
mortgage-backed securities for others. These loans have an average balance of
$94,165, a weighted average coupon rate of 7.46%, a weighted average maturity of
284 months and a service fee spread of 0.40%. The greater than 30 day
delinquency rate on these loans (including delinquent bankruptcies, foreclosed
loans and loans in foreclosure) at December 31, 1999 was 1.30%.
For information regarding the effect of interest rate changes or mortgage
banking activities, see --"Risk Management--Mortgage Banking Risk Management."
LOAN PORTFOLIO
The Company's principal lending activity is the origination of adjustable
and fixed-rate mortgage loans secured by residential real estate. The Company
also originates certain commercial real estate loans as well as consumer loans,
which principally consist of adjustable-rate home equity lines of credit. In
connection with the Glen Fed Merger, the Company acquired a portfolio of
business banking loans, which primarily have adjustable rates. Prior to 1997,
the commercial real estate lending activity of the Company had been limited to
restructuring and refinancing existing portfolio loans, and multi-family loans
originated under its affordable housing program. The Company commenced the
origination of multi-family (5+ units) and commercial loans on a limited basis
during 1997. The Company also participates in a number of other affordable
housing programs and initiatives. During 1999, increased focus was placed on
expanding the percentage of non-residential loans in the total portfolio. As a
result, originations for 5+ residential and commercial real estate loans
increased from $313 million in 1998 to $733 million in 1999. In addition, the
commercial banking group was expanded to heighten focus on small business and
middle market lending.
Page 36
The following table reflects activity related to loans receivable,
excluding loans held for sale:
Year Ended December 31,
-----------------------
1999 1998
---- ----
(in millions)
Balance at beginning of period $30,784 $19,921
Originations:
1-4 unit residential 7,344 3,457
5+ unit residential 568 181
Commercial real estate 165 132
Equity line 363 210
Other consumer 61 42
Business banking 610 81
Purchases:
Glen Fed Merger -- 14,562
Auto One 486 317
GSAC Acquisition -- 112
Other 1,712 409
Sales (19) (11)
Foreclosures (102) (119)
Payments, payoffs and other (7,645) (8,510)
------- -------
Balance at end of period $34,327 $30,784
======= =======
The composition of the Company's loan portfolio, excluding loans held for
sale, is as follows:
At December 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(in millions)
Real estate loans:
1-4 unit residential $26,966 $23,493 $14,071 $ 6,118 $ 5,423
5+ unit residential 2,881 2,641 3,035 2,164 1,854
Commercial real estate 2,565 2,940 2,146 1,978 1,716
Land 32 33 5 11 9
Construction 8 22 1 6 --
------- ------- ------- -------- -------
Total real estate loans 32,452 29,129 19,258 10,277 9,002
------- ------- ------- ------- -------
Equity-line loans 433 385 355 243 111
Other consumer loans 237 242 107 55 59
Purchased auto loans 698 487 171 -- --
Business banking loans 498 529 22 -- --
Commercial loans 9 12 8 30 2
------- ------- ------- ------- -------
Total loans receivable 34,327 30,784 19,921 10,605 9,174
------- ------- ------- ------- -------
Less:
Deferred loan fees, costs, discounts
and premiums, net (174) (82) (47) (5) (19)
Allowance for loan losses 555 589 419 247 210
Purchase accounting adjustments, net (7) (4) 125 150 153
------- ------- ------- ------- -------
Loans receivable, net $33,953 $30,281 $19,424 $10,213 $ 8,830
======= ======= ======= ======= =======
In addition to the interest earned on its loans, the Company charges fees
for loan originations, prepayments, modifications, late payments, changes of
property ownership and other similar services. The amount of this fee income
varies with the volume of loan originations, prepayments, the general economic
conditions affecting the portfolio and other competitive factors affecting the
mortgage market.
Generally, late charges are assessed when payments are delinquent. On loans
secured by real estate, these charges are generally limited to 4% to 6% of the
overdue payment of principal and interest and cannot be imposed until the
payment is more than 15 days late, in accordance with the contractual terms of
the loans and regulatory requirements in effect when the loans were made.
Page 37
The following table presents the Company's real estate loan portfolio
(excluding loans held for sale), by collateral type, interest rate type and
state concentration at December 31, 1999:
1-4 unit 5+ unit Commercial
Residential Residential and Other Total Real
------------------- ------------------- ------------------ Estate % of
State Variable Fixed Variable Fixed Variable Fixed Loans Total
- ----- -------- ----- -------- ----- -------- ----- ----- -----
(dollars in millions)
California $16,601 $4,689 $2,253 $354 $1,873 $434 $26,204 80.74%
New York 291 175 18 6 18 18 526 1.62
Florida 611 281 55 7 50 15 1,019 3.14
Nevada 199 76 10 16 6 3 310 0.96
Illinois 215 98 9 5 16 23 366 1.13
Texas 241 153 8 32 9 10 453 1.40
Other states (1) 2,111 1,225 51 57 86 44 3,574 11.01
------- ------ ------ ---- ------ ---- ------- ------
Total $20,269 $6,697 $2,404 $477 $2,058 $547 $32,452 100.00%
======= ====== ====== ==== ====== ==== ======= ======
- --------
(1) Real estate loans involving property located in 44 states, Puerto Rico and
the District of Columbia; not more than 1% of the total amount of such
loans are located in any one state.
The following table summarizes the Company's loan portfolio, excluding
loans held for sale, at December 31, 1999, based upon contractually scheduled
principal payments allocated to the indicated maturity categories. This table
does not reflect expected prepayments.
Due
Due Over One Due
Within But Within Over
One Year Five Years Five Years Total
-------- ---------- ---------- -----
(in millions)
Real estate loans:
1-4 unit residential
Fixed-rate $ 43 $ 59 $ 6,595 $ 6,697
Variable-rate 6 32 20,231 20,269
5+ unit residential
Fixed-rate 11 56 410 477
Variable-rate 104 490 1,810 2,404
Commercial real estate and other
Fixed-rate 38 127 382 547
Variable-rate 212 1,148 698 2,058
---- ------ ------- -------
Total 414 1,912 30,126 32,452
---- ------ ------- -------
Commercial and consumer loans:
Fixed-rate 115 761 133 1,009
Variable-rate 294 108 464 866
---- ------ ------- -------
Total 409 869 597 1,875
---- ------ ------- -------
Total loans receivable $823 $2,781 $30,723 $34,327
==== ====== ======= =======
1-4 UNIT RESIDENTIAL LENDING
The Company currently offers three primary 1-4 unit residential ARM
programs, and a variety of 1-4 unit fixed- rate programs with maturities ranging
from 15 to 30 years. The Company's 1-4 unit residential loans are originated by
FNMC through three channels: retail, wholesale and correspondent. The Company,
through its acquisitions, has a significant retail origination presence in
California. Wholesale originations (where loans are acquired from independent
loan brokers) are conducted through regional wholesale offices throughout the
United States. The Company also purchases newly originated loans from
correspondents throughout the United States and through contracts to administer
various housing bond and other private mortgage lending programs. The Company
originates adjustable-rate mortgage ("ARM") loans on 1-4 unit residential real
estate, which have generally been held for
Page 38
investment, and fixed-rate 1-4 unit residential loans, which are generally held
for sale to the secondary mortgage market.
Adjustable-rate programs include loans which:
(a) provide for monthly interest rate adjustments after the third month
based upon the twelve month average of the monthly one year Treasury
Bill index,
(b) provide for annual rate adjustments based upon the weekly average yield
on U.S. Treasury securities adjusted to a constant maturity of one year,
(c) provide for annual rate adjustments based upon the weekly average yield
on U.S. Treasury securities adjusted to a constant maturity of one year
after an initial fixed-rate period of three, five or seven years.
None of the ARM products currently offered is convertible. A variety of
features are incorporated into ARM loans to protect borrowers from unlimited
adjustments in interest rates and payments. All ARMs have lifetime caps which
limit the amount of rate increases over the life of the loan. ARMs whose rates
adjust annually have rate caps which limit the amount that rates can change to
two percentage points per year. Loans which adjust monthly based upon the twelve
month average of the monthly one year Treasury Bill index limit payment changes
to no more than 7.5% of the payment amount per year. This may lead to monthly
payments which are less than the amount necessary to amortize the loan to
maturity at the interest rate in effect for any particular month. In the event
that the monthly payment is not sufficient to pay interest accruing on the loan
during the month, this deficiency is added to the loan's principal balance
(i.e., negative amortization). The total outstanding principal balance for a
particular loan under this program is not allowed to exceed 110% of the original
loan amount as a result of negative amortization.
The Company's portfolio of 1-4 unit residential mortgage loans contains
other loan products which may negatively amortize, generally to not more than
125% of the original loan amount. Every five years and at any time the loan
reaches its maximum amount, the loan payment is recalculated to the payment
sufficient to repay the unpaid principal balance in full at the maturity date.
As of December 31, 1999, the Company's capitalized interest relative to such 1-4
unit residential loans was approximately $16.5 million. This amount represents
approximately 0.41% of the approximately $4.0 billion of 1-4 unit residential
ARMs that have the potential to experience negative amortization. The Company
also originates 15- and 30-year fully amortizing 1-4 unit fixed-rate residential
loans under a variety of fixed-rate programs, primarily for resale in the
secondary mortgage market. When 1-4 unit residential loans are sold, FNMC
normally retains the servicing of the loan. On all ARM products, the Company
offers a three-year prepayment penalty pricing option, wherein the borrower
receives favorable pricing in exchange for agreeing to pay a fee in the event
that the borrower prepays more than 20% of the original principal balance in any
rolling twelve-month period during the first three years after the inception of
the loan. On all fixed-rate products except for 15-year conforming loans, the
Company offers a similar prepayment penalty pricing option that applies during
the first five years after inception of the loan. The penalty does not apply if
the prepayment occurs in connection with the sale of the property securing the
loan. FNMC originated $9.1 billion of loans with prepayment penalty options for
the Company during 1999. See "--Mortgage Banking Activities" for a further
discussion of these activities.
The following table summarizes 1-4 unit residential loan originations for
the years ended December 31, 1999 and 1998 (in millions):
1999 1998
----------------------------------- ------------------------------------
Production Channel ARM Fixed Total ARM Fixed Total
------------------ --- ----- ----- --- ----- -----
Retail and portfolio retention $ 692.1 $1,432.2 $ 2,124.3 $ 315.1 $1,434.5 $ 1,749.6
Wholesale 4,368.4 2,866.8 7,235.2 2,325.5 4,166.3 6,491.8
Correspondent lending 1,899.2 2,478.3 4,377.5 680.7 1,776.3 2,457.0
Other 1.6 1,976.4 1,978.0 0.2 1,727.8 1,728.0
--------- -------- --------- -------- -------- ---------
$6,961.3 $8,753.7 $15,715.0 $3,321.5 $9,104.9 $12,426.4
======== ======== ========= ======== ======== =========
The Company attempts to mitigate the credit risks associated with mortgage
lending activities by the use of carefully developed underwriting standards.
Substantially all 1-4 unit residential loans originated are underwritten to
conform with standards adopted by FNMA, FHLMC, GNMA, or other secondary market
investors. Accordingly, the
Page 39
Company's underwriting standards include LTV ratios and maximum loan amounts for
both fixed-rate loans and ARMS that closely mirror secondary market
requirements.
LOANS HELD FOR SALE
Activity related to loans held for sale for the years ended December 31,
1999 and 1998 is summarized as follows:
1999 1998
---- ----
(in millions)
Balance at beginning of period $ 2,367 $ 1,483
Purchases and originations 8,755 9,136
Sales (9,703) (7,892)
Payments, payoffs and other (690) (360)
------- -------
Balance at end of period $ 729 $ 2,367
======= =======
Loans held for sale are carried at the lower of aggregate amortized cost or
market value; substantially all are 1-4 family fixed rate residential loans.
MULTI-FAMILY, COMMERCIAL AND OTHER REAL ESTATE LENDING
While the Company has historically originated multi-family, commercial, and
other real estate loans as part of affordable housing programs, it began to
originate other commercial real estate loans during 1997 and 1998 on a limited
basis. These efforts were enhanced during 1999, in line with the Company's goal
to increase its overall portfolio percentage of non-residential loans. The
Company's loan portfolio now includes loans that are secured by multi-family
residential, commercial, industrial, office and retail real estate properties.
The Company's variable-rate multi-family and commercial real estate loans
have a maximum amortized loan term of 30 years with loans having balloon
payments due in one to 15 years. ARMs primarily adjust with the FHLB 11th
District Cost of Funds or the six-month Treasury Bill indices with a monthly or
semi-annual rate adjustment. The terms and characteristics of the ARMs
originated for multi-family and commercial real estate lending purposes are
similar to those for residential lending. As such, many of the same risks and
protections related to residential borrowers are present in the multi-family and
commercial real estate portfolios, including the potential for negative
amortization. Negative amortization for multi-family and commercial real estate
loans is allowed to increase the outstanding principal balance to 110% of the
original loan amount. If the loan reaches 110% of the original loan amount, all
future interest rate increases will increase the monthly payment to amortize the
loan over the remaining life of the loan. At December 31, 1999, the Company's
capitalized interest relative to such loans was approximately $0.4 million,
which represents approximately 0.01% of the $2.9 billion of multi-family and
commercial real estate loans that have the potential to experience negative
amortization.
At December 31, 1999 and 1998, the multi-family and commercial real estate
loan portfolio totalled $5.4 billion and $5.6 billion, respectively. The Company
originates multi-family and commercial real estate loans through its Commercial
Real Estate Group which has loan production and asset management offices located
in San Francisco, Los Angeles, Dallas and Phoenix. New loan originations are
produced through several sources, including direct borrower solicitation,
mortgage brokerage referrals, real estate sales agent referrals, and loan
purchases from other investors or originators.
Loans are originated or purchased which meet stated underwriting guidelines
and pricing guidelines established by the Commercial Real Estate Subcommittee
and approved by the Credit Policy Committee of the Bank. Generally multi-family
secured loans have LTV ratios of 75% or below and debt coverage ratios ("DCRs")
of 1.20 or above. Loans secured by commercial properties (shopping centers,
office buildings, warehouses, etc.) generally have LTVs of 70% or below and DCRs
of 1.25 and above.
Page 40
The following table summarizes origination activity for multi-family,
commercial and other real estate loans for the years ended December 31, 1999 and
1998 (in millions):
1999 1998
---- ----
5+ unit residential $568 $181
Commercial real estate 165 132
---- ----
$733 $313
A portion of the Company's MSRs, which are rights to service mortgages held
by others, were acquired from Old FNB, Old California Federal, and Glendale
Federal which had sold multi-family and commercial real estate loans subject to
certain recourse provisions. These recourse liabilities were assumed by the
Company in the FN Acquisition, the Cal Fed Acquisition and the Glen Fed Merger.
At December 31, 1999, the principal balance of loans sold with recourse totalled
$2.1 billion.
CONSUMER LENDING
The Company's consumer loan originations are primarily concentrated in home
equity lending. The portfolio is geographically dispersed across California and
Nevada and correlates closely to retail deposit branch distribution. At December
31, 1999, the home equity portfolio totalled $433 million or 64.6% of the total
consumer loan portfolio of $670 million. At December 31, 1998, the home equity
portfolio totalled $385 million or 61.4% of the total consumer loan portfolio of
$627 million.
The following table summarizes consumer loan origination activity for the
years ended December 31, 1999 and 1998 (in millions):
1999 1998
---- ----
Equity line $363 $210
Other consumer 61 42
---- ----
$424 $252
==== ====
The Company offers a prime-based interest rate home equity line of credit
on owner-occupied residential and nonowner-occupied properties. In determining
the amount of credit to be extended, all loans secured by the collateral
properties are aggregated and compared to the appraised value of the properties.
The Company's policy is to extend credit up to a maximum combined LTV ratio of
100%.
Other consumer loan products include: fixed-rate home equity installment
loans, second trust deed residential loans, credit and retail/consumer loans,
mobile home loans, and unsecured lines of credit. The Company generates consumer
loan applications at its retail branches. In addition, the Company conducts
direct-mail solicitations, principally of its existing customers, for secured
loans. All consumer loan processing, servicing and collection operations are
located in Sacramento, California.
SUB-PRIME AUTO LENDING
The Company commenced purchases of sub-prime auto loans in connection with
the Auto One Acquisition. Auto One has been involved in the sub-prime auto
lending business for over ten years, and has an established servicing platform
for such loans. At December 31, 1999 and 1998, the Company's sub-prime purchased
auto loan portfolio totalled $698 million and $487 million, respectively. Such
loans were purchased in bulk from a third party or from independent automobile
dealers after the acquisition of Auto One. These purchased loans have fixed
interest rates, with terms to maturity based upon the mileage on the collateral
vehicle, up to a maximum of 60 months. Approximately 78% of Auto One's current
purchases are collateralized with vehicles two years old or newer. Underwriting
on loans purchased from dealers is performed by Auto One personnel prior to the
purchase.
Please refer to note 2 of the Company's Notes to Consolidated Financial
Statements for a complete discussion of the accounting for purchased sub-prime
auto loans.
Page 41
Activity related to purchased sub-prime loans for the years ended December
31, 1999 and 1998 is summarized as follows (in millions):
Allocated
Contractual Nonaccretable Allowance Purchased
Payments Contractual Accretable for Loan Sub-Prime
Receivable Cash Flows Yield Losses Loans, net
---------- ---------- ----- ------ ----------
Balance, December 31, 1997 $ 253 $ (47) $ (35) $ -- $ 171
Purchases and acquisitions 712 (136) (99) (5) 472
Repossessions & charge-offs (63) 43 -- -- (20)
Payments, payoffs & accretion (206) 17 48 -- (141)
Provision for loan losses -- -- -- (3) (3)
Reclassifications -- 2 (2) -- --
------ ----- ----- ---- -----
Balance, December 31, 1998 696 (121) (88) (8) 479
Purchases and acquisitions 750 (164) (115) -- 471
Repossessions & charge-offs (84) 60 (1) 1 (24)
Payments, payoffs & accretion (337) 29 80 -- (228)
Provision for loan losses -- -- -- (3) (3)
Allocation from allowance
for loan losses -- (7) -- 7 --
------ ----- ----- ---- -----
Balance, December 31, 1999 $1,025 $(203) $(124) $ (3) $ 695
====== ===== ===== ==== =====
BUSINESS BANKING
The Company's business banking program has four components: community
banking, commercial markets banking, agribusiness lending and Small Business
Administration ("SBA") lending. The Company's community business banking product
line includes business checking and savings products of various types, cash
management products and services, account analysis, payroll services, electronic
banking services, and merchant draft services. Community business banking
focuses primarily on businesses with annual sales of less than $10 million
located in the markets served by the Company's retail banking offices. To meet
the credit needs of these business customers, the Company offers a wide variety
of secured and unsecured prime-based lines of credit and term loans with
maturities up to ten years. The maximum credit commitment offered by community
business banking is $1 million. At December 31, 1999, total funded and unfunded
credit commitments under the community business banking group totalled $298
million, compared to $267 million at December 31, 1998.
The Company, through its commercial markets group, accommodates businesses
with annual sales of up to $150 million, but focuses primarily on businesses
with annual sales between $10 million and $75 million. The Company offers its
commercial markets group customers products including business checking
accounts, various cash management services, revolving lines of credit, accounts
receivable and inventory financing, and term loans. Specific loan terms are
determined based upon the financial strength of the borrower, the amount of
credit granted, and the type and quality of collateral available. At December
31, 1999, funded and unfunded credit commitments under the commercial markets
group totalled $220 million, compared to $131 million at December 31, 1998.
The Company's agribusiness lending program serves the Central Valley region
of California and specializes in production loans for crops such as cotton,
grapes, nuts, stone fruit and dairy operations, together with
agricultural-related businesses, such as processors and packers. At December 31,
1999, funded and unfunded credit commitments under the agribusiness lending
program totalled $215 million, compared to $230 million at December 31, 1998.
The SBA is a federal government agency created to assist small businesses
by providing guarantees of loans made to eligible small businesses. Through its
SBA lending program, the Company focuses on the long-term needs of small
businesses and provides long-term, variable and fixed-rate financing to
expanding businesses. The Company has been granted statewide preferred lender
status by the SBA. This designation allows the Company to approve SBA guaranteed
loan applications without prior review from the SBA, thereby accelerating the
decision-making
Page 42
process for small business loan applications. Preferred lenders, the highest
lender status awarded by the SBA, enjoy priority funding and service from the
SBA. Loans approved through the preferred lender program carry a maximum SBA
guarantee of 75%. At December 31, 1999, funded and unfunded credit commitments
under the SBA lending program totalled $152 million, compared to $185 million at
December 31, 1998. Additionally, the SBA servicing portfolio totalled $130
million and $173 million at December 31, 1999 and 1998, respectively.
At December 31, 1999, deposit relationships under the various business
banking product lines totalled $1.1 billion. The Company's business banking loan
products primarily have adjustable interest rates that are indexed to the Prime
Rate.
PROBLEM AND POTENTIAL PROBLEM ASSETS
The Company places a high degree of emphasis on the management of its asset
portfolio. The Company has three distinct asset management functions: performing
loan asset management, problem loan asset management and credit review. Each of
these three functions is charged with the responsibility of reducing the risk
profile within the residential, 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 development of
credit policies and performing credit risk analyses for all asset portfolios.
Savings associations are required to classify their assets on a regular
basis, establish prudent allowances for loan losses and make quarterly reports
of troubled asset classifications to the OTS. Assets must be classified as
"pass," "special mention," "substandard," "doubtful" or "loss." An asset is
generally designated as "special mention" if potential weaknesses are identified
that, if left uncorrected, would result in deterioration of the repayment
prospects for the asset. An asset, or a portion thereof, is generally classified
as "substandard" if it possesses a well-defined weakness which could jeopardize
the timely liquidation of the asset or realization of the collateral at the
asset's book value. Thus, these assets are characterized by the possibility that
the association will sustain some loss if the deficiencies are not corrected. An
asset, or portion thereof, is classified as "doubtful" if identified weaknesses
make collectibility or liquidation in full highly questionable and improbable.
An asset, or a portion thereof, that is considered to be uncollectible is
classified "loss." It should be noted that the Company does not maintain assets
in a loss classification category; rather, the carrying value of all troubled
assets is reduced by any amount considered to be uncollectible. The OTS has
authority to approve, disapprove or modify any asset classification or any
amount established as an allowance pursuant to such classification. Savings
associations must maintain adequate general valuation allowances in accordance
with generally accepted accounting principles and federal regulations for assets
classified as "substandard" or "doubtful" and either immediately write off
assets classified as "loss" or establish specific valuation allowances equal to
the amounts classified as "loss."
The Company has a comprehensive process for classifying assets, and asset
reviews are performed on a periodic basis. Such reviews are prioritized
according to an asset's risk characteristics, such as loan size, collateral type
and/or location, and potential loan performance problems. The objective of the
review process is to identify significant trends and determine the levels of
loss exposure to the Company that would require adjustments to specific and
general valuation allowances. If the quality of the Company's loans deteriorates
or if the allowance for loan losses is inadequate to absorb actual losses, a
material adverse effect on the Company's results of operations and financial
condition would be likely to result.
The Company considers a loan impaired when, based upon current information
and events, it is "probable" that it will be unable to collect all amounts due
(i.e. both principal and interest) according to the contractual terms of the
loan agreement. Any insignificant delay or insignificant shortfall in amount of
payments will not cause a loan to be considered impaired. In determining
impairment, the Company considers large non-homogeneous loans including
nonaccrual loans, troubled debt restructurings, and performing loans that
exhibit, among other characteristics, high LTV ratios, low debt-coverage ratios
or other indications that the borrowers are experiencing increased levels of
financial difficulty. Loans collectively reviewed for impairment by the Company
include all single-family loans, business banking loans under $100,000 and
performing multi-family and commercial real estate loans under $500,000,
excluding loans that have entered the workout process.
Page 43
The measurement of impairment may be based on (a) the present value of the
expected future cash flows of the impaired loan discounted at the loan's
original effective interest rate; (b) the observable market price of the
impaired loan; or (c) the fair value of the collateral of a collateral-dependent
loan. The Company bases the measurement of collateral-dependent impaired loans
on the fair value of the loan's collateral, less disposal costs. The amount, if
any, by which the recorded investment of the loan exceeds the measure of the
impaired loan's value is recognized by recording a valuation allowance. Lage
groups of smaller balance homogeneous loans are collectively evaluated for
impairment.
Cash receipts on impaired loans not performing according to contractual
terms are generally used to reduce the carrying value of the loan, unless the
Company believes it will recover the remaining principal balance of the loan.
Impairment losses are included in the allowance for loan losses. Upon
disposition of an impaired loan, loss of principal, if any, is recorded through
a charge-off to the allowance for loan losses.
At December 31, 1999 and 1998, loans that were considered to be impaired
totalled $123.6 million and $135.2 million, respectively, (of which $18.9
million and $32.5 million, respectively, were on nonaccrual status). The average
recorded investment in impaired loans during the years ended December 31, 1999
and 1998, was approximately $139.3 million and $137.1 million, respectively. For
the years ended December 31, 1999, 1998 and 1997, the Company recognized
interest income on those impaired loans of $9.5 million, $9.0 million and $10.5
million, respectively, which included $2.7 million, $1.2 million and $0.6
million, respectively, of interest income recognized using the cash basis method
of income recognition.
The following table presents the Company's non-performing loans, foreclosed
real estate, repossessed assets, troubled debt restructurings ("TDRs"), and
impaired loans as of the dates indicated. These categories are not mutually
exclusive; certain loans are included in more than one classification. Purchased
sub-prime auto loans are reflected as non-performing, impaired, or restructured
using each individual loan's contractual unpaid principal balance.
December 31, 1999 December 31, 1998
---------------------------------------- ----------------------------------------
Non-performing Impaired Restructured Non-performing Impaired Restructured
-------------- -------- ------------ -------------- -------- ------------
(in millions)
Real Estate:
1-4 unit residential $126 $ -- $ 2 $190 $ -- $ 3
5+ unit residential 6 34 5 16 55 9
Commercial and other 8 67 18 10 78 19
Land -- 2 -- -- 1 --
Construction -- -- -- 1 1 --
---- ---- --- ---- ---- ---
Total real estate 140 103 25 217 135 31
Non-real estate 11 21 -- 9 -- --
---- ---- --- ---- ---- ---
Total loans 151(a) $124(b) $25 226(a) $135(b) $31
==== === ==== ===
Foreclosed real estate, net 45 80
Repossessed assets 4 4
---- ----
Total non-performing assets $200 $310
==== ====
- -------------
(a) Includes loans securitized with recourse on non-performing status of $2.0
million and $6.0 million at December 31, 1999 and 1998, respectively.
(b) Includes $18.9 million and $32.5 million of non-performing loans and $13.7
million and $16.4 million of loans classified as troubled debt
restructurings at December 31, 1999 and 1998, respectively.
Page 44
IMPAIRED LOANS
The following table indicates outstanding balances of impaired loans, net
of purchase accounting adjustments, by collateral type, interest rate type and
state concentration as of December 31, 1999:
5+ unit Commercial
Residential and Other Total
------------------ ------------------ Impaired % of
State Variable Fixed Variable Fixed Loans Total
- ----- -------- ----- -------- ----- ----- -----
(dollars in millions)
California $30 $2 $60 $9 $101 81.45%
New York -- -- 3 -- 3 2.42
Illinois -- -- 6 -- 6 4.84
Hawaii -- -- 4 -- 4 3.23
Florida -- -- 8 -- 8 6.45
Other states (1) 2 -- -- -- 2 1.61
--- -- --- -- ---- ------
Total $32 $2 $81 $9 $124 100.00%
=== == === == ==== ======
- -----------
(1) Represents 4 states, none of which had impaired loans in excess of 1% of
the total.
TROUBLED DEBT RESTRUCTURED LOANS
The following table indicates loans classified by the Company as TDRs, net
of purchase accounting adjustments at the dates indicated:
At December 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(in millions)
Real Estate:
1-4 unit residential $ 2 $ 3 $ 2 $ 3 $ 8
5+ unit residential 5 9 7 55 147
Commercial and other 18 19 24 29 79
--- --- --- --- ----
Total restructured loans $25 $31 $33 $87 $234
=== === === === ====
The following table indicates outstanding balances of TDR loans, net of
purchase accounting adjustments, by collateral type, interest rate type and
state concentration as of December 31, 1999:
1-4 unit 5+ unit Commercial
Residential Residential and Other Total
----------- ----------- --------- TDR % of
State Variable Fixed Variable Fixed Variable Fixed Loans Total
- ----- -------- ----- -------- ----- -------- ----- ----- -----
(dollars in millions)
California $1 $1 $2 $1 $6 $-- $11 44.10%
New York -- -- 1 1 -- 12 14 55.90
-- -- -- -- -- --- --- ------
Total $1 $1 $3 $2 $6 $12 $25 100.00%
== == == == == === === ======
Interest income of $2.4 million, $3.0 million and $3.5 million was
recognized on restructured loans during the years ended December 31, 1999, 1998
and 1997, respectively. Had the loans performed in accordance with their
original terms, $2.4 million, $3.0 million and $3.6 million would have been
recognized during December 31, 1999, 1998 and 1997, respectively. There were no
non-real estate restructured loans in any of the past five years.
Page 45
NON-PERFORMING ASSETS
LOAN PORTFOLIO RISK ELEMENTS
When a borrower fails to make a contractually required payment on a loan,
the loan is characterized as delinquent. In most cases, delinquencies are cured
promptly. However, foreclosure proceedings, and in some cases workout
proceedings, are generally commenced if the delinquency is not cured. The
procedures for foreclosure actions vary from state to state, but generally if
the loan is not reinstated within certain periods specified by statute, the
property securing the loan can be acquired through foreclosure by the lender.
While deficiency judgments against the borrower are available in some of the
states in which the Company originates loans, the value of the underlying
collateral property is usually the principal source of recovery available to
satisfy the loan balance.
In general, loans are placed on nonaccrual status after being contractually
delinquent for more than 90 days. When a loan is placed on nonaccrual status,
all interest previously accrued but not received is reversed and the loan is
considered non-performing. The Company may modify or restructure a loan as a
result of a borrower's inability to service the obligation under the original
terms of the loan agreement.
The following table indicates the Company's loans which have been placed on
nonaccrual status, as well as the carrying value of foreclosed real estate and
repossessed assets, at the dates indicated:
December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(dollars in millions)
Non-performing loans:
Real Estate:
1-4 unit residential $126 $190 $165 $146 $136
5+ unit residential 6 16 12 13 23
Commercial and other 8 10 6 9 9
Land -- -- -- -- --
Construction -- 1 2 1 --
----- ---- ---- ---- ----
Total real estate 140 217 185 169 168
Equity-line and consumer 11 9 7 3 3
----- ---- ---- ---- ----
Total non-performing loans 151 226 192 172 171
Foreclosed real estate, net 45 80 77 52 49
Repossessed assets 4 4 3 -- --
----- ---- ---- ---- ----
Total non-performing assets $200 $310 (a) $272 (b) $224 (c) $220
==== ==== ==== ==== ====
Non-performing loans as a percentage
of loans receivable 0.44% 0.75% 0.99% 1.69% 1.94%
==== ==== ==== ==== ====
Non-performing assets as a percentage
of the Bank's total assets 0.35% 0.57% 0.87% 1.36% 1.50%
==== ==== ==== ==== ====
------------
(a) Includes $111.7 million of assets acquired in the Glen Fed Merger.
(b) Includes $70.2 million of assets acquired in the Cal Fed Acquisition.
(c) Includes $74.5 million of assets acquired in the SFFed Acquisition and
the 1996 acquisition of Home Federal Financial Corporation ("Home
Federal Acquisition" and together with the SFFed Acquisition, the "1996
Acquisitions"), and in the 1996 LMUSA Purchase.
Page 46
Interest income of $7.1 million, $9.7 million and $6.8 million was received
and recognized by the Company for nonaccrual loans during the years ended
December 31, 1999, 1998 and 1997, respectively. Had the loans performed in
accordance with their original terms, $10.9 million, $18.2 million and $15.9
million would have been recognized during December 31, 1999, 1998 and 1997,
respectively. The Company has had no loans contractually past due 90 days or
more on accrual status in the past five years.
The following table presents non-performing real estate assets by
geographical region of the country as of December 31, 1999:
Total
Non-performing Foreclosed Non-performing
Real Estate Real Estate, Real Estate Geographic
Loans, Net (2) Net (2) Assets Concentration
-------------- ------- ------ -------------
(dollars in millions)
Region:
Northeast (1) $ 15 $ 6 $ 21 11.48%
California 80 27 107 57.76
Other regions 45 12 57 30.76
---- --- ---- ------
Total $140 $45 $185 100.00%
==== === ==== ======
- -------------
(1) Consists of Connecticut, Massachusetts, New Hampshire, New Jersey, New York,
Pennsylvania, Rhode Island and Delaware.
(2) Net of purchase accounting adjustments.
At December 31, 1999, the Company's largest non-performing asset was $4.9
million and the Company had two non-performing assets over $2 million in size
with balances averaging approximately $3.3 million. At December 31, 1999, the
Company had 1,192 non-performing assets below $2 million in size, including
1,120 non-performing 1-4 unit residential assets.
The level of non-performing assets is directly affected by economic
conditions throughout the country. The following table indicates non-performing
real estate loans, net of purchase accounting adjustments, by collateral type,
interest rate type and state concentration as of December 31, 1999:
1-4 unit 5+ unit Commercial Total
Residential Residential and Other Non-Performing
------------------ ------------------ ------------------ Real Estate % of
State Variable Fixed Variable Fixed Variable Fixed Loans Total
----- -------- ----- -------- ----- -------- ----- ----- -----
(dollars in millions)
California $58 $13 $5 $-- $4 $-- $ 80 57.31%
New York 7 2 -- -- -- -- 9 6.11
Florida 9 4 -- -- -- -- 13 10.04
Hawaii 6 1 -- -- 4 -- 11 8.10
New Jersey 3 1 -- -- -- -- 4 2.96
Illinois 1 1 -- -- -- -- 2 1.36
Texas 1 2 -- -- -- -- 3 2.01
Other states (1) 10 7 1 -- -- -- 18 12.11
--- --- -- --- -- --- ---- ------
Total $95 $31 $6 $-- $8 $-- $140 100.00%
=== === == === == === ==== ======
- -------------------
(1) There are 44 states, Puerto Rico, Virgin Islands, Guam and the District of
Columbia, of which no one state had non-performing loans in excess of 1% of
the total.
Page 47
ALLOWANCE FOR LOAN LOSSES
An allowance is maintained to absorb losses inherent in the loan portfolio.
The adequacy of the allowance is periodically evaluated by management to
maintain the allowance at a level that is sufficient to absorb expected loan
losses. The allowance for loan losses is increased by provisions for loan losses
as well as by balances acquired through acquisitions and is decreased by
charge-offs (net of recoveries). The Company charges current earnings with a
provision for estimated credit losses on loans receivable. The provision
considers both specifically identified problem loans as well as credit risks not
specifically identified in the loan portfolio. The Company established
provisions for loan losses of $10 million, $40 million and $79.8 million for the
years ended December 31, 1999, 1998 and 1997, respectively.
The adequacy of the allowance 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 element gives consideration to loss that is imbedded
within loan portfolios, but has not yet been realized. Losses are recognized
when (a) available information indicates that it is probable that a loss has
been incurred and (b) the amount of the loss can be reasonably estimated.
Generally, the Company believes that borrowers are impacted by events that
result in loan default and eventual loss which occur well in advance of a
lender's knowledge of those events, and that the time-frame between the
occurrence of such events and the resulting default and loss realization is
between one and 2.5 years, depending upon the loan type. Examples of such
loss-causing events for single family mortgage and other consumer loans would be
borrower job loss, divorce, and medical crisis. An example for commercial real
estate loans would be the loss of a major tenant.
Therefore, if the general credit characteristics of a loan portfolio have
not changed significantly over time, and the time-frame between loss-causing
event and loss realization is estimated to be two years for a given portfolio
type, it is probable that historical losses approximate the loss that is
imbedded in today's portfolio, and such imbedded loss can be estimated by
calculating historical loss experience over a period of two years.
The formula allowance is determined by applying loss factors against all
non-impaired loans. Loss factors may be adjusted for significant factors that,
in management's judgment, affect the collectibility of the portfolio as of the
evaluation date. Loss factors are calculated based on migration models that
estimate the probability that loans will become delinquent and ultimately result
in foreclosure over a period of between one and 2.5 years, depending on the loan
type, and the rates of loss that have been experienced on foreclosed loans. The
foreclosure migration and loss severity rates are then averaged over the past
eight years in order to capture experience across a period that management
believes approximates a business cycle. A contingency factor is then added to
provide for the modeling risk associated with imprecision in estimating inherent
loan losses.
The specific allowances are established against individual loans, including
impaired loans in accordance with SFAS No. 114, ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN. Specific allowances are established against individual
residential 1-4 mortgage loans, commercial loans and commercial real estate
loans for which management has performed analyses and concluded that, based on
current information and events, it is probable that the Bank will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. Generally, management believes that collectibility is improbable if a
loan is severely delinquent or if it has been determined that borrower cash flow
is inadequate for debt repayment. The amount of specific allowance is determined
by an estimation of collateral deficiency, including consideration of costs that
will likely be incurred through the disposal of any repossessed collateral. In
other words, management estimates the fair value of collateral, net of the cost
of disposition of the collateral, and the fair value is compared to the net book
value of the loan. If the net book value exceeds the fair value, a specific
allowance is established in an amount equal to the excess. Loans evaluated for
specific allowance are excluded from the formula allowance analysis so as not to
double-count loss exposure.
Page 48
The unallocated allowance is established for inherent losses which may not
have been identified through the more objective processes used to derive the
formula and specific portions of the allowance. The unallocated portion is
necessarily more subjective and requires a high degree of management judgment
and experience. Management has identified several factors that impact the
potential for credit losses that are not considered in either the formula or the
specific allowance segments. These factors consist of industry and geographic
loan concentrations, changes in the composition of loan portfolios through
acquisitions and new business strategies, changes in underwriting processes, and
trends in problem loan and loss recovery rates. Each factor is analyzed and
assigned a range of values. At this time, management has chosen an unallocated
allowance amount at the mid-point of the range for each factor.
At December 31, 1999, the allowance for loan losses was $555 million,
consisting of a $358 million formula allowance, a $39 million specific allowance
and a $158 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. The following table sets forth the
allocation of the Company's allowance for loan losses and the percentage of
loans in each category to total loans at the dates indicated:
Year Ended December 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(in millions)
Specific allowance:
Real estate loans:
1-4 unit residential $ 16 $ -- $ -- $ -- $ 1
5+ unit residential and
commercial real estate 18 17 8 6 --
---- ---- ---- ---- ----
Total real estate loans 34 17 8 6 1
Equity-line and consumer loans 5 -- -- -- --
---- ---- ---- ---- ----
Total specific allowance 39 17 8 6 1
---- ---- ---- ---- ----
General allowance:
Real estate loans:
1-4 unit residential 219 251 202 123 115
5+ unit residential and
commercial real estate 258 261 190 109 85
---- ---- ---- ---- ----
Total real estate loans 477 512 392 232 200
Equity-line and consumer loans 39 60 19 9 9
---- ---- ---- ---- ----
Total general allowance 516 572 411 241 209
---- ---- ---- ---- ----
Total allowance for loan losses $555 $589 $419 $247 $210
==== ==== ==== ==== ====
The following table sets forth the allocation of the Company's allowance
for loan losses and the percentage of loans in each category to total loans at
the dates indicated (dollars in millions):
Year Ended December 31,
---------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------ ----------------- ----------------- ------------------ ------------------
% of % of % of % of % of
Loans Loans Loans Loans Loans
Allowance to Total Allowance to Total Allowance to Total Allowance to Total Allowance to Total
Balance Loans Balance Loans Balance Loans Balance Loans Balance Loans
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Real estate:
1-4 unit residential $235 79% $251 76% $202 71% $123 58% $116 59%
5+ unit residential and
commercial real estate 276 16 278 18 198 26 115 39 85 39
---- --- ---- --- ---- --- ---- --- ---- ----
Total real estate
loans 511 95 529 94 400 97 238 97 201 98
Equity-line and other loans 44 5 60 6 19 3 9 3 9 2
---- --- ---- --- ---- --- ---- --- ---- ---
Total $555 100% $589 100% $419 100% $247 100% $210 100%
==== === ==== === ==== === ==== === ==== ===
Page 49
The following table summarizes activity in the Company's allowance for loan
losses during the periods indicated:
Year Ended December 31,
---------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(in millions)
Balance at beginning of period $589 $419 $247 $210 $203
Purchases - Glen Fed Merger -- 170 -- -- --
Purchases - Cal Fed Acquisition -- -- 144 -- --
Purchases - SFFed Acquisition -- -- -- 40 --
Purchases - Home Federal Acquisition -- -- -- 5 --
Provision for loan losses 10 40 80 40 37
Charge-offs:
1-4 unit residential (19) (27) (38) (35) (28)
5+ unit residential and commercial real estate (a) (7) (9) (8) (4) --
Consumer and other (14) (10) (10) (6) (5)
---- ---- ---- ---- ----
Total charge-offs (40) (46) (56) (45) (33)
Recoveries 4 6 4 3 3
---- ---- ---- ---- ----
Net charge-offs (36) (40) (52) (42) (30)
Allocation to Nonaccretable Contractual
Cash Flows of purchased auto loan portfolio (7) -- -- -- --
Reclassifications (1) -- -- -- --
Allowance for losses assigned to loans sold -- -- -- (6) --
---- ---- ---- ---- ----
Balance at end of period $555 $589 $419 $247 $210
==== ==== ==== ==== ====
- ------------
(a) Reduced level of activity during 1996 and 1995 reflects the utilization of
a non-performing asset sale agreement between the Company and Granite
Management and Disposition, Inc. (the "Put Agreement"), which expired in
November, 1996.
