UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
-------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
---------------------- ---------------------
Commission File Number: 333-64597
--------------------------------------------------------
Golden State Holdings Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-4669792
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
135 Main Street, San Francisco, CA 94105
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
415-904-1100
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
--- ---
The number of shares outstanding of registrant's $1.00 par value common
stock, as of the close of business on July 31, 2000: 1,000 shares.
Page 1
GOLDEN STATE HOLDINGS INC.
SECOND QUARTER 2000 REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements
Unaudited Consolidated Balance Sheets
June 30, 2000 and December 31, 1999........................... 3
Unaudited Consolidated Statements of Income
Six Months Ended June 30, 2000 and 1999....................... 4
Unaudited Consolidated Statements of Income
Three Months Ended June 30, 2000 and 1999..................... 5
Unaudited Consolidated Statements of Comprehensive Income
Six Months Ended June 30, 2000 and 1999....................... 6
Unaudited Consolidated Statements of Comprehensive Income
Three Months Ended June 30, 2000 and 1999..................... 7
Unaudited Consolidated Statements of Stockholder's Equity
Six Months Ended June 30, 2000................................ 8
Unaudited Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999....................... 9
Notes to Unaudited Consolidated Financial Statements..........11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................19
Item 3. Quantitative and Qualitative Disclosures About Market Risk....45
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................46
Item 2. Changes in Securities.........................................46
Item 3. Defaults Upon Senior Securities...............................46
Item 4. Submission of Matters to a Vote of Security Holders...........46
Item 5. Other Information.............................................46
Item 6. Exhibits and Reports on Form 8-K..............................47
Signatures................................................................48
Page 2
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2000 and December 31, 1999
(Unaudited)
(dollars in thousands, except per share data)
June 30, December 31,
Assets 2000 1999
------ ----------- ------------
Cash and due from banks $ 607,215 $ 508,812
Interest-bearing deposits in other banks 70 5
Short-term investment securities 84,361 84,061
----------- -----------
Cash and cash equivalents 691,646 592,878
Securities available for sale, at fair value 622,988 1,075,734
Securities held to maturity 608,922 185,357
Mortgage-backed securities available for sale, at fair value 11,313,733 13,764,565
Mortgage-backed securities held to maturity 3,017,935 2,149,696
Loans held for sale, net 796,307 729,062
Loans receivable, net 38,402,418 33,953,461
Investment in Federal Home Loan Bank ("FHLB") System 1,315,260 1,167,144
Premises and equipment, net 284,362 296,800
Foreclosed real estate, net 27,982 45,091
Accrued interest receivable 345,747 321,596
Intangible assets (net of accumulated amortization of $215,340
at June 30, 2000 and $183,433 at December 31, 1999) 745,472 819,561
Mortgage servicing rights 1,421,201 1,272,393
Other assets 913,898 667,793
----------- -----------
Total assets $60,507,871 $57,041,131
=========== ===========
Liabilities, Minority Interest and Stockholder's Equity
-------------------------------------------------------
Deposits $23,268,266 $23,040,571
Securities sold under agreements to repurchase 5,609,545 5,481,747
Borrowings 28,183,515 25,668,626
Other liabilities 1,020,272 688,870
----------- -----------
Total liabilities 58,081,598 54,879,814
----------- -----------
Commitments and contingencies -- --
Minority interest 500,000 500,000
Stockholder's equity:
Common stock, $1.00 par value, 1,000 shares authorized,
issued and outstanding 1 1
Additional paid-in capital 1,544,568 1,542,171
Accumulated other comprehensive loss (284,743) (276,832)
Retained earnings (substantially restricted) 666,447 395,977
----------- -----------
Total stockholder's equity 1,926,273 1,661,317
----------- -----------
Total liabilities, minority interest and stockholder's equity $60,507,871 $57,041,131
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
Page 3
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Income
Six Months Ended June 30, 2000 and 1999
(Unaudited)
(in thousands)
Six Months Ended June 30,
--------------------------
2000 1999
----------- ----------
Interest income:
Loans receivable $1,343,507 $1,134,778
Mortgage-backed securities available for sale 435,545 423,616
Mortgage-backed securities held to maturity 90,836 95,900
Loans held for sale 28,686 67,692
Securities available for sale 38,462 38,067
Securities held to maturity 3,995 6,303
Interest-bearing deposits in other banks 3,384 2,300
Dividends on FHLB stock 45,110 28,184
---------- ----------
Total interest income 1,989,525 1,796,840
---------- ----------
Interest expense:
Deposits 443,146 444,058
Securities sold under agreements to repurchase 172,734 107,610
Borrowings 796,225 640,160
---------- ----------
Total interest expense 1,412,105 1,191,828
---------- ----------
Net interest income 577,420 605,012
Provision for loan losses -- 10,000
---------- ----------
Net interest income after provision for loan losses 577,420 595,012
---------- ----------
Noninterest income:
Loan servicing fees, net 90,592 70,290
Customer banking fees and service charges 98,724 91,367
Gain on sale, settlement and transfer of loans, net 27,062 20,453
(Loss) gain on sale of assets, net (16,036) 15,109
Other income 17,804 16,819
---------- ----------
Total noninterest income 218,146 214,038
---------- ----------
Noninterest expense:
Compensation and employee benefits 214,948 201,785
Occupancy and equipment 73,508 68,044
Professional fees 17,606 27,164
Loan expense 14,003 22,140
Foreclosed real estate operations, net (3,378) (2,068)
Amortization of intangible assets 31,907 35,168
Merger and integration costs -- 7,747
Other expense 103,012 114,768
---------- ----------
Total noninterest expense 451,606 474,748
---------- ----------
Income before income taxes, minority interest and extraordinary items 343,960 334,302
Income tax (benefit) expense (7,890) 154,714
Minority interest 13,394 19,907
---------- ----------
Income before extraordinary items 338,456 159,681
Extraordinary items - gain on early extinguishment of debt,
net of applicable taxes of $2,083 in 2000 3,014 --
---------- ----------
Net income available to stockholder $ 341,470 $ 159,681
========== ==========
See accompanying notes to unaudited consolidated financial statements.
Page 4
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended June 30, 2000 and 1999
(Unaudited)
(in thousands)
Three Months Ended June 30,
---------------------------
2000 1999
---------- ----------
Interest income:
Loans receivable $ 697,314 $ 567,505
Mortgage-backed securities available for sale 206,483 219,562
Mortgage-backed securities held to maturity 51,457 45,471
Loans held for sale 15,368 33,044
Securities available for sale 19,369 19,689
Securities held to maturity 1,934 2,843
Interest-bearing deposits in other banks 2,983 1,261
Dividends on FHLB stock 27,963 14,628
---------- ----------
Total interest income 1,022,871 904,003
---------- ----------
Interest expense:
Deposits 224,354 222,062
Securities sold under agreements to repurchase 89,828 53,562
Borrowings 418,372 331,337
---------- ----------
Total interest expense 732,554 606,961
---------- ----------
Net interest income 290,317 297,042
Provision for loan losses -- 5,000
---------- ----------
Net interest income after provision for loan losses 290,317 292,042
---------- ----------
Noninterest income:
Loan servicing fees, net 45,717 34,322
Customer banking fees and service charges 50,065 46,621
Gain on sale, settlement and transfer of loans, net 20,400 4,864
(Loss) gain on sale of assets, net (16,455) 14,935
Other income 8,238 7,213
---------- ----------
Total noninterest income 107,965 107,955
---------- ----------
Noninterest expense:
Compensation and employee benefits 107,194 99,200
Occupancy and equipment 36,137 30,089
Professional fees 8,850 13,211
Loan expense 7,960 9,962
Foreclosed real estate operations, net (1,145) (1,395)
Amortization of intangible assets 15,464 18,010
Merger and integration costs -- 1,665
Other expense 51,814 50,435
---------- ----------
Total noninterest expense 226,274 221,177
---------- ----------
Income before income taxes, minority interest and extraordinary items 172,008 178,820
Income tax expense 75,057 82,296
Minority interest 6,795 10,740
---------- ----------
Income before extraordinary items 90,156 85,784
Extraordinary items - gain on early extinguishment of debt,
net of applicable taxes of $1,204 in 2000 1,808 --
---------- ----------
Net income available to stockholder $ 91,964 $ 85,784
========== ==========
See accompanying notes to unaudited consolidated financial statements.
Page 5
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Six Months Ended June 30, 2000 and 1999
(Unaudited)
(in thousands)
Six Months Ended June 30,
-------------------------
2000 1999
--------- ---------
Net income $ 341,470 $ 159,681
Other comprehensive loss, net of tax:
Unrealized holding loss on securities available for sale:
Unrealized holding loss arising during the period (19,427) (161,335)
Less: reclassification adjustment for loss (gain)
included in net income 10,846 (194)
--------- ---------
(8,581) (161,529)
Amortization of market adjustment for securities
transferred from available for sale to held to maturity 670 --
--------- ---------
Other comprehensive loss (7,911) (161,529)
--------- ---------
Comprehensive income (loss) $ 333,559 $ (1,848)
========= =========
See accompanying notes to unaudited consolidated financial statements.
Page 6
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Three Months Ended June 30, 2000 and 1999
(Unaudited)
(in thousands)
Three Months Ended June 30,
---------------------------
2000 1999
-------- ---------
Net income $ 91,964 $ 85,784
Other comprehensive income (loss), net of tax:
Unrealized holding gain (loss) on securities available for sale:
Unrealized holding gain (loss) arising during the period 1,118 (145,356)
Less: reclassification adjustment for loss (gain) included
in net income 10,846 (22)
-------- ---------
11,964 (145,378)
Amortization of market adjustment for securities
transferred from available for sale to held to maturity 670 --
-------- ---------
Other comprehensive income (loss) 12,634 (145,378)
-------- ---------
Comprehensive income (loss) $104,598 $ (59,594)
======== =========
See accompanying notes to unaudited consolidated financial statements.
Page 7
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statement of Stockholder's Equity
Six Months Ended June 30, 2000
(Unaudited)
(in thousands)
Accumulated Retained
Additional Other Earnings Total
Common Paid-in Comprehensive (Substantially Stockholder's
Stock Capital Loss Restricted) Equity
----- ------- ---- --------- ------
Balance at December 31, 1999 $ 1 $1,542,171 $(276,832) $395,977 $1,661,317
Net income 341,470 341,470
Change in net unrealized holding loss
on securities available for sale -- -- (8,581) -- (8,581)
Amortization of unrealized holding
loss on securities held to maturity -- -- 670 -- 670
Dividends to parent -- -- -- (71,000) (71,000)
Impact of Golden State restricted
common stock -- 2,388 -- -- 2,388
Tax benefits on exercise of stock
options -- 9 -- -- 9
--- ---------- --------- -------- ----------
Balance at June 30, 2000 $ 1 $1,544,568 $(284,743) $666,447 $1,926,273
=== ========== ========= ======== ==========
See accompanying notes to unaudited consolidated financial statements.
Page 8
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999
(Unaudited)
(in thousands)
Six Months Ended June 30,
------------------------------
2000 1999
------------ ------------
Cash flows from operating activities:
Net income $ 341,470 $ 159,681
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of intangible assets 31,907 35,168
(Accretion) amortization of purchase accounting premiums and
discounts, net (343) 8,427
Accretion of discount on borrowings 535 501
Amortization of mortgage servicing rights 97,236 104,981
Provision for loan losses -- 10,000
Loss (gain) on sale of assets, net 16,036 (15,109)
Gain on sale of foreclosed real estate, net (6,324) (5,906)
Loss on sale, settlement and transfer of loans, net 27,416 89,030
Capitalization of originated mortgage servicing rights (54,478) (109,483)
Extraordinary items - gain on early extinguishment of debt, net (3,014) --
Depreciation and amortization of premises and equipment 23,766 17,590
Amortization of deferred debt issuance costs 3,674 3,619
FHLB stock dividends (45,110) (28,184)
Purchases and originations of loans held for sale (2,289,613) (5,570,718)
Net proceeds from the sale of loans held for sale 2,156,218 5,704,949
(Increase) decrease in other assets (53,679) 98,939
Increase in accrued interest receivable (22,913) (7,103)
Increase (decrease) in other liabilities 210,338 (131,165)
Amortization of deferred compensation expense-
restricted common stock 1,103 --
Minority interest 13,394 19,907
------------ ------------
Net cash provided by operating activities $ 447,619 $ 385,124
------------ ------------
(Continued)
See accompanying notes to unaudited consolidated financial statements.
Page 9
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
Six Months Ended June 30, 2000 and 1999
(Unaudited)
(in thousands)
Six Months Ended June 30,
------------------------------
2000 1999
------------ ------------
Cash flows from investing activities:
Downey Acquisition $ (379,314) $ --
Nevada Purchase -- 458,943
Purchases of securities available for sale (33,082) (791,189)
Proceeds from maturities of securities available for sale 35,469 355,033
Purchases of securities held to maturity (1,734) (3,066)
Principal payments and proceeds from maturities
of securities held to maturity 23,809 1,173
Purchases of mortgage-backed securities available for sale (58,340) (3,469,570)
Principal payments on mortgage-backed securities available for sale 953,057 2,295,935
Principal payments on mortgage-backed securities held to maturity 188,014 368,537
Proceeds from sales of mortgage-backed securities available for sale 480,159 193,732
Proceeds from sales of loans 32,820 10,450
Net increase in loans receivable (3,304,202) (594,812)
Purchases of loans receivable (811,740) (991,983)
Purchases of FHLB stock, net (107,570) (98,517)
Purchases of premises and equipment (20,201) (62,710)
Proceeds from disposal of premises and equipment 719 46,218
Proceeds from sales of foreclosed real estate 48,641 79,116
Purchases of mortgage servicing rights (191,998) (245,711)
Proceeds from sales of mortgage servicing rights 689 57,367
------------ ------------
Net cash used in investing activities (3,144,804) (2,391,054)
------------ ------------
Cash flows from financing activities:
Net increase (decrease) in deposits 228,661 (1,169,207)
Proceeds from additional borrowings 20,055,022 17,477,254
Principal payments on borrowings (17,531,143) (15,614,925)
Net increase in securities sold under
agreements to repurchase 127,798 1,109,040
Bank Preferred Stock Tender Offers -- (63,957)
Debt Tender Offers -- (253)
Dividends on common stock (71,000) (55,000)
Dividends paid to minority stockholders, net of taxes (13,394) (24,371)
Tax benefit on exercise of stock options 9 1,768
------------ ------------
Net cash provided by financing activities 2,795,953 1,660,349
------------ ------------
Net change in cash and cash equivalents 98,768 (345,581)
Cash and cash equivalents at beginning of period 592,878 967,950
------------ ------------
Cash and cash equivalents at end of period $ 691,646 $ 622,369
============ ============
See accompanying notes to unaudited consolidated financial statements.
