UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 333-64597
GOLDEN STATE HOLDINGS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4669792
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
135 MAIN STREET, SAN FRANCISCO, CALIFORNIA 94105
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 415-904-1100
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: N/A
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: N/A
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [Not applicable.]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of the close of business on February 28, 2001: N/A.
The number of shares outstanding of the registrant's $1.00 par value common
stock, as of the close of business on February 28, 2001: 1,000 shares of common
stock.
DOCUMENTS INCORPORATED BY REFERENCE:
None
Registrant meets the conditions set forth in General Instruction (I) (1) (a)
and (b) of Form 10-K and is therefore filing this Form with certain reduced
disclosures, as permitted by General Instruction (I) (2).
Page 1
GOLDEN STATE HOLDINGS INC.
2000 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
PART I
ITEM 1. Business..........................................................3
General....................................................3
Employees..................................................5
Competition................................................5
Regulation and Supervision.................................6
ITEM 2. Properties.......................................................10
ITEM 3. Legal Proceedings................................................11
ITEM 4. Submission of Matters to a Vote of Security Holders...............*
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters.......................................13
ITEM 6. Selected Financial Data...........................................*
ITEM 7. Management's Narrative Analysis of Results of Operations.........14
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.......21
ITEM 8. Financial Statements and Supplementary Data......................22
ITEM 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure....................22
PART III
ITEM 10. Directors and Executive Officers of the Registrant................*
ITEM 11. Executive Compensation............................................*
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management.............................................*
ITEM 13. Certain Relationships and Related Transactions....................*
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K...............................................23
Table of Defined Terms.....................................................27
Signatures.................................................................29
Audited Financial Statements..............................................F-1
* Items 4, 6, 10, 11, 12 and 13 are not included as per conditions met by
Registrant set forth in General Instructions I (1) (a) and (b) of Form 10-K.
Golden State Holdings Inc. is a wholly owned subsidiary of Golden State
Bancorp Inc. For more information, refer to Golden State Bancorp Inc.'s
Annual Report on Form 10-K for the year ended December 31, 2000.
Page 2
FORWARD-LOOKING STATEMENTS. THIS REPORT CONTAINS FORWARD-LOOKING
STATEMENTS, WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995, THAT PERTAIN TO OUR FUTURE OPERATING RESULTS. WORDS SUCH AS
"ANTICIPATE," "BELIEVE," "EXPECT," "INTEND" AND OTHER SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY THESE STATEMENTS. FORWARD-LOOKING STATEMENTS ARE NOT
HISTORICAL FACTS AND ARE INHERENTLY SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC
AND COMPETITIVE UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND OUR
CONTROL. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE IN THE
FORWARD-LOOKING STATEMENTS DUE TO SUCH FACTORS AS (I) PORTFOLIO CONCENTRATIONS;
(II) INTEREST RATE CHANGES, INCLUDING CHANGES IN SHORT-TERM INTEREST RATES, THE
SHAPE OF THE YIELD CURVE AND THE TREASURY-EURODOLLAR SPREAD; (III) CHANGES IN
ASSET PREPAYMENT SPEEDS; (IV) CHANGES IN OUR COMPETITIVE AND REGULATORY
ENVIRONMENTS; AND (V) CHANGES IN THE AVAILABILITY OF NET OPERATING LOSS
CARRYOVERS AND DEFERRED TAX LIABILITIES. IN NOVEMBER 2000, GOLDEN STATE BANCORP
INC. FILED AN S-3 REGISTRATION STATEMENT WITH THE SEC THAT DISCUSSES THESE
FACTORS IN GREATER DETAIL. WE ASSUME NO OBLIGATION TO UPDATE ANY OF OUR
FORWARD-LOOKING STATEMENTS.
A table of defined terms appears on page 27.
PART I
ITEM 1. BUSINESS
GENERAL
GS Holdings, a wholly owned subsidiary of Golden State, is a holding
company whose only significant asset is all of the common and preferred stock of
California Federal. GS Holdings was formed to acquire all of the assets of FN
Holdings (including all of the common and preferred stock of the Bank) as part
of the Golden State Acquisition. FN Holdings was a holding company whose only
significant asset was all the common stock of the Bank. As such, the principal
business operations of FN Holdings were, and the principal business operations
of GS Holdings are, primarily carried out by the Bank and its operating
subsidiaries.