The Company has increased its allowance for loan losses over the past five
years both through periodic provisions (and charges to income) of $207 million
and through balances of $359 million acquired in connection with the various
acquisitions which occurred during that time. Charge-offs during the five-year
period totalled $220 million. However, it should be noted that the charge-off
activity related to predecessor institutions is not reflected in this table for
periods prior to acquisition by the Company. Losses charged by predecessor
institutions during the years presented prior to 1999 totalled $470 million. On
a pro forma basis, average annual charge-offs for the five years ended December
31, 1999 were $138 million, which represents approximately four years of losses
based on the allowance for loan losses at December 31, 1999.
Page 50
A summary of the activity in the allowance for loan losses by loan type is
as follows for the years ended December 31, 1999, 1998 and 1997:
5+ Unit
Residential
1-4 Unit and Commercial Consumer
Residential Real Estate and Other Total
----------- ----------- --------- -----
(in millions)
Balance - December 31, 1996 $123 $115 $ 9 $247
Purchases and acquisitions, net 55 79 10 144
Provisions for loan losses 60 12 8 80
Charge-offs (38) (8) (10) (56)
Recoveries 2 -- 2 4
---- ---- ---- ----
Balance - December 31, 1997 202 198 19 419
Purchases and acquisitions, net 50 78 42 170
Provisions for loan losses 25 9 6 40
Charge-offs (27) (9) (10) (46)
Recoveries 1 2 3 6
---- ---- ---- ----
Balance - December 31, 1998 251 278 60 589
Provisions for loan losses 2 3 5 10
Charge-offs (19) (7) (14) (40)
Recoveries 1 1 2 4
Allocation to Nonaccretable
Contractual Cash Flows of
purchased auto loan portfolio -- -- (7) (7)
Reclassifications -- 1 (2) (1)
---- ---- ---- ----
Balance - December 31, 1999 $235 $276 $ 44 $555
==== ==== ==== ====
The table below provides the Company's ratios of net charge-offs on loans
to average outstanding loan balances during the periods indicated:
Year Ended December 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Real estate:
1-4 unit residential 0.07% 0.11% 0.25% 0.55% 0.47%
5+ unit residential and
commercial real estate 0.10 0.18 0.15 0.09 --
Consumer and other 0.67 0.50 1.72 1.86 1.00
Although management believes that its present 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.
Page 51
RISK MANAGEMENT
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 the
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. See
"--Quantitative and Qualitative Disclosures about Market Risk."
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 the net
interest income over changing interest rate cycles within the constraints
imposed by prudent lending and investing practices, liquidity needs, and capital
planning.
The Company's operations are significantly influenced by general economic
conditions in the markets and geographic areas in which the Company conducts its
business, the monetary and fiscal policies of the federal government and the
regulatory policies of certain governmental agencies. Deposit balances and the
cost of borrowings are influenced by interest rates on competing investments and
general market interest rates. The Company's loan volume and yields are also
impacted by market interest rates on loans, the supply and demand for housing,
and the availability of funds.
ASSET AND LIABILITY MANAGEMENT
GS Holdings, through the Bank, actively pursues investment and funding
strategies to minimize the sensitivity of its earnings to interest rate
fluctuations. The Company measures the interest rate sensitivity of its balance
sheet through gap and duration analysis, as well as net interest income and
market value simulation. After taking into consideration both the variability of
rates and the maturities of various instruments, it evaluates strategies which
may reduce the sensitivity of its earnings to interest rate and market value
fluctuations. An important decision is the selection of interest-bearing
liabilities and the generation of interest-earning assets which best match
relative to interest rate changes. In order to reduce interest rate risk by
increasing the percentage of interest-rate-sensitive assets, the Company has
continued its emphasis on the origination of adjustable rate mortgage products
for its portfolio. Where possible, the Company seeks to originate real estate
and other loans that reprice frequently and that on the whole adjust in
accordance with the repricing of its liabilities. At December 31, 1999,
approximately 77% of the Company's loan portfolio consisted of ARMs.
One of the most important sources of the Bank's net income is net interest
income, which is the difference between the combined yield earned on
interest-earning assets and the combined rate paid on interest-bearing
liabilities. Net interest income is also dependent on the relative balances of
interest-earning assets and interest-bearing liabilities.
ARMs have, from time to time, been offered with low initial interest rates
as marketing inducements. In addition, most ARMs are also subject to periodic
interest rate adjustment caps or floors. In a period of rising interest rates,
ARMs could reach a periodic adjustment cap while still at a rate significantly
below their contractual margin over existing market rates. Since repricing
liabilities are typically not subject to such interest rate adjustment
constraints, the Company's net interest margin would most likely be negatively
impacted in this situation. Certain ARMs now offered by the Company have a fixed
monthly payment for a given period, with any changes as a result of market
interest rates reflected in the unpaid principal balance through negative
amortization.
Page 52
As a result of the FN and Cal Fed Acquisitions, the Company acquired the
rights and assumed obligations related to certain interest rate swap agreements
that were entered into to hedge certain FHLB advances. Under the terms of these
agreements, the Company paid a variable rate based on LIBOR and received fixed
rates. During 1998 and 1997, the Company's net interest margin increased by $2.1
million and $0.6 million, respectively, as a result of these interest rate swap
agreements, largely due to the amortization of the premium assigned to these
agreements in the FN and Cal Fed Acquisitions. These interest rate swap
agreements had all expired by December 31, 1998.
During 1999, the Company entered into interest rate swap agreements to
adjust its interest rate risk exposure on variable rate reverse repurchase
agreements and FHLB advances. See --"Balance Sheet Analysis--Sources of Funds."
During 1999, the Company's net interest margin decreased by $8.9 million as a
result of these interest rate swap agreements.
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 exceeds interest-rate-sensitive liabilities,
while the opposite results in a negative gap. During a period of rising interest
rates, a negative gap would tend to adversely affect net interest income, and a
positive gap would tend to result in an increase in net interest income. During
a period of falling rates, the opposite would tend to occur.
Page 53
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 the Company's loan
portfolio based upon expected loan prepayments. Repricing mechanisms on the
Company's assets are subject to limitations, such as caps on the amount that
interest rates and payments on its loans may adjust. Accordingly, such assets
may not respond in the same manner or to the same extent to changes in interest
rates as the Company's liabilities. In addition, the interest rate sensitivity
of the assets and liabilities illustrated in the table would vary substantially
if different assumptions were used or if actual experience differed from the
assumptions set forth. The Company's estimated interest rate sensitivity gap at
December 31, 1999 was as follows:
Maturity/Rate Sensitivity
-----------------------------------------------------------
Within 1-5 Over 5 Noninterest
1 Year Years Years Bearing Total
------ ----- ----- ------- -----
(dollars in millions)
INTEREST-EARNING ASSETS:
Securities held to maturity, interest-bearing
deposits in other banks and short term
investment securities (1)(2) $ 183 $ -- $ 86 $ -- $ 269
Securities held for sale (3) 1,076 -- -- -- 1,076
Mortgage-backed securities available
for sale 13,765 -- -- -- 13,765
Mortgage-backed securities held
to maturity (1)(4) 2,112 22 14 -- 2,148
Loans held for sale, net (3) 729 -- -- -- 729
Loans receivable, net (1)(5) 18,694 10,765 4,885 -- 34,344
Investment in FHLB 1,167 -- -- -- 1,167
------- ------- ------ ------ -------
Total interest-earning assets 37,726 10,787 4,985 -- 53,498
Noninterest-earning assets -- -- -- 3,543 3,543
------- ------- ------ ------ -------
$37,726 $10,787 $4,985 $3,543 $57,041
======= ======= ====== ====== =======
INTEREST-BEARING LIABILITES:
Deposits (6) $19,753 $ 3,283 $ 5 $ -- $23,041
Securities sold under agreements to
repurchase (1) 5,482 -- -- -- 5,482
FHLB advances (1) 11,823 11,639 -- -- 23,462
Other borrowings (1) 110 1,204 892 2,206
------- ------- ------ ------ -------
--
Total interest-bearing liabilities 37,168 16,126 897 -- 54,191
Noninterest-bearing liabilities -- -- -- 689 689
Minority interest -- -- -- 500 500
Stockholder's equity -- -- -- 1,661 1,661
------- ------- ------ ------ -------
$37,168 $16,126 $ 897 $2,850 $57,041
======= ======= ====== ====== =======
Gap before interest rate swap agreements $ 558 $ (5,339) $4,088 $ (693)
Interest rate swap agreements 2,550 (1,650) (900) --
------- -------- ------ -------
Gap $ 3,108 $ (6,989) $3,188 $ (693)
======= ======== ====== =======
Cumulative gap $ 3,108 $ (3,881) $ (693) $ (693)
======= ======== ====== =======
Gap as a percentage of total assets 5.45% (12.25)% 5.59% (1.21)%
======= ======= ====== =======
Cumulative gap as a percentage of total assets 5.45% (6.80)% (1.21)% (1.21)%
======= ======= ====== =======
(Footnotes continued on next page)
Page 54
- ----------------------
(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 December 31, 1999.
The actual maturity and rate sensitivity of the assets could vary
substantially if future prepayments differ from prepayment estimates.
(2) Consists of less than $0.1 million of interest-bearing deposits in other
banks, $84 million of short-term investment securities and $185 million of
securities held to maturity.
(3) As securities and mortgage-backed securities available for sale and loans
held for sale may be sold within one year, they are considered to be
maturing within one year.
(4) Excludes underlying non-performing loans of $2 million.
(5) Excludes allowance for loan losses of $555 million and non-performing loans
of $149 million.
(6) Fixed rate deposits and deposits with fixed pricing intervals are reflected
as maturing in the year of contractual maturity or first repricing date.
Money market deposit accounts, demand deposit accounts and passbook
accounts are reflected as maturing within one year.
At December 31, 1999, GS Holdings' cumulative gap totalled $693 million. At
December 31, 1998, GS Holdings' cumulative gap totalled $400 million.
The Company utilizes computer modeling under various interest rate
scenarios to provide a dynamic view of the effects of the changes in rates,
spreads, and yield curve shifts on net interest income. However, the
maturity/rate sensitivity analysis is a static view of the balance sheet with
assets and liabilities grouped into certain defined time periods, and only
partially depicts the dynamics of the Company's sensitivity to interest rate
changes. Therefore, this analysis may not fully describe the complexity of
relationships between product features and pricing, market rates, and future
management of the balance sheet mix.
MORTGAGE BANKING RISK MANAGEMENT
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 MSRs and generally will result
in a reduction of 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 hedges the change in value of its MSRs based on
changes in interest rates ("MSR Hedge").
The Company owned several derivative instruments at December 31, 1999 which
were used to hedge against prepayment risk in its mortgage servicing portfolio.
These derivative instruments included Constant Maturity Treasury interest rate
floor contracts, swaptions and principal only swaps. The interest rate floor
contracts had a notional amount of $950 million, strike rates of 5.70%, 5.75%
and 6.06%, mature in the year 2004 and had an estimated fair value of $10.4
million at December 31, 1999. Premiums paid to counter-parties in exchange for
cash payments when the 10-year Constant Maturity Treasury falls below the strike
rate are recorded as part of the MSR asset on the balance sheet. The swaption
contracts had notional amounts of $834.0 million, a weighted average strike rate
of 6.98%, expire in the year 2002 and had an estimated fair value of $24.3
million at December 31, 1999. Premiums paid to counter-parties in exchange for
the right to enter into an interest rate swap are recorded as part of the MSR
asset on the balance sheet. Principal only swap agreements had notional amounts
of $202.3 million and an estimated (negative) fair value of $(15.8) million at
December 31, 1999. All outstanding prepayment-linked swaps matured during 1999.
These instruments effect a 39% hedge, at December 31, 1999, on the value of
the MSRs related to the fixed-rate loans serviced by FNMC, excluding loans with
prepayment penalties. The comparable hedge ratio at December 31, 1998 was 53%. A
reduction in the hedge during 1999 was executed in light of the reduction in
overall prepayment rates on the servicing portfolio.
Page 55
For information on the accounting for and activities in MSRs and the MSR
Hedge, refer to notes 2, 17 and 35 of the Company's Notes to Consolidated
Financial Statements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In connection with its off-balance-sheet activities, management is
assessing the potential effect of SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS No. 133"). SFAS No. 133 was issued by
the Financial Accounting Standards Board ("FASB") in June 1998. It establishes
standards for derivative instruments and for hedging activities. It 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, 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 the statement.
SFAS No. 133 should not be applied retroactively to financial statements of
prior periods. For more information, refer to note 2 in the Company's Notes to
Consolidated Financial Statements.
LIQUIDITY
The standard measure of liquidity in the savings industry is the ratio of
cash and short-term U.S. government and other specified securities to deposits
and borrowings due within one year. Effective November 24, 1997, the OTS
established a minimum liquidity requirement of 4.00%, a reduction from 5.00%
which had been in effect prior to that date. The Bank was in compliance with the
liquidity regulations during 1999 and 1998.
The major source of funding for GS Holdings on an unconsolidated basis is
distributions of the Bank's earnings and tax sharing payments. Net income
generated by the Bank is used to meet its own cash flow needs, including paying
dividends on its preferred stock owned by GS Holdings, and may be distributed,
subject to certain restrictions, to the Company. In turn, GS Holdings uses
distributions received from the Bank primarily to meet debt service
requirements, pay any expenses it may incur and make distributions to Golden
State, subject to certain restrictions. For more information on dividend
restrictions for the Bank and GS Holdings, refer to note 25 of the Company's
Notes to Consolidated Financial Statements.
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 originations or
purchases 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 December 31, 2000 total $8.7 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 December 31, 1999, the Company had FHLB advances, securities sold
under agreements to repurchase and other borrowings aggregating $17.4 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.
Page 56
During 1994, California Federal issued 3,007,300 shares of its 11 1/2%
noncumulative perpetual preferred stock (the "11 1/2% Bank Preferred Stock").
Cash dividends on the 11 1/2% Bank Preferred Stock are noncumulative and are
payable at an annual rate of 11 1/2% if, when, and as declared by the Board of
Directors of the Bank. The payment of dividends by the Bank is subject to
certain federal laws applicable to savings associations. Dividends paid by the
Bank on the 11 1/2% Bank Preferred Stock for each year ended December 31, 1999
and 1998 totalled $34.6 million. However, GS Holdings repurchased 2,688,959
shares of the 11 1/2% Bank Preferred Stock in connection with the Bank Preferred
Stock Tender Offers in 1998, and redeemed the remaining 318,341 shares in 1999,
which reduced dividend expenses on the 11 1/2% Bank Preferred Stock on a
consolidated basis to $1.8 million for the year ended December 31, 1999. At
December 31, 1999, all of the 11 1/2% Bank Preferred Stock was held by GS
Holdings.
In the Cal Fed Acquisition, the Company assumed certain indebtedness and
Old California Federal's 10 5/8% noncumulative perpetual preferred stock (the
"10 5/8% Bank Preferred Stock" and together with the 11 1/2% Bank Preferred
Stock, the "Bank Preferred Stock"), which have an annual interest cost of $0.6
million and an annual dividend cost of $18.3 million, respectively. Cash
dividends on the 10 5/8% Bank Preferred Stock are noncumulative and are payable
at an annual rate of 10 5/8%, if, when, and as declared by the Board of
Directors of the Bank. Similar to the 11 1/2% Bank Preferred Stock, the payment
of dividends by the Bank is subject to certain federal laws applicable to
savings associations. Dividends paid by the Bank on the 10 5/8% Bank Preferred
Stock, for each year ended December 31, 1999 and 1998 totalled $18.3 million.
However, GS Holdings purchased 1,117,701 shares of the 10 5/8% Bank Preferred
Stock in connection with the Bank Preferred Stock Tender Offers in 1998, and
redeemed the remaining 607,299 shares in 1999, which reduced dividend expense on
the 10 5/8% Bank Preferred Stock on a consolidated basis to zero for the year
ended December 31, 1999. At December 31, 1999, all of the 10 5/8% Bank Preferred
Stock was held by GS Holdings.
The dividends, net of tax benefits, on the preferred stock of California
Federal Preferred Capital Corp. (the "REIT Preferred Stock") were $26.4 million
and $33.1 million for the years ended December 31, 1999 and 1998, respectively.
The terms of the REIT Preferred Stock provide that California Federal Preferred
Capital Corp. ("Preferred Capital Corp.") may not declare or pay any dividends
or other distributions (other than in shares of common stock of Preferred
Capital Corp. or other Preferred Capital Corp. Junior Stock), with respect to
any Preferred Capital Corp. Junior Stock or repurchase, redeem or otherwise
acquire, or set apart funds for the repurchase, redemption or other acquisition
of any Preferred Capital Corp. Junior Stock (including the common stock held by
the Bank) through a sinking fund or otherwise, unless and until: (a) Preferred
Capital Corp. has paid full dividends on the REIT Preferred Stock for the four
most recent dividend periods or funds have been paid over to the dividend
disbursing agent of Preferred Capital Corp. for payment of such dividends, and
(b) Preferred Capital Corp. has declared a cash dividend on the REIT Preferred
Stock at the annual dividend rate for the current dividend period, and
sufficient funds have been paid over to the dividend disbursing agent of
Preferred Capital Corp. for the payment of a cash dividend for such current
dividend period. Preferred Capital Corp. is currently in compliance with such
requirement.
Interest on the GS Holdings Notes approximates $138.9 million per year.
Although GS Holdings expects that distributions and tax sharing payments from
the Bank will be sufficient to pay interest when due and the principal amount of
its long-term debt at maturity, there can be no assurance that earnings from the
Bank will be sufficient to make such distributions to GS Holdings. In addition,
there can be no assurance that such distributions will be permitted by the terms
of any debt instruments of GS Holdings' subsidiaries then in effect, by the
terms of any class of preferred stock issued by the Bank or its subsidiaries,
including the REIT Preferred Stock and the Bank Preferred Stock, or under
applicable federal thrift laws.
During the year ended December 31, 1998, $914.5 million of the FN Holdings'
12 1/4% Senior Notes due 2001, 9 1/8% Senior Subordinated Notes due 2003 and
105/8% Senior Subordinated Notes due 2003 (collectively the "FN Holdings Notes")
were purchased in connection with the Debt Tender Offers, with related premiums,
fees and other expenses totalling $98.7 million, on an after-tax basis. An
additional $225 thousand of the FN Holdings 12 1/4% Senior Notes due 2001 was
redeemed in 1999.
Page 57
The Company anticipates that cash and cash equivalents on hand, the cash
flows from assets as well as other sources of funds will provide adequate
liquidity for its operating, investing and financing needs and the Bank's
regulatory liquidity requirements for the foreseeable future. See
"Business--Regulation and Supervision." In addition to cash and cash equivalents
of $592.9 million at December 31, 1999, the Company has substantial additional
secured borrowing capacity with the FHLB and other sources.
Net cash provided by operating activities for the year ended December 31,
1999 totalled $2.0 billion compared to net cash used of $497.4 million during
the year ended December 31, 1998. The change was principally due to an increase
in net proceeds from the sale of loans held for sale.
Net cash used in operating activities for the year ended December 31, 1998
totalled $497.4 compared to $383.4 million during the year ended December 31,
1997. The change was principally due to the increase in purchases and
originations of loans held for sale, net of proceeds from sales.
Net cash used in investing activities for the year ended December 31, 1999
totalled $4.4 billion, an increase of $1.5 billion from the year ended December
31, 1998. Cash flows used in investing activities included purchases of
mortgage-backed securities available for sale of $4.8 billion, purchases of
loans receivable of $2.2 billion, a net increase in loans receivable of $1.7
billion, purchases of securities of $836.6 million and purchases of mortgage
servicing rights of $357.6 million. Cash flows provided by investing activities
included principal payments on mortgage-backed securities totalling $4.2
billion, proceeds from maturities of securities of $526.8 million and proceeds
from sales of mortgage-backed securities available for sale of $193.7 million.
Net cash used in investing activities for the year ended December 31, 1998
totalled $3.0 billion, an increase of $1.9 billion from the year ended December
31, 1997. Cash flows used in investing activities included purchases of $9.0
billion in mortgage-backed securities available for sale and purchases of
securities of $892.0 million. Cash flows provided by investing activities
included a net decrease in loans receivable of $2.3 billion, principal payments
on mortgage-backed securities totalling $3.7 billion and proceeds from
maturities of securities of $978.1 million.
Net cash provided by financing activities for the year ended December 31,
1999 totalled $2.1 billion, a decrease of $1.9 billion from the year ended
December 31, 1998. Cash flows provided by financing activities included
additional borrowings of $33.0 billion and a net increase in securities sold
under agreements to repurchase of $1.2 billion. Cash flows used in financing
activities included principal payments on borrowings of $29.7 billion, a net
decrease in deposits of $2.1 billion, common stock dividends of $225.5 million
and dividends paid to minority stockholders, net of taxes, of $30.8 million.
Additionally, $97.6 million was used in the Bank Preferred Stock Tender Offers
and $69.3 million was used in the branch sales.
Net cash provided by financing activities for the year ended December 31,
1998 totalled $4.0 billion, an increase of $2.4 billion from 1997. Cash flows
provided by financing activities included additional borrowings of $25.6
billion, a net increase in securities sold under agreements to repurchase of
$1.9 billion and proceeds from the GS Escrow Merger of $2.0 billion. Cash flows
used in financing activities included principal payments on borrowings totalling
$20.5 billion, a decrease in deposits of $1.4 billion, and funds used in the
Debt Tender Offers and Bank Preferred Stock Tender Offers of $1.1 billion and
$423.5 million, respectively. Additionally, $1.3 billion was used in the Florida
Branch Sale, $25.0 million was used in the redemption of the FN Holdings
Preferred Stock and dividends on preferred and common stock, including dividends
paid to minority stockholders, totalled $743.4 million.
Page 58
OTHER ACTIVITIES
LITIGATION INTERESTS
In July 1995, Old California Federal distributed to its common shareholders
its Contingent Litigation Recovery Participation Interests (the "CALGZs" or
"Litigation Interests"), each entitling the holder thereof to receive an amount
(the aggregate of such payments being referred to as the "Recovery Payment")
equal to five millionths of one percent (0.000005%) of the cash payment (the
"Cash Payment"), if any, actually received by the Bank pursuant to a final
nonappealable judgment in or final settlement of its claim against the United
States Government (the "Government") in the lawsuit, California Federal Bank v.
United States, Civil Action No. 92-138C (the "California Federal Goodwill
Litigation") after deduction of:
(a) aggregate expenses incurred by the Bank in prosecuting the California
Federal Goodwill Litigation and obtaining such Cash Payment including,
but not limited to, a portion of the annual salaries in the aggregate
amount of $1,000,000, an incentive fee in the amount of 0.25% of the
aggregate value of the pre-tax recovery from the California Federal
Goodwill Litigation, annual pension benefits aggregating $1,325,000,
and certain medical benefits and expenses, under a litigation
management agreement, for two executives of the Company ("Litigation
Management Agreement");
(b) any income tax liability of the Bank, computed on a pro forma basis, as
a result of the Bank's receipt of such Cash Payment (net of any income
tax benefit to the Bank from making the Recovery Payment, and
disregarding (c) for purposes of this clause);
(c) the effect of any net operating loss carryforwards or other tax
attributes held by the Bank or any of its subsidiaries or affiliated
entities); and
(d) the expenses incurred by the Bank in connection with the creation,
issuance and trading of the Litigation Interests, including without
limitation, legal and accounting fees and the fees and expenses of the
interest agent.
Pursuant to the merger agreement with Old California Federal, Cal Fed
distributed to common shareholders entitled to receive the merger consideration
one-tenth of a Secondary Contingent Litigation Recovery Participation Interest
(each a "CALGL" or "Secondary Litigation Interest") for each share of Cal Fed
common stock held. Each Secondary Litigation Interest will entitle the holder
thereof to receive an amount equal to twenty millionths of one percent
(0.000020%) of the "Secondary Recovery Payment," if any, as defined below.
"Secondary Recovery Payment" means sixty percent (60%) of the amount obtained
from the following equation: the Cash Payment, if any, actually received by the
Bank in respect of a final, nonappealable judgment in or final settlement of the
California Federal Goodwill Litigation, minus the sum of the following:
(a) the aggregate expenses incurred by the Bank in prosecuting the
California Federal Goodwill Litigation and obtaining such Cash Payment
including, but not limited to, a portion of the annual salaries in the
aggregate amount of $1,000,000, an incentive fee in the amount of 0.25%
of the aggregate value of the pre-tax recovery from the California
Federal Goodwill Litigation, annual pension benefits aggregating
$1,325,000, and certain medical benefits and expenses for two
executives of the Company, under the Litigation Management Agreement;
(b) any income tax liability of the Bank, computed on a pro forma basis, as
a result of the Bank's receipt of such Cash Payment (net of any income
tax benefit to the Bank, computed on a pro forma basis, from the
payment of a portion of the Secondary Recovery Payment to the holders
of Secondary Litigation Interests);
(c) the expenses incurred by the Bank in connection with the creation,
issuance and trading of the Litigation Interests and the Secondary
Litigation Interests, including without limitation, legal and
accounting fees and the fees and expenses of the interest agent;
(d) the payment due to the holders of the Litigation Interests; and
(e) one hundred twenty-five million dollars ($125,000,000).
Page 59
"Income tax liability of the Bank computed on a pro forma basis" means the
aggregate amount of any and all relevant items of income, gain, loss, or
deduction associated with the receipt by the Bank of the Cash Payment multiplied
by the highest, combined marginal rate of federal, state and local income taxes
in the relevant year and disregarding for purposes of such computation the
effect of any net operating loss carryforwards or other tax attributes of the
Bank or any of its subsidiaries or affiliated entities. "Income tax benefit to
the Bank computed on a pro forma basis" means the aggregate amount of any and
all relevant items of income, gain, loss, or deduction associated with the
payment by the Bank of the Secondary Recovery Payment multiplied by the highest,
combined marginal rate of federal, state and local income taxes in the relevant
year and disregarding for purposes of such computation the effect of any net
operating loss carryforwards or other tax attributes of the Bank or any of its
subsidiaries or affiliated entities. Any distribution with respect to the
Litigation Interests will be subject to the OTS capital distribution
regulations.
Holders of the CALGZs and the CALGLs are entitled to vote together as a
single class with the holders of the common stock of the Bank and the Bank
Preferred Stock, with each CALGZ and CALGL entitling the holder thereof to 1/5
of one vote.
In connection with the Cal Fed Acquisition, the Bank recorded as an asset
part of the estimated after-tax cash recovery from the California Federal
Goodwill Litigation that will inure to the Bank, net of amounts payable to
holders of the Litigation Interests and the Secondary Litigation Interests in
any such recovery (the "Goodwill Litigation Asset"). In connection with the Glen
Fed Merger, the Bank recorded a second Goodwill Litigation Asset related to the
estimated after-tax cash recovery from the Glendale Goodwill Litigation that
will inure to the Bank, net of amounts payable to the holders of the LTWTMs. The
Goodwill Litigation Asset related to the California Federal Goodwill Litigation
was recorded at its estimated fair value of $100 million, net of estimated tax
liabilities, as of January 3, 1997. The Goodwill Litigation Asset related to the
Glendale Goodwill Litigation was recorded at its estimated fair value of $56.9
million, net of estimated tax liabilities, as of September 11, 1998.
CAPITAL MANAGEMENT
At December 31, 1999, stockholder's equity was $1.7 billion, a decrease of
$70.9 million from December 31, 1998. The decrease is principally the net result
of a reduction of $283.0 million in the fair value of securities available for
sale, $225.5 million in dividends to parent and a $12.4 million reduction in the
purchase price of the Golden State Acquisition. These amounts were partially
offset by $341.1 million in net income for the year, a $66.4 million adjustment
to reduce the initial dividend of tax benefits to former parent due to
deconsolidation, a $40 million contribution from parent and $2.0 million tax
benefit on the exercise of stock options. For further information, see note 25
of the Company's Notes to Consolidated Financial Statements.
The unrealized loss on securities available for sale is primarily a result
of a decline in the value of the Company's mortgage-backed securities available
for sale due to an increase in Treasury yields and wider spreads on private
label collateralized mortgage obligations. This unrealized loss reflects general
declines in the prices of fixed-rate instruments during the year as a
consequence of rising interest rates, which led to a slowing of prepayment
expectations and extended the expected lives of the mortgage-related securities
in the portfolio. This unrealized loss represents a decline in the total
mortgage-backed securities available for sale portfolio of less than 2%.
However, this adjustment does not take into account market changes in the value
of borrowings or deposits. At December 31, 1999, the market valuation adjustment
of the offsetting borrowings would have been a positive $344.7 million. This
does not include any increase in the value of deposits.
OTS capital regulations require savings associations to satisfy three
minimum capital requirements: tangible capital, core (leverage) capital, and
risk-based capital.
TANGIBLE CAPITAL. Tangible capital is the sum of common stockholder's
equity (including retained earnings), noncumulative perpetual preferred stock
and minority interest in equity accounts of fully consolidated subsidiaries,
less disallowed intangibles. Tangible capital must be at least 1.5% of adjusted
total assets.
Page 60
CORE CAPITAL. Core capital generally is the sum of tangible capital plus
certain other qualifying intangibles. Under the leverage requirement, a savings
association is required to maintain core capital equal to a minimum of 4% of
adjusted total assets.
RISK-BASED CAPITAL. Risk-based capital equals the sum of core capital plus
supplementary capital. Risk-based capital must be at least 8% of risk-weighted
assets.
RISK-WEIGHTED ASSETS. Risk-weighted assets equal assets plus the credit
risk equivalent of certain off-balance sheet items, multiplied by the
appropriate risk weight.
SUPPLEMENTARY CAPITAL. Supplementary capital includes certain permanent
capital instruments, such as qualifying cumulative perpetual preferred stock, as
well as some forms of term capital instruments, such as qualifying subordinated
debt. Supplementary capital may not exceed 100% of core capital for purposes of
the risk-based requirement.
MINIMUM REQUIREMENTS. These capital requirements discussed above are viewed
as minimum standards by the OTS, and most associations are expected to maintain
capital levels well above the minimum. In addition, the OTS regulations provide
that minimum capital levels higher than those provided in the regulations may be
established by the OTS for individual savings associations, depending upon their
circumstances. These capital requirements are currently applicable to the Bank
but not to GS Holdings. The Bank is not subject to any such individual
regulatory capital requirement that is higher than the minimum.
Under OTS regulations, a savings association with a greater than "normal"
level of interest rate exposure must deduct an interest rate risk ("IRR")
component in calculating its total capital for purposes of determining whether
it meets its risk-based capital requirement. Interest rate exposure is measured,
generally, as the decline in an institution's net portfolio value that would
result from a 200-basis-point increase or decrease in market interest rates
(whichever would result in lower net portfolio value), divided by the estimated
economic value of the savings association's assets. The interest rate risk
component to be deducted from total capital is equal to one-half of the
difference between an institution's measured exposure and "normal" IRR exposure
(which is defined as 2%), multiplied by the estimated economic value of the
institution's assets. In August 1995, the OTS indefinitely delayed
implementation of its IRR regulation. However, based on internal measures of
interest rate risk at December 31, 1999, the Bank would not have been required
to deduct an IRR component in calculating total risk-based capital had the IRR
component of the capital regulations been in effect.
The Bank is also subject to the "prompt corrective action" standards
prescribed in FDICIA and related OTS regulations, which, among other things,
define specific capital categories based on an association's capital ratios. The
capital categories, in declining order, are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." Under the regulation, the ratio of total capital
to risk-weighted assets, core capital to risk-weighted assets and the leverage
capital ratio are used to determine an association's capital classification. The
Bank met the capital requirements of a "well capitalized" institution under the
FDICIA prompt corrective action standards as of December 31, 1999. The Bank is
not presently subject to any enforcement action or other regulatory proceeding
with respect to the prompt corrective action regulation.
At December 31, 1999, the Bank's regulatory capital levels exceeded the
minimum regulatory capital requirements, with tangible, core and risk-based
capital ratios of 5.81%, 5.81% and 12.89%, respectively.
Page 61
The following is a reconciliation of the Bank's stockholder's equity to
regulatory capital as of December 31, 1999:
Tangible Core Risk-based
Capital Capital Capital
------- ------- -------
(dollars in millions)
Stockholder's equity of the Bank $3,556 $3,556 $3,556
Minority interest - REIT Preferred Stock 500 500 500
Unrealized holding gain on securities available for sale, net 276 276 276
Non-allowable capital:
Intangible assets (819) (819) (819)
Goodwill Litigation Assets (159) (159) (159)
Investment in non-includable subsidiaries (60) (60) (60)
Supplemental capital:
Qualifying subordinated debentures -- -- 93
General loan loss allowance -- -- 363
Assets required to be deducted:
Land loans with more than 80% LTV ratio -- -- (7)
Equity in subsidiaries -- -- (7)
Low-level recourse deduction -- -- (11)
------ ------ ------
Regulatory capital of the Bank 3,294 3,294 3,725
Minimum regulatory capital requirement 850 2,266 2,313
------ ------ ------
Excess above minimum capital requirement $2,444 $1,028 $1,412
====== ====== ======
Tangible Core Risk-based
Capital Capital Capital
Ratio Ratio Ratio
----- ----- -----
Regulatory capital of the Bank 5.81% 5.81% 12.89%
Minimum regulatory capital requirement 1.50 4.00 8.00
---- ---- -----
Excess above minimum capital requirement 4.31% 1.81% 4.89%
==== ==== =====
The amount of adjusted total assets used for the tangible and leverage
capital ratios is $56.6 billion. Risk-weighted assets used for the risk-based
capital ratio amounted to $28.9 billion.
At December 31, 1999, the Bank's capital levels were sufficient for it to
be considered "well capitalized."
Risk-based
Leverage ----------------------------
Capital Tier 1 Total Capital
------- ------ -------------
Regulatory capital of the Bank 5.81% 11.36% 12.89%
"Well capitalized" ratio 5.00 6.00 10.00
---- ----- -----
Excess above "well capitalized" ratio 0.81% 5.36% 2.89%
==== ===== =====
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 December 31, 1999, none of the
net tax benefit was determined to be attributable to the amount of taxable
income that may be realized in periods beyond one year. Accordingly, no amount
has been excluded from regulatory capital at December 31, 1999.
Page 62
IMPACT OF INFLATION AND CHANGING PRICES
Prevailing interest rates have a more significant impact on the Company's
performance than does the general level of inflation. While interest rates may
bear some relationship to the general level of inflation (particularly in the
long run), over short periods of time interest rates may not necessarily move in
the same direction or change in the same magnitude as the general level of
inflation. As a result, the business of the Company is generally not affected by
inflation in the short run, but may be affected by inflation in the long run.
YEAR 2000
The Company completed all major milestones in executing its comprehensive
plan to make its computer systems, applications and facilities Year 2000 ready.
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 Bank participated in industry-wide Year 2000 integration testing
sponsored by the Mortgage Bankers Association. The Bank also assessed risks
related to the potential failure of material third parties to be ready for the
year 2000.
The contingency plan for the critical supply vendors was completed in
mid-February 1999 and contingency plans were completed for all other material
service providers by June 30, 1999. The Y2K weekend (January 1 and 2, 2000)
support plan for applications maintained in-house was completed by September 30,
1999. In addition, contingency plans for critical business areas to address
liquidity, customer communications, operations issues and potential failures
surrounding the Year 2000 event were completed by September 30, 1999.
Final testing in the fourth quarter of 1999, and completion of the Y2K
event management plans resulted in a smooth transition during the rollover to
the Year 2000. No significant Y2K-related events were reported, and it was not
necessary to activate any of the Company's contingency plans. Special attention
has been provided to possible Y2K-related exceptions throughout January and
February 2000.
It is currently expected that costs related to making the Bank's computer
systems, applications and facilities Year 2000 compliant will total
approximately $17.6 million over the years 1997 to 2000. Of this amount, $17.3
million has been incurred since the inception of the Year 2000 project through
December 31, 1999. Noninterest expense for the year ended December 31, 1999
included approximately $7.5 million in connection with the Bank's Year 2000
efforts.
Historically, cost estimates and actuals by year for the Year 2000 project
are as follows (in millions):
1999 1998 1997
---- ---- ----
Estimates $7.5 $8.9 $1.2
Actual 7.5 8.6 1.2
Of the total Year 2000 project costs, $11.4 million were third party
expenses funded through operating cash flows. Costs related to purchase of
equipment, both project equipment and replacement of non-compliant equipment,
were $2.8 million, also funded through operating cash flows. Expenditures in
1999 represented 10.4% of the total Information and Technology Services ("ITS")
expenses. No critical ITS projects have been deferred as a result of the Year
2000 efforts. Instead, incremental resources including consultants, contractors,
software utilities and hardware were obtained from outside the Company to
supplement existing staff. In addition, the Company has a prioritization
mechanism in place to ensure that other critical projects are addressed. The
Company is currently not aware of any asserted or unasserted claims of breach of
contract or warranty related to Y2K. The Company does not anticipate any
assertion of such claims in the future that will have a material effect on the
Company.
Page 63
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company is exposed to interest rate
risk, which is the potential for loss due to changes in interest rates.
Financial products that expose the Company to interest rate risk include
securities, loans, deposits, debt and derivative financial instruments such as
swaps, swaptions and floors.
ALCO, which includes senior management representatives, monitors and
considers methods of managing the rate and sensitivity repricing characteristics
of the balance sheet components consistent with maintaining acceptable levels of
changes in net portfolio value ("NPV") ratio and net interest income. A primary
purpose of the Company's asset and liability management is to manage interest
rate risk to effectively invest the Company's capital and to preserve the value
created by its core business operations. As such, certain management monitoring
processes discussed below are designed to minimize the impact of sudden and
sustained changes in interest rates on NPV ratio and net interest income.
The Company's exposure to interest rate risk is reviewed on at least a
quarterly basis by the Board of Directors and ALCO. Interest rate risk exposure
is measured using interest rate sensitivity analysis to determine the Bank's
change in NPV ratio and net interest income in the event of hypothetical changes
in interest rates, and interest rate sensitivity gap analysis is used to
determine the repricing characteristics of the Bank's assets and liabilities. If
estimated changes to NPV ratio and net interest income are not within the limits
established by the Board, the Board may direct management to adjust its asset
and liability mix to bring interest rate risk within Board-approved limits.
In order to reduce the exposures to interest rate fluctuations, the Company
has developed strategies to manage its liquidity, shorten its effective
maturities of certain interest-earning assets, and increase the ability of its
asset base to respond to changes in interest rates. Management has sought to
decrease the average maturity of its assets by emphasizing the origination of
adjustable-rate residential mortgage loans and consumer loans, which are
retained by the Company for its portfolio. In addition, long-term, fixed-rate
single-family residential mortgage loans are underwritten according to
guidelines of FHLMC, GNMA and FNMA, and are either swapped with FHLMC, GNMA and
FNMA in exchange for mortgage-backed securities secured by such loans which are
then sold or are sold directly for cash in the secondary market, generally with
servicing retained.
Interest rate sensitivity analysis is used to measure the Bank's interest
rate risk by computing estimated changes in NPV ratio of its cash flows from
assets, liabilities and off-balance sheet items in the event of a range of
assumed changes in market interest rates. NPV ratio is equal to the market value
of assets minus the market value of liabilities, with adjustments made for
off-balance sheet items divided by the market value of assets. This analysis
assesses the risk of loss in market risk sensitive instruments in the event of a
sudden and sustained increase or decrease in market interest rates of one
hundred to three hundred basis points. The Bank's Board of Directors has adopted
an interest rate risk policy which establishes minimum NPV ratios for various
interest rate scenarios.
The following table presents the Bank's NPV ratios for the various rate
shock levels at December 31, 1999. All market risk sensitive instruments
presented in this table are held to maturity or available for sale. The Bank has
no trading securities.
Change in
Interest Rates NPV Ratio
-------------- ---------
300 basis point rise 4.66%
200 basis point rise 5.85
100 basis point rise 6.87
Base Scenario 7.61
100 basis point decline 8.02
200 basis point decline 7.71
300 basis point decline 6.78
Page 64
The preceding table indicates that at December 31, 1999, in the event of a
sudden and sustained increase in prevailing market interest rates, the Bank's
NPV ratio, would be expected to decrease, and that in the event of a sudden and
sustained decrease in prevailing market interest rates, the Bank's NPV ratio
would be expected to slightly increase or experience a much lower decline for
the extreme scenarios. At December 31, 1999, the Bank's estimated changes in NPV
ratios were within the targets established by the Board of Directors.