Page 10
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(1) BASIS OF PRESENTATION
---------------------
The accompanying unaudited consolidated financial statements were
prepared in accordance with generally accepted accounting principles for interim
financial information and the requirements of Regulation S-X, Article 10 and
therefore do not include all disclosures necessary for complete financial
statements. In the opinion of management, all adjustments have been made that
are necessary for a fair presentation of the financial position and results of
operations and cash flows as of and for the periods presented. All such
adjustments are of a normal recurring nature. The results of operations for the
three and six months ended June 30, 2000 are not necessarily indicative of the
results that may be expected for the entire fiscal year or any other interim
period. Certain amounts for the three and six-month periods in the prior year
have been reclassified to conform to the current period's presentation.
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 common and preferred stock of California Federal 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 and preferred stock of the Bank and
therefore, activities for the consolidated entity are primarily carried out by
the Bank and its operating subsidiaries.
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 (as defined herein), and as the surviving entity in the GS Escrow
Merger for periods after the GS Escrow Merger. On September 11, 1998, Glendale
Federal Bank, Federal Savings Bank ("Glendale Federal") merged with and into the
Bank pursuant to the Glen Fed Merger (as defined herein). Unless the context
otherwise indicates, "California Federal" or "Bank" refers to California Federal
Bank as the surviving entity after the consummation of the Glen Fed Merger.
Minority interest represents amounts attributable to (a) the Preferred
Stock ("REIT Preferred Stock") of California Federal Preferred Capital
Corporation, a wholly owned subsidiary of the Bank, and (b) that portion of
stockholder's equity of Auto One Acceptance Corporation ("Auto One"), a
subsidiary of the Bank, attributable to 20% of its common stock. In 1999,
minority interest also included the Bank Preferred Stock that had not yet been
acquired by GS Holdings.
All significant intercompany balances and transactions have been
eliminated in consolidation. These financial statements should be read in
conjunction with the consolidated financial statements of GS Holdings included
in the Company's Annual Report on Form 10-K for the year ended December 31,
1999. All terms used but not defined elsewhere herein have meanings ascribed to
them in the Company's Annual Report on Form 10-K.
As GS Holdings' common stock is wholly owned by Golden State, earnings
per share data is not presented.
(2) ACQUISITIONS AND DIVESTITURES
-----------------------------
GOLDEN STATE ACQUISITION
On September 11, 1998, First Nationwide (Parent) Holdings Inc. ("Parent
Holdings") and Hunter's Glen/Ford Ltd. ("Hunter's Glen") completed the merger
with Golden State, the publicly traded parent company of Glendale Federal, in a
tax-free exchange of shares (the "Golden State Merger"), accounted for under the
purchase method of accounting. Pursuant to the Golden State Merger agreement,
(a) FN Holdings contributed all of its assets (including all of the common stock
of California Federal) to GS Holdings (the "FN Holdings Asset Transfer"), (b)
Parent Holdings, which then owned all of the common stock of FN Holdings as a
result of the extinguishment of the Hunter's Glen minority interest, merged with
and into Golden State, which indirectly owned all of the common stock of
Glendale Federal, (c) FN Holdings merged with and into Golden State Financial
Corporation, which owned all of the common stock of Glendale Federal (the "FN
Holdings Merger," and together with the Golden State Merger, the "Holding
Company Mergers"), and (d) Glendale Federal merged with and into California
Federal (the
Page 11
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
"Glen Fed Merger"). The FN Holdings Asset Transfer, the Holding Company Mergers
and the Glen Fed Merger are referred to collectively as the "Golden State
Acquisition."
At September 11, 1998, Glendale Federal had total assets of approximately
$18.9 billion and deposits of $11.3 billion and operated 181 branches and 26
loan offices in California.
The Golden State Acquisition was accounted for as a purchase of Golden
State by Parent Holdings and, accordingly, the purchase price was allocated to
the assets acquired and liabilities assumed in the transaction based on
estimates of fair value at the date of purchase. Since the date of purchase, the
results of operations related to such assets and liabilities have been included
in the Company's consolidated statements of income.
Merger and integration costs associated with the Golden State Acquisition
totalled $7.7 million for the six months ended June 30, 1999, including
severance for terminated California Federal employees, expenses for California
Federal branch closures, and conversion and consolidation costs, as well as
transition expenses for duplicate personnel, facilities and computer systems
during the integration period. No such expenses were incurred during the six
months ended June 30, 2000.
OTHER ACQUISITIONS AND DIVESTITURES
On February 29, 2000, Auto One acquired Downey Auto Finance Corporation,
a subsidiary of Downey Savings and Loan Association, F.A., with prime auto loans
of approximately $370 million (the "Downey Acquisition"). Intangible assets of
$7.7 million were recorded in connection with this acquisition.
On April 16, 1999, the Bank acquired twelve retail branches located in
Nevada with deposits of approximately $543 million from Norwest Bank, Nevada, a
subsidiary of Norwest Corporation, and Wells Fargo Bank, N.A. (the "Nevada
Purchase"). Intangible assets of $50.7 million were recorded in connection with
this acquisition, principally representing the deposit premium paid in the
transaction.
During April 1999, First Nationwide Mortgage Corporation ("FNMC") sold
servicing rights for approximately 49,000 loans with an unpaid principal balance
of approximately $2.0 billion, recognizing a pre-tax gain of $16.3 million (the
"Servicing Sale").
(3) RECLASSIFICATION OF SECURITIES
------------------------------
On April 30, 2000, the Company reclassified $1.1 billion and $497.9
million carrying value of mortgage-backed securities and U.S. government and
agency securities, respectively, from securities available for sale to their
respective held-to-maturity portfolios. These assets primarily comprise
securities which are required as part of the Bank's regulatory liquidity
portfolio. The Company has both the positive intent and the ability to hold
these securities to maturity. The net unrealized loss related to these
securities of $64.0 million, which is included as a component of equity
(accumulated other comprehensive loss), is amortized to interest income over the
remaining life of the securities using the effective interest yield method. The
effect of this amortization on interest income is fully offset by the effect of
amortization of the related discount recorded against the respective assets at
the time of transfer.
(4) CASH, CASH EQUIVALENTS, AND STATEMENTS OF CASH FLOWS
----------------------------------------------------
Cash paid for interest on deposits and other interest-bearing
liabilities during the six months ended June 30, 2000 and 1999 was $1.4 billion
and $1.1 billion, respectively. Net cash paid for income taxes during the six
months ended June 30, 2000 and 1999 was $12.0 million and $74.4 million,
respectively.
During the six months ended June 30, 2000, noncash activity consisted of
the reclassification of $1.1 billion and $497.9 million of mortgage-backed
securities and U.S. government and agency securities, respectively, from
securities available for sale to their respective held-to-maturity portfolios,
transfers of $31.9 million from loans receivable to foreclosed real estate,
transfers of $24.2 million from loans held for sale (at lower of cost or market)
to loans receivable and $5.4 million of loans made to facilitate sales of real
estate owned.
Page 12
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Noncash activity during the six months ended June 30, 2000 also included
the following: a $211.7 million reduction of the valuation allowance of the
Company's deferred tax asset representing pre-merger tax benefits, of which
$161.7 million was retained by the previous owners of FN Holdings; and an
increase of $2.4 million in additional paid-in capital reflecting the impact of
Golden State restricted common stock outstanding under an employee incentive
plan.
During the six months ended June 30, 1999, noncash activity consisted of
transfers of $227.1 million from loans receivable to mortgage-backed securities
upon the securitization of certain of the Bank's single-family loans, transfers
of $63.1 million from loans receivable to foreclosed real estate, $1.7 million
of loans made to facilitate sales of real estate owned, and transfers of $77
thousand from loans held for sale (at lower of cost or market) to loans
receivable.
(5) REDEMPTION OF FN HOLDINGS NOTES
-------------------------------
On May 15, 1999, GS Holdings redeemed the remaining $225 thousand
aggregate principal amount of the FN Holdings 12 1/4% Senior Notes for an
aggregate redemption price including accrued interest payable, of $252.6
thousand. The premium paid in connection with such redemption was not material.
(6) SEGMENT REPORTING
-----------------
Since the Company derives a significant portion of its revenues from
interest income, and interest expense is the most significant expense, the
segments are reported below using net interest income. Because the Company also
evaluates performance based on noninterest income and noninterest expense goals,
these measures of segment profit and loss are also presented. The Company does
not allocate income taxes to the segments.
Six Months Ended June 30, Three Months Ended June 30,
------------------------------------ ------------------------------------
Community Mortgage Community Mortgage
Banking Banking Total Banking Banking Total
------- ------- ----- ------- ------- -----
(in thousands)
Net interest income: (1)
2000 $675,340 $(47,912) $627,428 $343,921 $(25,944) $317,977
1999 686,086 (23,852) 662,234 336,871 (12,257) 324,614
Noninterest income: (2)
2000 $118,225 $124,418 $242,643 $ 57,949 $ 62,357 $120,306
1999 121,201 117,977 239,178 61,546 59,830 121,376
Noninterest expense: (3)
2000 $373,139 $ 80,787 $453,926 $187,457 $ 39,977 $227,434
1999 385,620 91,448 477,068 180,267 42,070 222,337
_______________
(1) Includes $50.0 million and $57.2 million for the six months ended June
30, 2000 and 1999, respectively, in earnings credit provided to FNMC by
the Bank, primarily for custodial bank account balances generated by
FNMC. Also includes $122.3 million and $124.0 million for the six months
ended June 30, 2000 and 1999, respectively, in interest income and
expense on intercompany loans.
Includes $27.7 million and $27.6 million for the three months ended June
30, 2000 and 1999, respectively, in earnings credit provided to FNMC by
the Bank, primarily for custodial bank account balances generated by
FNMC. Also includes $69.0 million and $62.6 million for the three months
ended June 30, 2000 and 1999, respectively, in interest income and
expense on intercompany loans.
(Footnotes continued on next page)
Page 13
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(2) Includes $24.5 million and $25.1 million for the six months ended June
30, 2000 and 1999, respectively, in intercompany servicing fees. Includes
$12.3 million and $13.4 million for the three months ended June 30, 2000
and 1999, respectively, in intercompany servicing fees.
(3) Includes $2.3 million for each of the six-month periods ended June 30,
2000 and 1999, in intercompany noninterest expense. Includes $1.2 million
for each of the three-month periods ended June 30, 2000 and 1999, in
intercompany noninterest expense.
The following reconciles the above table to the amounts shown on the
consolidated financial statements for the six and three months ended June 30,
2000 and 1999 (in thousands):
Six Months Ended June 30, Three Months Ended June 30,
------------------------- ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
Net interest income:
Total net interest income for reportable segments $ 627,428 $ 662,234 $ 317,977 $ 324,614
Elimination of intersegment net interest income (50,008) (57,222) (27,660) (27,572)
---------- --------- ---------- ----------
Total $ 577,420 $ 605,012 $ 290,317 $ 297,042
========= ========= ========== ==========
Noninterest income:
Total noninterest income for reportable segments $ 242,643 $ 239,178 $ 120,306 $ 121,376
Elimination of intersegment servicing fees (24,497) (25,140) (12,341) (13,421)
---------- --------- ---------- ----------
Total $ 218,146 $ 214,038 $ 107,965 $ 107,955
========= ========= ========== ==========
Noninterest expense:
Total noninterest expense for reportable segments $ 453,926 $ 477,068 $ 227,434 $ 222,337
Elimination of intersegment expense (2,320) (2,320) (1,160) (1,160)
--------- --------- ---------- ----------
Total $ 451,606 $ 474,748 $ 226,274 $ 221,177
========= ========= ========== ==========
(7) ACCRUED TERMINATION AND FACILITIES COSTS
----------------------------------------
In connection with the Golden State Acquisition, the Company recorded
liabilities resulting from (a) branch consolidations due to duplicate
facilities; (b) employee severance and termination benefits due to a planned
reduction in force; and (c) expenses incurred under a contractual obligation to
terminate services provided by outside service providers (principally relating
to data processing expenses). The merger and integration plan relative to the
Golden State Acquisition was in place on September 11, 1998. Certain of these
costs were included in the allocation of purchase price and others were
recognized in net income. The table below reflects a summary of the activity in
the liability for the costs related to such plan since December 31, 1999 (in
thousands):
Severance and
Branch Termination Contract
Consolidations Benefits Termination Total
-------------- -------- ----------- -----
Balance at December 31, 1999 $24,051 $12,770 $25 $36,846
Additional liabilities recorded 2,504 -- -- 2,504
Charges to liability account (8,015) (204) -- (8,219)
------- ------- --- -------
Balance at June 30, 2000 $18,540 $12,566 $25 $31,131
======= ======= === =======
Page 14
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(8) INCOME TAXES
------------
During the six months ended June 30, 2000, GS Holdings recorded a net
income tax benefit of $7.9 million. Based on favorable resolutions of federal
income tax audits of Old California Federal and Glendale Federal, and based on
the current status of Mafco's, including the Company's, audits for the years
1991 through 1995, management changed its judgment about the realizability of
the Company's deferred tax asset and reduced its valuation allowance by $211.7
million during the six-month period ended June 30, 2000. As a result of reducing
the valuation allowance, income tax expense was reduced by $161.7 million and
goodwill was reduced by $50.0 million.