The Company, which is headquartered in San Francisco, California, provides
diversified financial services to consumers and small businesses in California
and Nevada. The Company's principal business consists of operating retail
branches that provide deposit products such as demand, transaction and savings
accounts, and selling investment products such as mutual funds, annuities and
insurance. In addition, it engages in mortgage banking activities, including
originating and purchasing 1-4 unit residential loans for sale to various
investors in the secondary market or for retention in its own portfolio, and
servicing loans for itself and others. To a lesser extent, the Company
originates and/or purchases commercial real estate, commercial and consumer
loans for investment. These operating activities are financed principally with
customer deposits, secured short-term and long-term borrowings, including FHLB
advances, collections on loans, asset sales and retained earnings. Refer to note
24 of the Company's Notes to Consolidated Financial Statements for additional
information about the Company's business segments.
The Bank is chartered as a federal stock savings bank under the HOLA. It is
regulated by the OTS and the FDIC, which insures the deposit accounts of the
Bank up to applicable limits through the SAIF. The Bank is also a member of the
FHLB System. The Bank has three principal subsidiaries: (a) FNMC, its mortgage
banking subsidiary; (b) Auto One, which engages in indirect prime and sub-prime
auto financing activities; and (c) CFI, which offers securities and insurance
products to both existing and prospective customers of the Company. CFI is
subject to the guidelines established by the OTS for broker-dealer subsidiaries
of savings associations, and is a member of the National Association of
Securities Dealers. In addition, CFI is registered as a broker-dealer with the
Securities and Exchange Commission and is a member of the Securities Investor
Protection Corporation. CFI receives commission revenue for acting as a
broker-dealer on behalf of its customers, but CFI does not maintain customer
accounts or take possession of customer securities.
Page 3
The Company's revenues are derived 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
administrative expenses.
As of December 31, 2000, the Company had total assets of $60.5 billion,
deposits of $23.5 billion and operated 354 retail branch offices in California
and Nevada.
OWNERSHIP STRUCTURE
All of the common stock of the Company is held by Golden State. Prior to
the Golden State Acquisition, Parent Holdings owned 80% of the common stock of
FN Holdings, and Hunter's Glen, a limited partnership controlled by Gerald J.
Ford, Chairman of the Board, Chief Executive Officer and a Director of the
Company, owned 20% of the common stock of FN Holdings. Parent Holdings was
indirectly owned by Mafco Holdings, a corporation controlled by Ronald O.
Perelman, a Director of the Company. Pursuant to the Golden State Acquisition,
Parent Holdings was merged into Golden State and FN Holdings was merged into GS
Holdings. In consideration thereof, Golden State issued 41,067,270 shares of
common stock to a subsidiary of Mafco Holdings that directly owned Parent
Holdings and 15,655,718 shares of common stock to Hunter's Glen which, in the
aggregate, constituted 47.9% of the common stock outstanding, immediately after
giving effect to the Golden State Acquisition. Subsequent to the Golden State
Acquisition, Mafco Holdings caused the 41,067,270 shares to be transferred to
another of its indirectly owned subsidiaries, GSB Investments. In addition, the
Golden State Merger agreement provided that Mafco Holdings and Hunter's Glen, or
their successors, were entitled to receive additional shares of common stock
under certain circumstances, which could cause the actual ownership percentages
of Mafco Holdings and Hunter's Glen to change.
In addition to its common stock ownership of the Bank, GS Holdings owns all
of the Bank Preferred Stock with a total liquidation preference of $473.2
million, representing approximately 7% of the total voting power of voting
securities of the Bank. Immediately prior to the consummation of the Golden
State Acquisition, the charter of the Bank was amended to provide that each
share of Bank Preferred Stock is entitled to one vote, and each CALGZ and each
CALGL has 1/5 of one vote with the holders of the common stock of the Bank, the
Bank Preferred Stock, the CALGZs and the CALGLs voting together as a single
class. In addition, after giving effect to a stock split of the common stock of
the Bank, GS Holdings' ownership of 100% of the common stock represents
approximately 90% of the total voting power of voting securities of the Bank.
BUSINESS STRATEGY
Merger, acquisition, and divestiture activities have played a major role in
the Company's business strategy for the past several years. (Refer to note 3 of
the Company's Notes to Consolidated Financial Statements for specific
information about these mergers, acquisitions, and divestitures.) The Company's
business strategy has been executed through three types of transactions:
o Acquisitions which complemented the Company's geographic and business
line strategies;
o Divestitures of branches outside the Company's primary geographic region;
and
o Expansion of the Company's mortgage servicing operations.