The fair market value of portfolio equity decreases in a rising interest
rate environment because the Company's interest-bearing liabilities generally
reprice faster than its interest-earning assets, and certain interest-earning
assets are subject to periodic caps. The reduction in value of the net
interest-earning assets is partially offset by an increase in value of MSRs that
appreciate in value as rates rise. In a declining interest rate environment, the
reduction in value of MSRs generally outweighs the increase in value of the rest
of the portfolio resulting from the repricing differences of interest-earning
assets and interest-bearing liabilities.
NPV ratio is calculated by the Bank pursuant to guidelines established by
the OTS. The calculation is based on the net present value of estimated
discounted cash flows utilizing market prepayment assumptions and market rates
of interest provided by independent broker quotations and other public sources
as of December 31, 1999, with adjustments made to reflect the shift in the
Treasury yield curve as appropriate.
The computation of prospective effects of hypothetical interest rate
changes is based on numerous assumptions, including relative levels of market
interest rates, loan prepayments and deposits decay, and should not be relied
upon as indicative of actual results. Further, the computations do not
contemplate any actions the ALCO could undertake in response to changes in
interest rates.
Certain shortcomings are inherent in the method of analysis presented in
the computation of NPV. Actual values may differ from those projections
presented, should market conditions vary from assumptions used in the
calculation of the NPV ratio. Certain assets, such as adjustable-rate loans,
which represent one of the Bank's primary loan products, have features which
restrict changes in interest rates on a short-term basis and over the life of
the assets. In addition, the proportion of adjustable-rate loans in the Bank's
portfolio could decrease in future periods if market interest rates remain at or
decrease below current levels due to refinance activity. Further, in the event
of a change in interest rates, prepayment and early withdrawal levels would
likely deviate significantly from those assumed in the NPV. Finally, the ability
of many borrowers to repay their adjustable-rate mortgage loans may decrease in
the event of interest rate increases.
In addition, the Bank uses interest rate sensitivity gap analysis to
monitor the relationship between the maturity and repricing of its
interest-earning assets and interest-bearing liabilities, while maintaining an
acceptable interest rate spread. See --"Risk Management" for further
information.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of GS Holdings at December
31, 1999 and 1998 and for the years ended December 31, 1999, 1998 and 1997 are
included in this report at the pages indicated.
Page
----
Independent Auditor's Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Income F-3
Consolidated Statements of Comprehensive Income F-4
Consolidated Statements of Stockholder's Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Page 65
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The following table sets forth certain information (ages as of March 1,
2000) concerning the directors and executive officers of GS Holdings. All
directors serve terms of one year or until election of their respective
successors. All of the directors have served as directors of GS Holdings since
its formation in 1998.
Name Age Position
- ---- --- --------
Gerald J. Ford 55 Chairman of the Board, Chief Executive Officer
and Director
Carl B. Webb 50 President, Chief Operating Officer and Director
Ronald O. Perelman 56 Director
Howard Gittis 65 Director
Christie S. Flanagan 61 Executive Vice President and General Counsel
Richard H. Terzian 63 Executive Vice President and Chief Financial
Officer
Richard P. Hodge 45 Executive Vice President
Scott A. Kisting 52 Executive Vice President
James R. Staff 52 Executive Vice President
Renee Nichols Tucei 43 Executive Vice President and Controller
The following table sets forth certain information (ages as of March 1,
2000) concerning the directors and executive officers of the Bank and who may be
deemed to be officers of GS Holdings under the Securities Exchange Act of 1934,
as amended, and who are not listed above.
Name Age Position
- ---- --- --------
Richard A. Fink 59 Executive Vice President
Kendall M. Fugate 62 Executive Vice President
Walter C. Klein, Jr. 56 Executive Vice President
Richard A. Leweke 46 Executive Vice President
Lacy G. Newman, Jr. 50 Executive Vice President
Peter K. Thomsen 57 Executive Vice President
Stephen J. Trafton 53 Executive Vice President
Dennis L. Verhaegen 48 Executive Vice President
Michael R. Walker 54 Executive Vice President
Mr. Ford has been Chairman of the Board and Chief Executive Officer of
Golden State since 1998 and of California Federal and its predecessors since
1988. Mr. Ford has also been Chairman of the Board and Chief Executive Officer
of GS Holdings since 1998 and of Preferred Capital Corporation since 1996. Mr.
Ford is Chairman of the Board of FNMC and Chairman of the Board and Chief
Executive Officer of Liberte Investors Inc. Mr. Ford is also a Director of Auto
One, Freeport-McMoRan Copper & Gold Co. and McMoRan Exploration Co.
Mr. Webb has been President and Chief Operating Officer of Golden State
since 1998, of California Federal and its predecessors since 1988, and of
Preferred Capital Corporation since 1996. Mr. Webb has also been President and
Chief Operating Officer of GS Holdings since 1998. Mr. Webb is a Director of
Golden State, California Federal, Preferred Capital Corporation, FNMC and Auto
One.
Mr. Perelman has been Chairman of the Board and Chief Executive Officer of
Mafco Holdings, MacAndrews & Forbes Holdings Inc. ("MacAndrews & Forbes") and
various of their affiliates since 1980. Mr. Perelman is also Chairman of the
Executive Committee of the Board of M&F Worldwide Corp. ("MFW") and is Chairman
of the Board of Revlon, Inc. ("Revlon"), Revlon Consumer Products Corporation
("Products Corporation") and Panavision Inc. Mr. Perelman is a Director of the
following corporations which file reports pursuant to the Exchange Act: Golden
State, GS Holdings, MFW, Panavision Inc., Products Corporation, Revlon and REV
Holdings Inc. ("REV Holdings"). (On December 27, 1996, Marvel Entertainment
Group, Marvel (Parent) Holdings Inc., Marvel
Page 66
Holdings, Inc. and Marvel III Holdings Inc., of which Mr. Perelman was a
Director on such date, filed voluntary petitions for reorganization under
Chapter 11 of the United States Bankruptcy Code.)
Mr. Gittis has been Vice Chairman and Chief Administrative Officer of Mafco
Holdings, MacAndrews & Forbes and various of their affiliates since 1985. Mr.
Gittis is a Director of the following corporations which file reports pursuant
to the Exchange Act: Jones Apparel Group, Inc., Loral Space and Communications,
Ltd., Golden State, GS Holdings, MFW, Panavision Inc., Revlon, Products
Corporation, REV Holdings and Sunbeam Corporation.
Mr. Flanagan has been Executive Vice President and General Counsel of
Golden State since September 1998 and of the Bank since 1994. Mr. Flanagan is
also the Executive Vice President, General Counsel and a Director of Preferred
Capital Corp. and a Director of FNMC and Auto One. Mr. Flanagan was previously
the managing partner of the law firm of Jenkens & Gilchrist, P.C. and is
currently of counsel to the firm.
Mr. Terzian has been Executive Vice President and Chief Financial Officer
of Golden State since 1998 and of the Bank since April 1995. Mr. Terzian has
been the Executive Vice President, Chief Financial Officer and a Director of
Preferred Capital Corp. since 1996. Mr. Terzian is also a Director of the
Federal Home Loan Bank of San Francisco. Prior to joining the Bank, Mr. Terzian
served as Chief Financial Officer of Dime Bancorp, Inc. and its subsidiary, The
Dime Savings Bank of New York, FSB.
Mr. Hodge has been Executive Vice President and Corporate Tax Director of
Golden State since September 1998 and of the Bank since January 1996. Mr. Hodge
has been employed with the Bank since November 1995. Prior to joining the Bank,
Mr. Hodge was a tax partner of the public accounting firm of KPMG Peat Marwick
LLP.
Mr. Kisting has been Executive Vice President of Golden State and Executive
Vice President and Director of Consumer and Business Banking of the Bank since
September 1998. Mr. Kisting has also been Chairman of the Board of Auto One
since February 2000. Mr. Kisting was Chief Operating Officer of Citizens
Financial Group from 1997 to 1998 and was previously associated with Norwest
Corporation from 1993 to 1997, most recently as Group Executive Vice President.
Mr. Staff has been Executive Vice President and the Chief Financial Advisor
of Golden State since September 1998 and of the Bank since 1994. He also serves
as a Director of Preferred Capital Corp., Auto One and FNMC. Prior to joining
the Bank, Mr. Staff was associated with the public accounting firm of KPMG Peat
Marwick LLP, most recently as a partner specializing in financial services.
Ms. Tucei has been Executive Vice President and Controller of Golden State
since May 1999 and served as Senior Vice President and Controller from 1998
until 1999. Ms. Tucei has been Executive Vice President and Controller of the
Bank since January 1999 and served as Senior Vice President and Controller of
the Bank from 1994 until 1998 and of its predecessor, First Madison, from 1993
until 1994.
Mr. Fink has been an Executive Vice President of Golden State and of the
Bank since September 1998. Mr. Fink was Vice Chairman and a Director of Golden
State from 1997 until 1998 and was the Senior Executive Vice President and a
Director of Glendale Federal from May 1992 until September 1998. He served
Glendale Federal as Director, Corporate Development from April 1994 until
February 1996 and served as Chief Credit Officer from February 1996 until
September 1998.
Mr. Fugate has been Executive Vice President and Information and Technology
Services Director of the Bank since 1994. Mr. Fugate also served in the same
capacity for the Bank's predecessor, First Nationwide Bank, from 1991 until
1994.
Mr. Klein has been an Executive Vice President of the Bank and the
President of FNMC since January 1996. He also serves as a Director of FNMC.
Prior to joining the Bank, Mr. Klein was associated with PNC Mortgage Corp. of
America and its predecessor, Sears Mortgage Corporation, most recently as
Chairman and Chief Executive Officer.
Page 67
Mr. Leweke has been Executive Vice President and Administrative Services
Director of the Bank since January 1998. Mr. Leweke served as Senior Vice
President-Administrative Services of the Bank from 1994 to 1997 and of its
predecessor, First Nationwide Bank, from 1992 until 1994.
Mr. Newman has been Executive Vice President and Chief Credit Officer of
the Bank since 1994. Mr. Newman also previously served as Executive Vice
President of First Madison and First Gibraltar, both predecessors of the Bank,
from 1992 until 1994.
Mr. Thomsen has been Executive Vice President and Director of Retail
Banking of the Bank since 1994 and of its predecessor, First Nationwide Bank,
from 1991 until 1994.
Mr. Trafton has been an Executive Vice President of Golden State and of the
Bank since September 1998. Mr. Trafton was Chairman of the Board, Chief
Executive Officer, President and a Director of Golden State from 1997 until
1998. Mr. Trafton also served as Chairman of the Board, Chief Executive Officer
and President of Glendale Federal from 1992 until 1998.
Mr. Verhaegen has been Executive Vice President and Corporate Finance
Director of the Bank since February 1997. Mr. Verhaegen operated his own
financial advisory and consulting firm from 1994 to 1996 and served as a
Managing Director of First Southwest Company from 1992 to 1994. Mr. Verhaegen
was also Senior Managing Director of the Financial Institutions Group of Bear
Stearns & Co. Inc. from 1988 to 1992.
Mr. Walker has been Executive Vice President Commercial Real Estate of the
Bank since 1994 and served as Senior Vice President of First Madison and First
Gibraltar, the Bank's predecessors, from 1988 until 1994.
Directors and officers of GS Holdings were not required to file reports
under Section 16 of the Securities Exchange Act of 1934, as amended, during
1999.
Page 68
ITEM 11. EXECUTIVE COMPENSATION
GS Holdings is a holding company with no business operations of its own and
accordingly, engages in business through California Federal and its
subsidiaries. The officers of GS Holdings receive no compensation for their
services to GS Holdings itself. The following table summarizes the compensation
earned by GS Holdings' Chief Executive Officer and each of the four other most
highly compensated executive officers of GS Holdings during 1999 for services
rendered in all capacities to GS Holdings, California Federal and/or their
subsidiaries. The table also includes compensation in the form of restricted
shares and stock options awarded by Golden State, the indirect parent of
California Federal, to the named executive officers for services rendered to
California Federal and its subsidiaries in 1999.
Summary Compensation Table
Long Term
Annual Compensation Compensation Awards
-------------------------------------- ------------------------
Securities
Other Restricted Underlying
Annual Share Options/SARS All Other
Names & Principal Position Year Salary Bonus (1) Compensation (2) Awards (3) (#) Compensation (4)
- -------------------------- ---- --- --- --- --- --- ---
Gerald J. Ford 1999 $1,000,000 $1,375,913 $ 4,241 $589,677 225,000 $ 64,232
Chief Executive Officer 1998 1,000,000 600,000 1,790 0 0 97,152
1997 750,000 375,000 1,420 0 0 71,197
Carl B. Webb (5) 1999 840,000 750,498 5,539 321,636 185,000 199,920
Chief Operating Officer 1998 840,000 1,344,550 2,318 0 0 74,734
and President 1997 600,000 1,117,500 1,637 0 0 96,617
Scott A. Kisting (6) 1999 800,000 500,332 0 1,187,737 100,000 49,852
Executive Vice President 1998 266,668 225,000 55,132 0 0 29,596
and Director, Consumer and
Business Banking
Christie S. Flanagan (5) 1999 398,993 366,453 4,197 131,337 36,000 51,092
Executive Vice President 1998 399,000 734,650 1,549 0 0 126,691
and General Counsel 1997 350,000 727,500 833 0 0 55,856
James R. Staff (5) 1999 398,993 306,453 3,791 131,337 50,000 44,320
Executive Vice President 1998 398,993 757,175 1,566 0 0 122,179
and Chief Financial Advisor 1997 325,000 736,250 780 0 0 53,559
- --------------
(1) Bonus includes (i) cash amount of the 1999 performance-based annual
incentive bonus paid in January 2000 under the Executive Compensation Plan
and (ii) amounts awarded with respect to California Federal's annual net
income pursuant to the Deferred Executive Compensation Plan ("DECP") of
$944,550, $559,650, and $557,175 for Messrs. Webb, Flanagan and Staff,
respectively, in 1998, and $742,500, $577,500 and $536,250 for Messrs.
Webb, Flanagan and Staff, respectively, in 1997. Amounts awarded in 1997
and 1998 under the DECP were payable in 1998 in connection with the
termination of this plan. The terms of the Executive Compensation Plan are
described in the "Report of the Compensation Committee on Executive
Compensation."
(2) Other Annual Compensation includes amounts reimbursed for payment of taxes
for all named executives. None of the named executives had perquisites or
personal benefits paid by California Federal that exceeded $50,000.
(Footnotes continued on next page)
Page 69
(3) Represents the dollar value on the date of grant (January 24, 2000) of
42,120, 22,974, 15,316, 9,381 and 9,381 restricted shares of Golden State
common stock awarded to Messrs. Ford, Webb, Kisting, Flanagan and Staff,
respectively, as part of the executive's 1999 annual incentive bonus paid
under the Executive Compensation Plan and in addition to the cash amount of
the 1999 annual incentive bonus described in footnote (1) above. These
restricted shares vest in two equal installments on the first two
anniversaries of the grant date, have full voting rights and are eligible
for any dividends paid by Golden State at the same rate paid to all
stockholders.
For Mr. Kisting, the amount also includes the dollar value on the date of
grant (July 18, 1999) of 43,500 restricted shares of Golden State's common
stock awarded pursuant to his employment agreement. These restricted shares
vest in two equal installments on the first two anniversaries of the grant
date, have full voting rights and are eligible for any dividends paid by
Golden State at the same rate paid to all stockholders. On December 31,
1999, Mr. Kisting was the only named officer who owned restricted shares.
At that date, Mr. Kisting owned 43,500 shares, and the market value of
those shares based on the closing price of common shares on December 31,
1999 was $750,375.
(4) All Other Compensation includes:
(i) California Federal's contributions to the 401(k) plan of $9,086 in
1999, respectively, for each of Messrs. Ford, Webb, Kisting, Flanagan
and Staff,
(ii) California Federal's contribution to the Supplemental Employees'
Investment Plan for Messrs. Ford, Webb, Kisting, Flanagan and Staff,
respectively, in the amounts of $50,914, $188,138, $39,914, $36,514
and $32,913 in 1999,
(iii)premiums on group term life insurance paid by California Federal for
Messrs. Ford, Webb, Kisting, Flanagan and Staff, respectively, in the
amounts of $1,416, $528, $852, $2,196 and $852 in 1999, and
(iv) premiums on split-dollar life insurance paid by California Federal for
Messrs. Ford, Webb, Flanagan and Staff, respectively, in the amounts
of $2,816, $2,168, $3,296 and $1,469 in 1999.
(5) Does not include payments made by FN Holdings under its long term
management incentive plan which was terminated in 1998, to Mr. Webb in the
amount of $15 million and to Messrs. Flanagan and Staff of $4 million each,
in 1998.
(6) Mr. Kisting joined California Federal as an Executive Vice President on
September 1, 1999.
STOCK OPTIONS/STOCK APPRECIATION RIGHT ("SAR") GRANTS
GS Holdings had no outstanding stock options or freestanding SARs in 1999.
However, the named executive officers were granted certain Golden State stock
options in 1999 as compensation for services rendered to California Federal.
Golden State
Option/SAR Grants in 1999
Individual Grants (1)
---------------------------------------------------------------------------
Number of Securities Percent of Total
Underlying Options/SARs Exercise or Grant Date
Options/SARs Granted Granted to Employees in Base Price Expiration Present Value (2)
Name (#) Fiscal Year ($/Share) Date ($)
---- --- ----------- --------- ---- ---
Gerald J. Ford 225,000 16.64% $23.50 5/17/2009 $2,801,250
Carl B. Webb 185,000 13.68 23.50 5/17/2009 2,303,250
Scott A. Kisting 100,000 7.40 23.50 5/17/2009 1,245,000
Christie S. Flanagan 36,000 2.66 23.50 5/17/2009 448,200
James R. Staff 50,000 3.70 23.50 5/17/2009 622,500
(continued)
Page 70
- -------------
(1) The material terms of the Golden State options are as follows: (i) all
options are non-qualified, were granted on May 18, 1999 and become
exercisable in three equal annual installments on the first three
anniversaries of the grant date; (ii) the option exercise price equals
the fair market value of a common share on the date of grant; (iii) the
options include tax withholding rights, which permit the option holder
to elect to have shares withheld to satisfy tax withholding
requirements; (iv) the option holder may pay the option exercise price
by tendering Golden State common shares previously acquired by the
option holder; and (v) the vesting of the options is accelerated and
the options continue to be exercisable following termination of
employment under certain circumstances as provided in the executive's
employment agreement. See "Employment Contracts, Termination of
Employment and Change in Control."
(2) Present value determinations were made using the Black-Scholes option
pricing model. There is no assurance that any value realized by
optionees will be at or near the value estimated by the Black-Scholes
model. The estimated present values under that model are based on a
seven-year holding period, as opposed to the ten-year term of the
options, and on the following assumptions with respect to volatility
and the risk-free rate, forfeiture percentage and dividend yield. Based
upon the daily closing price of Golden State's common stock, and
Glendale Federal's common stock prior to Golden State becoming Glendale
Federal's holding company on July 24, 1997, for the five-year period
immediately proceeding the grant date of May 18, 1999, the model uses
annualized volatility of 41.3%. For the risk-free rate, the model uses
the yield on a seven-year treasury note of 5.60% interpolated from the
interest rates of five year and ten year treasury rates obtained from
the Bloomberg Service. For the forfeiture percentage, the model uses
5%. For the dividend yield, the model uses zero.
STOCK OPTION EXERCISES AND YEAR END OPTION VALUES
GS Holdings does not have a stock option program so there were no stock
option exercises or year end option values in 1999. However, the following table
sets forth information concerning the 1999 year end stock option values for
options granted by Golden State to the named executive officers during 1999 for
services rendered to California Federal. There were no Golden State stock option
or SAR exercises in 1999 by any of the named executive officers.
Golden State
Aggregated Option/SAR Exercises in 1999 and
Year-End Option/SAR Values
Number of Value of
Securities Unexercised
Underlying Unexercised In-The-Money
Options/SARs At Options/SARs At Fiscal
Shares Fiscal Year-End Year-End (1)
Acquired On Value (#) ($)
Exercisable Realized ----------------------------- ---------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- --------------------- --- --- ----------- ------------- ----------- -------------
Gerald J. Ford 0 0 0 225,000 0 0
Carl B. Webb 0 0 0 185,000 0 0
Scott A. Kisting 0 0 0 100,000 0 0
Christie S. Flanagan 0 0 0 36,000 0 0
James R. Staff 0 0 0 50,000 0 0
- --------------
(1) An option is "in the money" if the market value of the common stock
exceeds the exercise price. The market value of Golden State's common
stock on December 31, 1999 was $17.25, which was less than the $23.50
option exercise price.
Page 71
LONG TERM INCENTIVE PLAN AWARDS
GS Holdings did not make any long term incentive awards in 1999. However,
Golden State made certain long term incentive awards in 1999 to the named
executives for services rendered to California Federal. The following table sets
forth information concerning the long term incentive plan awards made by Golden
State in 1999.
Golden State
Long-Term Incentive Plans - Awards In 1999
Name Number of Shares (1) Performance Or Other Period Until Maturation Or Payout
----------------- -------------------- ------------------------------------------------------
Gerald J. Ford (2) - 1/1/99 - 12/31/01
Carl B. Webb (3) - 1/1/99 - 12/31/01
Scott A. Kisting (4) - 1/1/99 - 12/31/01
Christie S. Flanagan (5) - 1/1/99 - 12/31/01
James R. Staff (5) - 1/1/99 - 12/31/01
- --------------
(1) Awards are paid in the form of cash but up to 50% of any award may be paid
in restricted shares of Golden State's common stock pursuant to the Golden
State Bancorp Inc. Omnibus Stock Plan. Actual payouts, if any, will be
determined by a non-discretionary formula that measures the performance of
Golden State's common stock price over a three year period from January 1,
1999 through December 31, 2001 (the "Performance Period"). The plan
provides for a target award equal to a percentage of the executive's total
annual salary paid by California Federal and, in the case of Messrs. Ford,
Webb, Flanagan and Staff, paid by Golden State Management Inc.("GS
Management"), a subsidiary of Golden State, if the 30-day average stock
price at the end of the Performance Period equals $35 per share. For
Messrs. Ford and Webb, the target award will be based upon their respective
annual salaries at the time of the grant in 1999. For the other named
executives, the award will be based upon their respective annual salaries
at the end of the Performance Period. The payouts range from 50% of the
target award if the stock price reaches a threshold price of $32 per share
to 150% of the target award if the stock price ends at or above $40 per
share. No awards will be paid if the stock price is less than $32 per
share. These awards are also discussed in the "Report of the Compensation
Committee on Executive Compensation." The payment by GS Management of a
portion of the annual base salaries of Messrs. Webb, Flanagan and Staff is
discussed in "Employment Contracts, Termination of Employment and Change in
Control."
(2) The awards are undeterminable at this time but estimated payouts based upon
the formula and Mr. Ford's 1999 compensation are as follows: (i) if the
target stock price is achieved, a target award equal to 50% of Mr. Ford's
annual base compensation paid by California Federal and GS Management in
1999 or $1,100,000, (ii) if the threshold stock price is achieved, 50% of
his target award or $550,000, and (iii) if the maximum target stock price
is achieved, $1,650,000 or 150% of his target award. In addition to the
annual salary paid by the Bank, Mr. Ford received additional compensation
in 1999 pursuant to a consulting agreement with GS Management, which
terminated December 31, 1999.
(3) The awards are undeterminable at this time but estimated payouts based upon
the formula and Mr. Webb's 1999 annual salary are as follows: (i) if the
target stock price is achieved, a target award equal to 50% of his annual
salary paid by California Federal and GS Management in 1999 or $600,000,
(ii) if the threshold stock price is achieved, 50% of his target award or
$300,000, and (iii) if the maximum target stock price is achieved, $900,000
or 150% of his target award.
(4) The award is undeterminable at this time but estimated payouts based upon
the formula and Mr. Kisting's current annual salary are as follows: (i) if
the target stock price is achieved, a target award equal to 35% of his
annual salary or $280,000, (ii) if the threshold stock price is achieved,
50% of his target award or $140,000, and (iii) if the maximum target stock
price is achieved, 150% of his target award or $390,000. Does not include a
long term incentive cash payment in the amount of $4,000,000 to be paid to
Mr. Kisting on March 31, 2003 if California Federal achieves certain
performance criteria established annually by the Compensation Committee
during a four year period from 1999 to 2003.
(Footnotes continued on next page)
Page 72
(5) The awards are undeterminable at this time but estimated payouts based upon
the formula and the executive's current annual salary are as follows: (i)
if the target stock price is achieved, a target award equal to 35% of the
executive's annual salary paid by California Federal and G S Management or
$245,000, (ii) if the threshold stock price is achieved, 50% of the target
award or $122,500, and (iii) if the maximum target stock price is achieved,
150% of the target award or $367,500.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
GS Holdings has no compensation committee. The compensation policies
applicable to its executive officers are determined by the Compensation
Committee of Golden State and the Bank. Following is the Report of the
Compensation Committee on Executive Compensation of the Bank.
The Compensation Committee of the Board of Directors of California Federal
(the "Committee") has overall responsibility for reviewing and approving the
compensation practices and policies of California Federal. The Committee also
reviews and ratifies compensation for the Chief Executive Officer and the other
executive officers named in the Summary Compensation Table. The Compensation
Committee of the Board of Directors of Golden State (the "Golden State
Compensation Committee") establishes compensation for the Chief Executive
Officer and reviews and approves the compensation of the other named executive
officers. The Golden State Compensation Committee is also solely responsible for
establishing and approving all awards of stock options, restricted stock and
performance-based incentive compensation.
OBJECTIVES
The major objectives of California Federal's executive compensation
policies are:
o To retain executive officers by paying them competitively, motivating them
to contribute to California Federal's success and rewarding them for their
performance and
o To link a substantial part of each executive officer's compensation to the
performance of both California Federal and the individual officer.
OVERVIEW OF COMPENSATION PHILOSOPHY
The named executives are currently paid compensation for services rendered
to California Federal in the following forms: (a) annual compensation in the
form of base salary and performance-based annual incentive awards and (b)
long-term compensation in the form of performance-based stock options,
restricted stock and long-term incentive awards. The stock-based compensation is
awarded by Golden State, the indirect parent of California Federal, through the
Golden State Compensation Committee.
Prior to September 1998, California Federal was a privately held bank that
relied exclusively upon cash compensation to achieve its competitive objectives.
Accordingly, California Federal paid base salaries and total cash compensation
at higher levels than those of its competitors to offset the lack of stock
compensation. In 1999, because of Golden State's publicly-held status,
California Federal was able to consider other forms of executive compensation in
an effort to move away from a strictly cash based compensation program and to
control base salary costs. By exploring other forms of compensation, California
Federal intended to use Golden State's common stock to better align executives'
pay with stockholder interests and to reflect the pay practices of other
comparable publicly-held financial institutions.
In this regard, the Golden State Compensation Committee reviewed analyses
of the different types of incentive and stock plans based upon a custom peer
group of savings and loan institutions and commercial banks of comparable asset
size to California Federal developed by an independent executive compensation
consulting firm (the "Comparison Group"). Based upon the analyses and
management's recommendation, the Golden State Compensation Committee developed
the Golden State Bancorp Inc. Omnibus Stock Plan ("Omnibus Stock Plan") and the
Executive Compensation Plan, which were both approved at the Golden State Annual
Meeting of Stockholders on May 15, 1999.
Page 73
Using the Omnibus Stock Plan and the Executive Compensation Plan, the
Golden State Compensation Committee was able to adopt a compensation philosophy
that relied less on base salary increases and cash bonuses and that emphasized
performance-based and stock-based incentive awards as primary components of the
executives' total compensation.
EXECUTIVE COMPENSATION
ANNUAL COMPENSATION. The annual compensation paid to executive officers
consists of a base salary and an annual incentive opportunity, designed to be
competitive with the third quartile of total annual compensation paid by the
Comparison Group for comparable positions.
BASE SALARY. Individual base salaries for the named executive officers
other than Mr. Ford are recommended by the Chief Executive Officer. The Golden
State Compensation Committee approves the base salaries for these executive
officers and sets Mr. Ford's salary, all of which are ratified by the Committee.
In ratifying the salaries, the Committee considers the market base salary for
the experience, skills and knowledge required for the position and the
capabilities of the individual executive officer as compared to the Comparison
Group. The executives' salaries are reviewed and adjusted periodically based on
a subjective evaluation of overall performance of the executive officer and base
salary increases provided to executives at comparable financial institutions. To
establish base salary levels for 1999, the Golden State Compensation Committee
also evaluated California Federal's actual performance in 1998 and each
executive officer's contribution to that performance. Each of the named
executive officers has an employment agreement setting forth his base salary,
which was approved by the Golden State Compensation Committee and ratified by
the Committee, and which is described above in "Employment Contracts,
Termination of Employment and Change in Control."
ANNUAL INCENTIVE AWARDS. Annual incentive awards are governed by the
Executive Compensation Plan and may be based upon the achievement of one or more
performance measures. The Golden State Compensation Committee established 1999
annual incentive awards using target amounts based upon a percentage of base
salary for each executive officer and a payout formula based upon the
achievement of certain performance criteria designed to encourage profitable
growth and cost management. The performance goals adopted by the Golden State
Compensation Committee were the achievement by California Federal of (1) a
certain level of pre-tax earnings and (2) a certain "Efficiency Ratio,"
calculated as noninterest expenses as a percentage of interest and noninterest
income, which was used as an award modifier. The Golden State Compensation
Committee believed that these performance measurements would serve the purpose
of motivating the executives to achieve the profitability and cost-reduction
goals established in connection with the California Federal and Glendale Federal
merger. The payout formula provided for an initial award to be calculated as a
percentage of the executive's target award based upon the final pretax income.
An award modifier was then calculated based on California Federal's actual
Efficiency Ratio, and the final award was calculated by multiplying the initial
award by the modifier. Based upon the actual performance results of $832.6
million in pre-tax income and an Efficiency Ratio of 48.3%, the Golden State
Compensation Committee awarded to each named executive officer an annual
incentive award consisting of cash as shown in the "Bonus" column and shares of
restricted stock having the market value shown in the "Restricted Share Awards"
column of the Summary Compensation Table. The Golden State Compensation
Committee authorized payment of 30% of actual annual incentive awards in
restricted stock to enhance the alignment of management and shareholders'
interests and to improve the retention characteristics of the Plan.
LONG-TERM PERFORMANCE-BASED COMPENSATION. Under the Omnibus Stock Plan and
Executive Compensation Plan, the Golden State Compensation Committee granted
stock options and long-term incentive awards to executive officers designed to
provide total compensation at the 65th percentile of the Comparison Group
companies should Golden State achieve expected levels of financial and stock
price performance.
STOCK OPTIONS. Subject to the terms of the Omnibus Stock Plan, the Golden
State Compensation Committee has the authority to determine which persons
receive awards and to prescribe the terms and conditions of the awards. In 1999,
the Golden State Compensation Committee granted stock options to senior officers
of Golden State and California Federal, including the named executive officers
as set forth in the above table captioned "Option/SAR Grants in 1999." There
were no stock options awarded to consultants. To determine the 1999 awards for
the named executive officers, the Golden State Compensation Committee considered
recommendations from management and reviewed certain long-term incentive
compensation information for comparable positions at Comparison Group
Page 74
companies. The Golden State Compensation Committee also included a three-year
vesting period in the awards designed to encourage executive officers to remain
with Golden State for a period of years.
LONG-TERM INCENTIVE PLANS. Under the Executive Compensation Plan, the
Golden State Compensation Committee may implement long-term incentive plans
based upon one or more performance criteria. In 1999, the Golden State
Compensation Committee implemented a long-term incentive plan based solely on
the performance of Golden State's common stock over a three year period
commencing January 1, 1999 and ending December 31, 2001 (the "1999 LTIP Plan").
Payments under the 1999 LTIP Plan, if any, will be determined using (a)
individual target awards established as a percentage of the executives' base
salary as provided in the plan and (b) an award payout formula based on the
stock price performance measured by the average closing stock price over the
last thirty trading days in 2001. Payments will be made in 2002 in a multiple or
fraction of the target awards depending upon the actual stock performance. For
example, if the stock price achieves a 15% annualized return over the
performance period ($35 per share), the target award will be paid to
participants. If the stock price achieves a 20% annualized return ($40 per
share), the maximum award will be paid. However, no award will be paid if the
annualized rate of return is less than 12% ($32 per share). Hypothetical awards
for each executive are shown in the above table captioned "Long-Term Incentive
Plans - Awards in 1999." As provided in the Executive Compensation Plan, the
Golden State Compensation Committee may pay out up to 50% of each award earned
under the Plan in restricted shares of common stock.
OTHER COMPENSATION. Executive officers receive various perquisites and
participate in California Federal's 401(k) qualified deferred compensation plan
("401(k) Plan") and welfare benefit plans generally available to California
Federal's employees. Executive officers also participate in a nonqualified
deferred compensation plan intended only to offset the impact of Internal
Revenue Service limitations on the amount of compensation that can be deferred
under the qualified 401(k) Plan. In general, the benefit program is intended to
provide benefits that are competitive with the level of benefits made available
to executive officers of Comparison Group companies.
CHIEF EXECUTIVE OFFICER
The general policies described above for the executive officers also apply
to the compensation recommendations made by the Golden State Compensation
Committee with respect to the 1999 compensation of Mr. Ford. Mr. Ford's 1999
base salary was paid in accordance with an employment agreement with California
Federal and a consultant agreement with GS Management. The Golden State
Compensation Committee also approved, and the Committee ratified, a new
employment agreement that commenced on January 1, 2000 which superseded and
replaced Mr. Ford's prior agreement, as described in "Employment Contracts,
Termination of Employment and Change in Control." The new employment agreement
includes an adjustment to Mr. Ford's base salary in 2000 to comply with the tax
deductibility standards under Internal Revenue Code ss.162(m).
Mr. Ford's annual incentive award was determined by the Golden State
Compensation Committee as described above in the section captioned "Executive
Compensation." Based upon the achievement of the performance goals, the Golden
State Compensation Committee awarded annual incentive compensation for 1999 to
Mr. Ford in the total amount of $1,965,590, comprised of $1,375,913 in cash and
$589,677 in 42,120 shares of restricted stock, as shown in the Summary
Compensation Table. During 1999, the Golden State Compensation Committee also
approved a grant of 225,000 stock options with an exercise price equal to the
fair market value of Golden State's common stock on the date of grant as shown
in the table captioned "Stock Option/SAR Grants." In determining the size of the
stock option grant, the Golden State Compensation Committee considered the same
issues and competitive market that were used in determining stock option grants
for the other executive officers.
The Committee believes that Mr. Ford's leadership of Golden State and
California Federal during 1999, including without limitation, the integration of
the California Federal and Glendale Federal institutions, has enabled California
Federal to develop a strong franchise with consistent financial results and
financial discipline, and these compensation decisions are made in recognition
of California Federal and its subsidiaries' performance.
Page 75
TAX DEDUCTIBILITY
As a result of amendments to the Internal Revenue Code (the "Code") enacted
in 1993, a publicly-held company, such as Golden State, is limited to an annual
deduction for federal income tax purposes of $1,000,000 for compensation paid to
each of its chief executive officer and the four highest compensated executive
officers (other than its chief executive officer) determined at the end of each
year. However, performance-based compensation established by an independent
committee and based on performance goals and a maximum compensation amount,
which have been disclosed to and approved by stockholders, is excluded from this
limitation. Management believes that compensation payable under the Executive
Compensation Plan and the Omnibus Stock Plan as administered and awarded by the
Golden State Compensation Committee will be deemed to be performance-based
compensation within the meaning of the Code.
Members of the Compensation Committee
of California Federal
Gerald J. Ford, Chairman
Paul M. Bass, Jr.
George W. Bramblett, Jr.
John F. King
COMPENSATION OF DIRECTORS
Directors of GS Holdings receive no compensation for their services as
directors.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
FORD AGREEMENTS. Mr. Ford previously entered into an employment agreement
with California Federal (the "1999 Employment Agreement") calling for his
continued employment by California Federal in his current executive capacity
with an annual base salary of $1,000,000 and certain other benefits, which was
in effect until December 31, 1999. Effective January 1, 2000, Mr. Ford entered
into a new employment agreement with California Federal, which superseded and
replaced Mr. Ford's 1999 Employment Agreement. Mr. Ford's current employment
agreement calls for his continued employment by California Federal in his
current executive capacity with an annual base salary of $1,000,000, subject to
adjustment by California Federal. The agreement has a termination date of
December 31, 2002 and is automatically renewed for one year terms unless
California Federal or Mr. Ford provides notice not to renew. Mr. Ford's
agreement also provides for, among other things, a life insurance policy on the
life of Mr. Ford in an amount equal to three times his base salary.
Additionally, if the agreement is terminated (a) by California Federal without
"cause" or by Mr. Ford for "good reason" (each as defined in the employment
agreement) prior to the scheduled termination date, or (b) by California Federal
without "cause" or by Mr. Ford for any reason within 24 months following a
change of control, the agreement provides for: (i) a cash payment equal to three
times Mr. Ford's base salary and annual incentive bonus as calculated under the
agreement, (ii) medical and other benefits for a period of three years, and
(iii) the immediate vesting of all outstanding stock options, restricted stock,
SARs and deferred compensation payments which will then be exercisable for three
years from the date of termination, subject to certain restrictions
(collectively, the "Termination Payments").
EXECUTIVE EMPLOYMENT AGREEMENTS. Messrs. Webb and Staff previously entered
into employment agreements with California Federal calling for their continued
employment by California Federal in their current executive capacities, with
annual base salaries of $1,200,000 and $700,000, respectively, and certain other
benefits, which were in effect until December 31, 1999.
Effective January 1, 2000, Messrs. Webb and Staff entered into new
employment agreements with California Federal calling for their continued
employment by California Federal in their current executive capacities. Both
agreements have a termination date of December 31, 2002, and are automatically
renewed for one year terms unless notice not to renew is provided by California
Federal or the executive. The annual base salaries payable by California Federal
to Messrs. Webb and Staff are $1,000,000 and $700,000, respectively, which are
subject to adjustment by California Federal. The agreements also provide for,
among other things, a life insurance policy on the life of the insured in an
amount equal to 2.4 times the base salary payable by California Federal for Mr.
Webb and double the
Page 76
base salary payable by California Federal for Mr. Staff. Additionally, Messrs.
Webb and Staff are each entitled to Termination Payments under the circumstances
described above in the section on Mr. Ford's employment agreement.
Messrs. Kisting and Flanagan have also entered into employment agreements
with California Federal calling for their continued employment in their current
executive capacities, which are substantially similar in terms to Mr. Staff's
employment agreement except as follows. Both agreements have a termination date
of July 31, 2002 and are automatically renewed for one year terms unless notice
not to renew is provided by either California Federal or the executive. The
agreements provide for annual base salaries payable by California Federal to
Messrs. Kisting and Flanagan in the amounts of $800,000 and $700,000,
respectively. Messrs. Kisting and Flanagan are entitled to the Termination
Payments described above in the section on Mr. Ford's employment agreement in
the event the executive's agreement is terminated prior to the termination date
by California Federal without "cause" or by the executive for "good reason"
(each as defined in the employment agreements). In addition, if the executive is
terminated without "cause" within 24 months following a change of control, the
executive is entitled to receive the Termination Payments and a cash amount in
lieu of shares issuable upon the exercise of his stock options equal to the
aggregate spread between the exercise prices of all options held by the
executive and the highest price per share actually paid in connection with such
change of control. Mr. Flanagan's agreement also provides for a one time renewal
payment of $60,000. Mr. Kisting's agreement provides for the award of 43,500
restricted shares of Golden State common stock which were granted in 1999 and
are shown in the "Summary Compensation Table" and an initial award of 100,000
options for Golden State common stock which were also granted in 1999 and are
shown in the "Option/SARs Grants in 1999" table. Mr. Kisting's agreement also
provides for an additional grant of 100,000 options which were awarded on
January 24, 2000 and for a long term incentive payment of $4,000,000 to be paid
on March 31, 2003 provided California Federal achieves certain performance
criteria, established annually by the Golden State Compensation Committee during
a four year period from 1999 to 2003.
Pursuant to a services agreement for the provision of certain services by
California Federal to GS Management, a portion of each of the salaries for
Messrs. Webb, Staff and Flanagan was paid by GS Management such that the annual
net base compensation payable by California Federal for Messrs. Webb, Flanagan
and Staff in 1999 was $840,000, $398,993 and $398,993, respectively.
CHANGE OF CONTROL PLAN. The Deferred Executive Compensation Plan of
California Federal provided for certain payments to participants in the DECP for
annual incentives and in the event of a change of control of California Federal.