(9) MINORITY INTEREST
-----------------
On April 1, 1999, GS Holdings redeemed all of the remaining 607,299
outstanding shares of the Bank's 10 5/8% Preferred Stock not already owned by it
for $105.313 per share for a total redemption price of $63.9 million. This
transaction reduced minority interest on the Company's balance sheet and
resulted in a charge of $3.2 million to minority interest expense.
(10) STOCKHOLDER'S EQUITY
--------------------
COMMON STOCK
At June 30, 2000, there were 1,000 shares of GS Holdings common stock
issued and outstanding.
Dividends on common stock during the six months ended June 30, 2000 and
1999 totalled $71.0 million and $55.0 million, respectively.
(11) EXECUTIVE AND STOCK COMPENSATION
--------------------------------
In connection with the Golden State Acquisition, the Bank is
administering stock option plans that provided for the granting of options of
Golden State Common Stock to employees and directors. Upon the consummation of
the merger on September 11, 1998, substantially all options outstanding became
exercisable. All pre-merger stock option plans have expired as to the granting
of additional options.
In the first quarter of 2000, Golden State granted to its employees
non-qualified stock options equivalent to 1,333,850 shares of common stock at a
weighted average price of $13.99 per share under the Golden State Bancorp Inc.
Omnibus Stock Plan (the "Stock Plan"). In the second quarter of 2000, Golden
State granted an additional 12,000 non-qualified stock options at a weighted
average price of $16.25 per share. These shares generally vest over three years
in one-third increments on the anniversary of the grant date. The options
generally expire 10 years from the date of grant. No compensation cost was
recognized by the Company for these stock options during the six months ended
June 30, 2000, in accordance with the intrinsic value accounting methodology
prescribed in Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, whereby compensation expense to employees is determined
based upon the excess, if any, of the market price of Golden State's common
stock at the measurement date over the exercise price of the award.
During the three months ended June 30, 2000, 14,307 options were
exercised and 45,116 options were cancelled or expired under all plans. During
the six months ended June 30, 2000, 14,307 options were exercised and 64,366
options were cancelled or expired under all plans. At June 30, 2000, options to
acquire an equivalent of 3,828,259 shares and 1,177,775 LTWTMs remained
outstanding under all plans.
During the three and six months ended June 30, 1999, a total of 134,484
and 357,017 options, respectively, were exercised and 86,500 and 172,500
options, respectively, were cancelled or expired under all plans.
Page 15
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
On January 24, 2000, Golden State awarded to certain of its employees
220,327 shares of restricted stock under the Golden State Bancorp Inc. Executive
Compensation Plan. The market value on the date of the award was $14.00 per
share. These shares generally vest over two years in one-half increments on the
anniversary of the grant date, based upon the continued service of the employee.
At June 30, 2000, a total of 275,210 restricted shares was outstanding. The
compensation expense related to these awards is recognized on a straight line
basis over the vesting period for each tranche of the award with a corresponding
increase to additional paid-in capital. During the three and six months ended
June 30, 2000, $0.5 million and $1.1 million, respectively, in compensation
expense was recognized related to such awards. These restricted shares have full
voting and dividend rights.
(12) EXTRAORDINARY ITEMS
-------------------
During the first quarter of 2000, the FHLB called and the Bank prepaid
$200 million in FHLB advances, resulting in an extraordinary gain of $1.2
million, net of income taxes of $0.8 million, on the early extinguishment of
such borrowings.
Also during the first quarter of 2000, the Bank repurchased $2.5 million
outstanding principal amount of the Convertible Subordinated Debentures due
2001, resulting in an extraordinary gain of $41 thousand, net of income taxes of
$30 thousand, on the early extinguishment of debt.
During the second quarter of 2000, the FHLB called and the Bank prepaid
$200 million in FHLB advances, resulting in an extraordinary gain of $1.8
million, net of income taxes of $1.2 million, on the early extinguishment of
such borrowings.
(13) NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
--------------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS No. 133"). SFAS No. 133 was amended by
Statement of Financial Accounting Standards No. 137, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES-DEFERRAL OF THE EFFECTIVE DATE OF FASB
STATEMENT NO. 133 ("SFAS No. 137"). SFAS No. 137 mandates that SFAS No. 133
shall be effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000. SFAS No. 133 requires that all derivative instruments be recorded
on the balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on the type of hedge transaction.
Under SFAS No. 133, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective portion of the hedge. Upon
implementation, hedging relationships must be designated anew and documented
pursuant to the provisions of this statement.
For fair value hedge transactions in which the Company is hedging changes
in the fair value of assets, liabilities or firm commitments, changes in the
fair value of the derivative instrument will generally be offset in the income
statement by changes in the hedged item's fair value. For cash flow hedge
transactions in which the Company is hedging the variability of cash flows
related to a variable-rate asset, liability, or a forecasted transaction,
changes in the fair value of the derivative instrument will be reported in other
comprehensive income. The gains and losses on derivative instruments that are
reported in other comprehensive income will be reclassified as earnings in the
periods in which earnings are impacted by the variability of the cash flows of
the hedged item. The ineffective portion of all hedges will be recognized in
current-period earnings.
Page 16
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
The Company has identified various types of instruments which will
qualify as derivatives pursuant to SFAS No. 133. It is expected that the
derivative instruments (interest rate floors, principal only swaps and
swaptions) used to hedge the change in the fair value of the Company's mortgage
servicing rights will be reported as fair value hedges. The derivative
instruments (interest rate swaps) used to hedge the change in the cash flows of
the Company's Federal Home Loan Bank advances and reverse repurchase agreements
will be reported as cash flow hedges. During the second quarter of 2000, the
Derivatives Implementation Group ("DIG") of the FASB issued preliminary guidance
indicating that interest rate lock commitments, given to potential borrowers,
met the net settlement criteria described in paragraph nine of SFAS No. 133 and
would therefore be considered a derivative instrument. The DIG also addressed
the issue of how to measure hedge effectiveness for hedges of mortgage servicing
rights, and agreed to postpone a decision on that issue until the August DIG
meeting. The Company is currently assessing the impact of this additional
guidance.
On June 15, 2000, the FASB issued Statement of Financial Accounting
Standards No. 138 ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN
HEDGING ACTIVITIES, AN AMENDMENT OF FASB NO. 133 ("SFAS No. 138").
The Board amended SFAS No. 133 by:
(a) Expanding the normal purchases and normal sales exception,
(b) Permitting an entity to hedge to a designated benchmark interest rate
defined as either (i) the interest rate on direct Treasury obligations of
the U.S. government (Treasury rate), or (ii) the London Interbank Offered
Rate (LIBOR) swap rate,
(c) Permitting entities to hedge recognized foreign-currency-denominated
assets and liabilities for which a foreign currency transaction gain or
loss is recognized in earnings, and
(d) Permitting certain internal derivatives to qualify for hedge accounting
in the affiliate financial statements even though these internal
derivatives are offset on a net or aggregate basis, rather than
individually, by third party derivative contracts in another member of
the consolidated financial group.
In addition, certain decisions arising from the DIG process that required
specific amendments to SFAS No. 133 are incorporated in SFAS No. 138.
SFAS No. 133 applies to all entities and amends SFAS No. 107, DISCLOSURES
ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTs, to include in Statement 107 the
disclosure provisions about concentrations of credit risk from Statement 105.
SFAS No. 133 supersedes FASB Statements No. 80, ACCOUNTING FOR FUTURES
CONTRACTS, No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT
RISK, and No. 119, DISCLOSURE ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR
VALUE OF FINANCIAL INSTRUMENTS. SFAS No. 133 also nullifies or modifies the
consensuses reached in a number of issues addressed by the Emerging Issues Task
Force.
One of the qualifying criteria for hedge accounting under SFAS No. 133 is
that the hedging relationship between the hedging instrument and the hedged item
must be highly effective in achieving the offset of changes in those fair values
or cash flows that are attributable to the hedged risk, both at the inception of
the hedge and on an ongoing basis. An assessment of this effectiveness is
required at least every three months and whenever financial statements or
earnings are reported by the Company.
The high-effectiveness requirement has been interpreted to mean that the
cumulative changes in the value of the hedging instrument since hedge inception
should be between 80% and 125% of the inverse cumulative change since hedge
inception in the fair value or cash flows of the hedged items.
Page 17
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Early application of all of the provisions of SFAS No. 133 is encouraged,
but is permitted only as of the beginning of any fiscal quarter that begins
after issuance of this statement. SFAS No. 133 should not be applied
retroactively to financial statements of prior periods.
SFAS No. 133 will significantly change the accounting treatment of
derivative instruments used by the Company. Depending on the underlying risk
management strategy, these accounting changes could affect reported net income,
assets, liabilities and stockholder's equity. As a result, the Company may
choose to reconsider its risk management strategies, since SFAS No. 133 will not
reflect the results of many of those strategies in the same manner as current
accounting practice. The Company continues to evaluate the potential impact of
implementing SFAS No. 133. An accurate assessment of the Company's hedge
effectiveness and hence, the net impact of adopting SFAS No. 133, will not be
possible until the FASB, which is currently both interpreting and amending SFAS
No. 133 with regard to the measurement of hedge effectiveness, concludes its
deliberations, and until after the Company has fully implemented hedging
strategies in accordance with the FASB's amendments and interpretations.
Page 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE STATEMENTS CONTAINED IN THIS QUARTERLY REPORT ON FORM 10-Q THAT ARE
NOT PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, INCLUDING STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS,
INTENTIONS, BELIEFS OR STRATEGIES REGARDING THE FUTURE. FORWARD-LOOKING
STATEMENTS INCLUDE THE COMPANY'S STATEMENTS REGARDING LIQUIDITY, PROVISION FOR
LOAN LOSSES, CAPITAL RESOURCES AND ANTICIPATED EXPENSE LEVELS IN "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." IN
ADDITION, IN THOSE AND OTHER PORTIONS OF THIS DOCUMENT, THE WORDS "ANTICIPATE,"
"BELIEVE," "ESTIMATE," "EXPECT," "INTEND," AND OTHER SIMILAR EXPRESSIONS, AS
THEY RELATE TO THE COMPANY OR THE COMPANY'S MANAGEMENT, ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT THE CURRENT VIEWS OF THE
COMPANY WITH RESPECT TO FUTURE EVENTS AND ARE SUBJECT TO CERTAIN RISKS,
UNCERTAINTIES AND ASSUMPTIONS. IT IS IMPORTANT TO NOTE THAT THE COMPANY'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE DESCRIBED HEREIN AS ANTICIPATED,
BELIEVED, ESTIMATED OR EXPECTED. AMONG THE FACTORS THAT COULD CAUSE RESULTS TO
DIFFER MATERIALLY ARE: (A) CHANGES IN LEVELS OF MARKET INTEREST RATES, (B)
CHANGES IN THE CALIFORNIA ECONOMY OR CALIFORNIA REAL ESTATE VALUES, (C) CHANGES
IN THE LEVEL OF MORTGAGE LOAN PREPAYMENTS, (D) CHANGES IN FEDERAL BANKING LAWS
AND REGULATIONS, (E) ACTIONS BY THE COMPANY'S COMPETITORS, AND (F) THE RISKS
DESCRIBED IN THE "RISK FACTORS" SECTION INCLUDED IN THE REGISTRATION STATEMENT
ON FORM S-1 FILED BY GOLDEN STATE HOLDINGS INC. WITH THE SECURITIES AND EXCHANGE
COMMISSION ON SEPTEMBER 29, 1998 (FILE NO. 333-64597) AND DECLARED EFFECTIVE ON
NOVEMBER 12, 1998. THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH
FORWARD-LOOKING STATEMENT.
OVERVIEW
The principal business of GS Holdings, through California Federal,
consists of operating retail branches that provide deposit products such as
demand, transaction and savings accounts, and investment products such as mutual
funds, annuities and insurance. In addition, it engages in mortgage banking
activities, including originating and purchasing 1-4 unit residential loans for
sale to various investors in the secondary market or for retention in its own
portfolio, and servicing loans for itself and others. To a lesser extent, the
Company originates and/or purchases commercial real estate, commercial and
consumer loans for investment. Revenues are derived primarily from interest
earned on loans, interest received on government and agency securities and
mortgage-backed securities, gains on sales of loans and other investments and
fees received in connection with loan servicing, securities brokerage and other
customer service transactions. Expenses primarily consist of interest on
customer deposit accounts, interest on short-term and long-term borrowings,
general and administrative expenses consisting of compensation and benefits,
data processing, occupancy and equipment, communications, deposit insurance
assessments, advertising and marketing, professional fees and other general and
administrative expenses.
NET INCOME
GS Holdings reported net income for the six months ended June 30, 2000 of
$341.5 million compared with net income of $159.7 million for the corresponding
period in 1999. Net income for the six months ended June 30, 2000 includes gains
on the early extinguishment of debt, net of tax, of $3.0 million. Net income for
the six months ended June 30, 1999 includes the following nonrecurring items,
net of tax: a $9.4 million gain from the 1999 Servicing Sale and $3.2 million in
minority interest expense related to the redemption of the remaining $60.7
million of the Bank's 10 5/8% Preferred Stock.
GS Holdings reported net income for the three months ended June 30, 2000
of $92.0 million compared with net income of $85.8 million for the corresponding
period in 1999. Net income for the three months ended June 30, 2000 includes
gains on the early extinguishment of debt, net of tax, of $1.8 million. Net
income for the three months ended June 30, 1999 includes the following
nonrecurring items, net of tax: a $9.4 million gain from the 1999 Servicing Sale
and $3.2 million in minority interest expense related to the redemption of the
remaining $60.7 million of the Bank's 10 5/8% Preferred Stock.
Page 19
FINANCIAL CONDITION
During the six months ended June 30, 2000, consolidated total assets
increased $3.5 billion, to $60.5 billion from December 31, 1999, and total
liabilities increased from $54.9 billion to $58.1 billion.
During the six months ended June 30, 2000, stockholder's equity increased
$265.0 million to $1.9 billion. The increase in stockholder's equity is
principally the net result of $341.5 million in net income for the period,
partially offset by $71.0 million in dividends to parent and an $8.6 million net
unrealized loss, after tax, on securities.