These transactions have expanded and strengthened the Company's presence on
the West Coast, providing additional economies of scale and diversity of
operations within its target markets. The Company believes that its strategic
acquisition and divestiture activity has enhanced the value of its franchise and
improved its operating efficiency through the consolidation or elimination of
duplicative back office operations and administrative and management functions.
Further, because the Company had excess servicing capacity and existing
servicing expertise, it was able to accommodate the loan servicing portfolios
acquired in these transactions without the need for significant additional
investment.
Page 4
The Company's current strategic plan aims at achieving increased
profitability, revenue diversity and growth while preserving credit quality. Key
elements of the business plan include:
o California Federal intends to maintain its core competencies, including
firm expense control and operating efficiency, risk management
discipline and effective capital management.
o California Federal plans to continue to improve profitability as it
continues its transition to a more "bank like" institution. This plan
contemplates an increase in demand deposit and transaction accounts,
as well as growth of various retail and commercial products. In
addition, the Bank intends to focus on increasing its percentage of
non-single family residential loans.
o The Company expects to continue to build franchise value by focusing on
customer service and cross-selling opportunities, enhanced product
offerings and improved channel delivery. The Company intends to seek
to maintain its mortgage banking efficiency while reducing the costs
to service each account. In addition, the Bank intends to continue its
strong and prudent growth of its core banking businesses including the
sale of mutual funds and insurance annuity products, commercial
banking, and auto, home equity and commercial real estate lending.
o California Federal may make opportunistic acquisitions of other
companies or business lines which complement the Bank and where
efficiencies and economies of scale could be realized to produce
higher returns on investment.
EMPLOYEES
GS Holdings has no employees. At December 31, 2000, California Federal and
its subsidiaries had 8,424 employees, compared with 8,082 employees at December
31, 1999. The Company's employees are not represented by any collective
bargaining group and management considers its relations with its employees to be
good. The Company provides a comprehensive employee benefits program including
health and welfare benefits, long and short-term disability insurance, and life
insurance. The Company also offers employees a defined contribution investment
plan which is a qualified plan under Section 401(a) of the Internal Revenue
Code.
COMPETITION
The Company experiences significant competition in both attracting and
retaining deposits and in originating real estate and consumer loans. The
Company, through the Bank, competes with other savings associations, commercial
banks, mortgage banking companies, finance companies, insurance companies,
credit unions, money market mutual funds and brokerage firms in attracting and
retaining deposits. Competition for deposits from large commercial banks and
savings associations is particularly strong. Commercial banks and other savings
associations have a significant number of branch offices in the areas in which
the Company operates.
In addition, there is strong competition in originating and purchasing real
estate and consumer loans, principally from other savings associations,
commercial banks, mortgage banking companies, insurance companies, consumer
finance companies, pension funds and commercial finance companies. The primary
factors in competing for loans are the quality and extent of service to
borrowers and brokers, economic factors such as interest rates, interest rate
caps, rate adjustment provisions, loan maturities, LTV ratios, loan fees and the
amount of time it takes to process a loan from receipt of the loan application
to date of funding. The Company's future performance will depend on its ability
to originate a sufficient volume of mortgage loans in its local market areas and
through its wholesale network and, if it is unable to originate a sufficient
volume of mortgage loans, to purchase a sufficient quantity of high-quality
mortgage-backed securities or loans with adequate yields. There can be no
assurance that the Company will be able to effect such actions on satisfactory
terms.
Page 5
REGULATION AND SUPERVISION
GENERAL
GS Holdings is a savings and loan holding company within the meaning of the
HOLA and, as such, is registered with the OTS and is subject to comprehensive
OTS regulation. The Bank is a federally chartered and insured stock savings bank
subject to extensive regulation and supervision by the OTS, as the primary
federal regulator of savings associations, and to a lesser degree, the FDIC.
The federal banking laws contain numerous provisions affecting various
aspects of the business and operations of savings associations and savings and
loan holding companies. The primary purpose of the statutory and regulatory
scheme is to protect depositors, the financial institutions, and the financial
system as a whole. The following description is qualified in its entirety by
references to the particular statutory or regulatory provisions or proposals. It
is not intended to be a complete description of these provisions or their
effects on GS Holdings or the Bank.