The annual incentive feature of the DECP was terminated in 1998 upon the
consummation of the merger of California Federal and Glendale Federal, and all
amounts were paid out as shown in the "Summary Compensation Table." No payment
was made under the change of control provision because the Compensation
Committee of California Federal determined that the merger of California Federal
and Glendale Federal was not a change of control within the meaning of the DECP.
California Federal subsequently entered into a replacement change of control
agreement in 1999 with the former participants in the DECP, including Messrs.
Webb, Flanagan and Staff, so that amounts that would have been payable under the
change of control provisions of the DECP would be paid to the former
participants in the DECP who remain employed by California Federal upon the
earlier to occur of (1) a change of control of California Federal subsequent to
September 11, 1998 or (2) December 31, 2002. The amounts payable to Messrs.
Webb, Flanagan and Staff are $1,500,000, $875,000 and $875,000, respectively,
under the change of control agreement.
Page 77
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1999, Mr. Ford, the Chairman and Chief Executive Officer of
California Federal, served as one of the five members of the Compensation
Committee of California Federal. Mr. Ford also served as the Chairman of the
Board and Chief Executive Officer of Golden State during 1999.
During 1999, Director Bramblett served as one of the four members of the
Compensation Committee of California Federal. Mr. Bramblett is a partner of
Haynes & Boone, a law firm based in Dallas, Texas that provides certain legal
services to Golden State, California Federal and their subsidiaries. During
1999, the amounts paid in the aggregate by Golden State, California Federal and
their subsidiaries to Haynes & Boone did not exceed 5% of the firm's gross
revenues for its last fiscal year. California Federal has also retained Haynes &
Boone to provide certain legal services for California Federal and its
subsidiaries in 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
COMMON STOCK OF GS HOLDINGS
All of the common stock of GS Holdings is owned by the Golden State. GS
Holdings has no other voting securities.
COMMON STOCK OF GOLDEN STATE
The following table sets forth information as of February 29, 2000,
concerning the shares of Golden State common stock beneficially owned by each
director, by each executive officer named in the Summary Compensation Table and
by all directors and executive officers of GS Holdings as a group.
Title of Amount and Nature of Percent of
Golden State Class Name of Beneficial Owner Beneficial Ownership Class
- ------------------ ------------------------ -------------------- ----------
Common Christie S. Flanagan.................................................. 16,381(1) *
Common Gerald J. Ford........................................................ 17,708,902(2) 14.46%
Common Howard Gittis......................................................... 10,000 *
Common Scott A. Kisting...................................................... 84,742(3) *
Common Ronald O. Perelman.................................................... 45,499,525(4) 37.15*
Common James R. Staff........................................................ 9,381(1) *
Common Carl B. Webb.......................................................... 72,974(5) *
Common All directors and executive officers as a group (19 persons).. 17,816,664(6) 52.06
- ------------
* Less than one percent of the outstanding shares in each case.
(1) Includes 9,381 restricted shares of common stock.
(2) Includes 42,120 restricted shares of common stock owned by Mr. Ford. Also
includes 16,763,782 shares of common stock and 903,000 warrants, each
immediately exercisable for one share of common stock and one Litigation
Tracking Warrant, all owned by Hunter's Glen/Ford, Ltd. Mr. Ford and a
corporate entity controlled by Mr. Ford are the general partners of
Hunter's Glen/Ford, Ltd. Accordingly, Mr. Ford may be deemed to be the
beneficial owner of all of the shares of common stock owned by Hunter's
Glen/Ford, Ltd.
(3) Includes 58,816 shares of restricted stock.
(4) Represents shares of common stock owned by GSB Investments Corp. Mr.
Perelman is the indirect beneficial owner of all of the outstanding capital
stock of GSB Investments Corp. Accordingly, Mr. Perelman may be deemed to
be the beneficial owner of all of the shares of common stock owned by GSB
Investments Corp. The shares of common stock owned by GSB Investments
Corp., and the capital stock of any intermediate holding companies
affiliated with Mafco Holdings, are or may be from time to time pledged to
secure obligations of Mafco Holdings and its affiliates.
(5) Includes 22,974 restricted shares of common stock.
Page 78
(6) Includes 187,835 restricted shares granted to executive officers pursuant
to the Golden State Bancorp Inc. Omnibus Stock Plan. Also includes 41,000
shares as to which voting and investment power are shared and 27,220 shares
invested in the Common Stock Fund of California Federal's 401(k) Plan over
which the trustee for the Plan has sole voting authority and shared
investment authority.
Litigation Tracking Warrants(TM) of Golden State
The following table sets forth information as of February 29, 2000
concerning the number of LTW(TM)s beneficially owned by each director of Golden
State, by each executive officer named in the Summary Compensation Table and by
all directors and executive officers of Golden State as a group.
Title of Amount and Nature
Golden State of Beneficial Percent of
Class Name of Beneficial Owner Ownership Class
----- ------------------------ --------- -----
LTW Christie S. Flanagan......................................... 7,000 *
LTW Gerald J. Ford............................................... 1,903,000(1) *
LTW Howard Gittis................................................ 0 *
LTW Scott A. Kisting............................................. 0 *
LTW Ronald O. Perelman........................................... 0 *
LTW James R. Staff............................................... 0 *
LTW Carl B. Webb................................................. 0 *
LTW All directors and executive officers as a group (19) persons) 2,002,000 2.76%
- ---------
* Less than one percent of the outstanding warrants in each case.
(1) Includes 1,000,000 LTW(TM)s purchased and held of record by Turtle Creek
Revocable Trust, a revocable trust organized under the laws of the State of
Texas of which Gerald J. Ford is the sole grantor and trustee. Accordingly,
Mr. Ford may be deemed to be the beneficial owner of all of the LTW(TM)s
owned by Turtle Creek Revocable Trust. Also includes 903,000 warrants
purchased and held of record by Hunter's Glen/Ford, Ltd., each immediately
exercisable for one share of common stock and one LTW(TM). Mr. Ford and a
corporate entity controlled by Mr. Ford are the general partners of
Hunter's Glen/Ford, Ltd. Accordingly, Mr. Ford may be deemed to be the
beneficial owner of all of the LTW(TM)s owned by Hunter's Glen/Ford, Ltd.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIPS AND TRANSACTIONS WITH MAFCO HOLDINGS AND ITS SUBSIDIARIES
INTERCOMPANY COST SHARING ARRANGEMENTS
Golden State and its subsidiaries are insured under policies maintained by
Mafco Holdings, and Golden State and its subsidiaries reimburse Mafco Holdings
for the portion of the cost of such policies attributable to coverage of Golden
State and its subsidiaries. The amount paid for such policies during 1999 was
$1,084,385. California Federal and its subsidiaries also use certain consultants
retained by Mafco Holdings, and California Federal reimburses Mafco Holdings for
the portion of the cost of the consultants' services attributable to work
performed for the benefit of California Federal and its subsidiaries. The amount
paid for such services during 1999 was $3,136. Golden State, from time to time,
also uses certain assets owned by Mafco Holdings, including business aircraft.
The amount paid related to such use in 1999 was $201,000.
TAX SHARING AGREEMENT
Prior to the Merger Date, for federal income tax purposes, California
Federal, FN Holdings and Mafco Holdings were parties to the Tax Sharing
Agreement. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Provision for Federal and State Income Taxes."
No amounts were paid in 1999 for Consolidated Liabilities by Golden State,
GS Holdings or California Federal.
Page 79
LOANS TO EXECUTIVE OFFICERS AND DIRECTORS
Some of California Federal's executive officers, directors, and members of
their immediate families have engaged in loan transactions with California
Federal. Such loans were made: (i) in the ordinary course of California
Federal's business, (ii) on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions between California Federal and other persons, and (iii) did not
involve more than the normal risk of collectibility or present other unfavorable
features.
Page 80
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENT SCHEDULES
Schedules are omitted because of the absence of conditions under which they
are required or because the required information is provided in the consolidated
financial statements or notes thereto.
(b) EXHIBITS
2.1 Agreement and Plan of Reorganization, dated as of February 4,
1998, by and among First Nationwide (Parent) Holdings Inc.,
First Gibraltar Holdings, Inc., Hunter's Glen/Ford, Ltd.,
Golden State Bancorp Inc. and Golden State Financial
Corporation. (Incorporated by reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K dated February 4, 1998
(the "February 1998 Form 8-K").)
2.2 Amendment No. 1 dated as of July 31, 1998, by and among First
Nationwide (Parent) Holdings Inc., First Nationwide Holdings
Inc., Golden State Bancorp Inc., Golden State Financial
Corporation, First Gibraltar Holdings Inc. and Hunter's
Glen/Ford Ltd., to the Agreement and Plan of Reorganization,
dated as of February 4, 1998, by and among the Parties.
(Incorporated by reference to Exhibit 2.2 to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1998 (the "1998 Form 10-K").)
3.1 Certificate of Incorporation of the Registrant. (Incorporated
by reference to Exhibits 3.1 to the Registrant's Quarterly
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 3.2 to the Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended September 30,
1998.)
4.1 Indenture, dated as of September 19, 1996, between First
Nationwide Escrow Corp. and The Bank of New York, as trustee,
relating to the 10 5/8% Senior Subordinated Exchange Notes Due
2003 (the "10 5/8% Notes"). (Incorporated by reference to
Exhibit 4.1 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (File No. 333-21015).)
4.2 First Supplemental Indenture, dated as of January 3, 1997,
among FN Holdings, First Nationwide Escrow Corp. and The Bank
of New York, as trustee, relating to the 10 5/8% Notes.
(Incorporated by reference to Exhibit 4.2 to Amendment No. 1
to the Registrant's Registration Statement on Form S-1 (File
No. 333-21015).)
4.3 Second Supplemental Indenture dated September 11, 1998,
supplementing the Indenture, dated as of September 19, 1996,
as Supplemented, between First Nationwide Holdings Inc. and
The Bank of New York,as Trustee, relating to the 10 5/8%
Senior Subordinated Exchange Notes Due 2003. (Incorporated by
reference to Exhibit 4.3 to the Registrant's 1998 Form 10-K.)
4.4 Third Supplemental Indenture dated September 14, 1998, between
Golden State Holdings Inc. (formerly known as New First
Nationwide Holdings Inc.), as successor to First Nationwide
Holdings Inc., and The Bank of New York, as Trustee, relating
to the 10 5/8% Senior Subordinated Exchange Notes due 2003.
(Incorporated by reference to Exhibit 4.4 to the Registrant's
1998 Form 10-K.)
4.5 Indenture, dated as of October 1, 1986, between First
Nationwide Bank, A Federal Savings Bank, and Bank of America
National Trust and Savings Association Re: $100,000,000 10%
Subordinated Debentures due 2006 (the "2006 Indenture").
(Incorporated by reference to Exhibit 4.5 to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1994.)
Page 81
4.6 First Supplemental Indenture, dated as of September 30, 1994,
among First Madison Bank, FSB, First Nationwide Bank, A
Federal Savings Bank, and Bank of America National Trust and
Savings Association, supplementing the 2006 Indenture.
(Incorporated by reference to Exhibit 4.6 to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1994.)
4.7 Second Supplemental Indenture, dated as of January 3, 1997,
among First Nationwide Bank, A Federal Savings Bank,
California Federal Bank, A Federal Savings Bank and Bank of
America National Trust and Savings Association, as trustee,
supplementing the 2006 Indenture. (Incorporated by reference
to Exhibit 4.8 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (File No. 333-21015).)
4.8 Indenture, dated February 15, 1986, between Cal Fed Bancorp
Inc. and Manufacturers Hanover Trust Company, as trustee,
relating to the 6 1/2% Convertible Subordinated Debentures Due
2001 (the "6 1/2% Convertible Debenture Indenture").
(Incorporated by reference to Exhibit 4.11 to Amendment No. 1
to the Registrant's Registration Statement on Form S-1 (File
No. 333-21015).)
4.9 First Supplemental Indenture, dated as of December 16, 1992,
among Cal Fed Bancorp Inc., XCF Acceptance Corporation,
California Federal Bank, A Federal Savings Bank, and Chemical
Bank, supplementing the 6 1/2% Convertible Debenture
Indenture. (Incorporated by reference to Exhibit 4.12 to
Amendment No. 1 to the Registrant's Registration Statement on
Form S-1 (File No. 333-21015).)
4.10 Second Supplemental Indenture dated as of December 13, 1996
among XCF Acceptance Corporation, California Federal Bank, A
Federal Savings Bank, and The Chase Manhattan Bank, as
trustee, supplementing the 6 1/2% Convertible Debenture
Indenture. (Incorporated by reference to Exhibit 4.13 to
Amendment No. 1 to the Registrant's Registration Statement on
Form S-1 (File No. 333-21015).)
4.11 Third Supplemental Indenture dated as of December 13, 1996
among Cal Fed Bancorp, Inc., XCF Acceptance Corporation,
California Federal Bank, A Federal Savings Bank, and The Chase
Manhattan Bank, as Trustee, supplementing the 6 1/2%
Convertible Debenture Indenture. (Incorporated by reference to
Exhibit 4.14 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (File No. 333-21015).)
4.12 Fourth Supplemental Indenture dated as of December 13, 1996
among Cal Fed Bancorp Inc., XCF Acceptance Corporation, and
The Chase Manhattan Bank, as trustee, supplementing the 6 1/2%
Convertible Debenture Indenture. (Incorporated by reference to
Exhibit 4.15 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (File No. 333-21015).)
4.13 Indenture, dated December 1, 1992, between California Federal
Bank, A Federal Savings Bank and Chemical Bank, as trustee,
relating to the 10% Subordinated Debentures Due 2003.
(Incorporated by reference to Exhibit 4.16 to Amendment No. 1
to the Registrant's Registration Statement on Form S-1 (File
No. 333-21015).)
4.14 Agreement Regarding Contingent Litigation Recovery
Participation Interests, dated as of June 30, 1995, between
California Federal Bank, A Federal Savings Bank, and Chemical
Trust Company of California, as Interest Agent. (Incorporated
by reference to Exhibit 4.17 to Amendment No. 1 to the
Registrant's Registration Statement on Form S-1 (File No.
333-21015).)
4.15 Agreement Regarding Secondary Contingent Litigation Recovery
Participation Interests, dated as of December 2, 1996, between
California Federal Bank, A Federal Savings Bank, and Chase
Mellon Shareholder Services, L.L.C., as Interest Agent.
(Incorporated by reference to Exhibit 4.18 to Amendment No. 1
to the Registrant's Registration Statement on Form S-1 (File
No. 333-21015).)
Page 82
4.16 Indenture dated as of August 6, 1998 between GS Escrow Corp.
and The Bank of New York, as Trustee. (Incorporated by
reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form S-1 (File No. 333-64597).)
4.17 First Supplemental Indenture dated as of August 6, 1998
between GS Escrow Corp. and The Bank of New York, as Trustee.
(Incorporated by reference to Exhibit 4.2 to the Registrant's
Registration Statement on Form S-1 (File No. 33-64597).)
4.18 Second Supplemental Indenture dated as of August 6, 1998
between GS Escrow Corp. and The Bank of New York, as Trustee.
(Incorporated by reference to Exhibit 4.3 to the Registrant's
Registration Statement on Form S-1 (File No. 333-64597).)
4.19 Third Supplemental Indenture dated as of August 6, 1998
between GS Escrow Corp. and The Bank of New York, as Trustee.
(Incorporated by reference to Exhibit 4.4 to the Registrant's
Registration Statement on Form S-1 (File No. 333-64597).)
4.20 Fourth Supplemental Indenture dated as of August 6, 1998
between GS Escrow Corp. and The Bank of New York, as Trustee
(Incorporated by reference to Exhibit 4.5 to the Registrant's
Registration Statement on Form S-1 (File No. 333-64597).)
4.21 Fifth Supplemental Indenture dated as of September 11, 1998
between Golden State Holdings Inc. and the Bank of New York,
as Trustee (Incorporated by reference to Exhibit 4.6 to the
Registrant's Registration Statement on Form S-1 (File No.
333-64597).)
10.1 Tax Sharing Agreement, effective as of January 1, 1994, by and
among First Madison Bank, FSB, the Registrant's and Mafco
Holdings Inc. (Incorporated by reference to Exhibit 10.10 to
the Registrant's Registration Statement on Form S-1 (File No.
33-82654).)
10.2 Amendment to Tax Sharing Agreement, effective September 11,
1998, by and among Mafco Holdings Inc., Golden State Bancorp
Inc., First Nationwide Holdings Inc., Glendale Federal Bank, A
Federal Savings Bank, and New First Nationwide Holdings Inc.
(Incorporated by reference to Exhibit 10.2 to the Registrant's
1998 Form 10-K.)
10.3 Tax Sharing Modification Agreement dated as of December 22,
1998, between Mafco Holdings Inc. and Golden State Bancorp
Inc. (Incorporated by reference to Exhibit 10.3 to the
Registrant's 1998 Form 10-K.)
10.4 Office Lease, dated as of November 15, 1990, between Webb/San
Francisco Ventures, Ltd. and First Nationwide Bank, A Federal
Savings Bank. Confidential treatment has been granted for
portions of this document (Incorporated by reference to
Exhibit 10.6 to Amendment No. 3 to the Registrant's
Registration Statement on Form S-1 (File No. 33-82654).)
10.5 Amendment No. 2 to Lease between First Nationwide Bank, A
Federal Savings Bank, and RNM 135 Main, L.P. dated April 6,
1995. (Incorporated by reference to Exhibit 10.26 to
Post-Effective Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (File No. 33-82654).)
10.6 Employment Agreement between First Nationwide Bank, A Federal
Savings Bank, and Gerald J. Ford, dated as of October 1, 1994.
(Incorporated by reference to Exhibit 10.10 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994.)
10.7 Amendment to Employment Agreement between California Federal
Bank, A Federal Savings Bank, and Gerald J. Ford, dated as of
January 1, 1998. (Incorporated by reference to Exhibit 10.16
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997 (the "1997 Form 10-K").)
Page 83
10.8 Employment Agreement, dated as of November 22, 1999, between
California Federal Bank, A Federal Savings Bank, and Gerald J.
Ford.
10.9 Employment Agreement, dated as of January 1, 1998 between
California Federal Bank, A Federal Savings Bank, and Carl B.
Webb, II. (Incorporated by reference to Exhibit 10.13 to the
Registrant's 1997 Form 10-K.)
10.10 Employment Agreement, dated as of December 17, 1999, between
California Federal Bank, A Federal Savings Bank, and Carl B.
Webb, II.
10.11 Employment Agreement, dated as of June 1, 1996 between First
Nationwide Bank, A Federal Savings Bank, and Christie S.
Flanagan. (Incorporated by reference to Exhibit 10.4 to the
Registrant's Current Report on Form 8-K dated August 30,
1996.)
10.12 Amendment to Employment Agreement, dated as of May 1, 1999,
between California Federal Bank, A Federal Savings Bank, and
Christie S. Flanagan. (Incorporated by reference to Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1999.)
10.13 Employment Agreement, dated as of August 1, 1999, between
California Federal Bank, A Federal Savings Bank, and Christie
S. Flanagan. (Incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1999.)
10.14 Employment Agreement, dated as of January 1, 1998, between
California Federal Bank, A Federal Savings Bank, and J. Randy
Staff. (Incorporated by reference to Exhibit 10.17 to the
Registrant's 1997 Form 10-K.)
10.15 Employment Agreement, dated as of December 17, 1999, between
California Federal Bank, A Federal Savings Bank, and J. Randy
Staff.
10.16 Employment Agreement, dated as of August 1, 1999, between
California Federal Bank, A Federal Savings Bank, and Scott A.
Kisting. (Incorporated by reference to Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1999.)
10.17 Management Incentive Plan for Certain Employees of First
Nationwide Bank, A Federal Savings Bank. (Incorporated by
reference to Exhibit 10.34 to the Registrant's Registration
Statement on Form S-1 (File No. 333-00854).)
10.18 1998 Change of Control Plan, dated as of March 25, 1999.
10.19 Registration Agreement, dated September 13, 1996, among First
Nationwide Holdings Inc., First Nationwide Escrow Corp. and
the initial purchasers named therein relating to the 10 5/8%
Notes. (Incorporated by reference to Exhibit 4.20 to Amendment
No. 1 to the Registrant's Registration Statement on Form S-1
(File No. 333-21015).)
10.20 Litigation Management Agreement, dated as of February 4, 1998,
by and among Golden State Bancorp, Inc., Glendale Federal
Bank, Federal Savings Bank, California Federal Bank, A Federal
Savings Bank, Stephen J. Trafton and Richard A. Fink.
(Incorporated by reference to Exhibit 99.2 to the February
1998 Form 8-K.)
10.21 Purchase and Assumption Agreement between Norwest Bank Nevada,
N.A., and California Federal Bank, A Federal Savings Bank,
dated October 30, 1998. (Incorporated by reference to Exhibit
10.55 to the Registrant's 1998 Form 10-K.)
Page 84
10.22 Purchase and Assumption Agreement between Wells Fargo Bank, N.A.,
and California Federal Bank, A Federal Savings Bank, dated October
30, 1998. (Incorporated by reference to Exhibit 10.56 to the
Registrant's 1998 Form 10-K.)
10.23 Reimbursement and Expense Allocation Agreement between Golden
State Bancorp Inc. and California Federal Bank, A Federal Savings
Bank, dated November 23, 1998. (Incorporated by reference to
Exhibit 10.53 to the Registrant's 1998 Form 10-K.)
10.24 Agreement for Provision of Services between California Federal
Bank, A Federal Savings Bank and Golden State Management Inc.,
dated November 23, 1998. (Incorporated by reference to Exhibit
10.54 to the Registrant's 1998 Form 10-K.)
12.1 Statement regarding the computation of ratio of earnings to
combined fixed charges and minority interest for the Registrant.
21.1 Subsidiaries of the Registrant.
24.1 Power of Attorney executed by Ronald O. Perelman.
27.1 Financial Data Schedule.
(c) REPORTS ON FORM 8-K
None.
Page 85
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.
Dated: March 21, 2000
GOLDEN STATE HOLDINGS INC.
By: /s/ Gerald J. Ford
---------------------------
Gerald J. Ford
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Name Title Date
---- ----- ----
/s/ Gerald J. Ford Chairman of the Board, Chief March 21, 2000
- ----------------------- Executive Officer and Director
Gerald J. Ford (Principal Executive Officer)
/s/ Carl B. Webb President, Chief Operating Officer March 21, 2000
- ----------------------- and Director
Carl B. Webb
/s/ Richard H. Terzian Executive Vice President March 21, 2000
- ----------------------- and Chief Financial Officer
Richard H. Terzian (Principal Financial Officer)
/s/ Renee Nichols Tucei Executive Vice President and March 21, 2000
- ----------------------- Controller
Renee Nichols Tucei (Principal Accounting Officer)
* Director March 21, 2000
- -----------------------
Ronald O. Perelman
/s/ Howard Gittis Director March 21, 2000
- -----------------------
Howard Gittis
* Eric K. Kawamura, by signing his name, hereto, does hereby execute this
report on Form 10-K on behalf of the directors and officers of the Registrant
indicated above by asterisks, pursuant to powers of attorney duly executed by
such directors and officers and filed as exhibits to this report on Form
10-K.
By: /s/ Eric K. Kawamura
-----------------------------
Eric K. Kawamura
Attorney-in-fact
Page 86
INDEPENDENT AUDITORS' REPORT
The Stockholder and Board of Directors
Golden State Holdings Inc.:
We have audited the accompanying consolidated balance sheets of Golden State
Holdings Inc. and subsidiaries (the "Company") as of December 31, 1999 and 1998,
and the related consolidated statements of income, comprehensive income,
stockholder's equity and cash flows for each of the years in the three-year
period ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Golden State
Holdings Inc. and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
San Francisco, California
January 18, 2000
F-1
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
(dollars in thousands, except per share data)
Assets 1999 1998
------ ----------- -----------
Cash and due from banks $ 508,812 $ 854,954
Interest-bearing deposits in other banks 5 52,671
Short-term investment securities 84,061 60,325
----------- -----------
Cash and cash equivalents 592,878 967,950
Securities available for sale, at fair value 1,075,734 770,747
Securities held to maturity (fair value $180,449 and $251,489 at December 31, 185,357 250,964
1999 and 1998, respectively)
Mortgage-backed securities available for sale, at fair value 13,764,565 12,947,992
Mortgage-backed securities held to maturity (fair value $2,150,014 and
$2,825,227 at December 31, 1999 and 1998, respectively) 2,149,696 2,770,913
Loans held for sale, net 729,062 2,366,583
Loans receivable, net 33,953,461 30,280,944
Investment in Federal Home Loan Bank ("FHLB") System 1,167,144 1,000,147
Premises and equipment, net 296,800 310,572
Foreclosed real estate, net 45,091 80,068
Accrued interest receivable 321,596 317,455
Intangible assets (net of accumulated amortization of $183,433 and $113,709 at
December 31, 1999 and 1998, respectively) 819,561 923,598
Mortgage servicing rights 1,272,393 943,581
Other assets 667,793 866,422
----------- -----------
Total assets $57,041,131 $54,797,936
=========== ===========
Liabilities, Minority Interest and Stockholder's Equity
Deposits $23,040,571 $24,647,488
Securities sold under agreements to repurchase 5,481,747 4,238,395
Borrowings 25,668,626 22,375,557
Other liabilities 688,870 1,210,802
----------- -----------
Total liabilities 54,879,814 52,472,242
----------- -----------
Commitments and contingencies -- --
Minority interest 500,000 593,438
Stockholder's equity
Common stock, $1.00 par value, (1,000 shares authorized, issued and
outstanding at December 31, 1999 and 1998, respectively) 1 1
Additional paid-in capital 1,542,171 1,512,061
Accumulated other comprehensive (loss) income (276,832) 6,151
Retained earnings (substantially restricted) 395,977 214,043
----------- -----------
Total stockholder's equity 1,661,317 1,732,256
----------- -----------
Total liabilities, minority interest and stockholder's equity $57,041,131 $54,797,936
=========== ===========
See accompanying notes to consolidated financial statements.
F-2
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31, 1999, 1998 and 1997
(in thousands)
1999 1998 1997
---------- ---------- ----------
Interest income:
Loans receivable $2,332,500 $1,739,294 $1,553,210
Mortgage-backed securities available for sale 872,823 482,567 297,816
Mortgage-backed securities held to maturity 177,644 134,537 113,300
Loans held for sale 109,486 115,714 76,364
Securities available for sale 76,621 49,730 53,936
Securities held to maturity 11,459 4,702 2,436
Interest-bearing deposits in other banks 12,049 22,263 5,638
Dividends on FHLB stock 59,639 36,042 24,790
---------- ---------- ----------
Total interest income 3,652,221 2,584,849 2,127,490
---------- ---------- ----------
Interest expense:
Deposits 888,286 791,112 746,985
Securities sold under agreements to repurchase 265,467 153,697 140,547
Borrowings 1,312,629 829,316 553,272
---------- ---------- ----------
Total interest expense 2,466,382 1,774,125 1,440,804
---------- ---------- ----------
Net interest income 1,185,839 810,724 686,686
Provision for loan losses 10,000 40,000 79,800
---------- ---------- ----------
Net interest income after provision for loan losses 1,175,839 770,724 606,886
---------- ---------- ----------
Noninterest income:
Loan servicing fees, net 146,682 132,543 143,704
Customer banking fees and service charges 187,022 121,283 100,263
Gain on sale of assets, net 21,699 193 38,230
Gain on sale of branches, net 2,343 108,825 3,569
Gain on sale and settlement of loans, net 32,885 54,217 24,721
Other income 31,096 23,896 29,207
---------- ---------- ----------
Total noninterest income 421,727 440,957 339,694
---------- ---------- -----------
Noninterest expense:
Compensation and employee benefits 389,904 293,573 256,448
Occupancy and equipment 141,696 97,456 81,914
Professional fees 52,493 56,327 48,771
Loan expense 36,048 48,183 60,437
Foreclosed real estate operations, net (6,411) (6,152) (3,304)
Amortization of intangible assets 69,724 53,415 49,153
Merger and integration costs 7,747 59,162 --
Other expense 219,582 159,360 155,300
---------- ---------- ----------
Total noninterest expense 910,783 761,324 648,719
---------- ---------- ----------
Income before income taxes, minority interest and extraordinary items 686,783 450,357 297,861
Income tax expense (benefit) 234,263 (96,300) 47,148
Minority interest: provision in lieu of income tax expense 79,005 -- --
Minority interest: other 34,936 109,949 89,344
---------- ---------- ----------
Income before extraordinary items 338,579 436,708 161,369
Extraordinary items - gain (loss) on early extinguishment of debt,
net of applicable taxes of $1,801 and ($68,168) in 1999
and 1998, respectively 2,472 (98,706) --
---------- ---------- ----------
Net income 341,051 338,002 161,369
Preferred stock dividends -- 578 12,791
---------- ---------- ----------
Net income available to common stockholder $ 341,051 $ 337,424 $ 148,578
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-3
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years Ended December 31, 1999, 1998 and 1997
(in thousands)
1999 1998 1997
--------- -------- --------
Net income $ 341,051 $338,002 $161,369
Other comprehensive (loss) income, net of tax: Unrealized holding (loss) gain on
securities available for sale:
Unrealized holding (loss) gain arising during the period (282,241) (28,167) 10,907
Less: reclassification adjustment for gain included in net income (742) (844) (21,964)
--------- -------- --------
Other comprehensive loss (282,983) (29,011) (11,057)
--------- -------- --------
Comprehensive income $ 58,068 $308,991 $150,312
========= ======== ========
See accompanying notes to consolidated financial statements.
F-4
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Stockholder's Equity
Years Ended December 31, 1999, 1998 and 1997
(in thousands)
Accumulated Retained
Additional Other Earnings Total
Preferred Common Paid-in Comprehensive (Substantially Stockholder's
Stock Stock Capital Income (Loss) Restricted) Equity
----- ----- ------- ------------- ----------- ------
Balance at December 31, 1996 $ 150,792 $ 1 $ 47,752 $ 46,219 $ 674,453 $ 919,217
Net income -- -- -- -- 161,369 161,369
FN Escrow Merger 35,983 -- -- -- (1,163) 34,820
Redemption of FN Holdings/FN
Escrow Preferred Stock (35,983) -- -- -- -- (35,983)
Issuance costs of FN Holdings
Preferred Stock -- -- (650) -- -- (650)
Issuance costs of REIT Preferred
Stock -- -- (17,551) -- -- (17,551)
Redemption of FN Holdings
Preferred Stock (127,339) -- 2,339 -- -- (125,000)
Cash dividends on common stock -- -- -- -- (71,094) (71,094)
Cash dividends on FN Holdings
Preferred Stock -- -- -- -- (10,564) (10,564)
Preferred Stock dividends 2,227 -- -- -- (2,227) --
Change in net unrealized holding gain
on securities available for sale -- -- -- (11,057) -- (11,057)
--------- --- ---------- --------- --------- ----------
Balance at December 31, 1997 25,680 1 31,890 35,162 750,774 843,507
Net income -- -- -- -- 338,002 338,002
Redemption of FN Holdings
Preferred Stock (25,787) -- 787 -- -- (25,000)
Golden State Acquisition -- -- 1,482,760 -- -- 1,482,760
GS Escrow Merger -- -- (3,535) -- -- (3,535)
Capital contribution of Trans
Network Insurance Services -- -- 56 -- -- 56
Tax benefit on exercise of stock options -- -- 103 -- -- 103
Dividends on common stock -- -- -- -- (874,155) (874,155)
Cash dividends on FN Holdings
Preferred Stock -- -- -- -- (471) (471)
Preferred Stock dividends 107 -- -- -- (107) --
Change in net unrealized holding gain
on securities available for sale -- -- -- (29,011) -- (29,011)
--------- --- ---------- --------- ---------- ----------
Balance at December 31, 1998 -- 1 1,512,061 6,151 214,043 1,732,256
Net income -- -- -- -- 341,051 341,051
Golden State Acquisition - see note 3 -- -- (12,380) -- -- (12,380)
Adjustment to initial dividend of tax
benefits to parent due to
deconsolidation -- -- -- -- 66,383 66,383
Impact of Golden State restricted
common stock -- -- 477 -- -- 477
Tax benefit on exercise of stock options -- -- 2,013 -- -- 2,013
Dividends to parent -- -- -- -- (225,500) (225,500)
Contributions from parent -- -- 40,000 -- -- 40,000
Change in net unrealized holding gain (loss)
on securities available for sale -- -- -- (282,983) -- (282,983)
--------- --- ---------- --------- ---------- ----------
Balance at December 31, 1999 $ -- $ 1 $1,542,171 $(276,832) $ 395,977 $1,661,317
========= === ========== ========= ========= ==========
See accompanying notes to consolidated financial statements.
F-5
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
(in thousands)
1999 1998 1997
----------- ---------- -----------
Cash flows from operating activities:
Net income $ 341,051 $ 338,002 $ 161,369
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Amortization of intangible assets 69,724 53,415 49,153
Provision (benefit) for deferred income taxes 146,373 (212,993) 9,441
Accretion of discount on borrowings 1,018 285 --
Amortization (accretion) of purchase accounting
premiums and discounts, net 7,541 (236) (20,650)
Amortization of mortgage servicing rights 212,310 158,163 110,282
Provision for loan losses 10,000 40,000 79,800
Gain on sale of assets, net (21,699) (193) (38,230)
Gain on sale of branches, net (2,343) (108,825) (3,569)
Gain on sale of foreclosed real estate (13,069) (13,559) (12,087)
Loss on sale and settlement of loans, net 160,970 115,755 95,744
Capitalization of originated mortgage servicing rights (193,855) (169,972) (120,465)
Extraordinary items - (gain) loss on early
extinguishment of debt, net (2,472) 98,706 --
Depreciation and amortization of premises and
equipment 37,465 26,458 16,773
Amortization of deferred debt issuance costs 7,295 6,958 5,766
FHLB stock dividends (59,639) (36,042) (24,790)
Purchases and originations of loans held for sale (8,345,470) (8,843,499) (6,293,262)
Net proceeds from the sale of loans held for sale 9,703,072 7,892,122 5,510,777
Decrease in other assets 69,397 161,485 155,430
Increase in accrued interest receivable (4,141) (17,630) (11,197)
Decrease in other liabilities (263,027) (95,754) (143,022)
Amortization of deferred compensation expense -
Golden State restricted common stock 477 -- --
Minority interest: provision in lieu of income
tax expense 79,005 -- --
Minority interest: other 34,936 109,949 89,344
----------- ---------- -----------
Net cash provided by (used in) operating 1,974,919 (497,405) (383,393)
activities ----------- ---------- -----------
Cash flows from investing activities:
Acquisitions and divestitures:
Nevada Purchase 458,943 -- --
Golden State Acquisition -- 792,127 --
Cal Fed Acquisition -- -- (161,196)
GSAC Acquisition -- (13,577) --
Auto One Acquisition -- -- (2,845)
Mortgage loan servicing rights and operations -- -- (34,260)
(Continued)
See accompanying notes to consolidated financial statements.
F-6
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
Years Ended December 31, 1999, 1998 and 1997
(in thousands)
1999 1998 1997
------------ ------------ ------------
Cash flows from investing activities (continued):
Purchases of securities available for sale $ (807,690) $ (891,643) $ (1,340,881)
Proceeds from sales of securities available for sale -- -- 52,014
Proceeds from maturities of securities available for sale 431,934 975,288 1,015,410
Purchases of securities held to maturity (28,869) (384) (58,965)
Principal payments and proceeds from maturities of securities
held to maturity 94,820 2,827 4,938
Purchases of mortgage-backed securities available for sale (4,832,344) (8,955,882) (2,547,200)
Principal payments on mortgage-backed securities available for sale 3,623,918 3,261,363 1,057,642
Proceeds from sales of mortgage-backed securities available for sale 193,732 25,292 50,772
Purchases of mortgage-backed securities held to maturity -- -- (458)
Principal payments on mortgage-backed securities held to maturity 621,179 468,544 283,696
Proceeds from sales of loans 18,528 10,875 21,179
Net (increase) decrease in loans receivable (1,694,325) 2,280,576 889,575
Purchases of loans receivable (2,197,573) (593,378) (375,198)
Purchases of FHLB stock, net (110,477) (278,955) (50,721)
Purchases of premises and equipment (44,331) (71,361) (66,131)
Proceeds from disposal of premises and equipment 14,549 30,634 31,400
Proceeds from sales of foreclosed real estate 136,565 164,278 200,275
Purchases of mortgage servicing rights (357,557) (157,224) (29,627)
Proceeds from sales of mortgage servicing rights 30,802 31,051
------------ ------------ ------------
Net cash used in investing activities (4,448,196) (2,950,600) (1,029,530)
------------ ------------ ------------
Cash flows from financing activities:
Branch sales (69,340) (1,267,517) (79,900)
Net decrease in deposits (2,074,736) (1,426,963) (1,196,360)
Proceeds from additional borrowings 33,029,009 25,559,922 19,595,218
Principal payments on borrowings (29,717,967) (20,496,018) (17,495,008)
Net increase (decrease) in securities sold under agreements
to repurchase 1,243,352 1,945,646 (40,289)
Proceeds from the GS Escrow Merger -- 1,970,285 --
Bank Preferred Stock Tender Offers (97,621) (423,509) --
Debt Tender Offers (253) (1,089,885) --
Proceeds from FN Escrow Merger -- -- 603,313
Issuance of FN Holdings Preferred Stock, net -- -- (650)
Issuance of REIT Preferred Stock, net -- -- 482,449
Redemption of FN Holdings Preferred Stock -- (25,000) (125,000)
Redemption of FN Holdings/FN Escrow Preferred Stock -- -- (17,250)
Dividends on common stock (225,500) (662,914) (71,094)
Dividends on preferred stock -- (471) (10,564)
Dividends paid to minority stockholders, net of taxes (30,752) (80,035) (89,500)
Tax benefit on exercise of stock options 2,013 103 --
Capital contribution from parent 40,000 -- --
------------ --------- ---------
Net cash provided by financing activities 2,098,205 4,003,644 1,555,365
------------ ------------ ------------
Net change in cash and cash equivalents (375,072) 555,639 142,442
Cash and cash equivalents at beginning of year 967,950 412,311 269,869
------------ ------------ ------------
Cash and cash equivalents at end of year $ 592,878 $ 967,950 $ 412,311
============ ============ ============
See accompanying notes to consolidated financial statements.
F-7
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) ORGANIZATION
Golden State Holdings Inc. (the "Company" or "GS Holdings"), a wholly
owned subsidiary of Golden State Bancorp Inc. ("Golden State") was formed to
acquire all of the assets of First Nationwide Holdings Inc. ("FN Holdings"),
including all of the voting common stock of California Federal Bank, A Federal
Savings Bank and its subsidiaries ("California Federal" or "Bank"), as part of
the Golden State Acquisition (as defined herein). GS Holdings is a holding
company whose only significant asset is all of the common stock of the Bank and
therefore, activities for the consolidated entity are primarily carried out by
the Bank and its operating subsidiaries.
The Bank is a diversified financial services company that primarily
serves consumers in California and, to a lesser extent, in Nevada. The Bank's
principal business consists of (a) 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 (b) 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 Bank originates and/or purchases certain commercial real
estate, commercial business and consumer loans for investment. These operating
activities are financed principally with customer deposits, secured short-term
and long-term borrowings, collections on loans, asset sales and retained
earnings.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and prevailing practices within the banking and
thrift industries. The following summarizes the more significant of these
policies.
(a) Basis of Presentation
The accompanying 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 and as the surviving corporation in the GS Escrow Merger (as defined
herein) for periods after the GS Escrow Merger. On September 11, 1998, Glendale
Federal Bank, Federal Savings Bank ("Glendale Federal") merged with and into the
Bank pursuant to the Glen Fed Merger (as defined herein). Unless the context
otherwise indicates, "California Federal" or "Bank" refers to California Federal
as the surviving entity after the consummation of the Golden State Merger (as
defined herein). On January 3, 1997, First Nationwide merged with and into the
Bank pursuant to the Cal Fed Acquisition. Unless the context otherwise
indicates, (a) "Old California Federal" refers to California Federal Bank, A
Federal Savings Bank prior to the consummation of the Cal Fed Acquisition and
(b) "California Federal" or "Bank" refers to California Federal Bank, A Federal
Savings Bank, as the surviving entity after the consummation of the Cal Fed
Acquisition, and to First Nationwide and its predecessors for periods prior to
the Cal Fed Acquisition. All significant intercompany balances and transactions
have been eliminated in consolidation. Certain amounts in the prior years have
been reclassified to conform to the current period's presentation.
As GS Holdings' common stock is wholly owned by Golden State, earnings
per share data is not presented.
(b) Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash and amounts due from banks, interest-bearing deposits
in other banks, and other short-term investment securities with original
maturities of three months or less. Savings and loan associations are required
by the Federal Reserve System to maintain non-interest bearing cash reserves
equal to a percentage of certain deposits. The reserve requirement for
California Federal at December 31, 1999 was $106.2 million, which was met with
vault cash of $109.3 million and cash reserves of $23.7 million.