GS Holdings' non-performing assets, consisting of non-performing loans,
net of purchase accounting adjustments, foreclosed real estate, net, and
repossessed assets, decreased to $158 million at June 30, 2000 compared with
$200 million at December 31, 1999. Total non-performing assets as a percentage
of the Bank's total assets decreased to 0.26% at June 30, 2000 from 0.35% at
December 31, 1999.
Page 20
RESULTS OF OPERATIONS
Six months ended June 30, 2000 versus six months ended June 30, 1999
The following table shows the Company's consolidated average balance
sheets, with the related interest income, interest expense and the average
interest rates for the periods presented. Average balances are calculated on a
daily basis.
Six Months Ended June 30, 2000
---------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
(dollars in millions)
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,429 $ 46 6.42%
Mortgage-backed securities available for sale 13,158 435 6.62
Mortgage-backed securities held to maturity 2,390 91 7.60
Loans held for sale, net 764 29 7.51
Loans receivable, net 36,515 1,343 7.36
FHLB stock 1,250 45 7.26
------- ------
Total interest-earning assets 55,506 1,989 7.17
Noninterest-earning assets 2,887 ------
-------
Total assets $58,393
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits $22,920 443 3.89
Securities sold under agreements to repurchase (3) 5,606 173 6.09
Borrowings (3) 26,729 796 5.97
------- ------
Total interest-bearing liabilities 55,255 1,412 5.12
------
Noninterest-bearing liabilities 912
Minority interest 497
Stockholder's equity 1,729
-------
Total liabilities, minority interest
and stockholder's equity $58,393
=======
Net interest income $ 577
======
Interest rate spread 2.05%
=====
Net interest margin 2.07%
=====
Return on average assets 1.17%
=====
Return on average equity 39.50%
=====
Average equity to average assets 2.96%
=====
Page 21
Six Months Ended June 30, 1999
---------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
(dollars in millions)
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,545 $ 47 6.05%
Mortgage-backed securities available for sale 13,476 423 6.29
Mortgage-backed securities held to maturity 2,555 96 7.51
Loans held for sale, net 2,069 68 6.54
Loans receivable, net 30,967 1,135 7.33
FHLB stock 1,082 28 5.25
------- ------
Total interest-earning assets 51,694 1,797 6.95
Noninterest-earning assets 4,026
-------
Total assets $55,720
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDER'S EQUITY
Securities and interest-bearing deposits in banks (2) $ 1,429 $ 46 6.42%
Interest-bearing liabilities:
Deposits $24,126 444 3.71
Securities sold under agreements to repurchase (3) 4,311 108 4.97
Borrowings (3) 23,560 640 5.48
------- ------
Total interest-bearing liabilities 51,997 1,192 4.62
------
Noninterest-bearing liabilities 1,413
Minority interest 566
Stockholder's equity 1,744
-------
Total liabilities, minority interest
and stockholder's equity $55,720
=======
Net interest income $ 605
======
Interest rate spread 2.33%
====
Net interest margin 2.30%
====
Return on average assets 0.57%
====
Return on average equity 18.31%
=====
Average equity to average assets 3.13%
=====
- ----------------
(1) Non-performing assets are included in the average balances for the
periods indicated.
(2) Includes securities held to maturity, securities available for sale,
interest-bearing deposits in other banks and short-term investment
securities.
(3) Interest and average rate include the impact of interest rate swaps.
Page 22
The following table shows what portion of the changes in interest income
and interest expense were due to changes in rate and volume. For each category
of interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to volume (change in average outstanding
balance multiplied by the prior period's rate) and rate (change in average
interest rate multiplied by the prior period's volume). Changes attributable to
both volume and rate have been allocated proportionately.
Six Months Ended June 30, 2000 vs. 1999
Increase (Decrease) Due to
---------------------------------------
Volume Rate Net
------ ---- ---
INTEREST INCOME: (in millions)
Securities and interest-bearing deposits in banks $ (5) $ 4 $ (1)
Mortgage-backed securities available for sale (9) 21 12
Mortgage-backed securities held to maturity (6) 1 (5)
Loans held for sale, net (51) 12 (39)
Loans receivable, net 204 4 208
FHLB stock 5 12 17
---- ---- ----
Total 138 54 192
---- ---- ----
INTEREST EXPENSE:
Deposits (48) 47 (1)
Securities sold under agreements to repurchase 37 28 65
Borrowings 91 65 156
---- ---- ----
Total 80 140 220
---- ---- ----
Change in net interest income $ 58 $(86) $(28)
==== ==== ====
The volume variances in total interest income and total interest expense
for the six months ended June 30, 2000 compared to the corresponding period in
1999 are largely due to increased loan volume, partially offset by an increase
in borrowings.
INTEREST INCOME. Total interest income was $2.0 billion for the six
months ended June 30, 2000, an increase of $192.7 million from the six months
ended June 30, 1999. Total interest-earning assets for the six months ended June
30, 2000 averaged $55.5 billion, compared to $51.7 billion for the corresponding
period in 1999, primarily as a result of increased loan volume. The yield on
total interest-earning assets during the six months ended June 30, 2000
increased to 7.17% from 6.95% for the six months ended June 30, 1999, primarily
due to a higher percentage of loans to total earning assets and the repricing of
variable-rate earning assets.
GS Holdings earned $1.3 billion of interest income on loans receivable
for the six months ended June 30, 2000, an increase of $208.7 million from the
six months ended June 30, 1999. The average balance of loans receivable was
$36.5 billion for the six months ended June 30, 2000, compared to $31.0 billion
for the same period in 1999. The weighted average rate on loans receivable
increased to 7.36% for the six months ended June 30, 2000 from 7.33% for the six
months ended June 30, 1999. The changes in the average balance and weighted
average rate reflect the repricing of variable-rate loans, offset in part by the
impact of originations of mortgages with low introductory interest rates during
the fourth quarter of 1999 and the first quarter of 2000.
GS Holdings earned $28.7 million of interest income on loans held for
sale for the six months ended June 30, 2000, a decrease of $39.0 million from
the six months ended June 30, 1999. The average balance of loans held for sale
was $764 million for the six months ended June 30, 2000, a decrease of $1.3
billion from the comparable period in 1999, primarily attributed to a reduction
in fixed-rate originations due to the current rising interest rate environment,
coupled with longer holding periods for loans held for sale during the six
months ended June 30, 1999. The weighted average rate on loans held for sale
increased to 7.51% for the six months ended June 30, 2000 from 6.54% for the six
months ended June 30, 1999, primarily due to increasing market interest rates.
Page 23
Interest income on mortgage-backed securities available for sale was
$435.5 million for the six months ended June 30, 2000, an increase of $11.9
million from the six months ended June 30, 1999. The average portfolio balance
decreased $318 million, to $13.2 billion, for the six months ended June 30, 2000
compared to the same period in 1999. The weighted average yield on these assets
increased from 6.29% for the six months ended June 30, 1999 to 6.62% for the six
months ended June 30, 2000. The decrease in the volume and the increase in the
weighted average yield is primarily due to the reclassification of $1.1 billion
in mortgage-backed securities to the held-to-maturity portfolio, run-off of
existing portfolios and the sale of approximately $500 million in
mortgage-backed securities during the second quarter of 2000, partially offset
by purchases during the second half of 1999.
Interest income on mortgage-backed securities held to maturity was $90.8
million for the six months ended June 30, 2000, a decrease of $5.1 million from
the six months ended June 30, 1999. The average portfolio balance decreased $165
million, to $2.4 billion, for the six months ended June 30, 2000 compared to the
same period in 1999, primarily attributed to the run-off of existing portfolios,
partially offset by the reclassification of $1.1 billion in mortgage-backed
securities from the available-for- sale portfolio. The run-off in these
securities was replaced with the origination and purchase of whole loans instead
of additional mortgage-backed securities. The weighted average rates for the six
months ended June 30, 2000 and 1999 were 7.60% and 7.51%, respectively.
Interest income on securities and interest-bearing deposits in other
banks was $45.8 million for the six months ended June 30, 2000, a decrease of
$0.8 million from the six months ended June 30, 1999. The average portfolio
balance was $1.4 billion and $1.5 billion for the six months ended June 30, 2000
and 1999, respectively. The higher weighted average rate of 6.42% for the six
months ended June 30, 2000 compared to 6.05% for the six months ended June 30,
1999 reflects $2.4 million in interest income on a federal income tax refund
related to Old California Federal for periods prior to the Golden State
Acquisition for which there is no corresponding asset, partially offset by
interest earned in 1999 on the investment of proceeds from the assumption of the
GS Holdings Notes.
Dividends on FHLB stock were $45.1 million for the six months ended June
30, 2000, an increase of $16.9 million from the six months ended June 30, 1999.
The average balance outstanding during the six months ended June 30, 2000 and
1999 was $1.3 billion and $1.1 billion, respectively. The weighted average
dividend on FHLB stock increased to 7.26% for the six months ended June 30, 2000
from 5.25% for the six months ended June 30, 1999. The increase in the average
balance and weighted average yield is due to an increase in the amount of such
stock owned by the Company as a result of an increase in borrowings under FHLB
advances and an increase in the dividend rate on FHLB stock.
INTEREST EXPENSE. Total interest expense was $1.4 billion for the six
months ended June 30, 2000, an increase of $220.3 million from the six months
ended June 30, 1999. The increase is primarily the result of additional
borrowings under FHLB advances and securities sold under agreements to
repurchase used to fund loans and offset the reduction in deposit balances.
Interest expense on customer deposits, including brokered deposits, was
$443.1 million for the six months ended June 30, 2000, a decrease of $0.9
million from the six months ended June 30, 1999. The average balance of customer
deposits outstanding decreased from $24.1 billion for the six months ended June
30, 1999 to $22.9 billion for the six months ended June 30, 2000. The decrease
in the average balance is primarily due to lower certificate of deposit
balances, reflecting the Bank's pricing strategy during most of 1999. Partially
offsetting this decrease is $543 million in deposits at an average cost of
3.71%, which were assumed in the Nevada Purchase in April 1999. The overall
weighted average cost of deposits increased to 3.89% for the six months ended
June 30, 2000 from 3.72% for the six months ended June 30, 1999, primarily due
to rising market interest rates.
Interest expense on securities sold under agreements to repurchase
totalled $172.7 million for the six months ended June 30, 2000, an increase of
$65.1 million from the six months ended June 30, 1999. The average balance of
such borrowings for the six months ended June 30, 2000 and 1999 was $5.6 billion
and $4.3 billion, respectively. The increase is primarily attributed to the
funding of loans and the purchase of mortgage-backed securities in the second
half of 1999, as well as deposit run-off. The weighted average interest rate on
these instruments increased to 6.09% for the six months ended June 30, 2000 from
4.97% for the six months ended June 30, 1999, primarily due to an increase in
market rates on new borrowings in 2000 compared to 1999.
Page 24
Interest expense on borrowings totalled $796.2 million for the six months
ended June 30, 2000, an increase of $156.1 million from the six months ended
June 30, 1999. The average balance outstanding for the six months ended June 30,
2000 and 1999 was $26.7 billion and $23.6 billion, respectively. The weighted
average interest rate on these instruments increased to 5.97% for the six months
ended June 30, 2000 from 5.48% for the six months ended June 30, 1999, primarily
due to higher prevailing market rates in 2000. The higher volume reflects the
increase in FHLB advances used to fund loans and the purchase of mortgage-backed
securities in the second half of 1999.
NET INTEREST INCOME. Net interest income was $577.4 million for the six
months ended June 30, 2000, a decrease of $27.6 million from the six months
ended June 30, 1999. The interest rate spread declined to 2.05% for the six
months ended June 30, 2000 from 2.33% for the six months ended June 30, 1999,
primarily as a result of maturities and repayments of lower rate
interest-bearing liabilities being replaced with interest-bearing liabilities
having comparatively higher rates. The effect of higher rates on liabilities was
partially offset by higher yielding assets replenishing asset run-off in a
rising rate environment and the repricing of variable-rate assets.
NONINTEREST INCOME. Total noninterest income, consisting primarily of
loan servicing fees, customer banking fees and gains on sales of assets, was
$218.1 million for the six months ended June 30, 2000, representing an increase
of $4.1 million from the six months ended June 30, 1999.
Loan servicing fees, net of amortization of mortgage servicing rights,
were $90.6 million for the six months ended June 30, 2000, compared to $70.3
million for the six months ended June 30, 1999. The single-family residential
loan servicing portfolio, excluding loans serviced for the Bank, increased from
$69.2 billion at June 30, 1999 to $78.6 billion at June 30, 2000. Incremental
loan servicing fees were partially offset by amortization of MSRs. MSR
amortization for the six months ended June 30, 2000 decreased by $7.7 million
from the six months ended June 30, 1999 due to a reduction in the assumed
prepayment rate, partially offset by a higher MSR basis. Loan servicing fees
benefited from the slowdown in mortgage loan prepayments in 2000, with an
average prepayment rate on loans serviced for others of 8.1% in the first half
of 2000, compared to 22.3% in the comparable period in 1999.
Customer banking fees were $98.7 million for the six months ended June
30, 2000 compared to $91.4 million for the six months ended June 30, 1999. The
increase is primarily attributed to increased emphasis by management on
transaction account growth, the impact of revenues from the deposits assumed in
the Nevada Purchase and higher fee income on mutual fund, annuity and other
security sales through Cal Fed Investments.
Gain on sale, settlement and transfer of loans, net totalled $27.1
million for the six months ended June 30, 2000, an increase of $6.6 million from
the six months ended June 30, 1999. During the second quarter of 2000, the
Company recorded a $14.5 million reduction in its recourse liability. This
liability is a life-of-asset accrual. Given the paydowns which have occurred on
the underlying loans and the improving credit and real estate market conditions
present, the Company determined that the liability balance exceeded its estimate
of the required accrual for the remaining life of the recourse assets by $14.5
million. Gains attributed to early payoffs and settlement of commercial loans
with unamortized discounts were $6.3 million lower in the six months ended June
30, 2000 compared to the same period in 1999. During the six months ended June
30, 2000, California Federal sold $2.2 billion in single-family mortgage loans
originated for sale with servicing rights retained as part of its ongoing
mortgage banking operations compared to $5.8 billion of such sales for the
corresponding period in 1999, while the gains on such sales declined $1.6
million between the two periods.