REGULATION OF GS HOLDINGS
HOLDING COMPANY ACTIVITIES
GS Holdings is registered and qualified as a unitary savings and loan
holding company. As such, it is regularly examined by and files periodic reports
with the OTS. Generally, there are few restrictions on the activities of a
unitary savings and loan holding company and its non-savings association
subsidiaries. If GS Holdings ceases to be a unitary savings and loan holding
company, by, for example, acquiring another savings association that is not
merged with the Bank in a non-supervisory transaction, the activities of GS
Holdings and its non-savings association subsidiaries would thereafter be
subject to substantial restrictions.
HOLDING COMPANY ACQUISITIONS
The HOLA and OTS regulations generally require that a savings and loan
holding company obtain OTS approval before acquiring, directly or indirectly,
the ownership or control of any other savings association or savings and loan
holding company, or substantially all of the assets or more than 5% of the
voting shares thereof. These provisions also require OTS approval before any
director or officer of a savings and loan holding company, or any individual who
owns or controls more than 25% of the voting shares of such holding company,
acquires control of any savings association not a subsidiary of such savings and
loan holding company.
Under prior law, any company, regardless of the nature of the business in
which it was engaged, could qualify as a unitary savings and loan holding
company. Legislation enacted in 1999 provided that any company engaged in
activities not permitted for a financial holding company under the Bank Holding
Company Act would no longer qualify as a unitary savings and loan holding
company. Existing unitary savings and loan holding companies engaged in
non-financial related activities were "grandfathered" and may continue to engage
in such activities. However, such rights are not transferable to any other
company not otherwise qualified to own or control a savings association.
REGULATION OF THE BANK
REGULATORY SYSTEM
As a federal savings bank, lending activities and other investments of the
Bank must comply with various statutory and regulatory requirements. California
Federal is regularly examined by the OTS and must file periodic reports
concerning its activities and financial condition. Although the OTS is the
Bank's primary regulator, the FDIC has "backup enforcement authority" over the
Bank as the insurer (through the SAIF) of the Bank's deposit accounts.
Page 6
LIQUID ASSETS
Under OTS regulations, for each calendar quarter, a savings association is
required to maintain an average daily balance of liquid assets (including cash,
certain time deposits and savings accounts, bankers' acceptances, certain
government obligations and certain other investments) not less than a specified
percentage of the average daily balance of its net withdrawable accounts plus
short-term borrowings (its liquidity base) during the preceding calendar month.
This liquidity requirement was 4% during each of the years 2000, 1999 and 1998.
The liquidity requirement may be changed by the OTS to any amount between 4% and
10% depending upon certain factors. The Bank has maintained liquid assets in
compliance with the regulations in effect throughout 2000, 1999 and 1998.
REGULATORY CAPITAL REQUIREMENTS
OTS capital regulations require savings associations to satisfy minimum
capital standards: an 8% risk-based capital requirement, a 4% leverage capital
requirement and a 1.5% tangible capital requirement. Savings associations must
meet each of these standards in order to be deemed in compliance with OTS
capital requirements. In addition, the OTS may require a savings association to
maintain capital above the minimum capital levels. A savings association's
failure to maintain capital at or above the minimum capital requirements may be
deemed an unsafe and unsound practice and may subject the savings association to
enforcement actions and other proceedings.
The Bank currently satisfies all applicable regulatory capital requirements
and is not presently subject to any enforcement action or other regulatory
proceeding with respect to its compliance with regulatory capital requirements.
PROMPT CORRECTIVE ACTION
The prompt corrective action regulation of the OTS, promulgated under the
FDICIA, requires that the OTS take certain actions and authorizes other
discretionary actions against a savings association that falls within certain
undercapitalized capital categories specified in the regulation.
The regulation establishes five categories of capital classification: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Under the regulation, the
ratio of total capital to risk-weighted assets, core capital to risk-weighted
assets and the leverage capital ratio are used to determine an association's
capital classification. A "well capitalized" institution must maintain a ratio
of total capital to risk-based assets of 10%, a ratio of core capital to
risk-weighted assets of 6%, a leverage capital ratio of 5%, and must not be
subject to an OTS order or directive to meet a specific higher capital level.