F-8
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(c) Securities and Mortgage-backed Securities
The Company's investment in securities consists primarily of U.S.
government and agency securities and mortgage-backed securities. The Company
classifies debt and equity securities, including mortgage-backed securities,
into one of three categories: held to maturity, available for sale or trading
securities. Securities held to maturity represent securities which management
has the positive intent and ability to hold to maturity and are carried at
amortized cost. Securities bought and held principally for the purpose of
selling them in the near term are classified as trading securities and reported
at fair value, with unrealized gains and losses included in income. All other
securities including equity securities with readily determinable fair values are
classified as available for sale and are carried at fair value, with unrealized
holding gains and losses, net of tax, reported as a separate component of
stockholder's equity until realized. Declines in the value of held-to-maturity
and available-for-sale securities below their cost that are deemed to be other
than temporary are reflected in earnings as realized losses. Realized gains and
losses on securities available for sale are computed on a specific
identification basis and are accounted for on a trade-date basis.
Amortization and accretion of premiums and discounts relating to
mortgage-backed securities is recognized using the interest method over the
estimated lives of the underlying mortgages with adjustments based on prepayment
experience.
(d) Loans Held for Sale, Net
One-to-four unit residential loans originated and intended for sale in
the secondary market are carried at the lower of aggregate cost or market value
as determined by outstanding commitments from investors or current investor
yield requirements calculated on an aggregate basis. Net unrealized losses are
recognized in a valuation allowance by charges to income.
(e) Loans Receivable, Net
Loans receivable, net, is stated at unpaid principal balances, less the
allowance for loan losses, and net of deferred loan origination fees and
purchase discounts or premiums.
Discounts or premiums on 1-4 unit residential loans are accreted or
amortized to income using the interest method over the remaining period the
loans are expected to be outstanding. Discounts or premiums on consumer and
other loans are recognized over the lives of the loans using the interest
method.
A significant portion of the Company's real estate loan portfolio is
comprised of adjustable-rate mortgages. The interest rate and payment terms of
these mortgages adjust on a periodic basis in accordance with various published
indices. The majority of these adjustable-rate mortgages have terms which limit
the amount of interest rate adjustment that can occur each year and over the
life of the mortgage. During periods of limited payment increases, negative
amortization may occur on certain adjustable-rate mortgages. See note 32.
The allowance for loan losses is adjusted by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic evaluation
of the adequacy of the allowance is based on such factors as the Company's past
loan loss experience, known and inherent risks in the 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: (a) the
formula allowance, (b) specific allowances for identified problem loans and (c)
the unallocated allowance. As management utilizes information currently
available to make such evaluation, the allowance for loan losses is subjective
and may be adjusted in the future depending on changes in economic conditions or
other factors. Additionally, regulatory authorities, as an integral part of
their regular examination process, review the Bank's allowance for estimated
losses on a periodic basis. These authorities may require the Bank to recognize
adjustments to the allowance based on their judgment of information available to
them at the time of their examination.
F-9
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Uncollectible interest on loans that are contractually ninety days or
more past due is charged off, or an allowance is established, based on
management's periodic evaluation. The allowance is established by a charge to
interest income equal to all interest previously accrued, and income is
subsequently recognized only to the extent that cash payments are received.
When, in management's judgment, the borrower's ability to make periodic interest
and principal payments resumes, the loan is returned to accrual status.
(f) Auto One Loans
The Company, through its 80% owned subsidiary, Auto One (as defined
herein), purchases loans individually and in groups. Such loans are grouped and
accounted for in homogeneous pools based upon certain risk characteristics,
including interest coupon rate, credit quality, and period of origination. At
acquisition, the Company estimates the amount and timing of undiscounted
expected principal and interest cash flows ("Expected Cash Flows") for each
pool. For certain purchased pools of loans, the amount paid reflects the
Company's determination that it is probable the Company will be unable to
collect all amounts due according to the contractual terms of the underlying
loans in the pool. Accordingly, at acquisition, the Company recognizes the
excess of the pool's scheduled contractual principal and contractual interest
payments over its Expected Cash Flows as an amount that should not be accreted
("Nonaccretable Contractual Cash Flows"). The remaining amount - representing
the excess of the pool's Expected Cash Flows over the amount paid - is accreted
into interest income over the remaining life of each pool ("Accretable Yield").
Over the life of each pool of loans, the Company continues to estimate
Expected Cash Flows. In the event a pool's actual cash flows plus the expected
cash payments are less than the Expected Cash Flows estimated at the time of the
purchase, the amount by which the current carrying value of the pool exceeds the
present value of the expected cash flows discounted at the originally estimated
internal rate of return is an impairment and requires an allocation of the
allowance for loan losses established by provisions for loan losses. If the
present value of a pool's expected remaining cash flows discounted at the
originally estimated internal rate of return exceeds the current carrying value
of the pool, the amount of the Accretable Yield is increased and the amount of
the Nonaccretable Contractual Cash Flows is decreased by the amount the sum of a
pool's expected remaining cash flows exceeds the sum of the remaining payments
less the Nonaccretable Contractual Cash Flows. The adjusted Accretable Yield is
accreted into interest income over the pool's remaining life using the interest
method.
(g) Impaired Loans
The Company considers a loan impaired when, based on 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 loan-to-value 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 include all business banking loans, single-family loans,
and performing multi-family and commercial real estate loans under $500,000,
excluding loans that have entered the workout process.
The measurement of impairment may be based on (a) the present value of
the expected future cash flows of the impaired loan discounted at the loan's
original effective interest rate, (b) the observable market price of the
impaired loan, or (c) the fair value of the collateral of a collateral-dependent
loan. The Company bases the measurement of collateral-dependent impaired loans
on the fair value of the loan's collateral, less disposal costs. The amount, if
any, by which the recorded investment of the loan exceeds the measure of the
impaired loan's value is recognized by recording a valuation allowance. Large
groups of smaller balance homogeneous loans are collectively evaluated for
impairment.
F-10
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
(h) Loan Origination and Commitment Fees and Related Costs
Loan origination fees, net of direct underwriting and closing costs, are
deferred and amortized to interest income using the interest method over the
contractual term of the loan, adjusted for actual loan prepayment experience.
Unamortized fees on loans sold or paid in full are recognized as income.
Adjustable-rate loans with lower initial interest rates during the introductory
period result in the amortization of a substantial portion of the net deferred
fees during the introductory period.
Fees received in connection with loan commitments are deferred and
recognized as fee revenue on a straight-line basis over the term of the
commitment. If the commitment is subsequently exercised during the commitment
period, the remaining unamortized commitment fee at the time of exercise is
recognized over the term of the loan using the interest method.
Commitment fees paid to investors, for the right to deliver residential
loans in the future to the investors at specified yield, are deferred. Amounts
are included in the recognition of gain (loss) on sale of loans as loans are
delivered to the investor in proportion to the percentage relationship of loans
delivered to the total commitment amount. Any unused fees are recognized as an
expense at the expiration of the commitment date, or earlier, if it is
determined the commitment will not be filled.
Other loan fees and charges, which represent income from the prepayment
of loans, delinquent payment charges, and miscellaneous loan services, are
recognized as income when collected.
(i) Premises and Equipment
Land is carried at cost. Premises, equipment and leasehold improvements
are stated at cost, less accumulated depreciation. Premises, equipment and
leasehold improvements are depreciated on a straight-line basis over the lesser
of the lease term or the estimated useful lives of the various classes of
assets. Maintenance and repairs on premises and equipment are charged to expense
in the period incurred.
Closed facilities of the Company and its subsidiaries are carried at fair
value. In the case of leased premises that are vacated by the Company, a
liability is recorded representing the difference between the net present value
of future lease payments plus holding costs and the net present value of
anticipated sublease income, if any, for the remaining term of the lease.
(j) Foreclosed Real Estate
Real estate acquired through, or in lieu of, loan foreclosure is
initially recorded at fair value less estimated disposal costs at the time of
foreclosure. Subsequent to foreclosure, the Company charges current earnings
with a provision for estimated losses if the carrying value of the collateral
property exceeds its fair value. Gains or losses on the sale of real estate are
recognized upon disposition of the property. Carrying costs such as maintenance
and property taxes are expensed as incurred.
(k) Intangible Assets
Intangible assets, which primarily consist of the excess of cost over
fair value of net assets acquired in business combinations accounted for as a
purchase, are amortized on a straight-line basis over the expected period to be
benefited of 15 years. The Company periodically reviews the operations of the
businesses acquired to determine that income from operations continues to
support the recoverability of its intangible assets and the amortization periods
used.
F-11
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(l) Mortgage Servicing Rights
The Company purchases mortgage servicing rights separately and acquires
mortgage servicing rights through the sale of loans it purchases or originates.
Generally, purchased mortgage servicing rights are capitalized at the cost to
acquire the rights and are carried at the lower of cost, net of accumulated
amortization, or fair value.
Originated mortgage servicing rights are capitalized based on relative
fair value of the servicing right to the fair value of the loan and the
servicing right and are carried at the lower of the capitalized amount, net of
accumulated amortization, or fair value.
A portion of the cost of originating a mortgage loan is allocated to the
mortgage servicing right based on its relative fair value. To determine the fair
value of mortgage servicing rights the Company uses market prices for comparable
mortgage servicing contracts, when available, or alternatively, uses a valuation
model that calculates the present value of future net servicing income. In using
this valuation method, the Company incorporates assumptions that market
participants would use in estimating future net servicing income, which includes
estimates of the cost of servicing, the discount rate, mortgage escrow earnings
rate, an inflation rate, ancillary income, prepayment speeds and default rates
and losses.
Mortgage servicing rights are amortized in proportion to, and over the
period of, estimated net servicing income. The amortization of the mortgage
servicing rights is analyzed periodically and is adjusted to reflect changes in
prepayment rates and other estimates. Prepayment rates used in the determination
of amortization during 1999 and 1998 were 18.5% Constant Prepayment Rate ("CPR")
and 23.1% CPR, respectively. A decline in long-term interest rates generally
results in an acceleration in mortgage loan prepayments.
The Company evaluates the possible impairment of servicing rights based
on the difference between the carrying amount and current fair value of the
servicing rights. In determining impairment, the Company aggregates all mortgage
servicing rights and stratifies them based on the predominant risk
characteristics of interest rate, loan type and investor type. If impairment
were to exist, a valuation allowance would be established for any excess of
amortized cost over the current fair value, by risk stratification, by a charge
to income.
The Company employs hedging techniques through the use of interest rate
floor contracts, swaptions, principal-only swap agreements and prepayment linked
swap agreements to reduce the sensitivity of its earnings and value of its
servicing rights to declining interest rates and borrower prepayments as further
discussed in note 35. The Company uses hedge accounting because mortgage
servicing rights expose the Company to interest risk and at the inception of the
hedge and throughout the hedge period, high correlation of changes in the market
value of the hedge instruments and the fair value of the mortgage servicing
rights are probable so that the results of the hedge instruments will
substantially offset the effects of interest rate changes on the mortgage
servicing rights. If these requirements are not met, the hedge instruments would
be considered speculative and would be marked to market with changes in market
value reflected in current income.
The premium paid by the Company on the interest rate floor contracts and
swaptions is amortized over the life of the contract. Amounts receivable or
payable under the principal only swap agreements and prepayment linked swap
agreements and amounts receivable under the interest rate floor contracts,
swaptions or terminated hedges are included in the carrying value of mortgage
servicing rights and are amortized as part of the basis in mortgage servicing
rights.
(m) Gains/Losses on Sales and Settlement of Loans
Mortgage loans are generally sold with the mortgage servicing rights
retained by the Company. The carrying value of mortgage loans sold is reduced by
the cost allocated to the associated mortgage servicing rights. Gains or losses
on sales of mortgage loans are recognized based on the difference between the
selling price and the carrying value of the related mortgage loans sold.
Deferred origination fees and expenses, net of commitment fees paid in
connection with the sale of the loans, are recognized at the time of sale in the
gain or loss determination.
F-12
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In the normal course of business, the Company purchases loans held for
investment at a discount. Proceeds received in settlment of loans in excess of
the carrying value are included in gain on sale and settlement of loans, net.
(n) Servicing Fee Income
Servicing fee income is recorded for fees earned for servicing mortgage
loans under servicing agreements with Fannie Mae ("FNMA"), Freddie Mac
("FHLMC"), the Government National Mortgage Association ("GNMA"), and certain
private investors. The fees are based on a contractual percentage of the
outstanding principal balance or a fixed amount per loan and are recorded as
income when received. The amortization of mortgage servicing rights is netted
against servicing fee income.
(o) Derivatives
The Company uses interest rate derivative financial instruments (interest
rate swaps, interest rate floors, swaptions, principal only swaps and prepayment
linked swaps) primarily to hedge against prepayment risk in its mortgage
servicing portfolio caused by declining interest rates and, to a lesser extent,
to hedge against the interest rate risk inherent in fixed-rate FHLB advances.
These instruments serve to reduce rather than increase the Company's exposure to
movements in interest rates, both at inception and throughout the hedge period.
At the inception of the hedge, the Company identifies an individual asset or
liability, or an identifiable group of essentially similar assets or
liabilities, that expose the Company to interest rate risk at the consolidated
level.
Interest rate derivative financial instruments receive hedge accounting
treatment only if they are designated as a hedge and are expected to be, and
are, effective in substantially reducing interest rate risk arising from the
assets and liabilities identified as exposing the Company to risk. Those
derivative financial instruments that do not meet the hedging criteria discussed
below would be classified as trading activities and would be recorded at fair
value with changes in fair value recorded in income. Derivative hedge contracts
must meet specific correlation tests (i.e., the change in their fair values must
be within 80 to 125 percent of the opposite change in the fair values of the
hedged assets or liabilities). Changes in fair value of the derivative financial
instruments must be effective at offsetting changes in the fair value of the
hedged items during the term of the hedge. Further, if the underlying financial
instrument differs from the hedged asset or liability, there must be a clear
economic relationship between the prices of the two financial instruments.
If periodic assessment indicates derivatives no longer provide an
effective hedge, the derivatives contracts would be closed out, settled or
classified as a trading activity. The net settlement (upon close out or
termination) that offsets changes in the value of the hedged asset or liability
is deferred and amortized into net interest income over the life of the hedged
asset or liability. The portion, if any, of the net settlement amount that did
not offset changes in the value of the hedge asset or liability is recognized
immediately in noninterest income.
Interest rate swaps are accounted for under the "accrual method."
Interest rate floors, swaptions, principal only swaps and prepayment linked
swaps are accounted for under the "deferral method." Under the accrual method,
the net interest payment due or owed under the instrument is recognized over the
life of the contract in net interest income. Under the deferral method, realized
gains or losses, or payments made or received on the derivative financial
instrument, are reported as adjustments to the carrying value of the hedged
asset or liability. There is no recognition under either method on the balance
sheet for changes in the derivative's fair value.
Except for contracts designated as a hedge of an available-for-sale
security, derivative financial instruments are not carried at fair value. If
there were contracts that were designated as a hedge of an available-for-sale
security, in addition to the accrual method and deferral method of accounting,
these contracts would be carried at fair value with the resulting gain or loss
recognized in other comprehensive income.
Swaption and interest rate floor premiums are classified on the balance
sheet with the hedged asset or liability at the time the premium is paid. These
premiums are amortized to net loan servicing fee income over the life of the
contract.
F-13
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
If a hedged asset or liability settles before maturity of the hedging
interest rate derivatives, the derivatives are closed out, and previously
unrecognized hedge results, if any, and the net settlement upon close out would
be accounted for as part of the gains and losses on the hedged asset or
liability. If derivative financial instruments used in an effective hedge are
closed out before the hedged item settles, previously unrecognized hedge
results, if any, and the net settlement upon close out are deferred and
amortized over the life of the hedged asset or liability.
Cash flows resulting from the derivative financial instruments that are
accounted for as hedges of assets and liabilities are classified in the cash
flow statement in the same category as the cash flows of the items being hedged.
(p) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
A valuation allowance is maintained against the deferred tax asset in an
amount representing the amount of such asset which is more likely than not that
the Company will be unable to utilize. The deferred tax asset is continually
evaluated for realizability. To the extent that management's judgment regarding
the realization of the deferred tax asset changes, an adjustment to the
allowance is recorded, with an offsetting increase or decrease, as appropriate,
in income tax expense. Such adjustments are recorded in the period in which
management's estimate as to the realizability of the asset changed.
Prior to the Golden State Merger, for federal income tax purposes, the
Company was a member of the Mafco Holdings Inc. affiliated group, ("Mafco
Group"), and accordingly, its federal taxable income or loss prior to the Golden
State Acquisition was included in the consolidated federal income tax return
filed by Mafco. The Company was also included in certain state and local income
tax returns of Mafco or its subsidiaries. The Company's tax sharing agreement
with Mafco provided that income taxes be based on the separate results of the
Company. The agreement generally provided that the Company would pay Mafco
amounts equal to the taxes that the Company would be required to pay if it were
to file a return separately from the affiliated group. Furthermore, the
agreement provided that the Company would be entitled to take into account any
net operating loss carryovers in determining its tax liability. The agreement
also provided that Mafco pay the Company amounts equal to tax refunds the
Company would be entitled to if it had always filed a separate company tax
return.
In connection with the Golden State Acquisition, the tax sharing
agreement with FN Holdings was assumed by GS Holdings and the Company and its
subsidiaries became part of the Golden State affiliated group. Accordingly, the
Company and its subsidiaries file consolidated federal income tax returns and
certain state and local income tax returns for periods subsequent to September
11, 1998.
(q) Stock Compensation Plan
The Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
encourages all entities to adopt a fair value based method of accounting for
employee stock compensation plans, whereby compensation cost is measured at the
grant date based on the value of the award and is recognized over the service
period, which is usually the vesting period. However, it also allows an entity
to continue to measure compensation cost for those plans using the intrinsic
value based method of accounting prescribed by Accounting Principles Board
("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, whereby
compensation cost is the excess, if any, of the quoted market price of the stock
at the grant date (or other measurement date) over the amount an employee must
pay to acquire the stock. Stock options issued under Golden State's stock option
plan established for the benefit of the Bank's employees have no intrinsic value
at the grant date, and under APB Opinion No. 25, no compensation cost was
recognized for them. Compensation expense related to restricted stock issued
under Golden State's stock plan is recognized on a straight
F-14
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
line basis over the vesting period for each tranche of the award, with a
corresponding increase to additional paid-in capital. The Company has elected to
continue with the accounting methodology prescribed in APB Opinion No. 25 and
complies with the disclosure requirements of SFAS No. 123.
(r) Management's Use of Estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect (a) the reported amounts of assets and
liabilities, (b) disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and (c) the reported amounts of revenues
and expenses during the reported period. Actual results could differ from those
estimates.
(s) Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. 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 SFAS No. 80, ACCOUNTING FOR FUTURES CONTRACTS, SFAS No.
105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH OFF-BALANCE
SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK, and
SFAS No. 119, DISCLOSURE ABOUT DERIVATIVE INSTRUMENTS AND FAIR VALUE OF
FINANCIAL INSTRUMENTS. SFAS No. 133 also nullifies or modifies the consensuses
reached on 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 the 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.
(3) ACQUISITIONS AND DIVESTITURES
GOLDEN STATE ACQUISITION
On September 11, 1998, First Nationwide (Parent) Holdings Inc. ("Parent
Holdings") and Hunter's Glen/Ford Ltd. ("Hunter's Glen") completed the merger
with Golden State, the publicly traded parent company of Glendale Federal, in a
tax-free exchange of shares (the "Golden State Merger"), accounted for under the
purchase method of accounting. Pursuant to the Golden State Merger agreement,
(a) FN Holdings contributed all of its assets (including all of the common stock
of the Bank) to GS Holdings (the "FN Holdings Asset Transfer"), (b) Parent
Holdings, which then owned all of the common stock of FN Holdings as a result of
the extinguishment of the Hunter's Glen minority interest, merged with and into
Golden State, which indirectly owned 100% of the common stock of Glendale
Federal, (c) FN Holdings merged with and into Golden State Financial Corporation
("GS Financial"), which owned all of the common stock of Glendale Federal (the
"FN Holdings Merger," and together with the Golden State Merger, the "Holding
Company Mergers") and (d) Glendale Federal merged with and into the Bank (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."
F-15
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Pursuant to the Golden State Merger agreement, First Gibraltar Holdings
Inc. ("First Gibraltar"), the parent company of Parent Holdings, and Hunter's
Glen, a 20% minority shareholder of FN Holdings, received at the closing of the
Golden State Acquisition, in consideration of their interests as stockholders of
Parent Holdings and FN Holdings, 56,722,988 shares of common stock, par value
$1.00 (the "Golden State Common Stock"), that constituted, in the aggregate,
47.9% of the common stock outstanding, immediately after giving effect to the
Golden State Acquisition. In connection with the Golden State Merger, the
Hunter's Glen minority interest in FN Holdings was extinguished. Subsequent to
the Golden State Merger, GSB Investments Corp. ("GSB Investments"), an indirect
subsidiary of Mafco Holdings Inc., became the successor to First Gibraltar under
the Golden State Merger agreement and the owner of the shares of common stock
previously held by First Gibraltar.
At September 11, 1998, Glendale Federal had total assets of approximately
$18.9 billion and deposits of $11.3 billion and operated 181 branches and 26
loan offices in California. The following is a summary of assets acquired and
liabilities assumed in connection with the Golden State Acquisition at September
11, 1998.
Estimated
Carrying Fair Value Fair Remaining
Value Adjustments Value Lives
----- ----------- ----- -----
(dollars in thousands) (in years)
Cash and cash equivalents $ 782,233 $ -- $ 782,233 --
Securities and mortgage-backed securities 2,354,263 16,015 2,370,278 1-5
Loans receivable, net 14,432,389 129,718 14,562,107 6-9
Office premises and equipment, net 158,446 (9,692) 148,754 2-12
Investment in FHLB System 314,591 -- 314,591 --
Foreclosed real estate, net 47,504 -- 47,504 --
Accrued interest receivable 115,165 -- 115,165 --
Mortgage servicing rights 230,764 (17,831) 212,933 2-7
Goodwill 271,743 (271,743) -- --
Other assets 204,372 77,465 281,837 2-5
Deposits (11,293,173) (10,547) (11,303,720) 1-8
Borrowings (5,877,574) (45,310) (5,922,884) 1-5
Other liabilities (399,737) (65,017) (464,754) 1-10
------------ --------- -----------
$ 1,340,986 $(196,942) 1,144,044
============ =========
Purchase price 1,451,982
-----------
Excess cost over fair value of net assets acquired $ 307,938 15
===========
The Golden State Acquisition was accounted for as a purchase 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
were $7.7 million and $59.2 million for the years ended December 31, 1999 and
1998, respectively, including severance for terminated California Federal
employees, expenses for California Federal branch closures, and conversion and
consolidation costs, as well as transition expenses for duplicate personnel,
facilities and computer systems during the integration period.
During the year ended December 31, 1999, the Company recorded fair value
and other adjustments to increase intangible assets in the Golden State
Acquisition by $0.3 million, increasing a previously recorded vacant facility
accrual. In addition, intangible assets were reduced by $16.6 million, $18.1
million and $12.4 million related to (a) previously accrued severance and
termination costs (which had not been utilized upon completion of the
integration plan), (b) a "true-up" adjustment of the deferred tax asset and (c)
the purchase price, respectively.
F-16
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NEVADA BRANCH PURCHASE
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.
FLORIDA BRANCH SALE
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"). The Company recorded a pre-tax gain of approximately
$108.9 million in connection with the Florida Branch Sale, representing a
deposit premium of approximately 7.92%.
TEXAS BRANCH SALE
On December 12, 1997, the Bank sold its retail deposits and all related
retail banking facilities in the state of Texas (consisting of three branches)
totalling $57.6 million at a gross price representing a deposit premium of 4.1%
and resulting in a pre-tax gain on sale of $2.5 million (the "Texas Branch
Sale").
AUTO ONE AND GSAC ACQUISITION
On September 1, 1997, the Bank acquired Auto One Acceptance Corporation
("Auto One") in a purchase transaction (the "Auto One Acquisition"). Auto One
primarily engages in indirect sub-prime auto financing activities, providing
loan processing, funding and loan servicing, for over 800 franchised automobile
dealers. Auto One is a licensed lender in 47 states and is headquartered in
Dallas, Texas. The Company's consolidated statements of income include the
results of operations for Auto One from September 1, 1997.
On February 4, 1998, Auto One, a subsidiary of the Bank, 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 by Auto One in connection with the GSAC Acquisition was
approximately $13.6 million plus 250 shares of its common stock, par value $1.00
per share, representing a 20% interest in the common stock of Auto One. This
interest is reflected in the Company's consolidated balance sheet as minority
interest.
WEYERHAEUSER PURCHASE
On May 31, 1997, FNMC acquired a 1-4 unit residential loan servicing
portfolio of approximately $3.2 billion and approximately 40,000 loans from WMC
Mortgage Corporation (the "Weyerhaeuser Purchase") for $37.1 million. The
Company's consolidated statements of income include the results of the acquired
servicing portfolio from June 1, 1997.
GARBERVILLE BRANCH SALE
On May 9, 1997, the Bank consummated the sale of deposit accounts and
related retail banking assets comprised of cash on hand, loans on deposits and
facilities totalling $21.7 million to Humbolt Bank at a gross price representing
a deposit premium of 4.5% (the "Garberville Branch Sale"), and resulting in a
pre-tax gain on sale of $1.1 million.
F-17
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
CAL FED ACQUISITION
On January 3, 1997, pursuant to an Agreement and Plan of Merger (the
"Merger Agreement") among FN Holdings, Cal Fed Bancorp Inc. ("Cal Fed") and
California Federal Bank, A Federal Savings Bank ("Old California Federal"), FN
Holdings acquired 100% of the outstanding stock of Cal Fed and Old California
Federal, and First Nationwide merged with and into Old California Federal (the
"Cal Fed Acquisition"). The aggregate consideration paid under the Merger
Agreement consisted of approximately $1.2 billion in cash and the issuance of
litigation interests. Cal Fed, a savings and loan holding company, owned 100% of
the common stock of Old California Federal. At December 31, 1996, Old California
Federal had total assets of approximately $14.1 billion and deposits of $8.9
billion, and operated 119 branches in California and Nevada. Effective January
3, 1997, First Nationwide changed its name to California Federal Bank, A Federal
Savings Bank. In connection with the Cal Fed Acquisition, FN Holdings made a
capital contribution to the Bank on January 3, 1997 of approximately $685
million.
The following is a summary of the assets acquired and liabilities assumed
in connection with the Cal Fed Acquisition at January 3, 1997:
Cal Fed Bank Estimated
Carrying Fair Value Fair Remaining
Value Adjustments Value Lives
----- ----------- ----- -----
(dollars in thousands) (in years)
Cash and cash equivalents $ 1,027,491 $ -- $ 1,027,491 --
Securities 6,013 12 6,025 1
Mortgage-backed securities 1,963,869 4,532 1,968,401 6-9
Loans receivable, net 10,084,170 (23,991) 10,060,179 2-12
Office premises and equipment, net 58,900 (17,592) 41,308 3-10
Investment in FHLB System 166,786 -- 166,786 --
Foreclosed real estate, net 18,482 (16) 18,466 --
Accrued interest receivable 71,868 -- 71,868 --
Mortgage servicing rights 4,759 39,738 44,497 2-7
Other assets 87,096 142,634 229,730 2-5
Deposits (8,985,630) (9,699) (8,995,329) 1-8
Borrowings (3,468,004) (2,918) (3,470,922) 1-5
Other liabilities (198,454) (79,467) (277,921) 1-10
Preferred stock (172,500) -- (172,500) --
----------- -------- -----------
$ 664,846 $ 53,233 718,079
=========== ========
Purchase price 1,188,687
-----------
Excess cost over fair value of net assets acquired $ 470,608 15
===========
The Cal Fed Acquisition was accounted for as a purchase and accordingly,
the purchase price was allocated to assets acquired and liabilities assumed in
the transaction based on estimates of fair value at the date of purchase. During
1998, the Company recorded fair value adjustments to reduce other liabilities
and excess cost over fair value of net assets acquired by $71.2 million related
to (a) to receipt of a tax refund related to periods prior to January 3, 1997
and (b) previously accrued severance and contract termination costs (which had
not been utilized upon completion of the integration plan). During 1999, the
Company recorded an adjustment to reduce other liabilities and excess cost over
fair value of net assets acquired by $38.2 million, also related to a tax refund
for periods prior to January 3, 1997. 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.
F-18
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
SERVICING SALES
During April 1999, FNMC sold servicing rights on approximately 49,000
loans with an unpaid principal balance of $2.0 billion, recognizing a pre-tax
gain of $16.3 million. On September 30, 1997, FNMC sold servicing rights for
approximately 52,000 loans with an unpaid principal balance of approximately
$2.3 billion, recognizing a pre-tax gain of $14.0 million.
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information combines the
historical results of the Company as if the Golden State Acquisition, the
issuance of the GS Holdings Notes (as defined herein) and the Refinancing
Transactions (as defined herein) had occurred as of the beginning of each of the
years presented (in thousands):
Year Ended December 31,
--------------------------------
1998 1997
---- ----
Net interest income $1,054,324 $1,001,406
Net income 558,652 176,752
The pro forma information does not include the effect of the Weyerhaeuser
Purchase, the Auto One Acquisition, the GSAC Acquisition, the Servicing Sales,
the Garberville Branch Sale, the Texas Branch Sale, or the Florida Branch Sale
because such effect is not significant. The pro forma results are not
necessarily indicative of the results which would have actually been obtained if
the Golden State Acquisition, the issuance of the GS Holdings Notes or the
Refinancing Transactions had been consummated in the past nor do they project
the results of operations in any future period.
PURCHASE ACCOUNTING AGREEMENTS
Premiums and discounts related to interest-earning assets acquired and
interest-bearing liabilities assumed are amortized (accreted) to operations
using the interest method over the estimated remaining lives of the respective
assets and liabilities.
(4) ISSUANCE OF DEBT SECURITIES
On August 6, 1998, GS Escrow Corp, ("GS Escrow"), an affiliate of GS
Holdings, issued $2 billion in debt securities (the "GS Holdings Notes"). The GS
Holdings Notes were issued to fund, in part, the cash tender offers discussed
below, that occurred following the Golden State Acquisition. The GS Holdings
Notes consist of (a) $250 million aggregate principal amount of its Floating
Rate Notes Due 2003 (the "Floating Rate Notes"), (b) $350 million aggregate
principal amount of its 6 3/4% Senior Notes due 2001 (the "2001 Notes"),(c) $600
million aggregate principal amount of its 7% Senior Notes Due 2003 (the "2003
Notes") and (d) $800 million aggregate principal amount of its 7 1/8% Senior
Notes Due 2005 (the "2005 Notes" and, together with the 2001 Notes and the 2003
Notes, the "Fixed Rates Notes" and, together with the Floating Rates Notes, the
"GS Holdings Notes"). Interest on the Fixed Rate Notes is payable semi-annually
in arrears on February 1 and August 1 of each year, commencing on February 1,
1999. The Floating Rate Notes bear interest at a rate equal to the three-month
LIBOR plus 100 basis point per annum, except that the initial rate was 6 3/4%
per annum, based on six-month LIBOR (which initial interest rate resets on the
first interest payment date, and, thereafter, on a quarterly basis). The first
interest payment date for the Floating Rate Notes was February 1, 1999.
Thereafter, interest is payable, and the interest rate resets, quarterly on each
May 1, August 1, November 1 and February 1. The weighted average interest rate
on the Floating Rate Notes during 1999 was 6.33%. The 2001 Notes, 2003 Notes and
2005 Notes will mature on August 1 of the respective year.
The GS Holdings Notes were issued to fund, in part, the Refinancing
Transactions that occurred following the Golden State Acquisition. Deferred
issuance costs of $38.6 million related to the GS Holdings Notes are included in
the Company's other assets and are being amortized over the life of such notes.
See note 20.
F-19
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) REFINANCING TRANSACTIONS
On August 17, 1998, FN Holdings commenced cash tender offers (the "Bank
Preferred Stock Tender Offers") for each of the Bank's two outstanding series of
Bank Preferred Stock (as defined herein), which had a total aggregate
liquidation preference of $473.2 million. The Bank Preferred Stock Tender Offers
expired on September 14, 1998, at which time 222,721 shares of the 10 5/8%
Preferred Stock (as defined herein) and 995,437 shares of the 11 1/2% Preferred
Stock (as defined herein) were purchased for an aggregate purchase price of
$135.8 million.
During the remainder of 1998 and 1999, GS Holdings continued to
purchase Bank Preferred Stock through privately negotiated transactions. Through
December 31, 1998, 894,980 additional shares of the 10 5/8% Preferred Stock and
1,693,522 shares of the 11 1/2% Preferred Stock had been purchased for an
aggregate purchase price of $287.7 million. 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. On September 1, 1999, GS Holdings redeemed
all of the remaining 318,341 outstanding shares of the Bank's 11 1/2% Preferred
Stock not already owned by it for $105.75 per share for a total redemption price
of $33.7 million. The net tender premiums and expenses paid in connection with
the Bank Preferred Stock Tender Offers totalled $5.1 million and $36.9 million
for the years ended December 31, 1999 and 1998, respectively, and are reflected
as minority interest on the Company's consolidated statements of income. See
note 24.
On September 14, 1998, GS Holdings commenced cash tender offers (the
"Debt Tender Offers" and together with the Bank Preferred Stock Tender Offers
and the Parent Holdings Defeasance (as defined herein), the "Refinancing
Transactions") for the FN Holdings 12 1/4% Senior Notes, the FN Holdings 9 1/8%
Senior Sub Notes and the FN Holdings 10 5/8% Notes (each as defined herein and
collectively, the "FN Holdings Notes"), which together had a total aggregate
principal amount of $915 million. Through December 31, 1998, GS Holdings
purchased $914.5 million aggregate principal amount of the FN Holdings Notes for
an aggregate purchase price, including accrued interest payable, of $1.1
billion. On May 15, 1999, GS Holdings redeemed the remaining $0.2 million
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. At December 31, 1999, only $0.3 million of the FN Holdings 10 5/8%
Notes remained outstanding. The after tax tender premiums and expenses paid in
connection with the Debt Tender Offers totalled $98.7 million and are reflected
as an extraordinary loss, net of taxes, on the Company's consolidated statement
of income for the year ended December 31, 1998.
Concurrently with the closing of the Debt Tender Offers, GS Financial,
as the successor obligor, gave a 30-day notice of redemption for all the
outstanding $455 million aggregate principal amount of 12 1/2% Senior Notes Due
2003 of Parent Holdings (the "Parent Holdings Notes"), and irrevocably deposited
money or government obligations in trust in an amount sufficient to pay the
redemption price therefor, together with any accrued and unpaid interest to the
date of redemption, for the purpose of defeasing the Parent Holdings Notes (the
"Parent Holdings Defeasance"). The Parent Holdings Defeasance was completed on
October 14, 1998. The after-tax redemption premiums and expenses paid in
connection with the Parent Holdings Defeasance totalled $51.6 million and are
reflected as extraordinary loss, net of taxes, on the consolidated statement of
income for the year ended December 31, 1998.
(6) GS ESCROW MERGER
On September 14, 1998, GS Escrow was merged with and into GS Holdings,
pursuant to a merger agreement by and between GS Escrow and GS Holdings (the "GS
Escrow Merger"). In connection therewith, GS Holdings acquired the net proceeds
of $2.0 billion from the Refinancing Transactions and became successor obligor
on the GS Holdings Notes. GS Escrow was a newly formed subsidiary of GSB
Investments, an indirect parent company of FN Holdings, and had no significant
assets. GS Escrow had not engaged in any business operations, acquired any
assets or incurred any liabilities, other than in connection with the issuance
of the GS Holdings Notes.
F-20
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in thousands)
Year Ended December 31,
--------------------------------------------
1999 1998 1997
---- ---- ----
Cash paid for:
Interest $2,255,685 $1,725,769 $1,402,800
Income taxes, net 64,318 (142,012) 20,778
Non-cash investing and financing activities:
Principal reductions to loans due to foreclosure 101,692 118,801 179,607
Loans made to facilitate the sale of real estate 10,039 10,898 19,413
Loans exchanged for mortgage-backed securities 227,099 1,905,274 50,772
Reclassification of loans from loans held
for sale to loans receivable 110,313 -- --
Reduction of previously accrued severance
and contract termination costs 18,908 -- --
True-up of deferred tax asset 18,146 -- --
Initial dividend of tax benefits to parent due to
deconsolidation -- 211,242 --
Adjustment to initial dividend of tax benefits to
parent due to deconsolidation 66,383 -- --
Impact of restricted common stock 477 -- --
Adjustment to Golden State Acquisition
purchase price (12,380) -- --
Preferred stock dividends reinvested -- 107 2,227
(8) SECURITIES AVAILABLE FOR SALE
At December 31, 1999 and 1998, securities available for sale and the
related unrealized gain or loss consisted of the following (in thousands):
December 31, 1999
-----------------------------------------------------------------
Gross Gross Net
Amortized Unrealized Unrealized Unrealized Carrying
Cost Gains Losses Gain (Loss) Value
---- ----- ------ ----------- -----
Marketable equity securities $ 336 $811 $ -- $ 811 $ 1,147
U.S. government and agency obligations 1,143,665 47 (69,125) (69,078) 1,074,587
---------- ---- ------- -------- ----------
Total $1,144,001 $858 $(69,125) (68,267) $1,075,734
========== ==== ======== ==========
Estimated tax effect 28,774
--------
Net unrealized holding loss in
stockholder's equity $(39,493)
========
F-21
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
-----------------------------------------------------------------
Gross Gross Net
Amortized Unrealized Unrealized Unrealized Carrying
Cost Gains Losses Gain Value
---- ----- ------ ---- -----
Marketable equity securities $ -- $2,142 $ -- $ 2,142 $ 2,142
U.S. government and agency obligations 767,558 1,226 (179) 1,047 768,605
-------- ------ ----- ------- --------
Total $767,558 $3,368 $(179) 3,189 $770,747
======== ====== ===== ========
Estimated tax effect (1,222)
-------
Net unrealized holding gain in
stockholder's equity $ 1,967
=======
The weighted average stated interest rates on securities available for
sale were 6.24% and 6.15% at December 31, 1999 and 1998, respectively.
The following represents a summary of the amortized cost, estimated fair
value (carrying value) and weighted average yield of securities available for
sale with related maturities (dollars in thousands):
December 31, 1999
---------------------------------------------
Estimated Weighted
Amortized Fair Average
Cost Value Yield
---- ----- -----
Marketable equity securities $ 336 $ 1,147 1.79%
U.S. government and agency obligations:
Maturing within 1 year 24,157 24,150 5.78
Maturing after 1 year but within 5 years 575,712 556,785 6.21
Maturing after 5 years through 10 years 45,937 43,658 6.16
Maturing after 10 years 497,859 449,994 6.40
---------- ----------
Total $1,144,001 $1,075,734 6.28%
========== ==========
At December 31, 1999, U.S. government and agency obligations available
for sale of $109.4 million were pledged as collateral for various obligations.
See notes 19, 20 and 32.
(9) SECURITIES HELD TO MATURITY
At December 31, 1999 and 1998, securities held to maturity consisted of
the following (in thousands):
December 31, 1999
----------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---- ----- ------ ----------
Municipal securities $ 84,727 $415 $(5,323) $ 79,819
Commercial paper 100,630 -- 100,630
-------- ---- ------- --------
Total $185,357 $415 $(5,323) $180,449
======== ==== ======= ========
December 31, 1999
----------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---- ----- ------ ----------
Municipal securities $ 84,428 $533 $(8) $ 84,953
Commercial paper 166,536 -- -- 166,536
-------- ---- --- --------
Total $250,964 $533 $(8) $251,489
======== ==== === ========
F-22
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The weighted average stated interest rates on securities held to maturity
were 4.89% and 4.77% at December 1999 and 1998, respectively.