Net loss on sale of assets totalled $16.0 million for the six months
ended June 30, 2000, compared to a net gain of $15.1 million for the six months
ended June 30, 1999. The loss during 2000 is primarily attributed to an $18.7
million loss from the sale of approximately $500 million of mortgage-backed
securities with an average yield of 6.64% during the second quarter. While a
loss was incurred on this transaction, it is expected that the sale will benefit
both the net interest margin and the Company's interest rate sensitivity in
future periods. The $15.1 million gain reported in 1999 primarily relates to the
$16.3 million gain on the Servicing Sale.
Page 25
NONINTEREST EXPENSE. Total noninterest expense was $451.6 million for the
six months ended June 30, 2000, a decrease of $23.1 million compared to the six
months ended June 30, 1999. The variance between the two periods is primarily
attributed to continued expense reduction efforts by the Company and the
completion of merger and integration efforts in the first half of 1999.
Noninterest expense for the six months ended June 30, 2000 included decreases of
$11.8 million in other noninterest expense, $9.6 million in professional fees,
$8.1 million in loan expense and $7.7 million in specific merger and integration
costs incurred in 1999 in connection with the Golden State Acquisition. These
decreases were partially offset by increases of $13.2 million in compensation
expense and $5.5 million in occupancy and equipment expense.
Compensation and employee benefits expense was $214.9 million for the six
months ended June 30, 2000, an increase of $13.2 million from the six months
ended June 30, 1999. The increase is primarily attributed to normal salary
increases and higher employment levels in expanding lines of business, including
the impact of additional employees from the Downey Acquisition.
Occupancy and equipment expense was $73.5 million for the six months
ended June 30, 2000, an increase of $5.5 million from the six months ended June
30, 1999, primarily attributed to $4.8 million of adjustments in 1999 to
previously established accruals for vacant facilities.
Professional fees were $17.6 million for the six months ended June 30,
2000, a decrease of $9.6 million from the six months ended June 30, 1999,
primarily due to legal and consulting fee expenses incurred in 1999 related to
goodwill litigation and the Y2K project.
Loan expense was $14.0 million for the six months ended June 30, 2000, a
decrease of $8.1 million from the six months ended June 30, 1999, primarily due
to a decrease in pass-through interest expense on loans attributed to a decrease
in payoffs during 2000. Repayment rates on loans serviced for others averaged
11.8% during the first half of 2000, a significant decline from the 27% average
experienced during the first half of 1999.
Merger and integration costs were $7.7 million for the six months ended
June 30, 1999, representing transition expenses, which include severance,
conversion and consolidation costs incurred in connection with the Golden State
Acquisition. Such costs were not incurred during the first half of 2000.
Amortization of intangible assets was $31.9 million for the six months
ended June 30, 2000, a decrease of $3.3 million from the six months ended June
30, 1999, primarily attributed to a lower goodwill base due to a $50.0 million
reduction in goodwill in the first quarter of 2000, resulting from a reduction
in the valuation allowance against the Company's deferred tax asset (see "-
Provision for Income Tax"), and a $38.2 million reduction in goodwill resulting
from an income tax refund received during the fourth quarter of 1999 related to
Old California Federal. This decrease was partially offset by amortization
expense related to the $7.7 million and $50.7 million in goodwill recorded in
connection with the Downey Acquisition and the Nevada Purchase, respectively.
Other noninterest expense was $103.0 million in 2000 compared to $114.8
million in 1999. The decline in operating expenses is primarily attributed to
management's continued expense reduction efforts.
PROVISION FOR INCOME TAX. During the six months ended June 30, 2000 and
1999, GS Holdings recorded income tax (benefit) expense of $(7.9) million and
$154.7 million, respectively. Based on favorable resolutions of federal income
tax audits of Old California Federal and Glendale Federal, and the current
status of Mafco's, including the Company's, audits for the years 1991 through
1995, management changed its judgment about the realizability of the Company's
deferred tax asset and reduced its valuation allowance by $211.7 million during
the six-month period ended June 30, 2000. As a result of reducing the valuation
allowance, income tax expense was reduced by $161.7 million and goodwill was
reduced by $50.0 million.
Page 26
GS Holdings' effective gross federal tax rate was (9)% and 38% during the
six months ended June 30, 2000 and 1999, respectively, while its federal
statutory tax rate was 35% during both periods. The difference between the
effective and statutory rates was primarily the result of nondeductible goodwill
amortization. GS Holdings' effective state tax rate was 6% and 8% during each of
the six months ended June 30, 2000 and 1999, respectively. The effective tax
rate declined during the first half of 2000 as a result of changes in
management's estimates of the expected state tax liability of the Company.
MINORITY INTEREST. Dividends on the REIT Preferred Stock totalling $22.8
million were recorded during the six months ended June 30, 2000. Minority
interest expense relative to the REIT Preferred Stock is reflected net of
related income tax benefit of $9.4 million, which will inure to the Company as a
result of the deductibility of such dividends for income tax purposes.
During the six months ended June 30, 1999, minority interest expense
included $3.2 million in net premiums paid in connection with the redemption of
the Bank's 10 5/8% Preferred Stock. Minority interest expense also included
dividends on the Bank Preferred Stock that had not yet been acquired by GS
Holdings and the REIT Preferred Stock totalling $1.8 million and $22.8 million,
respectively. Minority interest expense relative to the REIT Preferred Stock is
reflected net of related income tax benefit of $9.6 million which will inure to
the Company as a result of the deductibility of such dividends for income tax
purposes. Minority interest expense for the six months ended June 30, 1999 also
included a $1.7 million benefit reversal representing that portion of Auto One's
loss attributable to the 20% interest in the common stock of Auto One that was
issued as part of the GSAC Acquisition.
Page 27
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 VERSUS THREE MONTHS ENDED JUNE 30, 1999
The following table shows the Company's consolidated average balance
sheets, with the related interest income, interest expense and the average
interest rates for the periods presented. Average balances are calculated on a
daily basis.
Three Months Ended June 30, 2000
---------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
(dollars in millions)
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,431 $ 24 6.79%
Mortgage-backed securities available for sale 12,447 207 6.64
Mortgage-backed securities held to maturity 2,700 51 7.62
Loans held for sale, net 814 15 7.56
Loans receivable, net 37,716 698 7.40
FHLB stock 1,306 28 8.61
------ ------
Total interest-earning assets 56,414 1,023 7.26
------
Noninterest-earning assets 3,011
-------
Total assets $59,425
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits $22,948 224 3.93
Securities sold under agreements to repurchase (3) 5,503 90 6.46
Borrowings (3) 27,684 419 6.06
------- ------
Total interest-bearing liabilities 56,135 733 5.22
------
Noninterest-bearing liabilities 985
Minority interest 498
Stockholder's equity 1,807
-------
Total liabilities, minority interest
and stockholder's equity $59,425
=======
Net interest income $ 290
======
Interest rate spread 2.04%
=====
Net interest margin 2.06%
=====
Return on average assets 0.62%
=====
Return on average equity 20.36%
=====
Average equity to average assets 3.04%
=====
Page 28
Three Months Ended June 30, 1999
---------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
(dollars in millions)
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,646 $ 23 5.78%
Mortgage-backed securities available for sale 13,960 220 6.29
Mortgage-backed securities held to maturity 2,466 45 7.37
Loans held for sale, net 1,977 33 6.69
Loans receivable, net 31,211 568 7.27
FHLB stock 1,120 15 5.24
------- ----
Total interest-earning assets 52,380 904 6.90
----
Noninterest-earning assets 3,895
-------
Total assets $56,275
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits $24,172 222 3.68
Securities sold under agreements to repurchase (3) 4,302 54 4.92
Borrowings (3) 24,238 331 5.48
------- ----
Total interest-bearing liabilities 52,712 607 4.62
----
Noninterest-bearing liabilities 1,312
Minority interest 533
Stockholder's equity 1,718
------
Total liabilities, minority interest
and stockholder's equity $56,275
=======
Net interest income $297
====
Interest rate spread 2.28%
=====
Net interest margin 2.26%
=====
Return on average assets 0.61%
=====
Return on average equity 19.97%
=====
Average equity to average assets 3.05%
=====
- ----------
(1) Non-performing assets are included in the average balances for the periods
indicated.
(2) Includes securities held to maturity, securities available for sale,
interest-bearing deposits in other banks and short-term investment
securities.
(3) Interest and average rate include the impact of interest rate swaps.
Page 29
The following table shows what portion of the changes in interest income
and interest expense were due to changes in rate and volume. For each category
of interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to volume (change in average outstanding
balance multiplied by the prior period's rate) and rate (change in average
interest rate multiplied by the prior period's volume). Changes attributable to
both volume and rate have been allocated proportionately.
Three Months Ended June 30, 2000 vs. 1999
Increase (Decrease) Due to
-----------------------------------------
Volume Rate Net
------ ---- ---
INTEREST INCOME: (in millions)
Securities and interest-bearing deposits in banks $ (1) $ 2 $ 1
Mortgage-backed securities available for sale (26) 13 (13)
Mortgage-backed securities held to maturity 5 1 6
Loans held for sale, net (23) 5 (18)
Loans receivable, net 120 10 130
FHLB stock 3 10 13
---- ---- ----
Total 78 41 119
---- ---- ----
INTEREST EXPENSE:
Deposits (9) 11 2
Securities sold under agreements to repurchase 17 19 36
Borrowings 51 37 88
---- ---- ----
Total 59 67 126
---- ---- ----
Change in net interest income $ 19 $(26) $ (7)
==== ==== ====
The volume variances in total interest income and total interest expense
for the three months ended June 30, 2000 compared to the corresponding period in
1999 are largely due to increased loan volume and purchases of mortgage-backed
securities in the second half of 1999, partially offset by an increase in
borrowings and the sale of mortgage-backed securities in 2000.
INTEREST INCOME. Total interest income was $1.0 billion for the three
months ended June 30, 2000, an increase of $118.9 million from the three months
ended June 30, 1999. Total interest-earning assets for the three months ended
June 30, 2000 averaged $56.4 billion, compared to $52.4 billion for the
corresponding period in 1999, primarily as a result of increased loan volume.
The yield on total interest-earning assets during the three months ended June
30, 2000 increased to 7.26% from 6.90% for the three months ended June 30, 1999,
primarily due to a higher percentage of loans to total earning assets and the
repricing of variable-rate earning assets.
GS Holdings earned $697.3 million of interest income on loans receivable
for the three months ended June 30, 2000, an increase of $129.8 million from the
three months ended June 30, 1999. The average balance of loans receivable was
$37.7 billion for the three months ended June 30, 2000, compared to $31.2
billion for the same period in 1999. The weighted average rate on loans
receivable increased to 7.40% for the three months ended June 30, 2000 from
7.27% for the three months ended June 30, 1999. The changes in the average
balance and weighted average rate reflect the repricing of variable-rate loans,
offset in part by the impact of originations of mortgages with low introductory
interest rates during the fourth quarter of 1999 and the first quarter of 2000.
GS Holdings earned $15.4 million of interest income on loans held for
sale for the three months ended June 30, 2000, a decrease of $17.7 million from
the three months ended June 30, 1999. The average balance of loans held for sale
was $814 million for the three months ended June 30, 2000, a decrease of $1.2
billion from the comparable period in 1999, primarily attributed to a reduction
in fixed-rate originations due to the current rising interest rate environment,
coupled with longer holding periods for loans held for sale during the three
months ended June 30, 1999. The weighted average rate on loans held for sale
increased to 7.56% for the three months ended June 30, 2000 from 6.69% for the
three months ended June 30, 1999, primarily due to increasing market interest
rates.
Page 30
Interest income on mortgage-backed securities available for sale was
$206.5 million for the three months ended June 30, 2000, a decrease of $13.1
million from the three months ended June 30, 1999. The average portfolio balance
decreased $1.5 billion, to $12.4 billion, for the three months ended June 30,
2000 compared to the same period in 1999. The weighted average yield on these
assets increased from 6.29% for the three months ended June 30, 1999 to 6.64%
for the three months ended June 30, 2000. The decrease in the volume and the
increase in the weighted average yield are primarily due to the reclassification
of $1.1 billion in mortgage-backed securities to the held-to-maturity portfolio,
run-off of existing portfolios and the sale of approximately $500 million of
mortgage-backed securities during the second quarter of 2000, partially offset
by purchases during the second half of 1999.
Interest income on mortgage-backed securities held to maturity was $51.5
million for the three months ended June 30, 2000, an increase of $6.0 million
from the three months ended June 30, 1999. The average portfolio balance
increased $234 million, to $2.7 billion, for the three months ended June 30,
2000 compared to the same period in 1999, primarily attributed to the
reclassification of $1.1 billion in mortgage-backed securities from the
available-for-sale portfolio, partially offset by the run-off of existing
portfolios. The run-off in these securities was replaced with the origination
and purchase of whole loans instead of additional mortgage-backed securities.
The weighted average rates for the three months ended June 30, 2000 and 1999
were 7.62% and 7.37%, respectively.
Interest income on securities and interest-bearing deposits in other
banks was $24.3 million for the three months ended June 30, 2000, an increase of
$0.5 million from the three months ended June 30, 1999. The average portfolio
balance was $1.4 billion and $1.6 million for each of the three months ended
June 30, 2000 and 1999, respectively. The higher weighted average rate of 6.79%
for the three months ended June 30, 2000 compared to 5.78% for the three months
ended June 30, 1999 reflects $2.4 million in interest income on a federal income
tax refund related to Old California Federal for periods prior to the Golden
State Acquisition for which there is no corresponding asset, partially offset by
interest earned in 1999 on the investment of proceeds from the assumption of the
GS Holdings Notes.