The following represents a summary of the amortized cost (carrying
value), estimated fair value, and weighted average yield of securities held to
maturity with related maturities (dollars in thousands):
December 31, 1999
-----------------------------------------
Estimated Weighted
Amortized Fair Average
Cost Value Yield
---- ----- -----
Municipal securities
Maturing after 5 years
through 10 years $ 2,469 $ 2,358 4.71%
Maturing after 10 years 82,258 77,461 5.00
Commercial paper
Maturing within 1 year 100,630 100,630 4.81
-------- --------
Total $185,357 $180,449 4.89%
======== ========
(10) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
At December 31, 1999 and 1998, mortgage-backed securities available for
sale and the related unrealized gain or loss consisted of the following (in
thousands):
December 31, 1999
----------------------------------------------------------------------
Gross Gross Net
Amortized Unrealized Unrealized Unrealized Carrying
Cost Gains Losses Loss Value
---- ----- ------ ---- -----
GNMA $ 645,299 $ 402 $ (12,897) $ (12,495) $ 632,804
FNMA 2,554,242 5,087 (56,767) (51,680) 2,502,562
FHLMC 910,543 4,958 (8,553) (3,595) 906,948
Other mortgage-backed securities 499,117 6,845 (10,018) (3,173) 495,944
Collateralized mortgage obligations 9,562,817 1,778 (338,288) (336,510) 9,226,307
----------- ------ --------- -------- -----------
Total $14,172,018 $19,070 $(426,523) (407,453) $13,764,565
=========== ======= ========= ===========
Estimated tax effect 171,741
---------
Net unrealized holding loss in
stockholder's equity $(235,712)
=========
December 31, 1998
----------------------------------------------------------------------
Gross Gross Net
Amortized Unrealized Unrealized Unrealized Carrying
Cost Gains Losses Loss Value
---- ----- ------ ---- -----
GNMA $ 61,515 $ 1,366 $ (5,324) $ (3,958) $ 757,557
FNMA 2,896,972 11,829 (13,394) (1,565) 2,895,407
FHLMC 1,354,254 7,415 (5,239) 2,176 1,356,430
Other mortgage-backed securities 705,459 3,372 (4,467) (1,095) 704,364
Collateralized mortgage obligations 7,222,559 26,155 (14,480) 11,675 7,234,234
----------- ------- --------- --------- ---------
Total $12,940,759 $50,137 $(42,904) 7,233 $12,947,992
=========== ======= ======== ===========
Estimated tax effect (3,049)
---------
Net unrealized holding gain in
stockholder's equity $ 4,184
=========
F-23
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following represents a summary of the amortized cost, estimated fair
value (carrying value) and weighted average yield of mortgage-backed securities
available for sale (dollars in thousands):
December 31, 1999
---------------------------------------------------
Estimated Weighted
Amortized Fair Average
Cost Value Yield
---- ----- -----
GNMA $ 645,299 $ 632,804 6.47%
FNMA 2,554,242 2,502,562 6.55
FHLMC 910,543 906,948 6.73
Other mortgage-backed securities 499,117 495,944 6.67
Collateralized mortgage obligations 9,562,817 9,226,307 6.60
----------- -----------
Total $14,172,018 $13,764,565 6.58%
=========== ===========
The weighted average stated interest rates on mortgage-backed securities
available for sale were 6.62% and 6.74% at December 31, 1999 and 1998,
respectively. At December 31, 1999 and 1998, mortgage-backed securities
available for sale included securities totalling $0.9 billion and $1.1 billion,
respectively, which resulted from the securitization of certain qualifying
mortgage loans from the Bank's loan portfolio.
At December 31, 1999 and 1998, mortgage-backed securities available for
sale included $4.3 billion and $5.6 billion, respectively, of variable-rate
securities.
At December 31, 1999, mortgage-backed securities available for sale of
$9.9 billion were pledged as collateral for FHLB advances and securities sold
under agreements to repurchase as further discussed in notes 19, 20 and 32.
Further, at December 31, 1999, mortgage-backed securities available for sale
with a carrying value of $755.0 million were pledged for various other
obligations and includes $42.9 million in securities pledged to FNMA associated
with the sales of certain securitized multi-family loans as further discussed in
note 32.
(11) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
At December 31, 1999 and 1998, mortgage-backed securities held to
maturity consisted of the following (in thousands):
December 31, 1999
---------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---- ----- ------ ----------
FHLMC $ 161,129 $ 3,801 $ -- $ 164,930
FNMA 1,987,428 16,687 (20,170) 1,983,945
Other mortgage-backed securities 1,139 -- -- 1,139
---------- ------- -------- ----------
Total $2,149,696 $20,488 $(20,170) $2,150,014
========== ======= ======== ==========
December 31, 1998
---------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---- ----- ------ ----------
FHLMC $ 223,378 $ 4,553 $-- $ 227,931
FNMA 2,545,967 49,766 (5) 2,595,728
Other mortgage-backed securities 1,568 -- -- 1,568
---------- ------- --- ----------
Total $2,770,913 $54,319 $(5) $2,825,227
========== ======= === =========
F-24
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following represents a summary of the amortized cost (carrying
value), estimated fair value and weighted average yield of mortgage-backed
securities held to maturity (dollars in thousands):
December 31, 1999
--------------------------------------------------
Estimated Weighted
Amortized Fair Average
Cost Value Yield
---- ----- -----
FHLMC $ 161,129 $ 164,930 7.28%
FNMA 1,987,428 1,983,945 7.03
Other mortgage-backed securities 1,139 1,139 14.15
---------- ----------
Total $2,149,696 $2,150,014 7.05%
========== ==========
The weighted average stated interest rates on mortgage-backed securities
held to maturity were 6.92% and 7.22% at December 31, 1999 and 1998,
respectively. At December 31, 1999 and 1998, mortgage-backed securities held to
maturity included variable-rate securities totalling $2.1 billion and $2.7
billion, respectively, which resulted from the securitization with FNMA and
FHLMC of certain qualifying mortgage loans from the Bank's loan portfolio with
full recourse to the Bank.
At December 31, 1999, mortgage-backed securities held to maturity of $1.9
billion were pledged as collateral for various obligations as further discussed
in notes 19, 20 and 32. Further, at December 31, 1999, mortgage-backed
securities held to maturity with a carrying value of $50.1 million were pledged
for various other obligations. See note 32.
(12) LOANS RECEIVABLE, NET
At December 31, 1999 and 1998, loans receivable, net, included the
following (in thousands):
1999 1998
----------- -----------
Real estate loans:
1-4 unit residential $26,965,684 $23,493,221
5+ unit residential 2,881,462 2,640,635
Commercial 2,564,644 2,940,129
Construction 10,179 32,066
Land 32,421 33,002
----------- -----------
32,454,390 29,139,053
Undisbursed loan funds (2,375) (9,933)
----------- -----------
Total real estate loans 32,452,015 29,129,120
----------- -----------
Equity-line loans 433,366 385,118
Other consumer loans 237,090 241,884
Purchased auto loans, net 697,667 486,571
Business banking loans 498,318 528,665
Commercial loans 8,764 12,683
----------- -----------
Total consumer and other loans 1,875,205 1,654,921
----------- -----------
Total loans receivable 34,327,220 30,784,041
Deferred loan fees, costs, discounts and premiums, net 173,719 81,728
Allowance for loan losses (554,893) (588,533)
Purchase accounting discounts, net 7,415 3,708
----------- -----------
Total loans receivable, net $33,953,461 $30,280,944
=========== ===========
At December 31, 1999, $23.9 billion in residential loans were pledged as
collateral for FHLB advances as further discussed in notes 20 and 32.
F-25
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As a result of the Golden State and Cal Fed Acquisitions, the Bank assumed
obligations for certain loans sold with recourse. The outstanding balances of
loans sold with recourse at December 31, 1999 totalled $3.0 billion. No loans
were sold with recourse during the years ended December 31, 1999, 1998 and 1997.
The Bank evaluates the credit risk of loans sold with recourse and, if
necessary, records a liability (included in other liabilities) for estimated
losses related to these potential obligations. At December 31, 1999, such
liability totalled $70.9 million.
Auto loans purchased at a discount related to credit quality are included
in the balance sheet amount of loans receivable as follows (in thousands):
December 31,
-------------------------------
1999 1998
---------- ---------
Auto loans: contractual payments receivable $1,024,612 $ 696,050
Accretable Yield (123,944) (88,145)
Nonaccretable Contractual Cash Flows (203,001) (121,334)
---------- ---------
Loans purchased at a discount relating to credit quality, net $ 697,667 $ 486,571
========== =========
Nonaccretable Contractual Cash Flows represents contractual principal and
interest cash flows that the Company determined, at acquisition, it was probable
the Company would be unable to collect. The increase in Accretable Yield in 1998
includes a $2.0 million reclassification from Nonaccretable Contractual Cash
Flows for cash flows expected to be collected in excess of those previously
expected. The increase in Nonaccretable Contractual Cash Flows in 1999 includes
$7.3 million representing an allocation from the allowance for loan losses. The
actual cash flows for one of the purchased pools plus the expected cash payments
were determined to be less than the expected cash flows estimated at the time of
purchase. Accordingly, an allocation from the allowance for loan losses was made
in the amount by which the carrying value of this purchased pool exceeded the
present value of the expected cash flows from such pool.
Nonaccretable
Accretable Contractual
Yield Cash Flows
----- ----------
(in thousands)
Balance at December 31, 1997 $ (35,198) $ (47,220)
Addition - Glen Fed Merger (6,934) (7,324)
Addition - GSAC Acquisition (38,359) (30,845)
Addition - other purchases (53,599) (97,985)
Accretion 47,929 --
Reclassifications (1,984) 1,984
Eliminations -- 60,056
--------- ---------
Balance at December 31, 1998 (88,145) (121,334)
Addition - purchases (114,640) (163,816)
Accretion 80,432 --
Allocation from allowance for loan losses -- (7,339)
Eliminations (1,591) 89,488
--------- ---------
Balance at December 31, 1999 $(123,944) $(203,001)
========= =========
During the years ended December 31, 1999 and 1998, the Company incurred
losses of $7.3 million and zero, respectively, on loans purchased at a discount
by increasing the allocated allowance for loan losses relative to such loans.
Further, loss allowances totalling $5.1 million were acquired from predecessor
institutions in connection with the Glen Fed Merger and the GSAC Acquisition. No
loss accruals were reversed in 1999 or 1998.
F-26
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents loans which have been placed on nonaccrual
status as of the dates indicated (in thousands):
December 31,
-----------------------------
1999 1998
---- ----
Nonaccrual loans:
Real estate loans:
1-4 unit residential $125,238 $189,193
5+ unit residential 5,820 16,045
Commercial and other 8,279 10,362
Construction 150 1,208
-------- --------
Total real estate 139,487 216,808
Non-real estate 11,267 9,380
-------- --------
Total nonaccrual loans $150,754 $226,188
======== ========
The following table presents performing loans classified as troubled debt
restructuring, as of December 31, 1999 and 1998 (in thousands):
December 31,
-----------------------------
1999 1998
---- ----
1-4 unit residential $ 1,944 $ 3,468
5+ unit residential 4,834 8,805
Commercial and other real estate 18,052 19,211
-------- --------
Total restructured loans $ 24,830 $ 31,484
======== ========
At December 31, 1999, $27.0 billion, or 83.3%, of the Company's loan
portfolio consisted of real estate loans collateralized by properties located in
California. The financial condition of the Company is subject to general
economic conditions such as the volatility of interest rates and real estate
market conditions and, in particular, to conditions in the California
residential real estate market. Any downturn in the economy generally, and in
California in particular, could reduce real estate values. An increase in the
general level of interest rates may adversely affect the ability of certain
borrowers to pay the interest on and principal of their obligations.
Accordingly, in the event interest rates rise or real estate market values
decline, particularly in California, the Company and the Bank may find it
difficult to maintain its asset quality and may require additional allowances
for loss above the amounts currently estimated by management.
For nonaccrual loans and loans classified as troubled debt
restructurings, the following table summarizes the interest income recognized
("Recognized") and total interest income that would have been recognized had the
borrowers performed under the original terms of the loans ("Contractual") for
the years ended December 31, 1999 and 1998 (in thousands):
1999 1998
------------------------------ ------------------------------
Recognized Contractual Recognized Contractual
---------- ----------- ---------- -----------
Restructured loans $2,434 $ 2,396 $ 2,988 $ 2,960
Nonaccrual loans 7,111 10,937 9,680 18,219
------ ------- ------- -------
Total $9,545 $13,333 $12,668 $21,179
====== ======= ======= =======
F-27
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Activity in the allowance for loan losses for the years ended December
31, 1999, 1998 and 1997 is summarized as follows (in thousands):
1999 1998 1997
-------- --------- --------
Balance - beginning of year $588,533 $418,674 $246,556
Purchases, net -- 170,014 143,819
Provision for loan losses 10,000 40,000 79,800
Charge-offs (40,312) (46,126) (56,124)
Recoveries 4,681 5,971 4,623
Reclassifications (670) -- --
Allocation to Nonaccretable Contractual Cash
Flows of purchased auto loan portfolio (7,339) -- --
-------- -------- --------
Balance - end of year $554,893 $588,533 $418,674
======== ======== ========
(13) IMPAIRED LOANS
At December 31, 1999 and 1998, the balance of loans that are considered
to be impaired totalled $123.6 million and $135.2 million respectively (of which
$18.9 million and $32.5 million, respectively, were on nonaccrual status). The
average recorded investment in impaired loans during the years ended December
31, 1999, 1998 and 1997 was approximately $139.3 million, $137.1 million and
$112.9 million, respectively. For the years ended December 31, 1999, 1998 and
1997, the Company recognized interest income on those impaired loans of $9.5
million, $9.0 million and $10.5 million, respectively, which included $2.7
million, $1.2 million and $0.6 million of interest income recognized using the
cash basis method of income recognition.
Generally, allowances for loan losses relative to impaired loans have not
been allocated from the general allowance because the carrying value of such
loans, net of purchase accounting adjustments, exceeds the loans' related
collateral values less estimated selling costs.
(14) INVESTMENT IN FHLB
The Company's investment in FHLB stock is carried at cost. The FHLB
provides a central credit facility for member institutions. As a member of the
FHLB system, the Bank is required to own capital stock in the FHLB in an amount
equal to the greater of (a) 1% of the aggregate outstanding principal amount of
its residential mortgage loans, home purchase contracts and similar obligations
at the beginning of each calendar year, (b) .3% of total assets, or (c) 5% of
its advances (borrowings) from the FHLB of San Francisco. The Bank was in
compliance with this requirement at December 31, 1999, 1998 and 1997. At
December 31, 1999, the Bank's investment in FHLB stock was pledged as collateral
for FHLB advances as further discussed in note 20.
(15) PREMISES AND EQUIPMENT, NET
Premises and equipment, net, at December 31, 1999 and 1998 is summarized
as follows (dollars in thousands):
Estimated
Depreciable Lives at
1999 1998 December 31, 1999
-------- -------- --------------------
Land $ 47,266 $ 49,812 --
Buildings and leasehold improvements 144,739 146,108 1-39
Furniture and equipment 182,987 126,663 1-7
Construction in progress 4,496 43,483 --
-------- --------
379,488 366,066
Accumulated depreciation and amortization (82,688) (55,494)
-------- --------
Total premises and equipment, net $296,800 $310,572
======== ========
F-28
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Depreciation and amortization expense related to premises and equipment
for the years ended December 31, 1999, 1998 and 1997 totalled $37.4 million,
$26.5 million and $16.8 million, respectively.
The Company rents certain premises and equipment under long-term,
noncancellable operating leases expiring at various dates through the year 2034.
Rental expenses under such operating leases, included in occupancy and equipment
expense, for the years ended December 31, 1999, 1998 and 1997 totalled $41.1
million, $36.0 million and $29.6 million, respectively. Rental income from
sublease agreements for the years ended December 31, 1999, 1998 and 1997
totalled $5.6 million, $3.0 million and $2.0 million, respectively. At December
31, 1999, the projected minimum rental commitments, net of sublease agreements,
under terms of the leases were as follows (in thousands):
Cash Effect on
Commitment Net Income
---------- ----------
Year Ending
-----------
2000 $ 54,691 $ 46,447
2001 45,167 39,080
2002 37,823 33,151
2003 32,259 28,767
2004 26,848 24,225
Thereafter 94,054 85,723
-------- --------
Total $290,842 $257,393
======== ========
The effect of lease commitments on net income is different from the cash
commitment primarily as a result of lease commitments assumed in acquisitions
with related purchase accounting adjustments and accrued facilities costs
recorded in connection with branch consolidations. See note 21.
On November 15, 1999, the Bank sold a complex consisting of a retail
branch, a parking lot and administrative offices totalling approximately 139,608
square feet. As part of the sale agreement, the Bank agreed to lease back 16,253
square feet under two separate lease agreements. The lease covering the branch
and parking lot is cancellable with six months notice with a final termination
date of November, 2009. The lease covering the administrative offices is
non-cancellable with a termination date of November, 2004. It is the Bank's
intent to occupy these facilities until the lease termination.
At December 31, 1999, the projected minimum rental commitments under
the terms of the leases were as follows (in thousands):
Branch and Administrative
Parking Lot Offices Total
------------- -------------- -------
Year Ending
-----------
2000 $ 115 $ 219 $ 334
2001 116 205 321
2002 116 205 321
2003 116 204 320
2004 116 187 303
Thereafter 568 -- 568
------ ------ ------
Total $1,147 $1,020 $2,167
====== ====== ======
The sale discussed above resulted in a gain of $5.3 million.
Approximately $1.8 million of this gain was deferred and will be recognized
using the interest method over the life of the respective leases.
F-29
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(16) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31, 1999 and 1998 is summarized
as follows (in thousands):
1999 1998
-------- ---------
Cash and cash equivalents and securities $ 65,443 $ 46,321
Mortgage-backed securities 43,492 57,051
Loans receivable and loans held for sale 212,661 214,083
-------- --------
Total accrued interest receivable $321,596 $317,455
======== ========
(17) MORTGAGE SERVICING RIGHTS
The following is a summary of activity for mortgage servicing rights
("MSRs") and the hedge against the change in value of the mortgage servicing
rights ("MSR Hedge") for the years ended December 31, 1999, 1998 and 1997 (in
thousands):
MSR
MSR Hedge Total
---------- --------- ----------
Balance at December 31, 1996 $ 420,458 $ 3,234 $ 423,692
Additions from Cal Fed Acquisition 44,497 -- 44,497
Additions from Weyerhaeuser Purchase 41,949 -- 41,949
Originated servicing 120,465 -- 120,465
Additions - other purchases 27,939 -- 27,939
Sales - Servicing Sale (16,792) -- (16,792)
Sales - other (4) -- (4)
Premiums paid for interest rate floor contracts -- 7,088 7,088
Payments received from counterparties, net (1,849) -- (1,849)
Amortization (106,972) (3,310) (110,282)
---------- -------- ----------
Balance at December 31, 1997 529,691 7,012 536,703
Additions from Glen Fed Merger 212,933 -- 212,933
Originated servicing 169,972 -- 169,972
Additions - other purchases 160,619 -- 160,619
Sales (1,057) -- (1,057)
Gain on termination (16,089) -- (16,089)
Interest rate floor sales (43,924) (16,141) (60,065)
Premium paid -- 107,412 107,412
Payments received from counterparties, net (8,684) -- (8,684)
Amortization (147,734) (10,429) (158,163)
---------- -------- ----------
Balance at December 31, 1998 855,727 87,854 943,581
Additions - purchases 334,842 -- 334,842
Originated servicing 193,855 -- 193,855
Sales (18,604) -- (18,604)
Swaption sales 28,727 (58,553) (29,826)
Interest rate floor sales 21,208 (38,242) (17,034)
Premium paid -- 67,698 67,698
Payments made to counterparties, net 10,191 -- 10,191
Amortization (193,710) (18,600) (212,310)
---------- -------- ----------
Balance at December 31, 1999 $1,232,236 $ 40,157 $1,272,393
========== ======== ==========
At December 31, 1999, 1998 and 1997, the outstanding balance of 1-4 unit
residential loan participations, whole loans and mortgage pass-through
securities serviced for other investors (not including the Bank) by FNMC
totalled $72.9 billion, $65.4 billion and $44.9 billion, respectively. In
addition, FNMC had $10.4 billion, $10.4 billion and $6.2 billion of master
servicing at December 31, 1999, 1998 and 1997, respectively.
F-30
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The percentage of principal outstanding in the Company's portfolio of
loans serviced for others, secured by properties located in California, Texas,
and Florida was 53%, 7% and 7%, respectively, at December 31, 1999 and 54%, 8%
and 8%, respectively, at December 31, 1998.
The estimated fair value of the MSRs was $1.5 billion and $989.7 million
at December 31, 1999 and 1998, respectively. The estimated market value of
interest rate floor contracts, principal only swaps and swaptions designated as
hedges against MSRs at December 31, 1999 were $10.4 million, $(15.8) million and
$24.3 million, respectively. The estimated market value of prepayment linked
swaps, interest rate floor contracts, principal only swaps and swaptions
designated as hedges against MSRs at December 31, 1998 were $1.3 million, $32.2
million, $18.8 million and $89.3 million, respectively. At December 31, 1999 and
1998, no allowance for impairment of the MSRs was necessary.
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 and generally will result in a reduction of the market value of the
mortgage servicing rights 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 servicing rights based on changes
in interest rates.
At December 31, 1999, the Company, through FNMC, was a party to several
interest rate floor contracts maturing in 2004. The Company paid counterparties
a premium in exchange for cash payments in the event that the 10-year Constant
Maturity Swaps rate fell below the strike prices. At December 31, 1999, the
notional amount of the interest rate floors was $950 million and the strike
prices were between 5.70% and 6.04%. In addition, the Company, through FNMC,
held principal only swap agreements with a notional amount of $202.3 million.
Further, at December 31, 1999, the Company, through FNMC, was a party to
swaption contracts in which the Company paid to the counterparties premiums in
exchange for the right, but not the obligation, to purchase an interest rate
swap. At December 31, 1999, the notional amount of the underlying interest swap
agreement was $834 million. See note 35 for further discussion.
Servicing advances and other receivables (included in other assets)
related to 1-4 unit residential loan servicing, net of valuation allowances of
$20.1 million and $30.7 million in 1999 and 1998, respectively, consisted of the
following (in thousands):
December 31,
----------------------------
1999 1998
---- ----
Servicing advances $138,071 $168,944
Checks in process of collection 1,123 924
Other 8,393 7,897
-------- --------
$147,587 $177,765
======== ========
F-31
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(18) DEPOSITS
A summary of the carrying value of deposits at December 31, 1999 and 1998
follows (in thousands):
1999 1998
---- ----
Passbook accounts $ 3,666,206 $ 3,371,976
Demand deposits:
Interest-bearing 1,974,119 1,865,151
Noninterest-bearing 2,202,505 3,029,381
Money market deposit accounts 3,144,084 3,254,690
Term accounts 11,989,664 13,079,920
----------- -----------
22,976,578 24,601,118
Accrued interest payable 61,313 39,438
Purchase accounting adjustments 2,680 6,932
----------- -----------
Total deposits $23,040,571 $24,647,488
=========== ===========
The aggregate amount of jumbo certificates of deposit (term deposits)
with a minimum denomination of $100,000 was approximately $2.5 billion and $2.9
billion at December 31, 1999 and 1998, respectively. Brokered certificates of
deposit totalling $390 million and $369 million were included in deposits at
December 31, 1999 and 1998, respectively. Total deposits at December 31, 1999
and 1998 include escrow balances for loans serviced for others of $814 million
and $1.5 billion, respectively.
Total deposits include deposits of Golden State of $4.8 million and $27.4
million at December 31, 1999 and 1998, respectively.
A summary of interest expense by deposit category follows (in thousands):
1999 1998 1997
-------- -------- --------
Passbook accounts $124,618 $ 96,942 $ 68,408
Interest-bearing demand deposits 17,772 13,770 12,331
Money market deposit accounts 124,368 65,234 50,152
Term accounts 621,528 615,166 616,094
-------- -------- --------
Total $888,286 $791,112 $746,985
======== ======== ========
At December 31, 1999, term accounts had scheduled maturities as follows
(in thousands):
Year Ending
-----------
2000 $ 8,715,591
2001 2,862,720
2002 262,637
2003 78,558
2004 64,901
Thereafter 5,257
-----------
Total $11,989,664
===========
F-32
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(19) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
A summary of information regarding securities sold under agreements to
repurchase follows (dollars in thousands):
December 31, 1999
-----------------------------------------------------------------------
Underlying Collateral Repurchase Liability
------------------------------ -----------------------------
Recorded Market Interest
Value (a) Value Amount Rate
----- ----- ------ ----
Maturing within 30 days $ 33,564 $ 34,044 $ -- --%
Maturing in 30 to 90 days 2,731,295 2,709,851 2,573,574 5.35
Maturing after 90 days to 1 year 2,796,083 2,781,442 2,633,514 5.61
Maturing over 1 year 167,214 165,972 150,000 6.13
---------- ---------- ----------
Total (b) 5,728,156 5,691,309 5,357,088
Accrued interest payable -- -- 124,659
---------- ---------- ----------
$5,728,156 $5,691,309 $5,481,747
========== ========== ==========
December 31, 1998
-----------------------------------------------------------------------
Underlying Collateral Repurchase Liability
------------------------------ -----------------------------
Recorded Market Interest
Value (a) Value Amount Rate
----- ----- ------ ----
Maturing in 30 to 90 days $2,895,807 $2,908,071 $2,984,964 5.13%
Maturing after 90 days to 1 year 1,287,385 1,285,310 1,237,094 4.86
---------- ---------- ----------
Total (b) 4,183,192 4,193,381 4,222,058
Accrued interest payable -- -- 16,337
---------- ---------- ----------
$4,183,192 $4,193,381 $4,238,395
========== ========== ==========
--------------
(a) Recorded value includes accrued interest at December 31, 1999 and 1998.
In addition, the recorded values at December 31, 1999 and 1998 include
adjustments for the unrealized gain or loss on mortgage-backed securities
available for sale.
(b) Total mortgage-backed securities collateral at December 31, 1999 and 1998
includes $2.1 billion and $2.0 billion, respectively, in outstanding
balances of loans securitized with full recourse to the Bank. The market
value of such collateral was $2.1 billion and $2.0 billion at December
31, 1999 and 1998, respectively.
At December 31, 1999 and 1998, these agreements had weighted average
stated interest rates of 5.50% and 5.05%, respectively. The underlying
securities were delivered to, and are being held under the control of, third
party securities dealers. These dealers may have loaned the securities to other
parties in the normal course of their operations, but all agreements require the
dealers to resell to California Federal the identical securities at the
maturities of the agreements. The average daily balance of securities sold under
agreements to repurchase was $5.1 billion and $2.8 billion during 1999 and 1998,
respectively, the weighted average rate was 5.18% and 5.40% during 1999 and
1998, respectively, and the maximum amount outstanding at any month-end during
these periods was $6.2 billion and $4.3 billion, respectively.
At December 31, 1999, securities sold under agreements to repurchase were
collateralized with $3.8 billion of mortgage-backed securities available for
sale, $1.9 billion of mortgage-backed securities held to maturity and $37.4
million of investment securities.
F-33
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(20) BORROWINGS
Borrowings are summarized as follows (dollars in thousands):
December 31,
-----------------------------------------------------------
1999 1998
------------------------- -------------------------
Carrying Average Carrying Average
Value Rate Value Rate
----- ---- ----- ----
Fixed-rate borrowings from FHLB $19,977,878 5.61% $15,427,033 5.38%
Variable-rate borrowings from FHLB 3,365,000 6.04 4,570,743 5.53
10% Subordinated Debentures due 2006 92,100 10.00 92,100 10.00
11.20% Senior Notes due 2004 -- -- 6,000 11.20
FN Holdings 12 1/4% Senior Notes due 2001 -- -- 225 12.25
FN Holdings 10 5/8% Senior Subordinated
Notes due 2003 250 10.63 250 10.63
6 1/2% Convertible Subordinated
Debentures due 2001 2,635 6.50 2,635 6.50
10% Subordinated Debentures due 2003 4,299 10.00 4,299 10.00
Floating Rate Notes due 2003 250,000 7.21 250,000 6.75
6 3/4% Senior Notes due 2001 350,000 6.75 350,000 6.75
7% Senior Notes due 2003 600,000 7.00 600,000 7.00
7 1/8% Senior Notes due 2005 800,000 7.13 800,000 7.13
Federal funds purchased 55,000 5.50 138,000 5.00
Other borrowings 209 6.69 4,083 8.78
----------- -----------
Total borrowings 25,497,371 5.79 22,245,368 5.57
Discount on borrowings (11,481) (5,643)
Purchase accounting adjustments, net 21,742 38,989
----------- -----------
Subtotal 25,507,632 5.79% 22,278,714 5.54%
Accrued interest payable 160,994 96,843
----------- -----------
$25,668,626 $22,375,557
=========== ===========
Maturities and weighted average stated interest rates of borrowings at
December 31, 1999, not including discounts, accrued interest payable or purchase
accounting adjustments, are as follows (dollars in thousands):
Weighted
Balances Maturing Average Rates
Maturities during the Years ------------------------------ -------------------------
Ending December 31, FHLB Other FHLB Other
------------------- ---- ----- ---- -----
2000 $11,270,000 $ 55,028 5.84% 5.50%
2001 1,210,833 352,635 5.56 6.75
2002 3,660,000 54 5.44 8.57
2003 4,850,000 854,549 5.40 7.08
2004 2,350,000 -- 5.84 --
Thereafter 2,045 892,227 7.83 7.42
----------- ----------
Total $23,342,878 $2,154,493 5.67% 7.13%
=========== ==========
F-34
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Interest expense on borrowings for the years ended December 31, 1999, 1998
and 1997 is summarized as follows (in thousands):
Year Ended December 31,
------------------------------------------
1999 1998 1997
---- ---- ----
FHLB advances $1,165,010 $706,299 $443,966
Interest rate swap agreements 5,940 (2,536) (10,743)
10% Subordinated Debentures due 2006 9,210 9,209 9,210
11.20% Senior Notes due 2004 651 672 672
FN Holdings 12 1/4% Senior Notes due 2001 -- 18,093 24,500
FN Holdings 9 1/8% Senior Subordinated Notes
due 2003 -- 9,337 12,775
FN Holdings 10 5/8% Senior Subordinated Notes
due 2003 26 44,353 60,648
10.668% Subordinated Notes due 1998 -- 5,203 5,291
6 1/2% Convertible Subordinated Debentures due 2001 172 171 172
10% Subordinated Debentures due 2003 430 430 418
Floating Rate Notes due 2003 15,931 5,006 --
6 3/4% Senior Notes due 2001 23,625 7,031 --
7% Senior Notes due 2003 42,000 12,441 --
7 1/8% Senior Notes due 2005 57,000 16,882 --
Federal funds purchased 2,750 3,987 5,300
Other borrowings 25 271 434
Discount accretion 1,031 -- --
Purchase accounting adjustments (11,172) (7,533) 629
---------- -------- --------
Total $1,312,629 $829,316 $553,272
========== ======== ========
The following is a summary of the carrying value of assets pledged as
collateral for FHLB advances (in thousands):
December 31, 1999
-----------------
Real estate loans (primarily residential) $23,853,514
Mortgage-backed securities available for sale 6,060,974
Mortgage-backed securities held to maturity 2,783
Investment securities 71,967
FHLB stock 1,167,144
-----------
Total $31,156,382
===========
10% SUBORDINATED DEBENTURES DUE 2006
As part of its 1994 acquisition of First Nationwide Bank ("FNB") ("FN
Acquisition"), California Federal assumed $92.1 million principal amount of
subordinated debentures, which bear interest at 10% per annum and mature on
October 1, 2006 (the "10% Subordinated Debentures Due 2006").
Events of Default under the indenture governing the 10% Subordinated
Debentures Due 2006 (the "Old FNB Indenture") include, among other things: (a) a
default in the payment of interest when due and such default continues for 30
days, (b) a default in the payment of any principal when due, (c) the failure to
comply with covenants in the Old FNB Indenture, provided that the trustee or
holders of at least 25% in principal amount of the outstanding 10% Subordinated
Debentures Due 2006 notify the Bank of the Default and the Bank does not cure
the default within 60 days after receipt of such notice, (d) certain events of
bankruptcy, insolvency or reorganization of the Bank, (e) the FSLIC/RF (or a
comparable entity) is appointed to act as conservator, liquidator, receiver or
other legal custodian for the Bank and (f) a default under other indebtedness of
the Bank in excess of $10 million resulting in such indebtedness becoming due
and payable, and such default or acceleration has not been rescinded or annulled
F-35
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
within 60 days after the date on which written notice of such failure has been
given by the trustee to the Bank or by holders of at least 25% in principal
amount of the outstanding 10% Subordinated Debentures Due 2006 to the Bank and
the trustee.
11.20% SENIOR NOTES DUE 2004
As part of its 1996 acquisition of San Francisco Federal ("SFFed")
("SFFed Acquisition"), California Federal assumed $50 million principal amount
of SFFed 11.20% Senior Notes due September 1, 2004 (the "11.20% Senior Notes").
On December 20, 1999, the Bank repurchased all of the remaining $6.0 million
outstanding principal amount of the 11.20% Senior Notes at a price of 113.9% of
the principal amount, plus the accrued interest thereon. The Bank recorded an
extraordinary loss, net of tax, of $0.2 million in connection with this
repurchase.
FN HOLDINGS 12 1/4% SENIOR NOTES DUE 2001
In connection with the FN Acquisition, the Company issued $200 million
principal amount of 12 1/4% Senior Notes due 2001 ("FN Holdings 12 1/4% Senior
Notes"), including $5.5 million principal amount of FN Holdings 12 1/4% Senior
Notes to certain directors and officers of the Bank.
During 1998, a total of $199.8 million aggregate principal amount of the
FN Holdings 12 1/4% Senior Notes were redeemed in connection with the Debt
Tender Offers for an aggregate redemption price, including accrued interest
payable, of $228.3 million. 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.
FN HOLDINGS 9 1/8% SENIOR SUBORDINATED NOTES DUE 2003
On January 31, 1996, FN Holdings issued $140 million principal amount
of the 9 1/8% Senior Sub Notes due 2003 (the "FN Holdings 9 1/8% Senior Sub
Notes").
During 1998, all of the FN Holdings 9 1/8% Senior Sub Notes were
redeemed in connection with the Debt Tender Offers for an aggregate purchase
price, including accrued interest payable, of $159.9 million.
FN HOLDINGS 10 5/8% SENIOR SUBORDINATED NOTES DUE 2003
In connection with the Cal Fed Acquisition, GS Holdings acquired the
net proceeds from the issuance of $575 million principal amount of FN Escrow's
10 5/8% Senior Sub Notes due 2003 (the "FN Holdings 10 5/8% Notes") and assumed
FN Escrow's obligations under the FN Holdings 10 5/8% Notes and indenture.
During 1998, a total of $574.8 million aggregate principal amount of the FN
Holdings 10 5/8% Notes were redeemed in connection with the Debt Tender Offers
for an aggregate purchase price, including accrued interest payable, of $692.7
million. At December 31, 1999, $0.3 million of the FN Holdings 10 5/8% Notes
remain outstanding.
The FN Holdings 10 5/8% Notes are redeemable at the option of GS
Holdings, in whole or in part, during the twelve-month period beginning January
1, 2001, at a redemption price of 105.313% plus accrued and unpaid interest to
the date of redemption, during the twelve-month period beginning January 1, 2002
at a redemption price of 102.656% plus accrued and unpaid interest to the date
of redemption, and thereafter at 100% plus accrued and unpaid interest to the
date of redemption.
The FN Holdings 10 5/8% Notes are subordinate in right of payment to all
existing and future subordinated debt, if any is issued, of GS Holdings. The FN
Holdings 10 5/8% Notes are subordinated to all existing and future liabilities,
including deposits, indebtedness and trade payables, of the subsidiaries of GS
Holdings, including California Federal and all preferred stock issued by the
Bank, including the Bank Preferred Stock (as defined herein).
As a result of the Cal Fed Acquisition, the Bank is obligated with
respect to the following three outstanding securities of Old California Federal.
F-36
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
10.668% SUBORDINATED NOTES DUE 1998
California Federal assumed $50 million of 10.668% unsecured senior
subordinated notes which matured and were repaid in full on December 22, 1998
(the "10.668% Subordinated Notes").
6 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2001
In 1986, Cal Fed Inc., Old California Federal's former parent company,
issued $125 million of 6.5% convertible subordinated debentures due February 20,
2001 (the "6 1/2% Convertible Subordinated Debentures"). As a result of a
corporate restructuring in December 1992, Cal Fed Inc. was merged with and into
XCF Acceptance Corporation ("XCF"), a subsidiary of Old California Federal. The
6 1/2% Convertible Subordinated Debentures are redeemable at the option of the
holders on February 20, 2000, at 123% of their principal amount. Due to the
purchase of all of the Cal Fed Stock by FN Holdings in the Cal Fed Acquisition
on January 3, 1997, the common stock conversion feature has been eliminated.
Events of Default under the indenture governing the 6 1/2% Convertible
Subordinated Debentures include, among other things: (a) any failure to make any
payment of interest when due and such payment is not made within 30 days after
the date such payment was due; (b) failure to make any payment of principal when
due; (c) default in the performance, or breach, of any covenant or warranty in
the indenture, provided that such default or breach continues for more than 60
days after notice is delivered to the Bank; or (d) certain events of bankruptcy,
insolvency, or reorganization of the Bank or its subsidiaries.
10% SUBORDINATED DEBENTURES DUE 2003
On December 16, 1992, Old California Federal issued $13.6 million of
10.0% unsecured subordinated debentures due 2003 (the "10% Subordinated
Debentures").
Events of Default under the indenture governing the 10% Subordinated
Debentures include, among other things: (a) failure to make any payment of
principal when due; (b) any failure to make any payment of interest when due and
such payment is not made within 30 days after the date such payment was due; (c)
failure to comply with certain covenants in the indenture; (d) failure to comply
with certain covenants in the indenture provided that such failure continues for
more than 60 days after notice is delivered to the Bank; (e) certain events of
bankruptcy, insolvency or reorganization of the Bank; or (f) the default or any
event which, with the giving of notice or lapse of time or both, would
constitute a default under any indebtedness of the Bank and cause such
indebtedness with an aggregate principal amount exceeding $15 million to
accelerate.
GS HOLDINGS NOTES
On August 6, 1998, GS Escrow, which subsequently merged into GS Holdings,
issued $2 billion principal amount of fixed and floating rate notes, as
described below. The GS Holdings Notes are unsecured and unsubordinated
obligations of GS Holdings and rank in right of payment with all other
unsubordinated and unsecured indebtedness of GS Holdings. The terms and
conditions of the notes indentures impose restrictions that affect, among other
things, the ability of GS Holdings to incur debt, pay dividends or make
distributions, engage in a business other than holding the common stock of the
Bank and similar banking institutions, make acquisitions, create liens, sell
assets and make certain investments.
FLOATING RATE NOTES DUE 2003
On August 6, 1998, GS Escrow, an affiliate of GS Holdings, issued $250
million principal amount of the Floating Rate Notes Due 2003. The notes will
mature on August 1, 2003 with interest payable quarterly on February 1, May 1,
August 1 and November 1. Interest on the Floating Rate Notes is equal to
three-month LIBOR plus 100 basis points per annum, except that the initial rate
was 6 3/4%, based on six-month LIBOR until the first interest payment date on
February 1, 1999. At December 31, 1999, the interest rate on the Floating Rate
Notes Due 2003 was 6.33%. Deferred costs associated with the issuance of the
Floating Rate Notes totalling $3.1 million were recorded in other assets and are
being amortized over the term of the Floating Rate Notes.
F-37
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Floating Rate Notes are redeemable at the option of GS Holdings, in
whole or in part, after August 1, 2000 at a price of 101.5% of the outstanding
principal amount during the twelve-month period beginning August 1, 2000; at a
price of 101% of the outstanding principal amount during the twelve-month period
beginning August 1, 2001; and at a price of 100.5% of the outstanding principal
amount during the twelve-month period beginning August 1, 2002; including
accrued and unpaid interest, if any, to the date of redemption. In the event of
a change in control, the Floating Rate Notes are redeemable in whole at the
option of GS Holdings. The redemption price includes principal plus accrued and
unpaid interest, if any, to the date of redemption, plus the excess, if any, of
(a) the sum of the present value of the redemption price for the Floating Rate
Notes and the remaining scheduled interest payments over (b) the outstanding
principal amount of the Floating Rate Notes to be redeemed.
FIXED RATE NOTES
On August 6, 1998, GS Escrow, an affiliate of GS Holdings, issued $350
million principal amount of the 2001 Notes, $600 million principal amount of the
2003 Notes and $800 million principal amount of the 2005 Notes. The Fixed Rate
Notes will mature on August 1 of the respective year with interest payable
semiannually on February 1 and August 1. Deferred costs associated with the
issuance of the Fixed Rate Notes totalling $3.5 million, $12.5 million and $19.5
million for the 2001 Notes, the 2003 Notes and the 2005 Notes, respectively,
were recorded in other assets and are being amortized over the terms of the
notes.
The Fixed Rate Notes are redeemable at the option of GS Holdings, in
whole or in part, at a redemption price equal to principal plus accrued and
unpaid interest, if any, to the date of redemption, plus the excess, if any, of
(a) the sum of the present value of the redemption price for the notes and the
remaining scheduled interest payments over (b) the outstanding principal amount
of the notes to be redeemed.
(21) ACCRUED TERMINATION AND FACILITIES COSTS
In connection with the Golden State Acquisition, the Company recorded
liabilities resulting from (a) branch consolidations due to duplicate
facilities, (b) employee severance and termination benefits due to a planned
reduction in force; and (c) expenses incurred under contractual obligations to
terminate services provided by outside service providers (principally relating
to data processing expenses). The merger and integration plan relative to the
Golden State Acquisition was in place on September 11, 1998. Certain of these
costs were included in the allocation of purchase price and others were
recognized in net income. The table below reflects a summary of the activity in
the liability for the costs related to such plan (in thousands):
Severance and
Branch Termination Contract
Consolidations Benefits Terminations Total
-------------- ------------- ------------ --------
Balance at December 31, 1997 $ -- $ -- $ -- $ --
Initial liabilities recorded 29,870 48,303 14,455 92,628
Charges to liability account -- (14,823) (2,640) (17,463)
-------- -------- ------- --------
Balance at December 31, 1998 29,870 33,480 11,815 75,165
Additional liabilities recorded 9,401 71 -- 9,472
Charges to liability account (15,220) (4,140) (9,523) (28,883)
Reversal of accrual -- (16,641) (2,267) (18,908)
-------- -------- ------- --------
Balance at December 31, 1999 $ 24,051 $ 12,770 $ 25 $ 36,846
======== ======== ======= ========
The Bank has identified certain of its retail banking facilities that
will be closed and marketed for sale, with the related operations consolidated
into other retail banking facilities acquired in the Golden State Acquisition.
Accordingly, the liabilities established represent the estimated present value
of occupancy expenses, offset by estimates of sub-lease income over the
applicable remaining lease terms. The first group of branches was closed in
November 1998. Closures are scheduled to continue through the second quarter of
2000.
F-38
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In connection with the Golden State Acquisition, management identified
approximately 1,100 full-time equivalent positions to be eliminated. During
1999, this estimate was increased to 1,141. These positions span all areas and
business units of the Bank. Through December 31, 1999, 1,137 positions have been
eliminated. The elimination of the remaining four positions is expected to be
completed during 2000. The balance remaining at December 31, 1999 primarily
represents a liability for annuity benefits contractually payable to former
senior officers of Golden State.
The Bank has also established additional liabilities for contract
termination costs with outside service providers. The termination of one
remaining contract is expected to be finalized during the first quarter of 2000.
The table below provides detail of the initial liability recorded in
1998, the additional liability recorded in 1999 and the subsequent reversal of
the excess liability in 1999 (see note 3) (in thousands):
Merger Costs Expenses
Included in Recognized in
Allocation of Net Income
Purchase Price (Pre-tax) Total
-------------- ------------- ---------
Branch Consolidation $ 22,304 $ 7,566 $ 29,870
Severance and termination benefits 42,211 6,092 48,303
Contract termination 14,455 -- 14,455
-------- ------- --------
Total liability initially established 78,970 13,658 92,628
in 1998
Additional liability recorded in 1999 500 8,972 9,472
Excess liability reversed in 1999 (16,641) (2,267) (18,908)
-------- ------- --------
Net liability recorded from
Golden State Acquisition $ 62,829 $20,363 $ 83,192
======== ======= ========
(22) SEGMENT REPORTING
The Company has two reportable segments, the community bank and the
mortgage bank. The community bank operates retail deposit branches in California
and Nevada. The community bank segment provides retail consumer and small
businesses with: (a) deposit products such as demand, transaction and savings
accounts, (b) investment and insurance products such as mutual funds and
annuities and (c) lending products, such as consumer and commercial loans.
Further, the community bank segment invests in residential real estate loans
purchased from FNMC and from others, and also invests in mortgage-backed and
other securities. The mortgage banking segment, conducted by FNMC, operates loan
production facilities throughout the United States and originates or purchases
fixed-rate 1-4 unit residential loans for sale to various investors in the
secondary market and services loans for itself and for others. The mortgage
banking segment also originates adjustable-rate loans for the community bank
segment.
The accounting policies of the segments are the same as those described
in note 2. The Company evaluates performance based on net income, noninterest
income, and noninterest expense. The total of these three items is the
reportable segment's net contribution.
The Company's reportable segments are strategic business units that offer
different services in different geographic areas. They are managed separately
because each segment appeals to different markets and, accordingly, requires
different technology and marketing strategies.
F-39
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
Community Mortgage
Banking Banking Total
----------- ---------- -----------
(in thousands)
Net interest income: (1)
1999 $ 1,357,223 $ (61,785) $ 1,295,438
1998 964,926 (52,830) 912,096
1997 798,813 (45,788) 753,025
Noninterest income: (2)
1999 247,849 220,509 468,358
1998 284,142 191,706 475,848
1997 174,671 187,536 362,207
Noninterest expense: (3)
1999 737,516 177,907 915,423
1998 591,761 174,203 765,964
1997 499,435 153,924 653,359
Segment assets: (4)
1999 56,806,653 3,459,880 60,266,533
1998 54,503,592 4,847,633 59,351,225
1997 31,160,466 3,072,219 34,232,685
- -------------
(1) Includes $109.6 million, $101.4 million and $66.3 million for 1999, 1998
and 1997, respectively, in earnings credit provided to FNMC by the Bank,
primarily for custodial bank account balances generated by FNMC. Also
includes $235.6 million, $198.9 million and $124.1 million for 1999, 1998
and 1997, respectively, in interest income and expense on intercompany
loans.
(2) Includes $46.6 million, $34.9 million and $22.5 million for 1999, 1998 and
1997, respectively, in intercompany servicing fees.
3) Includes $4.6 million for 1999, 1998 and 1997, respectively, in
intercompany noninterest expense.
(4) Includes $3.2 billion, $4.5 billion and $2.9 billion for 1999, 1998 and
1997, respectively, in intercompany borrowings and $30.2 million, $29.2
million and $20.2 million for 1999, 1998 and 1997, respectively, in
intercompany deposits maintained with the Bank.
F-40
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following reconciles the above table to the amounts shown on the
consolidated financial statements as of and for the years ended December 31, (in
thousands):
1999 1998 1997
----------- ----------- -----------
Net interest income:
Total net interest income for reportable segments $ 1,295,438 $ 912,096 $ 753,025
Elimination of intersegment net interest income (109,599) (101,372) (66,339)
----------- ----------- -----------
Total $ 1,185,839 $ 810,724 $ 686,686
=========== =========== ===========
Noninterest income:
Total noninterest income for reportable segments $ 468,358 $ 475,848 $ 362,207
Elimination of intersegment servicing fees (46,631) (34,891) (22,513)
----------- ----------- -----------
Total $ 421,727 $ 440,957 $ 339,694
=========== =========== ===========
Noninterest expense:
Total noninterest expense for reportable segments $ 915,423 $ 765,964 $ 653,359
Elimination of intersegment expense (4,640) (4,640) (4,640)
----------- ----------- -----------
Total $ 910,783 $ 761,324 $ 648,719
=========== =========== ===========
Total assets:
Total assets for reportable segments $60,266,533 $59,351,225 $34,232,685
Elimination of intersegment deposits (30,222) (29,217) (20,218)
Elimination of intersegment borrowings (3,195,180) (4,524,072) (2,865,388)
----------- ----------- -----------
Total $57,041,131 $54,797,936 $31,347,079
=========== =========== ===========
The Company typically reviews the results of operations for the mortgage
banking segment based on that segment's contribution as opposed to its income
before income taxes, extraordinary item and minority interest. The main
difference between the two measures of profitability is that contribution for
the mortgage banking segment includes custodial earnings that are reported in
the community banking segment when computing net income and that intercompany
interest expense is computed using an internal cost of funds rate instead of a
market rate. The mortgage banking segment's contribution for the years ended
December 31, 1999, 1998 and 1997 was $90.4 million, $66.0 million and $35.9
million, respectively.
(23) COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, Reporting Comprehensive Income, as of
October 1, 1997. Accounting principles generally require that recognized
revenue, expenses, gains, and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
equity section of the balance sheet, such items along with net income are
components of comprehensive income. The adoption of SFAS No. 130 had no effect
on the Company's net income or stockholders' equity.
F-41
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The tax effect associated with unrealized gain (loss) on securities for
the years ended December 31, 1999, 1998 and 1997 is summarized as follows (in
thousands):
Before-tax Tax benefit Net-of-tax
amount (expense) amount
------ --------- ------
1999
----
Unrealized (loss) gain on securities:
Unrealized holding (loss) gain arising during the period $(487,673) $205,432 $(282,241)
Less: reclassification adjustments for gains in net income (1,283) 541 (742)
--------- -------- ---------
Other comprehensive (loss) income $(488,956) $205,973 $(282,983)
========= ======== =========
1998
----
Unrealized (loss) gain on securities:
Unrealized holding (loss) gain arising during the period $ (28,761) $ 594 $ (28,167)
Less: reclassification adjustments for gains in net income (1,131) 287 (844)
--------- -------- ---------
Other comprehensive (loss) income $ (29,892) $ 881 $ (29,011)
========= ======== =========
1997
----
Unrealized gain (loss) on securities:
Unrealized holding gain (loss) arising during the period $ 14,142 $ (3,235) $ 10,907
Less: reclassification adjustments for gains in net income (25,182) 3,218 (21,964)
--------- -------- ---------
Other comprehensive (loss) income $ (11,040) $ (17) $ (11,057)
========= ======== =========
Unrealized gain (loss) on securities is the only component of other
comprehensive income and accumulated other comprehensive income for the years
ended December 31, 1999, 1998 and 1997.
(24) MINORITY INTEREST
AUTO ONE COMMON STOCK
In connection with the GSAC Acquisition, Auto One issued 250 shares of
its common stock par value $1.00 per share, representing a 20% interest in Auto
One. The carrying value of Auto One's common stockholders' equity attributable
to the minority stockholders at December 31, 1999 has been reduced to zero as a
result of realized operating losses of Auto One.
11 1/2% PREFERRED STOCK
In connection with the FN Acquisition, California Federal issued
3,007,300 shares of its 11 1/2% noncumulative perpetual preferred stock ("11
1/2% Preferred Stock") with a par value of $.01 per share, having a liquidation
preference of $300.7 million. This stock has a stated liquidation value of $100
per share. Costs related to the 11 1/2% Preferred Stock issuance were deducted
from additional paid-in capital.
In connection with the Bank Preferred Stock Tender Offers, 2,688,959
shares of the 11 1/2% Preferred Stock were purchased by GS Holdings during the
year ended December 31, 1998 for a total redemption price of $301.3 million.
These transactions reduced minority interest by $268.9 million on the Company's
consolidated balance sheet and resulted in a charge of $32.4 million to minority
interest expense.
On September 1, 1999, the remaining 318,341 outstanding shares of 11 1/2%
Preferred Stock were redeemed at $105.75 per share, for a total redemption price
of $33.7 million. This transaction reduced minority interest by $31.8 million on
the Company's consolidated balance sheet and resulted in a charge of $1.8
million to minority interest expense. See note 5.
F-42
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Dividends are payable quarterly at an annual rate of 11.50% per share when
declared by the Bank's Board of Directors. Dividends paid on the 11 1/2%
Preferred Stock for each year ended December 31, 1999, 1998 and 1997 totalled
$34.6 million, of which $1.8 million, $26.8 million and $34.6 million was
included in minority interest expense in 1999, 1998 and 1997, respectively.
10 5/8% PREFERRED STOCK
In connection with the Cal Fed Acquisition, California Federal assumed
Old California Federal's 10 5/8% noncumulative perpetual preferred stock, with a
liquidation value of $172.5 million (the "10 5/8% Preferred Stock" and, together
with the 11 1/2% Preferred Stock, the "Bank Preferred Stock").
In connection with the Bank Preferred Stock Tender Offers, 1,117,701
shares of the 10 5/8% Preferred Stock were purchased by GS Holdings during the
year ended December 31, 1998 for a total redemption price of $121.7 million.
These transactions reduced minority interest by $111.8 million on the Company's
consolidated balance sheet and resulted in a charge of $9.9 million to minority
interest expense.
On April 1, 1999, the remaining 607,299 outstanding shares were redeemed
at $105.313 per share, for a total redemption price of $63.9 million. This
transaction reduced minority interest by $60.7 million on the Company's
consolidated balance sheet and resulted in a charge of $3.2 million to minority
interest expense. See note 5.
Cash dividends on the 10 5/8% Preferred Stock are noncumulative and are
payable at an annual rate of 10 5/8% per share if, when, and as declared by the
Board of Directors of the Bank. Dividends paid on the 10 5/8% Preferred Stock
for each year ended December 31, 1999, 1998 and 1997 totalled $18.3 million, of
which zero, $15.3 million and $18.3 million was included in minority interest
expense in 1999, 1998 and 1997, respectively.
REIT PREFERRED STOCK
In November 1996, the Bank formed California Federal Preferred Capital
Corporation ("Preferred Capital Corp.") for the purpose of acquiring, holding
and managing real estate mortgage assets. Preferred Capital Corp. is a Maryland
corporation and qualifies as a real estate investment trust ("REIT"), for
federal income tax purposes. All of Preferred Capital Corp.'s common stock is
owned by the Bank. Pursuant to a subservicing agreement with the Bank's
wholly-owned mortgage banking subsidiary, First Nationwide Mortgage Corporation
("FNMC"), FNMC services Preferred Capital Corp.'s mortgage assets.
On January 31, 1997, Preferred Capital Corp. issued to the public $500
million of its 9 1/8% Noncumulative Exchangeable Preferred Stock ("REIT
Preferred Stock"), which is reflected in the Company's consolidated balance
sheet as minority interest. Preferred Capital Corp. used the proceeds from such
offering to acquire mortgage assets from the Bank. The REIT Preferred Stock has
a stated liquidation value of $25 per share, plus declared and unpaid dividends,
if any. The annual cash dividends on the 20,000,000 shares of REIT Preferred
Stock, assuming such dividends are declared by the Board of Directors of
Preferred Capital Corp., are expected to approximate $45.6 million per year. As
long as Preferred Capital Corp. qualifies as a REIT, a distribution on the REIT
Preferred Stock will be a dividends-paid deduction by Preferred Capital Corp.
for tax purposes. Dividends paid on the REIT Preferred Stock during 1999, 1998
and 1997 were $26.4 million, $33.1 million and $36.6 million, respectively, net
of the income tax benefit.
The REIT Preferred Stock ranks prior to the common stock of Preferred
Capital Corp. and to all other classes and series of equity securities
subsequently issued, other than any class or series expressly designated as
being on a parity with or senior to the REIT Preferred Stock as to dividends and
liquidating distributions.
Holders of the REIT Preferred Stock have no voting rights, except as
required by law or certain limited circumstances.
F-43
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Except in the event of a change of control or upon certain tax events,
the REIT Preferred Stock is not redeemable prior to January 31, 2002. The REIT
Preferred Stock is redeemable solely at the option of Preferred Capital Corp. or
its successor or any acquiring or resulting entity with respect to Preferred
Capital Corp. (including by any parent or subsidiary of Preferred Capital Corp.,
any such successor or any such acquiring or resulting entity), as applicable, at
any time on and after January 31, 2002 in whole or in part, at $26.14 per share
on or after January 31, 2002 and prior to January 31, 2003, and at prices
decreasing pro rata annually thereafter to the stated liquidation value of $25
per share on or after January 31, 2007, plus declared and unpaid dividends, if
any, without interest. Upon change of control, the REIT Preferred Stock is
redeemable on or prior to January 31, 2002 at the option of Preferred Capital
Corp. or its successor or any acquiring or resulting entity with respect to the
Bank (including by any parent or subsidiary of Preferred Capital Corp., any such
successor or any such acquiring or resulting entity), as applicable, in whole,
but not in part, at a price per share equal to: (a) $25, plus (b) an amount
equal to declared and unpaid dividends, if any, to the date fixed for
redemption; without interest and without duplication, an additional amount equal
to the amount of dividends that would be payable on the REIT Preferred Stock in
respect of the period from the first day of the dividend period in which the
date fixed for redemption occurs to the date fixed for redemption (assuming all
such dividends were to be declared), plus (c) a specified make whole premium.
Each share of REIT Preferred Stock will be exchanged automatically for
one newly issued share of preferred stock of the Bank having substantially the
same terms as the REIT Preferred Stock (the "9 1/8% Preferred Stock") if the
appropriate federal regulatory agency directs in writing such exchange because
(a) the Bank becomes "undercapitalized" under prompt corrective action
regulations, (b) the Bank is placed into conservatorship or receivership or (c)
the appropriate federal regulatory agency, in its sole discretion, anticipates
the Bank becoming "undercapitalized" in the near term. If issued, the 9 1/8%
Preferred Stock will rank on a parity with the Bank Preferred Stock.
PRE-MERGER TAX BENEFITS
During 1999, minority interest expense of $79.0 million was recorded
based upon changes to estimated pre-merger tax benefits retained by GSB
Investments and Hunter's Glen. This amount was fully offset by an income tax
benefit to GS Holdings in the same period. See note 28.
(25) STOCKHOLDER'S EQUITY
PREFERRED STOCK
In March 1998, the Company redeemed all remaining 1,666.7 outstanding
shares of the floating rate cumulative perpetual preferred stock of FN Holdings
("FN Holdings Preferred Stock"), reducing stockholder's equity by $25.0 million.
The redemption price was equal to the liquidation value of $15,000 per share.
Upon redemption of the FN Holdings Preferred Stock, all remaining 52.5 shares of
another series of the FN Holdings Preferred Stock which had been issued in
conjunction with stock dividends ("Additional FN Holdings Preferred Stock")
totalling $0.8 million liquidation value, was contributed to the capital of the
Company, without any payment therefore. Such shares were retired and cancelled.
Dividends on the FN Holdings Preferred Stock totalled $0.6 million and
$12.8 million during 1998 and 1997, respectively, including the issuance of
Additional FN Holdings Preferred Stock of $0.1 million and $2.2 million.
COMMON STOCK
In connection with the Golden State Merger, First Gibraltar, holder of
100% of class A common stock of the Company and Hunter's Glen, which was
controlled by the Bank's Chairman and was holder of 100% of class B common stock
of the Company, received 56,722,988 shares of Golden State stock in
consideration for all of the shares of class A and class B common stock of the
Company. Subsequent to the Golden State Merger, GSB Investments became the owner
of the shares previously issued to First Gibraltar. Prior to this transaction,
class B common stock represented 20% of the voting common shares of the company
(representing approximately 15% of the voting power of the common stock). Class
A common stock represented 80% of the voting common shares of the Company
(representing approximately 85% of the voting power of the common stock).
F-44
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In connection with the Golden State Merger, the Company issued 1,000
shares of its common stock with par value of $1.00 per share. The common stock
of the company is owned 100% by its parent, Golden State.
Dividends and distributions on the Company's common stock in 1999
totalled $225.5 million. During 1999, the Company also recorded a $66.4 million
adjustment to the initial dividend of tax benefits to parent related to the
Company's deconsolidation from its tax reporting group. See "Retained Earnings."
Dividends and distributions on the Company's common stock in 1998 totalled
$874.2 million, consisting of the following: (a) $28.5 million on the class A
stock; (b) $7.1 million on the class B stock; (c) $211.2 million related to the
Company's deconsolidation from its tax reporting group as a result of the Golden
State Merger; (d) $553.7 million related to the Parent Holdings Defeasance and
(e) $73.7 million on common stock. Dividends on the Company's class A and B
common stock during 1997 totalled $56.9 million and $14.2 million, respectively.
ADDITIONAL PAID-IN CAPITAL
During 1999, the Company received a capital contribution from its parent
of $40 million. In addition, the Company recorded an adjustment during 1999 to
the purchase price in the Golden State Acquisition of $12.4 million. See note 3.
RETAINED EARNINGS
During 1999, the Company recorded a $66.4 million increase in retained
earnings representing an adjustment to reduce the initial dividend of tax
benefits to parent upon the Company's deconsolidation from its tax reporting
group on September 11, 1998. See note 28.
PAYMENT OF DIVIDENDS
The terms of the GS Escrow Notes indenture generally will permit the
Company to make distributions of up to 75% of the Consolidated Net Income (as
defined therein) of GS Holdings since July 1, 1998 if after giving effect to
such distribution, (a) the Bank is "well capitalized" under applicable OTS
regulations and (b) the Consolidated Common Stockholder's Equity (as defined
therein) of the Bank is at least equal to the Minimum Common Equity Amount (as
defined therein). The Federal thrift laws and regulations of the Office of
Thrift Supervision (the "OTS") limit the Bank's ability to pay dividends on its
preferred or common stock. The Bank generally may not pay dividends without the
consent of the OTS if, after the payment of the dividends, it would not be
deemed "adequately capitalized" under the prompt corrective action standards of
the Federal Deposit Insurance Corporation Improvement Act of 1991.
As of December 31, 1999, the Bank could pay dividends of $102.8 million
without the consent of the OTS and it could pay dividends of $461.5 million and
still be "well-capitalized." As of December 31, 1999, the Company could pay
dividends, in addition to those already paid, of $222.4 million without
violating the most restrictive terms of the GS Escrow Notes indenture.
(26) REGULATORY CAPITAL OF THE BANK
The Bank is subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Company's and the Bank's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
F-45
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Quantitative measures established by regulation to insure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of tangible and leverage capital to adjusted total assets, and
of Tier 1 and total risk-based capital to risk-weighted assets. Management
believes, as of December 31, 1999, that the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 1999 and 1998, the most recent notification from the
OTS categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum leverage, Tier 1 risk-based and total risk-based ratios as set
forth in the table below. There are no conditions or events since the most
recent notification that management believes have changed the institution's
category.
The Bank's actual capital amounts and ratios as of December 31, 1999 and
1998 are presented in the following table (dollars in thousands):
To be Adequately
Actual Capitalized To be Well Capitalized
---------------------- ---------------------- ------------------------
As a % of As a % of As a % of
1999 Amount Assets Amount Assets Amount Assets
- --------------------------- ------ ------ ------ ------ ------ ------
Stockholder's equity of the Bank
per financial statements $3,555,851
Minority interest 500,000
Net unrealized holding loss 275,625
----------
4,331,476
Adjustments for tangible and
leverage capital:
Goodwill litigation assets (158,713)
Intangible assets (819,561)
Non-includable subsidiaries (59,579)
----------
Total tangible capital $3,293,623 5.81% $ 849,649 1.50% N/A
========== ==========
Total leverage capital $3,293,623 5.81% $2,265,731 4.00% $2,832,163 5.00%
========== ========== ==========
Tier 1 risk-based capital $3,293,623 11.36% N/A N/A $1,734,619 6.00%
========== ==========
Adjustments for risk-based
capital:
Qualifying subordinated
debt 92,602
General loan loss allowance 363,328
Qualifying portion of
unrealized holding gains 37
Low level recourse (10,619)
Assets required to be
deducted (13,559)
----------
Total risk-based capital $3,725,412 12.89% $2,312,825 8.00% $2,891,031 10.00%
========== ========== ==========
F-46
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
To be Adequately
Actual Capitalized To be Well Capitalized
---------------------- ---------------------- ------------------------
As a % of As a % of As a % of
1999 Amount Assets Amount Assets Amount Assets
- --------------------------- ------ ------ ------ ------ ------ ------
Stockholder's equity of the Bank
per financial statements $3,678,712
Minority interest 498,348
Net unrealized holding gains
(4,884)
4,172,176
Adjustments for tangible and
leverage capital:
Goodwill litigation assets (160,341)
Intangible assets (923,598)
Non-qualifying MSRs (94,358)
Non-includable subsidiaries (57,999)
Excess deferred tax asset (118,659)
----------
Total tangible capital $2,817,221 5.29% $ 799,271 1.50% N/A N/A
========== ==========
Total leverage capital $2,817,221 5.29% $2,131,388 4.00% $2,664,235 5.00%
========== ========== ==========
Tier 1 risk-based capital $2,817,221 10.27% N/A N/A $1,645,485 6.00%
========== ==========
Adjustments for risk-based
capital:
Qualifying subordinated
debt 93,210
General loan loss allowance 345,583
Qualifying portion of
unrealized holding gains 73
Low level recourse (11,759)
Assets required to be
deducted (38,234)
----------
Total risk-based capital $3,206,094 11.69% $2,193,980 8.00% $2,742,475 10.00%
========== ========== ==========
(27) OTHER NONINTEREST EXPENSE
Other noninterest expense amounts are summarized as follows for the years
ended December 31, 1999, 1998 and 1997 (in thousands):
1999 1998 1997
-------- ------- --------
Other noninterest expense:
Telephone $ 26,088 $ 19,640 $ 15,932
Marketing 31,814 19,597 20,186
Data processing 23,440 15,707 12,402
Savings Association Insurance Fund deposit insurance premium 14,230 11,055 10,680
Insurance and surety bonds 7,412 6,027 5,642
Postage 13,021 10,023 8,070
Printing, copying and office supplies 12,968 11,179 9,230
Employee travel 13,855 10,386 8,745
Clerical and other losses 18,703 10,534 11,410
Other expense 58,051 45,212 53,003
--------- --------- ---------
$219,582 $159,360 $155,300
======== ======== ========
F-47
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(28) INCOME TAXES
Total income tax expense (benefit) for the years ended December 31, 1999,
1998 and 1997 was allocated as follows (in thousands):
1999 1998 1997
--------- --------- -------
Income before income taxes, extraordinary items
and minority interest $ 234,263 $ (96,300) $47,148
Extraordinary items 1,801 (68,168) --
Net unrealized holding (loss) gain on securities
available for sale (205,973) (881) 17
Provision in lieu of income taxes - minority interest 79,005 -- --
--------- --------- -------
$ 109,096 $(165,349) $47,165
========= ========= =======
Income tax expense (benefit) attributable to income before income taxes,
extraordinary items and minority interest consisted of (in thousands):
1999 1998 1997
-------- --------- -------
Federal
Current $ 33,843 $ 66,918 $ 5,908
Deferred 117,796 (223,094) --
-------- --------- -------
151,639 (156,176) 5,908
State and local
Current 54,047 49,775 31,799
Deferred 28,577 10,101 9,441
-------- --------- -------
82,624 59,876 41,240
-------- --------- -------
Income tax expense (benefit) before provision in
lieu of income taxes 234,263 (96,300) 47,148
Provision in lieu of income taxes - minority interest 79,005 -- --
-------- ----------- -------
Total income tax expense (benefit) $313,268 $ (96,300) $47,148
======== ========= =======
F-48
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The consolidated income tax expense (benefit) for the years ended December
31, 1999, 1998 and 1997 differs from the amounts computed by applying the
statutory federal corporate tax rate of 35% for 1999, 1998 and 1997 to income
before income taxes, extraordinary items and minority interest as follows (in
thousands):
1999 1998 1997
-------- --------- ---------
Computed "expected" income tax expense $240,374 $ 157,625 $ 104,251
Increase (decrease) in taxes resulting from:
State income taxes, net of federal income
tax benefit 53,705 38,919 26,806
Tax exempt income (1,010) -- (5)
Amortization of excess cost over fair
value of net assets acquired 22,355 17,613 16,959
Adjustment to prior year's tax expense (2,693) -- --
Unrealized holding (loss) gain on securities
available for sale recognized for tax purposes -- -- (12,234)
Other 537 181 2,843
Adjustments to deferred tax asset fully offset by
valuation allowance:
Temporary differences from acquisitions -- -- (107,416)
Adjustment to deferred tax asset (12,169) 17,561 (16,911)
REIT Preferred Stock dividends -- (6,700) (14,682)
Change in the beginning-of-the-year balance of
the valuation allowance for deferred tax assets
allocated to income tax expense 12,169 (321,499) 47,537
-------- --------- ---------
$313,268 $ (96,300) $ 47,148
======== ========= =========
The significant components of deferred income tax (benefit) expense
attributable to income before income taxes, extraordinary items and minority
interest are as follows (in thousands):
1999 1998 1997
-------- --------- ---------
Deferred tax expense (exclusive of the effects
of other components listed below) $117,796 $ 87,544 $ 91,472
Adjustment to deferred tax asset fully offset by
valuation allowance (12,169) 10,861 (139,009)
Increase (decrease) in beginning-of-the-year balance
of the valuation allowance for deferred tax assets 12,169 (321,499) 47,537
-------- --------- ---------
$117,796 $(223,094) $ --
======== ========= =========
F-49
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities are
presented below (in thousands):
1999 1998
--------- ---------
Deferred tax assets:
Net operating loss carryforwards $ 239,197 $ 354,281
Foreclosed real estate 906 2,182
Deferred interest 2,287 8,509
Loans receivable 140,999 77,523
Miscellaneous accruals 68,333 161,540
Accrued liabilities 43,058 33,468
State taxes 67,056 35,171
Purchased mortgage servicing rights 105,241 221,743
Alternative minimum tax credit and investment tax
credit carryforwards 72,980 15,347
Unrealized losses on securities available for sale 201,701 --
Other 11,560 16,749
--------- ---------
Total gross deferred tax assets 953,318 926,513
Less valuation allowance (251,234) (239,065)
--------- ---------
Net deferred tax assets 702,084 687,448
--------- ---------
Deferred tax liabilities:
Mortgage servicing rights 182,466 238,938
Purchase accounting adjustments 5,191 2,071
FHLB stock 126,904 101,595
Unrealized gains on securities available for sale -- 4,271
Goodwill litigation 111,746 111,746
Other 174,899 155,024
--------- ---------
Net deferred tax liabilities 601,206 613,645
--------- ---------
Net deferred tax assets and liabilities $ 100,878 $ 73,803
========= =========
The net change in the total valuation allowance for the year ended
December 31, 1999 was an increase of $12.2 million which is attributable to
income before income taxes and minority interest.
Based on resolutions of federal tax audits and favorable future earnings
expectations, management changed its judgment about the realizability of the
Company's net deferred tax assets and reduced the valuation allowance by $250
million in the second quarter of 1998. Management believes that the realization
of the resulting deferred tax asset is more likely than not, based upon the
expectation that the Company will generate the necessary amount of taxable
income in future periods.
In connection with the Golden State Merger, the Company deconsolidated
from the Mafco Group. As a result, only the amount of the net operating losses
("NOLs") of the Company not utilized by the Mafco Group on or before December
31, 1998 are available to offset taxable income of the Company thereafter. At
September 11, 1998, had the Company filed a consolidated federal income tax
return on behalf of itself and its subsidiaries for each of the years since the
formation of the Company, it would have had regular NOL carryforwards for
federal income tax purposes of approximately $1.7 billion. Upon deconsolidation,
the NOLs available to offset taxable income of the Company was initially
estimated to be reduced by $757 million. This reduction of NOLs and other tax
attributes (the "Deconsolidation Adjustment") resulted in a $211.2 million
reduction in retained earnings during 1998.
Based upon the actual filing of the Mafco Group and GS Holdings 1998
consolidated federal income tax returns during the third quarter of 1999, tax
benefits of $79.0 million were recognized. The tax benefit is fully offset by an
increase in minority interest expense, since under the Golden State Merger
agreement, the tax benefits from any NOLs and other tax attributes of Parent
Holdings and its subsidiaries are retained by GSB Investments and Hunter's Glen.
F-50
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In addition, the Company recorded an adjustment of $66.4 million to
reduce the initial dividend of tax benefits to GSB Investments and Hunter's Glen
due to its deconsolidation from the Mafco Group, which was recorded as an
increase to retained earnings during 1999.
At December 31, 1999, the Company had regular NOL carryforwards for
federal income tax purposes of approximately $683 million which are available to
offset future federal taxable income, if any, through 2009. In addition, the
Company had alternative minimum tax credit carryforwards of approximately $70
million which are available to offset future federal regular income taxes, if
any, over an indefinite period. The IRS is examining the 1991 through 1995
federal income tax returns of Holdings and any NOL carryforwards are subject to
review and disallowance, in whole or in part, by the IRS.
In accordance with SFAS No. 109, Accounting for Income Taxes, a deferred
tax liability has not been recognized for the base year reserves of the Bank.
The base year reserves are generally the balance of the tax bad debt reserve as
of December 31, 1987 reduced proportionately for reductions in the Bank's loan
portfolio since that date. At December 31, 1999, the amount of those reserves
was $305 million. The amount of the unrecognized deferred tax liability at
December 31, 1999 was $107 million. Pursuant to the Act, circumstances that may
require an accrual of this unrecorded tax liability are a failure to meet the
definition of a "bank" for federal income tax purposes, dividend payments in
excess of tax earnings and profits, and other distributions, dissolution,
liquidation or redemption of stock, excluding preferred stock meeting certain
conditions.
(29) EMPLOYEE BENEFIT PLANS
POSTRETIREMENT HEALTH CARE AND DEFINED BENEFIT PLANS
The Bank provides certain postretirement medical benefits to certain
eligible employees and their dependents through age 64. In general, early
retirement is age 55 with 10 years of service. Retirees participating in the
plans generally pay Consolidated Omnibus Budget Reduction Act premiums for the
period of time they participate. The estimated cost for postretirement health
care benefits has been accrued on an actuarial net present value basis.
In connection with the Cal Fed Acquisition, the Bank assumed sponsorship
of the Old California Federal defined benefit plan, which was frozen effective
May 31, 1993, at which time all accrued benefits became 100% vested. Effective
April 30, 1997, the SFFed benefit plan was merged with and into the Old
California Federal benefit plan. The fair value of the assets transferred was
$23.6 million.
In connection with the Glen Fed Merger, the Bank assumed Glendale
Federal's defined benefit pension plan (the "Glendale Federal Retirement Plan")
and the Redlands Federal Bank defined benefit plan, (collectively "the Glen Fed
Pension Plan"), which covered substantially all employees of Glendale Federal.
The Glen Fed Pension Plan was frozen upon the merger on September 11, 1998 and
no additional benefits accrued after such time. Effective October 15, 1998, the
Glen Fed Pension Plan was merged with and into the Old California Federal
defined benefit plan. The fair value of the assets transferred was $102.0
million. The Old California Federal defined benefit plan also includes the
former SFFed benefit plan.
F-51
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table sets forth the changes in the plan's benefit
obligations and fair value of plan assets, as well as the funded status at
December 31, 1999 and 1998 (in thousands):
Non-Qualified Plans Qualified Plan
Postretirement Benefits Pension Benefits Pension Benefits
----------------------- ---------------- ----------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 8,166 $ 4,125 $ 15,481 $ 9,206 $136,818 $ 35,795
Service Cost 612 309 -- -- -- --
Interest cost 539 317 1,000 723 8,059 4,157
Amendments -- -- -- -- -- --
Actuarial (gain) loss (717) 182 868 1,634 (23,792) 9,218
Glen Fed Merger -- 3,446 -- 5,025 -- 95,900
Acquisitions -- -- -- -- -- --
Settlements -- -- -- -- -- --
Benefits paid (352) (213) (1,994) (1,107) (9,162) (8,252)
------- ------- -------- -------- -------- --------
Benefit obligation at end of year $ 8,248 $ 8,166 $ 15,355 $ 15,481 $111,923 $136,818
======= ======= ======== ======== ======== ========
CHANGE IN PLAN ASSETS
Fair value at beginning of year $ -- $ -- $ -- $ -- $139,390 $ 29,754
Actual return on plan assets -- -- -- -- 15,548 388
Glen Fed Merger -- -- -- -- -- 117,500
Employer contribution -- -- 1,994 1,107 -- --
Benefits paid (1,994) (1,107) (9,161) (8,252)
------- ------- -------- -------- -------- --------
-- --
Fair value at end of year $ -- $ -- $ -- $ -- $145,777 $139,390
======= ======= ======== ======== ======== ========
Funded Status $(8,248) $(8,166) $(15,355) $(15,481) $ 33,854 $ 2,572
Unrecognized actuarial loss -- -- -- -- (10,660) 16,656
--------- ------- -------- -------- -------- --------
Prepaid (accrued) benefit cost
recognized in the consolidated
balance sheet $(8,248) $(8,166) $(15,355) $(15,481) $ 23,194 $ 19,228
======= ======= ======== ======== ======== ========
Assumptions used in computing the funded status were:
Non-Qualified Plans Qualified Plan
Weighted Average Assumptions as of Postretirement Benefits Pension Benefits Pension Benefits
December 31, ----------------------- ------------------- ----------------
- ---------------------------------- 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
Discount rate 6.75% 6.75% 7.25% 6.00% 7.25% 6.00%
Expected return on plan assets N/A N/A 9.00 9.00 9.00 9.00
Rate of compensation increase 0.00% 0.00 0.00 0.00 0.00 0.00
The initial health care cost trend rate for medical benefits in 2000 is
assumed to be 8%, the average trend rate is assumed to be 6.53% and the ultimate
trend rate is assumed to be 5.25%, which will be reached in seven years.
At December 31, 1999, an increase of 1% in the health care cost trend
rate would cause the accumulated postretirement benefit obligation to increase
by $0.9 million, and the service and interest cost to increase by less than $0.2
million. At December 31, 1999, a decrease of 1% in the health care cost trend
rate would cause the accumulated postretirement benefit obligation to decrease
by $0.8 million, and the service and interest costs to decrease by $0.1 million.
F-52
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The net periodic benefit cost for the years ended December 31, 1999, 1998
and 1997 included the following components (in thousands):
Qualified and
Non-Qualified
Postretirement Benefits Pension Benefits
--------------------------- ---------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
Service Cost $612 $309 $ 364 $ -- $ -- $ --
Interest cost 539 317 498 9,059 4,880 3,453
Expected return on plan assets -- -- -- (12,320) (5,648) (3,306)
Recognized net actuarial loss (gain) (717) 182 (3,104) 1,164 2,293 1,611
Settlement/curtailment gain -- -- -- (404)
---- ---- ------- -------- ------- ------
Net periodic cost (income) $434 $808 $(2,242) $ (2,097) $ 1,525 $1,354
==== ==== ======= ======== ======= ======
DEFINED CONTRIBUTION PLAN
The Bank offers a defined contribution plan, which is available to
substantially all employees with at least six months of employment. Employee
contributions are voluntary. The plan provides for the deferral of up to 12% of
eligible compensation of plan participants not to exceed the maximum allowed by
the Internal Revenue Service. The Bank's matching contribution was a maximum of
100% of up to the first 3% of employee deferrals. The annual discretionary
employer profit sharing contribution is a maximum of 3% of eligible
compensation. It can be declared at any level in the range from 0% to 3%.
Employees vest immediately in their own deferrals and any employer profit
sharing contributions and vest in employer matching contributions based on
completed years of service. The Bank's contributions to such plan totalled $14.6
million, $9.3 million and $3.8 million for the years ended December 31, 1999,
1998 and 1997, respectively.
In the Cal Fed Acquisition, contributions made to Old California
Federal's defined contribution plan (the "Investment Plus Plan") became 100%
vested at the date of acquisition. Effective December 31, 1997, the Investment
Plus Plan was merged with and into the First Nationwide Employees' Investment
Plan, which was renamed in 1997 the California Federal Employees' Investment
Plan. The fair value of assets transferred was $33.6 million.
Effective January 1, 1999, the California Federal Employees' Investment
Plan was amended to provide for automatic enrollment into the plan at a
contribution rate of 3% unless the employee opts, in writing, to participate at
a different deferral rate, or to opt out of the plan. Effective January 15,
1999, the plan was amended to allow the use of certain employer and employee
contributions to purchase Golden State Common Stock at market prices.
Contributions to the plan were used to purchase 341,024 shares for $6.9 million
in 1999. Sales by the plan of Golden State shares during 1999 were 52,126 shares
for $1.1 million. Effective March 1, 1999, the plan was also amended to reduce
the length of required service to six months before an employee can contribute
to the plan and to amend the enrollment date to the first of the applicable
month.
Effective January 1, 2000, the California Federal Employees' Investment
Plan was amended to take advantage of the safe harbor match provision of the
Internal Revenue Code which provides for employer matching contributions of 100%
of the first 3% of employee deferrals and 50% of the next 2% of employee
deferrals. The safe harbor match provision also requires immediate 100% vesting
of all contributions to the plan, a change which was executed effective January
1, 2000.
In connection with the Glen Fed Merger, the Bank assumed sponsorship of
the Glendale Federal's defined contribution plan. This plan was frozen at the
merger date, therefore no contributions were made to the plan subsequent to the
merger date. The plan is being maintained as a separate plan. It is anticipated
that Glendale Federal's plan will be merged with the Bank's plan in the second
quarter of 2000.
F-53
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
STOCK PLANS
At December 31, 1999, the Bank is administering the following stock-based
compensation plans: pre-merger stock option plans and the Golden State Bancorp
Inc. Omnibus Stock Plan (the "Omnibus Stock Plan").
In connection with the Glen Fed Merger, the Bank is administering stock
option plans that provided for the granting of options of Golden State Common
Stock to employees and directors. All pre-merger stock option plans expired on
August 18, 1998 as to the making of additional grants. Upon the consummation of
the merger on September 11, 1998, substantially all options outstanding became
exercisable.
On May 17, 1999, the Omnibus Stock Plan was approved, providing for the
granting of Golden State stock options and restricted stock, as well as other
instruments, to employees of Golden State and its subsidiaries and affiliates,
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.
Non-qualified options granted under the stock plan 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.