Dividends on FHLB stock were $28.0 million for the three months ended
June 30, 2000, an increase of $13.3 million from the three months ended June 30,
1999. The average balance outstanding during the three months ended June 30,
2000 and 1999 was $1.3 billion and $1.1 billion, respectively. The weighted
average dividend on FHLB stock increased to 8.61% for the three months ended
June 30, 2000 from 5.24% for the three months ended June 30, 1999. The increase
in the average balance and weighted average yield is due to an increase in the
amount of such stock owned by the Company as a result of an increase in
borrowings under FHLB advances and an increase in the dividend rate on FHLB
stock.
Interest Expense. Total interest expense was $732.6 million for the three
months ended June 30, 2000, an increase of $125.6 million from the three months
ended June 30, 1999. The increase is primarily the result of additional
borrowings under FHLB advances and securities sold under agreements to
repurchase used to fund loans and offset the reduction in deposit balances.
Interest expense on customer deposits, including brokered deposits, was
$224.4 million for the three months ended June 30, 2000, an increase of $2.3
million from the three months ended June 30, 1999. The average balance of
customer deposits outstanding decreased from $24.2 billion for the three months
ended June 30, 1999 to $22.9 billion for the three months ended June 30, 2000.
The decrease in the average balance is primarily due to lower certificate of
deposit balances, reflecting the Bank's pricing strategy during most of 1999.
The overall weighted average cost of deposits increased to 3.93% for the three
months ended June 30, 2000 from 3.68% for the three months ended June 30, 1999,
primarily due to rising market interest rates.
Interest expense on securities sold under agreements to repurchase
totalled $89.8 million for the three months ended June 30, 2000, an increase of
$36.3 million from the three months ended June 30, 1999. The average balance of
such borrowings for the three months ended June 30, 2000 and 1999 was $5.5
billion and $4.3 billion, respectively. The increase is primarily attributed to
the funding of loans and the purchase of mortgage-backed securities in the
second half of 1999, as well as deposit run-off. The weighted average interest
rate on these instruments increased to 6.46% for the three months ended June 30,
2000 from 4.92% for the three months ended June 30, 1999, primarily due to an
increase in market rates on new borrowings in 2000 compared to 1999.
Page 31
Interest expense on borrowings totalled $418.4 million for the three
months ended June 30, 2000, an increase of $87.0 million from the three months
ended June 30, 1999. The average balance outstanding for the three months ended
June 30, 2000 and 1999 was $27.7 billion and $24.2 billion, respectively. The
weighted average interest rate on these instruments increased to 6.06% for the
three months ended June 30, 2000 from 5.48% for the three months ended June 30,
1999, primarily due to higher prevailing market rates in 2000. The higher volume
reflects the increase in FHLB advances used to fund loans and the purchase of
mortgage-backed securities in the second half of 1999.
NET INTEREST INCOME. Net interest income was $290.3 million for the three
months ended June 30, 2000, a decrease of $6.7 million from the three months
ended June 30, 1999. The interest rate spread declined to 2.04% for the three
months ended June 30, 2000 from 2.28% for the three months ended June 30, 1999,
primarily as a result of maturities and repayments of lower rate
interest-bearing liabilities being replaced with interest-bearing liabilities
having comparatively higher rates. The effect of higher rates on liabilities was
partially offset by higher yielding assets replenishing asset run-off in a
rising rate environment and the repricing of variable-rate assets.
NONINTEREST INCOME. Total noninterest income, consisting primarily of
loan servicing fees, customer banking fees and gains on sales of assets, was
$108.0 million for the three months ended June 30, 2000, representing an
increase of less than $0.1 million from the three months ended June 30, 1999.
Loan servicing fees, net of amortization of mortgage servicing rights,
were $45.7 million for the three months ended June 30, 2000, compared to $34.3
million for the three months ended June 30, 1999. The single-family residential
loan servicing portfolio, excluding loans serviced for the Bank, increased from
$69.2 billion at June 30, 1999 to $78.6 billion at June 30, 2000. Incremental
loan servicing fees were partially offset by amortization of MSRs. MSR
amortization for the quarter decreased by $3.1 million from the three months
ended June 30, 1999 due to a reduction in the assumed prepayment rate, partially
offset by a higher MSR basis. Loan servicing fees benefited from the slowdown in
mortgage loan prepayments in 2000, with an average prepayment rate on loans
serviced for others of 9.2% in the second quarter of 2000, compared to 20.0% in
the comparable period in 1999.
Customer banking fees were $50.1 million for the three months ended June
30, 2000 compared to $46.6 million for the three months ended June 30, 1999. The
increase is primarily attributed to increased emphasis by management on
transaction account growth and higher fee income on mutual fund, annuity and
other security sales through Cal Fed Investments.
Gain on sale, settlement and transfer of loans, net totalled $20.4
million for the three months ended June 30, 2000, an increase of $15.5 million
from the three months ended June 30, 1999. During the second quarter of 2000,
the Company recorded a $14.5 million reduction in its recourse liability. See "-
Six Months Ended June 30, 2000 versus Six Months Ended June 30, 1999 -
Noninterest Income." During the three months ended June 30, 2000, California
Federal sold $1.1 billion in single-family mortgage loans originated for sale
with servicing rights retained as part of its ongoing mortgage banking
operations compared to $2.6 billion of such sales for the corresponding period
in 1999. The gain on residential loan sales increased $4.8 million during the
three months ended June 30, 2000 compared to the same period in 1999, primarily
as a result of an $8.8 million adjustment recorded during the second quarter of
1999 to reflect the lower of cost or market valuation on loans held for sale at
June 30, 1999. Gains attributed to early payoffs and settlement of commercial
loans with unamortized discounts were $3.8 million lower in the three months
ended June 30, 2000 compared to the same period in 1999.
Net loss on sale of assets totalled $16.5 million for the three months
ended June 30, 2000, compared to a net gain of $14.9 million for the three
months ended June 30, 1999, primarily attributed to an $18.7 million loss from
the sale of approximately $500 million of mortgage-backed securities during the
second quarter of 2000. See "- Six Months Ended June 30, 2000 versus Six Months
Ended June 30, 1999 - Noninterest Income."
Page 32
NONINTEREST EXPENSE. Total noninterest expense was $226.3 million for the
three months ended June 30, 2000, an increase of $5.1 million compared to the
three months ended June 30, 1999. The variance between the two periods is
primarily attributed to normal inflation rates and investments in expanding
lines of business. Noninterest expense for the three months ended June 30, 2000
included increases of $8.0 million in compensation expense, $6.0 million in
occupancy and equipment and $1.4 million in other noninterest expense. These
increases were partially offset by decreases of $4.4 million in professional
fees, $2.0 million in loan expense and $1.7 million in merger and integration
costs incurred in 1999 in connection with the Golden State Acquisition.
Compensation and employee benefits expense was $107.2 million for the
three months ended June 30, 2000, an increase of $8.0 million from the three
months ended June 30, 1999. The increase is primarily attributed to normal
salary increases and higher employment levels in expanding lines of business,
including the impact of additional employees from the Downey Acquisition.
Occupancy and equipment expense was $36.1 million and $30.1 million for
the three months ended June 30, 2000 and 1999, respectively. This increase
reflects $4.8 million of adjustments in 1999 to previously established accruals
for vacant facilities and an acceleration of depreciation on computer equipment
during the second quarter of 2000.
Professional fees were $8.9 million for the three months ended June 30,
2000, a decrease of $4.4 million from the three months ended June 30, 1999,
primarily due to expenses incurred in 1999 attributed to the Y2K project and
goodwill litigation.
Loan expense was $8.0 million for the three months ended June 30, 2000, a
decrease of $2.0 million from the three months ended June 30, 1999, primarily
due to a decrease in pass-through interest expense on loans attributed to a
decrease in payoffs during 2000. Repayment rates on loans serviced for others
averaged 13% during the second quarter of 2000, a significant decline from the
24% average experienced during the same period in 1999.
Merger and integration costs were $1.7 million for the three months ended
June 30, 1999, representing transition expenses, which include severance,
conversion and consolidation costs incurred in connection with the Golden State
Acquisition. Such costs were not incurred during 2000.
Amortization of intangible assets was $15.5 million for the three months
ended June 30, 2000, a decrease of $2.5 million from the three months ended June
30, 1999, primarily attributed to a lower goodwill base due to a $50.0 million
reduction in goodwill in the first quarter of 2000, resulting from a reduction
in the valuation allowance against the Company's deferred tax asset, and a $38.2
million reduction resulting from an income tax refund received during the fourth
quarter of 1999 related to Old California Federal. These decreases were
partially offset by amortization expense related to the $7.7 million in goodwill
recorded in connection with the Downey Acquisition.
PROVISION FOR INCOME TAX. During the three months ended June 30, 2000 and
1999, GS Holdings recorded income tax expense of $75.1 million and $82.3
million, respectively.
GS Holdings' effective gross federal tax rate was 38% during each of the
three months ended June 30, 2000 and 1999, while its federal statutory tax rate
was 35% during both periods. The difference between the effective and statutory
rates was primarily the result of nondeductible goodwill amortization. GS
Holdings' effective state tax rate was 6% and 8% during each of the three months
ended June 30, 2000 and 1999, respectively. The effective tax rate declined
during the second quarter of 2000 as a result of changes in management's
estimates of the expected state tax liability of the Company.
MINORITY INTEREST. Dividends on the REIT Preferred Stock totalling $11.4
million were recorded during the three months ended June 30, 2000. Minority
interest expense relative to the REIT Preferred Stock is reflected net of
related income tax benefit of $4.6 million, which will inure to the Company as a
result of the deductibility of such dividends for income tax purposes.
Page 33
During the three months ended June 30, 1999, minority interest expense
included $3.2 million in net premiums paid in connection with the redemption of
the Bank's 10 5/8% Preferred Stock. Minority interest expense also included
dividends on the Bank Preferred Stock that had not yet been acquired by GS
Holdings and the REIT Preferred Stock totalling $0.9 million and $11.4 million,
respectively. Minority interest expense relative to the REIT Preferred Stock is
reflected net of related income tax benefit of $4.8 million which will inure to
the Company as a result of the deductibility of such dividends for income tax
purposes.
PROVISION FOR LOAN LOSSES
The adequacy of the allowance for loan losses is periodically evaluated
by management to maintain the allowance at a level that is sufficient to absorb
expected loan losses. The allowance for loan losses is increased by provisions
for loan losses as well as by balances acquired through acquisitions and is
decreased by charge-offs (net of recoveries). The Company charges current
earnings with a provision for estimated credit losses on loans receivable. The
provision considers both specifically identified problem loans as well as credit
risks not specifically identified in the loan portfolio. See "-- Problem and
Potential Problem Assets" for a discussion of the methodology used in
determining the adequacy of the allowance for loan losses. The Company recorded
no provision for loan losses during the six months ended June 30, 2000. The
Company recorded provisions for loan losses of $10 million and $5 million during
the six and three months ended June 30, 1999, respectively.
The decrease in the provision for loan losses during the six-month period
ended June 30, 2000 compared to the same period in 1999 reflects management's
evaluation of the adequacy of the allowance based on, among other things, past
loan loss experience and known and inherent risks in the portfolio, evidenced in
part by the continued decline in the Company's level of non-performing assets.
In addition, management's periodic evaluation of the adequacy of the allowance
for loan losses considers potential adverse situations that have occurred but
are not yet known that may affect the borrower's ability to repay, the estimated
value of underlying collateral and economic conditions.
Activity in the allowance for loan losses is as follows (in thousands):
Six Months Ended June 30, Three Months Ended June 30,
------------------------- ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
Balance - beginning of period $554,893 $588,533 $543,188 $583,214
Provision for loan losses -- 10,000 -- 5,000
Charge-offs (20,297) (21,483) (7,827) (11,179)
Recoveries 1,518 1,989 753 1,334
Reclassification -- (670) -- --
-------- -------- -------- --------
Balance - end of period $536,114 $578,369 $536,114 $578,369
======== ======== ======== ========
Although management believes that the allowance for loan losses is
adequate, it will continue to review its loan portfolio to determine the extent
to which any changes in economic conditions or loss experience may require
further provisions in the future.
Page 34
PROBLEM AND POTENTIAL PROBLEM ASSETS
The Company considers a loan impaired when, based upon current
information and events, it is "probable" that it will be unable to collect all
amounts due (i.e., both principal and interest) according to the contractual
terms of the loan agreement. Any insignificant delay or insignificant shortfall
in amount of payments will not cause a loan to be considered impaired. In
determining impairment, the Company considers large non-homogeneous loans
including nonaccrual loans, troubled debt restructurings, and performing loans
that exhibit, among other characteristics, high LTV ratios, low debt-coverage
ratios or other indications that the borrowers are experiencing increased levels
of financial difficulty. Loans collectively reviewed for impairment by the
Company include all single-family loans, business banking loans under $100,000
and performing multi-family and commercial real estate loans under $500,000,
excluding loans which have entered the work-out process.
The measurement of impairment may be based on (a) the present value of
the expected future cash flows of the impaired loan discounted at the loan's
original effective interest rate, (b) the observable market price of the
impaired loan, or (c) the fair value of the collateral of a collateral-dependent
loan. The Company bases the measurement of collateral-dependent impaired loans
on the fair value of the loan's collateral, less disposal costs. The amount, if
any, by which the recorded investment of the loan exceeds the measure of the
impaired loan's value is recognized by recording a valuation allowance. Large
groups of smaller balance homogeneous loans are collectively evaluated for
impairment.
Cash receipts on impaired loans not performing according to contractual
terms are generally used to reduce the carrying value of the loan, unless the
Company believes it will recover the remaining principal balance of the loan.
Impairment losses are included in the allowance for loan losses. Upon
disposition of an impaired loan, loss of principal, if any, is recorded through
a charge-off to the allowance for loan losses.
At June 30, 2000, loans that were considered to be impaired totalled
$100.2 million (of which $18.9 million were on nonaccrual status). The average
recorded investment in impaired loans during the six and three-month periods
ended June 30, 2000 was approximately $113.5 million and $104.4 million,
respectively. For the six and three-month periods ended June 30, 2000, GS
Holdings recognized interest income on those impaired loans of $4.1 million and
$2.0 million, respectively, which included $0.4 million and $0.2 million,
respectively, of interest income recognized using the cash basis method of
income recognition.
Page 35
The following table presents the Company's non-performing loans,
foreclosed real estate, repossessed assets, troubled debt restructurings and
impaired loans as of the dates indicated. These categories are not mutually
exclusive; certain loans are included in more than one classification. Purchased
sub-prime auto loans are reflected as non-performing, impaired or restructured
using each individual loan's contractual unpaid principal balance.
June 30, 2000
--------------------------------------------------
Non-performing Impaired Restructured
-------------- -------- ------------
(in millions)
Real Estate:
1-4 unit residential $100 $ 1 $ 1
5+ unit residential 4 30 --
Commercial and other 4 46 --
Land -- -- --
Construction -- -- --
---- ---- ---
Total real estate 108 77 1
Non-real estate 16 23 --
---- ---- ---
Total loans 124 (a) $100 (b) $ 1
==== ===
Foreclosed real estate, net 28
Repossessed assets 6
----
Total non-performing assets $158
====
December 31, 1999
--------------------------------------------------
Non-performing Impaired Restructured
-------------- -------- ------------
(in millions)
Real Estate:
1-4 unit residential $126 $ -- $ 2
5+ unit residential 6 34 5
Commercial and other 8 67 18
Land -- 2 --
Construction -- -- --
---- ---- ---
Total real estate 140 103 25
Non-real estate 11 21 --
---- ---- ---
Total loans 151 (a) $124 (b) $25
==== ===
Foreclosed real estate, net 45
Repossessed assets 4
----
Total non-performing assets $200
====
- --------------
(a) Includes loans securitized with recourse on non-performing status of $2.0
million at December 31, 1999. There are no loans securitized with
recourse on non-performing status at June 30, 2000.
(b) Includes $18.9 million of non-performing loans at both June 30, 2000 and
December 31, 1999. Also includes $10.0 million and $13.7 million of loans
classified as troubled debt restructurings at June 30, 2000 and December
31, 1999, respectively.
There were no accruing loans contractually past due 90 days or more at
June 30, 2000 or December 31, 1999.
The Company's non-performing assets, consisting of nonaccrual loans,
repossessed assets and foreclosed real estate, net, decreased to $158 million at
June 30, 2000, from $200 million at December 31, 1999. Non-performing assets as
a percentage of the Bank's total assets decreased to 0.26% at June 30, 2000,
from 0.35% at December 31, 1999.
Page 36
The Company places a high degree of emphasis on the management of its
asset portfolio. The Company has three distinct asset management functions:
performing loan asset management, problem loan asset management and credit
review. Each of these three functions is charged with the responsibility of
reducing the risk profile within the commercial, multi-family and other asset
portfolios by applying asset management and risk evaluation techniques that are
consistent with the Company's portfolio management strategy and regulatory
requirements. In addition to these asset management functions, the Company has a
specialized credit risk management group that is charged with the development of
credit policies and performing credit risk analyses for all asset portfolios.
The following table presents non-performing real estate assets by
geographic region of the country as of June 30, 2000:
Total
Non-performing Foreclosed Non-performing
Real Estate Real Estate, Real Estate Geographic
Loans, Net (2) Net (2) Assets Concentration
-------------- -------- ------ -------------
(dollars in millions)
Region:
California $ 67 $14 $ 81 60%
Northeast (1) 12 3 15 11
Other regions 29 11 40 29
---- --- ---- ---
Total $108 $28 $136 100%
==== === ==== ===
- -------------
(1) Consists of Connecticut, Massachusetts, New Hampshire, New Jersey, New
York, Pennsylvania, Rhode Island, Delaware, Maine and Vermont.
(2) Net of purchase accounting adjustments.
At June 30, 2000, the Company's largest non-performing asset was
approximately $2.9 million, and it had two non-performing assets over $2 million
in size with balances averaging $2.6 million. At June 30, 2000, the Company had
3,426 non-performing assets below $2 million in size, including 876
non-performing 1-4 unit residential assets.
An allowance is maintained to absorb losses inherent in the loan
portfolio. The adequacy of the allowance is periodically evaluated and is based
on past loan loss experience, known and inherent risks in the loan portfolio,
adverse situations that have occurred but are not yet known that may affect the
borrower's ability to repay, the estimated value of underlying collateral and
economic conditions. Management's methodology for assessing the adequacy of the
allowance includes the evaluation of the following three key elements: the
formula allowance, specific allowances for identified problem loans and the
unallocated allowance.
The formula allowance is determined by applying loss factors against all
non-impaired loans. Loss factors may be adjusted for significant factors that,
in management's judgment, affect the collectibility of the portfolio as of the
evaluation date. Loss factors are calculated based on migration models that
estimate the probability that loans will become delinquent and ultimately result
in foreclosure over a period of between one and 2.5 years, depending on the loan
type, and the rates of loss that have been experienced on foreclosed loans. The
foreclosure migration and loss severity rates are then averaged over the past
eight years in order to capture experience across a period that management
believes approximates a business cycle. A contingency factor is then added to
provide for the modeling risk associated with imprecision in estimating inherent
loan losses.
Page 37
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.
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 June 30, 2000, the allowance for loan losses was $536 million,
consisting of a $379 million formula allowance, a $26 million specific allowance
and a $131 million unallocated allowance.
Although the loan loss allowance has been allocated by type of loan for
internal valuation purposes, $510 million of the allowance is general in nature
and is available to support any losses which may occur, regardless of type, in
the Company's loan portfolio. A summary of the activity in the total allowance
for loan losses by loan type is as follows:
5+ Unit
Residential
1 - 4 Unit and Commercial Consumer
Residential Real Estate and Other Total
----------- ----------- --------- -----
(in millions)
Balance - December 31, 1999 $235 $276 $44 $555
Provision for loan losses -- (1) 1 --
Charge-offs (2) (4) (7) (13)
Recoveries -- -- 1 1
---- ---- --- ----
Balance - March 31, 2000 233 271 39 543
Provision for loan losses -- (1) 1 --
Charge-offs (2) (2) (4) (8)
Recoveries -- -- 1 1
---- ---- --- ----
Balance - June 30, 2000 $231 $268 $37 $536
==== ==== === ====
Page 38
ASSET AND LIABILITY MANAGEMENT
Banks and savings associations are subject to interest rate risk to the
degree that their interest-bearing liabilities, consisting principally of
deposits, securities sold under agreements to repurchase and FHLB advances,
mature or reprice more or less frequently, or on a different basis, than their
interest-earning assets. A key element of the banking business is the monitoring
and management of liquidity risk and interest rate risk. The process of planning
and controlling asset and liability mixes, volumes and maturities to influence
the net interest spread is referred to as asset and liability management. The
objective of the Company's asset and liability management is to maximize its net
interest income over changing interest rate cycles within the constraints
imposed by prudent lending and investing practices, liquidity needs and capital
planning.
GS Holdings, through the Bank, actively pursues investment and funding
strategies intended to minimize the sensitivity of its earnings to interest rate
fluctuations. The Company measures the interest rate sensitivity of its balance
sheet through gap and duration analysis, as well as net interest income and
market value simulation. After taking into consideration both the variability of
rates and the maturities of various instruments, it evaluates strategies which
may reduce the sensitivity of its earnings to interest rate and market value
fluctuations. An important decision is the selection of interest-bearing
liabilities and the generation of interest-earning assets which best match
relative to interest rate changes. In order to reduce interest rate risk by
increasing the percentage of interest sensitive assets, the Company has
continued its emphasis on the origination of adjustable rate mortgage ("ARM")
products for its portfolio. Where possible, the Company seeks to originate real
estate and other loans that reprice frequently. At June 30, 2000, approximately
78% of the Company's loan portfolio consisted of ARMs.
One of the most important sources of the Bank's net income is net
interest income, which is the difference between the combined yield earned on
interest-earning assets and the combined rate paid on interest-bearing
liabilities. Net interest income is also dependent on the relative balances of
interest-earning assets and interest-bearing liabilities.
ARMs have, from time to time, been offered with low initial interest
rates as marketing inducements. In addition, most ARMs are subject to periodic
interest rate adjustment caps or floors. In a period of rising interest rates,
ARMs could reach a periodic adjustment cap while still at a rate significantly
below their contractual margin over existing market rates. Since repricing
liabilities are typically not subject to such interest rate adjustment
constraints, the Company's net interest margin would most likely be negatively
impacted in this situation. Certain ARMs now offered by the Company have a fixed
monthly payment for a given period, with any changes as a result of market
interest rates reflected in the unpaid principal balance through negative
amortization.
A traditional measure of interest rate risk within the savings industry
is the interest rate sensitivity gap, which is the sum of all interest-earning
assets minus the sum of all interest-bearing liabilities to be repriced within
the same period. A gap is considered positive when the amount of interest rate
sensitive assets exceed interest rate sensitive liabilities, while the opposite
results in a negative gap. During a period of rising interest rates, a negative
gap would tend to adversely affect net interest income, and a positive gap would
tend to result in an increase in net interest income. During a period of falling
rates, the opposite would tend to occur.
Page 39
The following table sets forth the projected maturities based upon
contractual maturities as adjusted for projected prepayments and "repricing
mechanisms" (provisions for changes in the interest rates of assets and
liabilities). Prepayment rates are assumed in each period on substantially all
of the Company's loan portfolio based upon expected loan prepayments. Repricing
mechanisms on the Company's assets are subject to limitations, such as caps on
the amount that interest rates and payments on its loans may adjust.
Accordingly, such assets may not respond in the same manner or to the same
extent to changes in interest rates as the Company's liabilities. In addition,
the interest rate sensitivity of the assets and liabilities illustrated in the
table would vary substantially if different assumptions were used or if actual
experience differed from the assumptions set forth. The Company's estimated
interest rate sensitivity gap at June 30, 2000 was as follows:
Maturity/Rate Sensitivity
-----------------------------------------------------------------
Within 1 - 5 Over 5 Noninterest
1 Year Years Years Bearing Total
------ ----- ----- ------- -----
(dollars in millions)
INTEREST-EARNING ASSETS:
Interest-bearing deposits in other banks
and short-term investment
securities (1) (2) $ 84 $ -- $ -- $ -- $ 84
Securities held to maturity (1) 76 190 343 -- 609
Securities available for sale (3) 623 -- -- -- 623
Mortgage-backed securities
available for sale (3) 11,314 -- -- -- 11,314
Mortgage-backed securities
held to maturity (1) (4) 2,039 349 629 -- 3,017
Loans held for sale, net (3) 796 -- -- -- 796
Loans receivable, net (1) (5) 20,830 13,150 4,826 -- 38,806
Investment in FHLB 1,315 -- -- -- 1,315
------- -------- ------ ------ -------
Total interest-earning assets 37,077 13,689 5,798 -- 56,564
Noninterest-earning assets -- -- -- $3,944 3,944
------- -------- ------ ------ -------
$37,077 $ 13,689 $5,798 $3,944 $60,508
======= ======== ====== ====== =======
INTEREST-BEARING LIABILITIES:
Deposits (6) $20,944 $ 2,321 $ 3 $ -- $23,268
Securities sold under agreements to
repurchase 5,410 200 -- -- 5,610
FHLB advances (1) 14,590 11,325 -- -- 25,915
Other borrowings (1) 175 2,001 92 -- 2,268
------- -------- ------ ------ -------
Total interest-bearing liabilities 41,119 15,847 95 -- 57,061
Noninterest-bearing liabilities -- -- -- 1,021 1,021
Minority interest -- -- -- 500 500
Stockholder's equity -- -- -- 1,926 1,926
------- -------- ------ ------ -------
$41,119 $ 15,847 $ 95 $3,447 $60,508
======= ======== ====== ====== =======
Gap before interest rate swap agreements $(4,042) $ (2,158) $5,703 $ (497)
Interest rate swap agreements 3,400 (2,500) (900) --
------- -------- ------
Gap $ (642) $ (4,658) $4,803 $ (497)
======= ======== ====== =======
Cumulative gap $ (642) $ (5,300) $ (497) $ (497)
======= ======== ====== =======
Gap as a percentage of total assets (1.06)% (7.70)% 7.94% (0.82)%
===== ===== ===== =====
Cumulative gap as a percentage of total assets (1.06)% (8.76)% (0.82)% (0.82)%
===== ===== ===== =====
(Continued)
Page 40
(1) Based upon (a) contractual maturity, (b) instrument repricing date, if
applicable, and (c) projected repayments and prepayments of principal, if
applicable. Prepayments were estimated generally by using the prepayment
rates forecast by various large brokerage firms as of June 30, 2000. The
actual maturity and rate sensitivity of these assets could vary
substantially if future prepayments differ from prepayment estimates.
(2) Consists of $84 million of short-term investment securities and less than
$0.1 million of interest-bearing deposits in other banks.
(3) As securities and mortgage-backed securities available for sale and loans
held for sale may be sold within one year, they are considered to be
maturing within one year.
(4) Excludes underlying non-performing loans of $1 million.
(5) Excludes allowance for loan losses of $536 million and non-performing
loans of $122 million, net of $10 million related to specific allowances.
(6) Fixed rate deposits and deposits with fixed pricing intervals are
reflected as maturing in the year of contractual maturity or first
repricing date. Money market deposit accounts, demand deposit accounts
and passbook accounts are reflected as maturing within one year.
At June 30, 2000, GS Holdings' cumulative gap totalled ($497) million. At
December 31, 1999, GS Holdings' cumulative gap totalled ($693) million.
The Company utilizes computer modeling, under various interest rate
scenarios, to provide a dynamic view of the effects of the changes in rates,
spreads, and yield curve shifts on net interest income. However, the
maturity/rate sensitivity analysis is a static view of the balance sheet with
assets and liabilities grouped into certain defined time periods, and only
partially depicts the dynamics of the Company's sensitivity to interest rate
changes. Therefore, this analysis may not fully describe the complexity of
relationships between product features and pricing, market rates and future
management of the balance sheet mix.