The following is a summary of the transactions under all stock option
plans:
Weighted
Number of Range of Option Average Exercise
Shares Prices Price
--------- --------------- ----------------
Outstanding at September 11, 1998 2,238,326 $ 9.00 - $35.00 $19.99
Canceled or expired 193,334 $28.50 - $28.50 $28.50
Exercised 51,205 $12.63 - $17.75 $14.80
---------
Outstanding at December 31, 1998 1,993,787 $ 9.00 - $35.00 $19.30
Granted 1,352,000 $23.50 - $23.50 $23.50
Cancelled or expired 276,000 $23.50 - $28.50 $28.10
Exercised 508,705 $ 9.00 - $17.75 $13.44
---------
Outstanding at December 31, 1999 2,561,082 $ 9.00 - $35.00 $21.74
=========
Information about stock options outstanding at December 31, 1999 was as
follows:
Options Outstanding Options Exercisable
------------------------------------------------------- ------------------------------
Options Weighted Average Weighted Shares Weighted
Outstanding Remaining Contractual Average Exercisable Average
Exercise Price Range at End of Year Life (in years) Exercise Price at End of Year Exercise Price
- -------------------- -------------- --------------- -------------- -------------- --------
$ 9.00 - $12.63 337,000 4.6 $11.35 337,000 $11.35
$14.50 - $17.75 432,082 6.4 $16.57 432,082 $16.57
$23.50 - $23.50 1,330,000 9.5 $23.50 -- --
$28.50 - $35.00 462,000 7.7 $29.06 462,000 $29.06
No compensation cost was recognized by the Company for stock options
granted during 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.
If compensation cost during 1999 for the Omnibus Stock Plan had been
determined based on the fair value of the awards at the grant dates, net income
would have been $331.3 million. The fair values of the options were estimated at
the grant date using the Black-Scholes option pricing model, which includes the
following assumptions
F-54
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
used for the stock options awarded during 1999: risk-free interest rate of
5.60%; expected option life of 7 years; expected volatility of 41.3%; no
expected dividends; and a forfeiture rate of 5%. Since pro forma compensation
cost relates to all periods over which the awards vest, the impact on pro forma
net income may not be representative of compensation cost in subsequent years
when the effect of the amortization of multiple awards would be reflected.
The grant date fair value of the Golden State options granted during 1999
was $12.45 per share. The exercise price of each option equals the market price
of Golden State's Common Stock on the date of the grant.
On July 19, 1999, Golden State awarded to certain of the Company's
employees 56,908 shares of Golden State restricted common stock. The market
value on the date of the award was $22.38 per share. These shares vest over two
years in one-half increments on the anniversary of the grant date, contingent
upon the continued service of the employee. The compensation expense related to
this award is recognized on a straight line basis over the vesting period for
each tranche of the award with a corresponding increase to additional paid-in
capital. During 1999, $0.5 million in compensation expense was recognized
related to such award. These restricted shares have full voting rights.
(30) INCENTIVE PLAN
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 Golden State restricted common stock granted under the Omnibus
Stock Plan discussed in note 29. Compensation expense totalling $9.1 million
relating to the ECP was recorded during the year ended December 31, 1999.
In addition, effective October 1, 1995, FN Holdings entered into a
management incentive plan ("Incentive Plan") with certain executive officers of
the Bank ("Participants"). Awards under the Incentive Plan were made in the form
of performance units. Each performance unit entitled Incentive Plan Participants
to receive cash and/or stock options ("Bonuses") based upon the Participants'
vested interest in a bonus pool. Generally, the Incentive Plan provided for the
payment of Bonuses, on a quarterly basis, to the Participants upon the
occurrence of certain events. Bonuses vested at 20% per year beginning October
1, 1995 and were subject to a cap of $50 million. Bonuses were recorded by a
charge to compensation and employee benefits and an increase to other
liabilities. The Glen Fed Merger constituted a change of control pursuant to the
terms of the Incentive Plan and, as such, cash payments were made to the
Participants on September 11, 1998.
(31) EXTRAORDINARY ITEMS
During the fourth quarter of 1999, the FHLB called and the Bank prepaid
$500 million in FHLB advances, resulting in an extraordinary gain of $2.7
million, net of income taxes, on the early extinguishment of such borrowings.
On December 20, 1999, the Bank repurchased all of the remaining $6.0
million outstanding principal amount of the 11.20% Senior Notes assumed in the
SFFed Acquisition, resulting in an extraordinary loss of $0.2 million, net of
income taxes, on the early extinguishment of debt.
In connection with the Debt Tender Offers during 1998, GS Holdings
purchased $914.5 million aggregate principal amount of the FN Holdings Notes for
an aggregate purchase price, including accrued interest payable of $1.1 billion,
resulting in an extraordinary loss of $98.7 million, net of income taxes, on the
early extinguishment of such debt.
(32) COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company has commitments and
contingent liabilities that are not reflected in the accompanying consolidated
financial statements. The Company, through FNMC, enters into financial
instruments with off-balance sheet risk through the origination and sale of
mortgage loans and the management of the related loss exposure caused by
fluctuations in interest rates. These financial instruments
F-55
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
include commitments to extend credit and purchase loans (mortgage loan pipeline)
and mandatory and optional forward commitments to sell loans.
The following is a summary of the Company's pipeline of loans in process
and mandatory forward commitments to sell loans at December 31, 1999 (in
thousands):
December 31,
----------------------------
1999 1998
---------- ---------
Commitments to originate loans:
Fixed rate $ 394,923 $1,362,727
Variable rate 1,078,909 780,759
Commitments to purchase loans 1,434,893 1,823,837
Mandatory commitments to sell loans 903,526 2,746,839
The Company's pipeline of loans in process includes loan applications in
various stages of processing. Until all required documentation is provided and
underwritten, there is no credit risk to the Company. There is no interest rate
risk until a rate commitment is extended by the Company to a borrower. Some of
these commitments will ultimately be denied by the Company or declined by the
borrower and therefore the commitment amounts do not necessarily represent
future cash requirements.
Loans in process for which rates were committed to the borrower totalled
approximately $1.2 billion at December 31, 1999. On a daily basis, the Company
determines what percentage of the portfolio of loans in process for which rate
commitments have been extended to a borrower to hedge. Both the anticipated
percentage of the pipeline that is expected to fund and the inherent risk
position of the portfolio are considered in making this determination.
Mandatory and optional delivery forward commitments to sell loans are
used by the Company to hedge its interest rate exposure from the time a loan has
a committed rate to the time the loan is sold. These instruments involve varying
degrees of credit and interest rate risk. Credit risk on these instruments is
controlled through credit approvals, limits and monitoring procedures. To the
extent that counterparties are not able to fulfill forward commitments, the
Company is at risk for any fluctuations in the market value of the mortgage
loans and locked pipeline.
Realized gains and losses on mandatory and optional-delivery forward
commitments are recognized in the period settlement occurs. At December 31,
1999, unrealized gains resulting from the use of forward commitments to sell
loans were $3.3 million. Unrealized gains and losses on mandatory and
optional-delivery forward commitments are included in the lower of cost or
market valuation adjustment to mortgage loans held for sale.
The Company is party to an agreement with FNMA pursuant to which FNMA
provided credit enhancements for certain bond-financed real estate projects
originated by Old FNB. The agreement requires that the Company pledge to FNMA
collateral in the form of certain eligible securities which are held by a third
party trustee. The collateral requirement varies based on the balance of the
bonds outstanding, losses incurred (if any), as well as other factors. At
December 31, 1999, the Company had pledged as collateral certain investment
securities, mortgage-backed securities available for sale and mortgage-backed
securities held to maturity with carrying values of $15.7 million, $18.0 million
and $18.9 million, respectively.
At December 31, 1999, the Bank had pledged as collateral certain
mortgage-backed securities available for sale and held to maturity with carrying
values of $197.9 million and $6.2 million, respectively, to guarantee credit
enhancements on multi-family bond issues and loans securitized by FNMA and
FHLMC.
At December 31, 1999, the Bank had pledged as collateral certain
mortgage-backed securities available for sale and held to maturity with carrying
values of $164.5 million and $11.9 million, respectively, to guarantee state and
local agency deposits, and certain deposits with the Federal Reserve Bank.
F-56
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 31, 1999, the Bank had pledged as collateral certain
mortgage-backed securities available for sale with a carrying value of $25.8
million to cover the margin on interest rate swap agreements.
In addition, the Bank retains principal and interest funds on securitized
loans with appropriate collateral held and monitored by the trustee. The pledge
agreement requires the collateral to be 150% of the average remittances for the
prior twelve months, to be adjusted quarterly. At December 31, 1999, the Bank
had pledged as collateral certain mortgage-backed securities available for sale
and held to maturity with carrying values of $348.8 million and $13.1 million,
respectively.
In addition, at December 31, 1999, mortgage-backed securities available
for sale and mortgage-backed securities held to maturity of $9.9 billion and
$1.9 billion, respectively, were pledged as collateral for various obligations
as discussed in notes 10, 11, 19 and 20. At December 31, 1998, mortgage-backed
securities available for sale and mortgage-backed securities held to maturity of
$8.4 billion and $2.5 billion, respectively, were pledged as collateral for
various obligations.
At December 31, 1999, $23.9 billion in residential loans were pledged as
collateral for FHLB advances.
At December 31, 1999 and 1998, loans receivable included approximately
$6.4 billion and $7.8 billion, respectively, of loans that had the potential to
experience negative amortization.
(33) LEGAL PROCEEDINGS
CALIFORNIA FEDERAL GOODWILL LITIGATION
The Bank is the plaintiff in a lawsuit against the United States
Government (the "Government"), California Federal Bank v. United States, Civil
Action 92-138 (the "California Federal Goodwill Litigation"). In the California
Federal Goodwill Litigation, the Bank alleged, among other things, that the
Government breached certain contractual commitments regarding the computation of
its regulatory capital for which the Bank sought damages and restitution. The
Bank's claims arose from changes, mandated by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA"), with respect to the rules for
computing Old California Federal's regulatory capital.
In late 1997, a United States Court of Federal Claims (the "Claims
Court") Judge ruled in favor of the Bank's motion for partial summary judgment
as to the Government's liability to the Bank for breach of contract, and a
formal order in that regard was subsequently issued. In late 1998, a second U.S.
Claims Court Judge ruled that California Federal cannot meet its burden for
proving lost profits damages and ordered that the case proceed to trial on the
damage issue of restitution and reliance. The trial began in January 1999 and
concluded in March 1999.
On April 16, 1999, this second Claims Court Judge issued his decision on
the damages claim against the Government in the California Federal Goodwill
Litigation, ruling that the Government must compensate the Bank in the sum of
$23.0 million. The summary judgment liability decision by the first Court of
Claims Judge has been appealed by the Government and the damage award by the
second Court of Claims Judge has been appealed by the Bank. All appellate briefs
have been filed and it is anticipated that oral argument in the Federal Circuit
Court of Appeals will take place in conjunction with the appellate argument in
the Glendale Goodwill Litigation (as defined herein) in mid 2000.
GLENDALE GOODWILL LITIGATION
By virtue of the Glen Fed Merger, the Bank is also a plaintiff in a claim
against the United States in a second lawsuit, Glendale Federal Bank v. United
States, No.90-772C (the "Glendale Goodwill Litigation"). In the Glendale
Goodwill Litigation, Glendale Federal sued the Government contending that
FIRREA's treatment of supervisory goodwill constituted a breach by the
Government of its 1981 contract with the Bank, under which the Bank had merged
with a Florida thrift and was permitted to include the goodwill resulting from
the merger in its regulatory capital. In 1992, the Claims Court found in favor
of Glendale Federal's position, ruling that the Government
F-57
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
breached its express contractual commitment to permit Glendale Federal to
include supervisory goodwill in its regulatory capital and that Glendale Federal
is entitled to seek financial compensation.
The trial began in February 1997 and concluded in September 1998. On
April 9, 1999, the Claims Court issued its decision in 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.
All appellate briefs have been filed by both the Government and the Bank and
oral argument on the appeal will be scheduled in conjunction with the argument
in the California Federal Goodwill Litigation in mid 2000.
OTHER LITIGATION
In addition to the California Federal Goodwill Litigation and the
Glendale Goodwill Litigation, the Company and its subsidiaries are involved in
other legal proceedings on claims incidental to the normal conduct of its
businesses. 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
Company or the Bank.
(34) GOODWILL LITIGATION ASSETS
In connection with the Cal Fed Acquisition, the Bank recorded as an asset
part of the estimated after-tax cash recovery from the California Federal
Goodwill Litigation that will inure to the Bank, net of amounts payable to
holders of the Litigation Interests and the Secondary Litigation Interests in
any such recovery (the "Goodwill Litigation Asset"). In connection with the Glen
Fed Merger, the Bank recorded a second Goodwill Litigation Asset related to the
estimated after-tax cash recovery from the Glendale Goodwill Litigation that
will inure to the Bank, net of amounts payable to holders of the Litigation
Tracking Warrants. The Goodwill Litigation Asset related to the California
Federal Goodwill Litigation was recorded at its estimated fair value of $100
million, net of estimated tax liabilities, as of January 3, 1997. The Goodwill
Litigation Asset related to the Glendale Goodwill Litigation was recorded at its
estimated fair value of $56.9 million, net of estimated tax liabilities, as of
September 11, 1998.
(35) OFF-BALANCE-SHEET ACTIVITIES
CREDIT RELATED FINANCIAL INSTRUMENTS
The Company is a party to credit related financial instruments with
off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit, standby letters of credit and commercial letters of credit. Such
commitments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the consolidated balance sheets.
The Company's exposure to credit loss is represented by the contractual
amount of these commitments. The Company uses the same credit policies in making
commitments as it does for on-balance sheet instruments.
Listed below are unfunded financial instruments whose contract amounts
represent credit risk at December 31, 1999 and 1998 (in thousands):
Contract Amount
----------------------------
Commitments to extend credit 1999 1998
---------------------------- ---------- -------
Unutilized consumer lines of credit $1,034,913 $905,907
Unutilized commercial lines of credit 159,744 169,536
Commercial and standby letters of credit 3,892 4,552
Unutilized consumer lines of credit are commitments to extend credit.
These lines are either secured or nonsecured and may be cancelled by the Company
if certain conditions of the contract are not met. Many consumer line of credit
customers are not expected to fully draw down their total lines of credit and,
therefore, the total contractual amount of these lines does not necessarily
represent future cash requirements.
F-58
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Unutilized commitments under commercial lines of credit are commitments
for possible future extensions of credit to existing customers. These lines of
credit are uncollateralized, usually do not contain a specified maturity date
and may not be drawn upon to the total extent to which the Company is committed.
Commercial and standby letters of credit are conditional commitments
issued by the Company to guarantee the performance of a customer to a third
party. Those letters of credit are primarily issued to support public and
private borrowing arrangements. Essentially, all letters of credit issued have
expiration dates within five years. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loan facilities
to customers. The Company generally holds collateral supporting those
commitments in an amount deemed to be necessary.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes various derivative instruments for
other-than-trading purposes such as asset/liability management. The primary
focus of the Company's asset/liability management program is to measure and
monitor the sensitivity of the Company's net portfolio value and net income
under varying interest rate scenarios. On a quarterly basis, the Company
simulates the net portfolio value and net income expected to be earned over a
twelve-month period following the date of simulation. The simulation is based on
a projection of market interest rates at varying levels and estimates the impact
of such market rates on mortgage prepayment speeds, the levels of
interest-earning assets and interest-bearing liabilities during the measurement
period. Based upon the outcome of the simulation analysis, the Company may
consider the use of derivatives as a means of reducing the volatility of net
portfolio value and projected net income within certain ranges of projected
changes in interest rates. The Company evaluates the effectiveness of entering
into any derivative instrument agreement by measuring the cost of such an
agreement in relation to the reduction in net portfolio value and net income
volatility within an assumed range of interest rates.
Derivative financial instruments include swaps, futures, forwards, and
options contracts, all of which derive their value from underlying interest
rates. These transactions involve both credit and market risk. The notional
amounts are amounts on which calculations, payments, and the value of the
derivative are based. Notional amounts do not represent direct credit exposures.
Direct credit exposure is limited to the net difference between the calculated
amounts to be received and paid, if any.
The Company is exposed to credit-related losses in the event of
nonperformance by the counterparties to those agreements. The Company controls
the credit risk of its financial contracts through credit approvals, limits and
monitoring procedures, but does not expect any counterparties to fail their
obligations. The Company deals only with primary dealers and the FHLB of San
Francisco.
Derivative instruments are generally either negotiated over-the-counter
("OTC") contracts or standardized contracts executed on a recognized exchange.
Negotiated OTC derivative contracts are generally entered into between two
counterparties that negotiate specific agreement terms, including the underlying
instrument, amount, exercise prices and maturity.
INTEREST RATE SWAPS
The Company utilizes interest rate swaps primarily as an asset/liability
management strategy to hedge against the interest rate risk inherent in
variable-rate FHLB advances and securities sold under agreements to repurchase.
Interest rate swap agreements are contracts to make or receive payments, such as
making a series of floating rate payments in exchange for receiving a series of
fixed rate payments. Payments related to swap contracts are made either monthly,
quarterly or semi-annually by one of the parties depending on the specific terms
of the related contract. The notional amount of the contracts, on which the
payments are based, are not exchanged. The primary risks associated with swaps
are the exposure to movements in interest rates and the ability of the
counterparties to meet the terms of the contract.
F-59
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 31, 1999, interest rate swap agreements with a notional
amount of $2.6 billion and a weighted average maturity of 5.2 years were
outstanding. These agreements provided for the Company to receive payments at a
variable rate determined by a specified index (three month LIBOR) in exchange
for making payments at a fixed rate. At December 31, 1999, the weighted average
pay rate was 6.60% and the weighted average receive rate was 6.11%. No interest
rate swap agreements were terminated in 1999 prior to maturity. At December 31,
1999, unrealized gains relating to the use of interest rate swaps were $51.9
million. These gains will be recognized over the life of the FHLB advances or
securities sold under agreements to repurchase, as appropriate. There were no
interest rate swap agreements outstanding at December 31, 1998.
PRINCIPAL ONLY SWAPS
The Company utilizes principal only ("PO") swap agreements to hedge
against prepayment risk in its mortgage servicing portfolio caused by declining
interest rates. PO swap agreements simulate the ownership of a PO strip, the
value of which is affected directly by prepayment rates themselves in an inverse
manner as servicing rights, which act in a manner similar to interest only
("IO") strips. Under the terms of the PO swap agreements, the counterparty to
the transaction purchases a PO strip and places the PO strip in a trust. The
contracts entered into prior to December 31, 1998 call for the Company to pay
floating interest to the counterparty based on: (a) an index tied to one month
LIBOR and (b) the notional balance of the swap. The contract calls for the
Company to receive cash from the counterparty based on the cash flows received
from the PO strip. For all PO swap agreements entered into after December 31,
1998, the agreement requires the PO swap to be marked to market value. A
decrease in the market value of the PO swap requires the Company to increase the
amount paid to the counterparty and an increase in the market value requires the
counterparty to increase their payment to the Company. Further, the contract
calls for the Company to pay floating interest to the counterparty based on (a)
one month LIBOR plus an agreed upon spread and (b) the market value of the
remaining notional balance of the swap at the time of the prior month
settlement. The amounts to be paid and to be received are then netted together
each month. The structure of this instrument results in increased cash flows and
positive changes in the value of the swap during a declining interest rate
environment. This positive change in the value of the swap is highly correlated
to prepayment activity. PO swap agreements present yield curve risk to the
extent that short term interest rates (which impact the cash amount that the
Company pays on the swap to the counterparty) rise while long term rates (which
drive prepayment rates) stay the same. A third type of risk associated with PO
swaps is the ability of the counterparties to meet the terms of the contract.
At December 31, 1999, PO swap agreements with a notional balance of
$202.3 million were outstanding. During 1999, the calculated amount to be paid
to and to be received from the PO swap counterparties was $29.6 million and
$19.2 million, respectively. No PO swap agreements were terminated in 1999 prior
to maturity. At December 31, 1998, PO swap agreements with a notional balance of
$164.7 million were outstanding. During 1998, the calculated amount to be paid
to and to be received from the PO swap counterparties was $6.2 million and $11.2
million, respectively. The Company received $16.1 million from counterparties to
terminate PO swap agreements in 1998.
PREPAYMENT LINKED SWAPS
The Company utilizes prepayment linked swap agreements to hedge against
prepayment risk in its mortgage servicing portfolio caused by declining interest
rates. Prepayment linked swap agreements are similar to interest rate floors,
discussed below. However, interest rate floor contracts provide for the
counterparty to make immediate payments to the Company if the floating rate
drops below a specified strike rate. Under the terms of the prepayment linked
swap agreements, the Company is to pay fixed interest to the counterparty based
on: (a) a fixed rate and (b) the amortized notional balance of the swap. The
Company is to receive cash from the counterparty only after a sustained drop in
the 10-year Constant Maturity Treasury interest rate below a strike interest
rate. The amounts to be paid and to be received are netted together each month.
The structure of this instrument results in increased cash flows and positive
changes in the value of the swap during a sustained decline in the interest rate
environment. This positive change in the value of the swap is correlated to
prepayment activity. Prepayment linked swap agreements have basis risk and yield
curve risk. A third type of risk associated with prepayment linked swaps is the
ability of the counterparties to meet the terms of the contract.
F-60
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
All outstanding prepayment linked swaps matured during 1999 and none was
outstanding at December 31, 1999. During 1999, the calculated amount to be paid
to and to be received from the prepayment linked swap counterparties was $0.1
million and $0.4 million, respectively. At December 31, 1998, prepayment linked
swap agreements with a notional balance of $1.9 billion were outstanding and the
calculated amount to be paid and to be received from the prepayment linked swap
counterparties was $0.2 million and $0.8 million, respectively. No prepayment
linked swap agreements were terminated in 1999 or 1998 prior to maturity.
INTEREST RATE FLOORS
The Company currently uses interest rate floors to hedge against prepayment
risk in its mortgage servicing portfolio caused by declining interest rates.
Interest rate floors are interest rate protection instruments that involve
payment from the seller to the buyer of an interest differential. This
differential represents the difference between a long-term rate (e.g., 10-year
Constant Maturity Swaps in 1999 and 1998, 10-year Constant Maturity Treasury in
1999 and 1997) and an agreed-upon rate, the strike rate, applied to a notional
principal amount. By purchasing a floor, the Company will be paid the
differential by a counterparty, should the current short-term rate fall below
the strike level of the agreement. The Company generally receives cash monthly
on purchased floors (when the current interest rate falls below the strike
rate.) The unamortized premium, if any, paid for interest rate purchased floor
agreements is included with the assets hedged. Interest rate floors are subject
to basis risk because changes in the relationship between prepayment rates and
the interest rate may occur, as well as market volatility and swap spread
movement. In addition, a credit risk associated with purchased interest rate
floor agreements is the ability of the counterparties to meet the terms of the
contract.
At December 31, 1999 and 1998, the Company was a party to interest rate
floor contracts with a weighted average maturity of 4.9 years and 4.8 years,
respectively. At December 31, 1999, the notional amount of the remaining
interest rate floor contracts was $950 million, the weighted average strike rate
was 5.84% and the monthly floating rate was 6.44%. During 1999, the Company
received cash from the interest rate floor counterparties in the amount of $0.1
million. During 1999, the Company received proceeds of $17.0 million from sales
of interest rate floor contracts with unamortized premiums of $38.2 million. At
December 31, 1998, the notional amount of the remaining interest rate floor
contracts was $2.1 billion, the weighted average strike rate was 5.31% and the
monthly floating rate was 5.47%. During 1998, the Company received cash from the
interest rate floor counterparties in the amount of $4.8 million. During 1998,
the Company received proceeds of $60.1 million from sales of interest rate floor
contracts with unamortized premiums of $16.1 million. The amount of the
unamortized premium on the interest rate floors at December 31, 1999 and 1998
was $13.7 million and $27.6 million, respectively. At December 31, 1999, the
floating rate exceeded the strike rate by 0.60%. At December 31, 1998, the
floating rate exceeded the strike rate by 0.16%.
SWAPTIONS
The Company also uses swaptions to hedge against the prepayment risk in its
mortgage servicing portfolio caused by declining interest rates. A swaption (a
combination of an interest rate swap and an option) is an over-the-counter
option that provides the right but not the obligation to enter into an interest
rate swap agreement at predetermined terms at some time in the future. The
unamortized premiums, if any, paid for swaptions are included with the assets
hedged. Swaptions are subject to basis risk because changes in the relationship
between prepayment rates and the interest rate may occur, as well as market
volatility and swap spread movement. In addition, credit risk associated with
swaptions is the ability of the counterparties to meet the terms of the
contract.
At December 31, 1999 and 1998, the Company was a party to swaption
contracts with a weighted average maturity of 2.7 years and 2.8 years,
respectively, in which the Company paid the counterparties premiums in exchange
for the right but not the obligation to purchase an interest rate swap
agreement. Under the terms of the underlying interest rate swap agreement, the
Company would pay the variable rate tied to three month LIBOR and would receive
the fixed rate. At December 31, 1999, the notional amount of the underlying
interest rate swap contract was $834 million, the weighted average strike rate
was 6.98% and the three month LIBOR rate was 6.00%. At December 31, 1999, the
strike rate exceeded the floating rate by 0.98%. The unamortized premium on the
swaptions at December 31, 1999 was $26.5 million. During 1999, the Company
received proceeds of $29.8 million from the sales of swaption contracts with
unamortized premiums of $58.6 million. At December 31, 1998, the
F-61
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
notional amount of the underlying interest rate swap contract was $2.3 billion,
the weighted average strike rate was 5.57% and three month LIBOR rate was 5.06%.
At December 31, 1998, the strike rate exceeded the floating rate by 0.51%. The
unamortized premium on the swaptions at December 31, 1998 was $60.2 million.
During 1998, there were no swaption contracts that expired or that were sold.
Information pertaining to the notional amounts of the Company's
derivative financial instruments is as follows (in thousands):
December 31, 1999 December 31, 1998
--------------------------------- --------------------------------
Notional Notional
Amount Credit Risk (1) Amount Credit Risk (1)
------- --------------- ------ ---------------
Interest rate swaps $2,550,000 $51,882 $ -- $ --
Principal only swaps 202,316 -- 164,672 18,770
Prepayment linked swaps -- -- 1,850,000 1,255
Interest rate floors 950,000 10,431 2,075,000 32,229
Interest rate swaptions 834,000 24,294 2,345,000 89,332
---------- ------- ---------- --------
Total $4,536,316 $86,607 $6,434,672 $141,586
========== ======= ========== ========
----------------
(1) Credit risk represents current replacement cost after the effects of
master netting agreements.
The maturity of derivative financial instruments used for
other-than-trading purposes at December 31, 1999 is as follows (in thousands):
Notional Amounts
--------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Interest rate swaps $ -- $ -- $ -- $ -- $1,650,000 $900,000 $2,550,000
Principal only swaps 22,117 110,619 69,580 -- -- -- 202,316
Prepayment linked swaps -- -- -- -- -- --
Interest rate floors -- -- -- -- 950,000 -- 950,000
Interest rate swaptions -- -- 834,000 -- -- -- 834,000
------- -------- -------- ------ ---------- -------- ----------
Total $22,117 $110,619 $903,580 $ -- $2,600,000 $900,000 $4,536,316
======= ======== ======== ====== ========== ======== ==========
The year-end fair values of derivative financial instruments used for
other-than-trading purposes at December 31, 1999 and 1998 are listed below .
Fair value amounts consist of unrealized gains and (losses), accrued interest
receivable and payable, and premiums paid or received.
1999 1998
---- ----
(in thousands)
Interest rate swaps $ 51,882 $ --
Principal only swaps (15,792) 18,770
Prepayment linked swaps -- 1,255
Interest rate floors 10,431 32,229
Interest rate swaptions 24,294 89,332
-------- --------
Total $ 70,815 $141,586
======== ========
F-62
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(36) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1999 and 1998 (in thousands):
1999 1998
------------------------- ------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Financial Assets:
Cash and cash equivalents $ 592,878 $ 592,878 $ 967,950 $ 967,950
Securities available for sale 1,075,734 1,075,734 770,747 770,747
Securities held to maturity 185,357 180,449 250,964 251,489
Mortgage-backed securities
available for sale 13,764,565 13,764,565 12,947,992 12,947,992
Mortgage-backed securities
held to maturity 2,149,696 2,150,014 2,770,913 2,825,227
Loans held for sale 729,062 727,569 2,366,583 2,379,216
Loans receivable, net 33,953,461 33,125,997 30,280,944 30,561,022
Investment in FHLB 1,167,144 1,167,144 1,000,147 1,000,147
Accrued interest receivable 321,596 321,596 317,455 317,455
Mortgage servicing rights (a) 1,272,393 1,451,451 943,581 989,683
Financial Liabilities:
Deposits 23,040,571 22,934,191 24,647,488 24,629,219
Securities sold under agreements to
repurchase 5,481,747 5,476,485 4,238,395 4,238,395
Borrowings 25,668,626 25,135,037 22,375,557 22,425,592
Off-balance sheet net unrealized gains (losses):
Forward Commitments:
Commitments to originate loans -- $ 834 -- $ 9,102
Commitments to sell loans -- 3,338 -- (5,412)
Derivatives:
Interest rate swaps -- 51,882 -- --
Principal only swaps -- (15,792) -- 18,770
Prepayment linked swaps -- -- -- 1,255
Interest rate floors -- 10,431 -- 32,229
Interest rate swaptions -- 24,294 -- 89,332
(a) Fair value amounts presented exclude the fair values of interest rate
floors and interest rate swaptions, which are reflected in the carrying
value.
The following summary presents a description of the methodologies and
assumptions used to estimate the fair value of the Company's financial
instruments. Much of the information used to determine fair value is highly
subjective. When applicable, readily available market information has been
utilized. However, for a significant portion of the Company's financial
instruments, active markets do not exist. Therefore, considerable judgment was
required in estimating fair value for certain items. The subjective factors
include, among other things, the estimated timing and amount of cash flows, risk
characteristics, and interest rates, all of which are subject to changes.
Cash and cash equivalents: Cash and cash equivalents are valued at their
carrying amounts included in the consolidated statement of financial condition,
which are reasonable estimates of fair value due to the relatively short period
to maturity of the instruments.
F-63
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
SECURITIES AND MORTGAGE-BACKED SECURITIES: Securities and mortgage-backed
securities are valued at quoted market prices where available. If quoted market
prices are not available, fair values are based on quoted market prices of
comparable instruments.
LOANS HELD FOR SALE: Loans held for sale are valued based on quoted
market prices for mortgage-backed securities backed by similar loans.
LOANS RECEIVABLE, NET: Fair values are estimated for loans in groups with
similar financial and risk characteristics. Loans are segregated by type
including residential, multi-family and commercial. Each loan type is further
segmented into fixed and variable interest rate terms and by performing and
non-performing categories in order to estimate fair values.
For performing residential mortgage loans, fair value is estimated by
discounting contractual cash flows adjusted for prepayment estimates using
discount rates based on secondary market sources. The fair value of performing
commercial and multi-family loans is calculated by discounting scheduled
principal and interest cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest rate risk inherent in
the respective loan type.
Fair value for non-performing loans is based on discounting estimated
cash flows using a rate commensurate with the risk associated with the estimated
cash flows, or underlying collateral values, where appropriate.
INVESTMENT IN FHLB: Since no secondary market exists for FHLB stock and
the stock is bought and sold at par by FHLB, fair value of these financial
instruments approximates the carrying value.
ACCRUED INTEREST: The carrying amounts of accrued interest approximate
their fair values.
MORTGAGE SERVICING RIGHTS: The fair value of mortgage servicing rights is
based on market prices for comparable mortgage servicing contracts, when
available, or alternatively a valuation model that calculates the present value
of future net servicing income. In using the valuation model, the Company
incorporates assumptions that market participants would use in estimating future
net servicing income, which include estimates of the cost of servicing, the
discount rate, mortgage escrow earnings rate, an inflation rate, ancillary
income, prepayment speeds and default rates and losses.
DEPOSITS: The fair values of demand deposits, passbook accounts, money
market accounts, and other deposits immediately withdrawable, by definition,
approximate carrying values for the respective financial instruments. For fixed
maturity deposits, the fair value was estimated by discounting expected cash
flows by the current offering rates of deposits with similar terms and
maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE: The fair value of
securities sold under agreements to repurchase is estimated using a discounted
cash flow analysis based on interest rates currently offered on such repurchase
agreements with similar maturities.
BORROWINGS: The fair value of borrowings, other than FHLB advances, is
estimated using discounted cash flow analyses based on current incremental rates
for similar borrowing arrangements. The fair values of FHLB advances are
estimated using a discounted cash flow analysis based on interest rates
currently offered on advances with similar maturities.
F-64
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
FORWARD COMMITMENTS
Fair values of the Company's commitments to originate loans are estimated
using the fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present creditworthiness
of the counterparties. For fixed-rate commitments, fair value also considers the
difference between current levels of interest rates and the committed rates.
Fair values of forward commitments to sell loans are determined using current
estimated replacement costs.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are recorded at fair value based on the
estimated amounts that the Company would receive or pay to terminate the
contracts at the reporting date (i.e., mark-to-market value). Dealer quotes are
available for substantially all of the Company's derivative financial
instruments.
(37) SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
The following table presents selected quarterly financial data for the
years ended December 31, 1999 and 1998 (in thousands, except per share data):
Quarter Ended
--------------------------------------------------------------------------
December 31, September 30, June 30, March 31,
1999 1999 1999 1999 Total 1999
---- ---- ---- ---- ----------
Total interest income $ 937,543 $ 917,838 $ 904,003 $ 892,837 $ 3,652,221
Total interest expense (643,808) (630,746) (606,961) (584,867) (2,466,382)
---------- --------- --------- --------- -----------
Net interest income 293,735 287,092 297,042 307,970 1,185,839
Provision for loan losses -- -- (5,000) (5,000) (10,000)
---------- --------- --------- --------- -----------
Net interest income after
provision for loan losses 293,735 287,092 292,042 302,970 1,175,839
Total noninterest income 104,543 103,146 107,955 106,083 421,727
Total noninterest expense (217,359) (218,676) (221,177) (253,571) (910,783)
---------- --------- --------- --------- -----------
Income before income taxes,
minority interest and
extraordinary items 180,919 171,562 178,820 155,482 686,783
Income tax (expense) benefit (82,582) 3,033 (82,296) (72,418) (234,263)
Minority interest: provision in
lieu of income tax expense -- (79,005) -- -- (79,005)
Minority interest: other (6,598) (8,431) (10,740) (9,167) (34,936)
---------- --------- --------- --------- -----------
Income before extraordinary items 91,739 87,159 85,784 73,897 338,579
Extraordinary items 2,472 -- -- -- 2,472
---------- --------- --------- --------- -----------
Net income available to
common stockholder $ 94,211 $ 87,159 $ 85,784 $ 73,897 $ 341,051
========== ========= ========= ========= ===========
F-65
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Quarter Ended
--------------------------------------------------------------------------
December 31, September 30, June 30, March 31,
1998 1998 1998 1998 Total 1998
---- ---- ---- ---- ----------
Total interest income $ 867,102 $ 626,224 $ 551,094 $ 540,429 $ 2,584,849
Total interest expense (580,608) (440,921) (384,133) (368,463) (1,774,125)
---------- --------- --------- --------- -----------
Net interest income 286,494 185,303 166,961 171,966 810,724
Provision for loan losses (10,000) (10,000) (10,000) (10,000) (40,000)
---------- --------- --------- --------- -----------
Net interest income after
provision for loan losses 276,494 175,303 156,961 161,966 770,724
Total noninterest income 79,360 191,425 87,401 82,771 440,957
Total noninterest expense (264,080) (195,548) (156,944) (144,752) (761,324)
---------- --------- --------- --------- -----------
Income before income taxes,
minority interest and
extraordinary items 91,774 171,180 87,418 99,985 450,357
Income tax (expense) benefit (46,806) (78,028) 236,366 (15,232) 96,300
Minority interest (27,929) (36,406) (22,662) (22,952) (109,949)
---------- --------- --------- --------- -----------
Income before extraordinary items 17,039 56,746 301,122 61,801 436,708
Extraordinary items (18,699) (80,007) -- -- (98,706)
---------- --------- --------- --------- -----------
Net income (loss) (1,660) (23,261) 301,122 61,801 338,002
Preferred stock dividends -- -- -- (578) (578)
---------- --------- --------- --------- -----------
Net income (loss) available to
common stockholder $ (1,660) $ (23,261) $ 301,122 $ 61,223 $ 337,424
========== ========= ========= ========= ===========
(38) CONDENSED PARENT COMPANY FINANCIAL INFORMATION
The following represents condensed balance sheets of the Company (parent
company only) at December 31, 1999 and 1998 (in thousands):
1999 1998
---------- ----------
Assets
Cash and cash equivalents $ 66,581 $ 109,269
Investment in the Bank 3,555,851 3,678,712
Other assets 89,461 92,537
---------- ----------
Total assets $3,711,893 $3,880,518
========== ==========
Liabilities, Minority Interest and Stockholder's Equity
GS Holdings Notes $2,000,000 $2,000,000
FN Holdings 12 1/4% Senior Notes -- 225
FN Holdings 10 5/8% Notes 250 250
Discount on borrowings (4,659) (5,643)
Accrued interest payable 54,102 56,419
Payable to affiliates -- 171
Other liabilities 883 1,750
---------- ----------
Total liabilities 2,050,576 2,053,172
Minority interest - Bank Preferred Stock -- 95,090
Total stockholder's equity 1,661,317 1,732,256
---------- ----------
Total liabilities, minority interest and stockholder's equity $3,711,893 $3,880,518
========== ==========
F-66
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following represents parent company only condensed statements of
income for the years ended December 31, 1999, 1998 and 1997 (in thousands):
1999 1998 1997
-------- -------- ---------
Interest income $ 1,444 $ 739 $ 859
Dividends received from the Bank 324,582 381,258 311,200
-------- -------- --------
Total income 326,026 381,997 312,059
Interest expense 139,613 113,143 97,923
Noninterest expense 7,625 17,107 13,610
-------- -------- --------
Total expense 147,238 130,250 111,533
Income before equity in undistributed
Net income of subsidiaries 178,788 251,747 200,526
Equity in undistributed net income of subsidiaries 104,613 230,178 2,482
-------- -------- --------
Income before income taxes, minority interest and
extraordinary items 283,401 481,925 203,008
Income tax benefit (143,545) (33,868) (11,117)
-------- -------- --------
Income before minority interest and extraordinary items 426,946 515,793 214,125
Minority interest 85,895 79,085 52,756
-------- -------- --------
Income before extraordinary items 341,051 436,708 161,369
Extraordinary items -- 98,706 --
-------- -------- --------
Net income 341,051 338,002 161,369
Preferred stock dividends -- 578 12,791
-------- -------- --------
Net income available to common stockholder $341,051 $337,424 $148,578
======== ======== ========
The following represents parent company only statements of cash flows for
the years ended December 31, 1999, 1998 and 1997 (in thousands):
1999 1998 1997
-------- --------- ---------
Cash flows from operating activities:
Net income $ 341,051 $ 338,002 $ 161,369
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred issuance costs 7,295 6,958 5,766
Accretion of discount on borrowings 1,018 285 --
Extraordinary loss on early extinguishment of debt -- 98,706 --
(Increase) decrease in other assets (5,331) 35,700 2,686
Decrease in payable to affiliates -- (1,204) (3,411)
(Decrease) increase in accrued interest payable (2,245) 52,708 (2,481)
(Decrease) increase in other liabilities (3,376) (57,989) 11,160
Equity in undistributed net income of subsidiaries (104,613) (230,178) (2,482)
Minority interest 6,887 79,085 52,756
--------- --------- ---------
Net cash provided by operating activities 240,686 322,073 225,363
--------- --------- ---------
Cash flows from investing activities:
Increase in loans receivable -- -- 61
Capital contributions to the Bank -- -- (697,985)
--------- --------- ---------
Net cash used in investing activities -- -- (697,924)
--------- --------- ---------
(continued)
F-67
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1999 1998 1997
--------- ----------- ---------
Cash flows from financing activities:
Proceeds from FN Escrow Merger $ -- $ -- $ 603,313
Proceeds from GS Escrow Merger -- 1,970,285 --
Bank Preferred Stock Tender Offers (97,621) (423,509) --
Debt Tender Offers (253) (1,089,885) --
Issuance of FN Holdings Preferred Stock -- -- (650)
Redemption of FN Holdings/FN Escrow Preferred Stock -- -- (17,250)
Redemption of FN Holdings Preferred Stock -- (25,000) (125,000)
Capital contribution 40,000 -- --
Dividends on common stock (225,500) (662,914) (71,094)
Dividends on preferred stock -- (471) (10,564)
--------- ----------- ---------
Net cash (used in) provided by financing activities (283,374) (231,494) 378,755
--------- ----------- ---------
Net change in cash and cash equivalents (42,688) 90,579 (93,806)
Cash and cash equivalents at beginning of year 109,269 18,690 112,496
--------- ----------- ---------
Cash and cash equivalents at end of year $ 66,581 $ 109,269 $ 18,690
========= =========== =========
Supplemental Disclosure of Cash Flow Information:
Year Ended December 31,
----------------------------------------
1999 1998 1997
---- ---- ----
(in thousands)
Cash paid (received) for:
Interest $141,930 $ 80,913 $ 82,755
Income taxes, net (60,209) (48,895) (10,814)
Non-cash financing activities:
Preferred stock dividends reinvested -- 107 2,227
Initial dividend of tax benefits to parent due to
deconsolidation -- 211,242 --
Adjustments to initial dividend of tax benefits
to parent due to deconsolidation 66,383 -- --
F-68