The Company's risk management policies are established by the
Asset/Liability Management Committee ("ALCO") of the Bank. ALCO meets monthly to
formulate the Bank's investment and risk management strategies. The basic
responsibilities of ALCO include management of net interest income and market
value of portfolio equity to measure the stability of earnings, management of
liquidity to provide adequate funding, and the establishment of asset product
priorities by formulating performance evaluation criteria, risk evaluation
techniques and a system to standardize the analysis and reporting of
originations, competitive trends, profitability and risk. On a quarterly basis,
the Board of Directors of the Bank is apprised of ALCO strategies adopted and
their impact on operations, and, at least annually, the Board of Directors of
the Bank reviews the Bank's interest rate risk management policy statements.
LIQUIDITY
The standard measure of liquidity in the savings industry is the ratio of
cash and short-term U.S. Government securities and other specified securities to
deposits and borrowings due within one year. The OTS established a minimum
liquidity requirement for the Bank of 4.00%. California Federal has been in
compliance with the liquidity regulations during the six months ended June 30,
2000 and the year ended December 31, 1999.
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 cash flow needs, including paying
dividends on its preferred stock owned by the Company, and may be distributed,
subject to certain restrictions, to GS Holdings. In turn, GS Holdings uses
distributions received from the Bank primarily to meet debt service
requirements, pay any expenses it may incur, and make distributions to Golden
State, subject to certain restrictions. For more information on dividend
restrictions for the Bank and GS Holdings, refer to "Business - Regulation and
Supervision" and note 26 of the "Notes to Consolidated Financial Statements" in
the Company's 1999 Form 10-K.
Page 41
On a consolidated basis, a major source of the Company's funding is
expected to be the Bank's retail deposit branch network, which management
believes will be sufficient to meet its long-term liquidity needs. The ability
of the Company to retain and attract new deposits is dependent upon the variety
and effectiveness of its customer account products, customer service and
convenience, and rates paid to customers. The Company also obtains funds from
the repayment and maturities of loans and mortgage-backed securities, while
additional funds can be obtained from a variety of other sources, including
customer and brokered deposits, loan sales, securities sold under agreements to
repurchase, FHLB advances, and other secured and unsecured borrowings. It is
anticipated that FHLB advances and securities sold under agreements to
repurchase will continue to be important sources of funding, and management
expects there to be adequate collateral for such funding requirements.
Interest on the GS Holdings Notes approximates $138.9 million per year.
Although GS Holdings expects that distributions and tax sharing payments from
the Bank will be sufficient to make required interest and principal payments,
there can be no assurance that earnings from the Bank will be sufficient to make
such distributions to GS Holdings. In addition, there can be no assurance that
such distributions will be permitted by the terms of any debt instruments of GS
Holdings' subsidiaries then in effect, by the terms of any class of preferred
stock issued by the Bank or its subsidiaries, including the REIT Preferred
Stock, or under applicable federal thrift laws.
The Company anticipates that cash and cash equivalents on hand, the cash
flows from assets as well as other sources of funds will provide adequate
liquidity for its operating, investing and financing needs and the Bank's
regulatory liquidity requirements for the foreseeable future. In addition to
cash and cash equivalents of $691.6 million at June 30, 2000, the Company has
substantial additional borrowing capacity with the FHLB and other sources.
The consolidated Company's primary uses of funds are the origination or
purchase of loans, the purchase of mortgage-backed securities, the funding of
maturing certificates of deposit, demand deposit withdrawals and the repayment
of borrowings. Certificates of deposit scheduled to mature during the twelve
months ending June 30, 2001 aggregate $10.0 billion. The Company may renew these
certificates, attract new replacement deposits, replace such funds with other
borrowings, or it may elect to reduce the size of the balance sheet. In
addition, at June 30, 2000, GS Holdings had FHLB advances, securities sold under
agreements to repurchase and other borrowings aggregating $20.2 billion maturing
or repricing within twelve months. The Company may elect to pay off such debt or
to replace such borrowings with additional FHLB advances, securities sold under
agreements to repurchase or other borrowings at prevailing rates.
As presented in the accompanying unaudited consolidated statements of
cash flows, the sources of liquidity vary between periods. The primary sources
of funds during the six months ended June 30, 2000 were $20.1 billion in
proceeds from additional borrowings, $2.2 billion in proceeds from sales of
loans held for sale, $1.1 billion in principal payments on mortgage-backed
securities available for sale and held to maturity, and $480.2 million in
proceeds from sales of mortgage-backed securities available for sale. The
primary uses of funds were $17.5 billion in principal payments on borrowings, a
$3.3 billion net increase in loans receivable, $2.3 billion in purchases and
originations of loans held for sale, $811.7 million in purchases of loans
receivable and $379.3 million for the Downey Acquisition.
MORTGAGE BANKING OPERATIONS
During the six months ended June 30, 2000 and 1999, the Company, through
the Bank's wholly owned mortgage bank subsidiary, FNMC, acquired
mortgage-servicing rights on loan portfolios of $8.1 billion and $9.3 billion,
respectively. The 1-4 unit residential loans serviced for others (including
loans sub-serviced for others and excluding loans serviced for the Bank)
totalled $78.6 billion at June 30, 2000, an increase of $5.7 billion and $9.4
billion from December 31, 1999 and June 30, 1999, respectively. During the six
months ended June 30, 2000 and 1999, the Bank, through FNMC, originated $7.4
billion and $9.6 billion, respectively, and sold (generally with servicing
retained) $2.2 billion and $5.8 billion, respectively, of 1-4 unit residential
loans. Gross revenues from mortgage loan servicing activities for the six months
ended June 30, 2000 totalled $158.3 million, an increase of $17.4 million from
the six months ended June 30, 1999. Gross loan servicing fees for the six months
ended June 30, 2000 were reduced by $97.2 million of amortization of servicing
rights to arrive at net loan servicing fees of $61.0 million.
Page 42
A decline in long-term interest rates generally results in an
acceleration of mortgage loan prepayments. Higher than anticipated levels of
prepayments generally cause the accelerated amortization of mortgage servicing
rights ("MSRs"), and generally will result in a reduction in the market value of
MSRs and in the Company's servicing fee income. To reduce the sensitivity of its
earnings to interest rate and market value fluctuations, the Company hedged the
change in value of its MSRs based on changes in interest rates ("MSR Hedge").
The Company owned several derivative instruments at June 30, 2000 which
were used to hedge against prepayment risk in its mortgage servicing portfolio.
These derivative instruments included Constant Maturity Swap interest rate floor
contracts, swaptions and principal only swaps. The estimated fair value of all
derivatives used to hedge prepayment risk was $33.0 million at June 30, 2000.
The interest rate floor contracts had a notional amount of $1.2 billion, strike
rates between 5.70% and 7.62%, mature in the years 2004 and 2005, and had an
estimated fair value of $18.2 million at June 30, 2000. Premiums paid to
counterparties in exchange for cash payments when the 10-year Constant Maturity
Swap rate falls below the strike rate are recorded as part of the MSR asset on
the balance sheet. The swaption contracts had a notional amount of $1.1 billion,
strike rates between 6.75% and 7.88%, expire in the years 2002 and 2003, and had
an estimated fair value of $26.7 million at June 30, 2000. Premiums paid to
counterparties in exchange for the right to enter into an interest rate swap are
recorded as part of the MSR asset on the balance sheet. Principal only swap
agreements had notional amounts of $198.3 million and an estimated fair value of
$(11.8) million at June 30, 2000.
The following is a summary of activity in MSRs and the MSR Hedge for the
six months ended June 30, 2000 (in millions):
Total MSR
MSRs MSR Hedge Balance
---- --------- -------
Balance at December 31, 1999 $1,232 $40 $1,272
Additions - purchases 178 -- 178
Originated servicing 55 -- 55
Swaption sales (4) (8) (12)
Servicing Sale/Transfer (1) -- (1)
Floor sales (1) (4) (5)
Premiums paid -- 25 25
Payments made to counterparties, net 6 -- 6
Amortization (90) (7) (97)
------ --- ------
Balance at June 30, 2000 $1,375 $46 $1,421
====== === ======
Capitalized MSRs are amortized in proportion to, and over the period of,
estimated net servicing income. SFAS No. 125 requires enterprises to measure the
impairment of MSRs based on the difference between the carrying amount of the
MSRs and their current fair value. At June 30, 2000 and December 31, 1999, no
allowance for impairment of the MSRs was necessary.
CAPITAL RESOURCES
OTS capital regulations require savings associations to satisfy three
minimum capital requirements: tangible capital, core (leverage) capital, and
risk-based capital.
TANGIBLE CAPITAL. Tangible capital is the sum of common 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.
CORE CAPITAL. Core capital generally is the sum of tangible capital plus
certain other qualifying intangibles. Under the leverage requirement, a savings
association is required to maintain core capital equal to a minimum of 4% of
adjusted total assets.
Page 43
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.
At June 30, 2000, the Bank's regulatory capital levels exceeded the
minimum regulatory capital requirements, with tangible, core and risk-based
capital ratios of 6.06%, 6.06% and 12.95%, respectively. The following is a
reconciliation of the Bank's stockholder's equity to regulatory capital as of
June 30, 2000:
Tangible Coree Risk-based
Capital Capital Capital
------- ------- -------
(dollars in millions)
Stockholder's equity of the Bank $ 3,849 $ 3,849 $ 3,849
Minority interest - REIT Preferred Stock 500 500 500
Unrealized holding loss on securities, net 283 283 283
Non-allowable capital:
Intangible assets (745) (745) (745)
Goodwill Litigation Assets (159) (159) (159)
Investment in non-includable subsidiaries (60) (60) (60)
Excess deferred tax asset (38) (38) (38)
Supplemental capital:
Qualifying subordinated debentures -- -- 93
General loan loss allowance -- -- 397
Assets required to be deducted:
Land loans with more than 80% LTV ratio -- -- (4)
Equity in subsidiaries -- -- (6)
Low-level recourse deduction -- -- (10)
------- ------- -------
Regulatory capital of the Bank 3,630 3,630 4,100
Minimum regulatory capital requirement 898 2,395 2,533
------- ------- -------
Excess above minimum capital requirement $ 2,732 $ 1,235 $ 1,567
======= ======= =======
Regulatory capital of the Bank 6.06% 6.06% 12.95%
Minimum regulatory capital requirement 1.50 4.00 8.00
---- ---- -----
Excess above minimum capital requirement 4.56% 2.06% 4.95%
==== ==== =====
The amount of adjusted total assets used for the tangible and leverage
capital ratios is $59.9 billion. Risk-weighted assets used for the risk-based
capital ratio amounted to $31.7 billion.
Page 44
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 June 30, 2000. The Bank is not
presently subject to any enforcement action or other regulatory proceeding with
respect to the prompt corrective action regulation.
At June 30, 2000, the Bank's capital levels were sufficient for it to be
considered "well capitalized," as presented below.
Risk-based
Leverage ---------------------------
Capital Tier 1 Total Capital
------- ------ -------------
Regulatory capital of the Bank 6.06% 11.44% 12.95%
"Well capitalized" ratio 5.00 6.00 10.00
---- ----- -----
Excess above "well capitalized" ratio 1.06% 5.44% 2.95%
==== ===== =====
OTS capital regulations allow a savings association to include a net
deferred tax asset in regulatory capital, subject to certain limitations. To the
extent that the realization of a deferred tax asset depends on a savings
association's future taxable income, such deferred tax asset is limited for
regulatory capital purposes to the lesser of the amount that can be realized
within one year or 10 percent of core capital. At June 30, 2000, $38 million of
the net tax benefit was determined to be attributable to the amount of taxable
income that may be realized in periods beyond one year. Accordingly, such amount
has been excluded from the Bank's regulatory capital at June 30, 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in reported market risks faced by GS
Holdings since the Company's report in Item 7A of its Form 10-K for the year
ended December 31, 1999.
Page 45
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Goodwill Litigation Against the Government
On April 9, 1999, the Claims Court issued its decision on a claim by the
Bank against the United States Government (the "Government") in the lawsuit,
GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK V. UNITED STATES, Civil Action No.
90-772-C (the "Glendale Goodwill Litigation"), ruling that the Government must
compensate the Bank in the sum of $908.9 million. This decision was appealed by
the Government and the Bank. After all appellate briefs were filed by both the
Government and the Bank, oral argument on the appeal took place in conjunction
with the argument in the California Federal Goodwill Litigation (as defined
herein) on July 7, 2000.
On April 16, 1999, the Claims Court issued its decision on a claim by the
Bank against the Government in the lawsuit, CALIFORNIA FEDERAL BANK V. UNITED
STATES, Civil Action No. 92-138C (the "California Federal Goodwill Litigation"),
ruling that the Government must compensate the Bank in the sum of $23.0 million.
The summary judgment liability decision by the first Claims Court Judge has been
appealed by the Government and the damage award by the second Claims Court Judge
has been appealed by the Bank. After all appellate briefs were filed, oral
argument in the Federal Circuit Court of Appeals took place in conjunction with
the appellate argument in the Glendale Goodwill Litigation on July 7, 2000.
In each of the Glendale Goodwill Litigation and the California Federal
Goodwill Litigation, it is alleged, among other things, that the United States
breached certain contractual commitments regarding the computation of its
regulatory capital for which each of Glendale Federal and California Federal
seek damages and restitution. The claims arose from changes made by the
Financial Institutions Reform, Recovery and Enforcement Act of 1989 and its
implementing regulations ("FIRREA") with respect to the rules for computing
regulatory capital.
OTHER LITIGATION
In addition to the matters described above, Golden State and its
subsidiaries are involved in other legal proceedings on claims incidental to the
normal conduct of their business. Although it is impossible to predict the
outcome of any outstanding legal proceedings, management believes that such
legal proceedings and claims, individually or in the aggregate, will not have a
material effect on GS Holdings or the Bank.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
Page 46
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3.1 Certificate of Incorporation of the Registrant, as amended.
(Incorporated by reference to Exhibit 3.1 to the Registrant's
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 of the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998.)
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
Page 47
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Golden State Holdings Inc.
/s/ Richard H. Terzian
--------------------------
By: Richard H. Terzian
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
/s/ Renee Nichols Tucei
--------------------------
By: Renee Nichols Tucei
Executive Vice President and Controller
(Principal Accounting Officer)
August 9, 2000
Page 48