In general, the prompt corrective action regulation prohibits an insured
depository institution from declaring any dividends, making any other capital
distribution, or paying a management fee to a controlling person if, following
the distribution or payment, the institution would be within any of the three
undercapitalized categories. In addition, adequately capitalized institutions
must obtain an FDIC waiver before accepting Brokered Deposits and are subject to
restrictions on the interest rates that may be paid on such deposits.
Institutions that are considered "undercapitalized," "severely
undercapitalized," or "critically undercapitalized" become subject to
increasingly serious supervisory actions (as capital levels deteriorate)
including increased monitoring, mandatory capital restoration plans, limitations
on business activities, and ultimately, the placement of a "critically
undercapitalized" association into conservatorship or receivership.
The Bank met the capital requirements of a "well capitalized" institution
under the FDICIA prompt corrective action regulation as of December 31, 2000 and
is not subject to any enforcement action or other regulatory proceeding with
respect to the prompt corrective action regulation. Management believes there
have been no conditions or events since December 31, 2000 which would change the
Bank's capital classification.
Page 7
ENFORCEMENT POWERS
The OTS and, under certain circumstances, the FDIC, have substantial
enforcement authority with respect to savings associations, including authority
to bring various enforcement actions against a savings association and any of
its institution-affiliated parties. The Bank is not subject to any OTS or FDIC
enforcement proceedings.
CAPITAL DISTRIBUTION REGULATION
In addition to the prompt corrective action restrictions, OTS regulations
limit "capital distributions" by savings associations. Capital distributions
include dividends and payments for stock repurchases and cash-out mergers.
A savings institution that is a subsidiary of a savings and loan holding
company must notify the OTS of a capital distribution at least 30 days prior to
the declaration of a capital distribution, provided the total of all capital
distributions made during that calendar year (including the proposed
distribution) does not exceed the sum of the institution's year-to-date net
income and its retained income for the preceding two years. A capital
distribution in a greater amount requires an application to the OTS and OTS
approval prior to distribution. The OTS may disapprove a capital distribution
notice or application if the institution is undercapitalized or if the
distribution would raise other safety and soundness concerns. The Bank's capital
distributions have complied with the capital distribution rule.
DIVIDEND POLICY
The dividend policy of the Bank complies with applicable legal and
regulatory restrictions. Before declaring any dividend, the directors of the
Bank consider the following factors:
(a) the quality and stability of the Bank's net income,
(b) the availability of liquid assets to make dividend payments,
(c) the level of earnings retention as it impacts the Bank's capital
needs and projected growth and funding levels, both internal
and external, and
(d) the adequacy of capital after the payment of a dividend.
Under the Bank's dividend policy, a dividend will not be declared or paid
which would:
(a) cause the capital level of the Bank to be reduced below "adequately
capitalized" levels, or
(b) together with any other dividends declared during the same calendar
year, exceed 100% of the net income to date for that calendar year
plus retained net income for the preceding two years, except as may be
permitted by regulation in extraordinary circumstances.
For further information regarding dividend payments, refer to note 27 of
the Company's Notes to Consolidated Financial Statements.
TAX EFFECTS OF DIVIDEND PAYMENTS BY THE BANK
Dividend distributions made to GS Holdings, as the sole owner of the Bank's
common and preferred stock, in each case in excess of the greater of the Bank's
current or accumulated earnings and profits, as well as any distributions in
dissolution or in redemption or liquidation of stock, excluding preferred stock
meeting certain conditions, may cause the Bank to recognize a portion of its tax
bad debt reserves as income. Accordingly, this could cause the Bank to make
payments to GS Holdings under the Tax Sharing Agreement. As a result, GS
Holdings may be required to make payments to Golden State and, for tax periods
prior to the September 11, 1998 deconsolidation from the Mafco Holdings group,
the Company may be required to make tax payments to Mafco Holdings under the Tax
Sharing Agreement.
Page 8
QUALIFIED THRIFT LENDER TEST
Unless a savings association is a qualified thrift lender (a "QTL"), both
it and its holding company are subject to certain restrictions on their
activities. In order to be a QTL, either (a) at least 65% of the savings
association's portfolio assets must be qualified thrift investments or (b) the
savings association must meet the asset composition test under the Internal
Revenue Code for a "domestic building and loan association." The restrictions to
which a savings association that is not a QTL is subject include restrictions on
its ability to obtain advances from the FHLB, to establish branches and to pay
dividends. A holding company whose savings association is not a QTL must
register as a bank holding company and be subject to all of the restrictions of
the Bank Holding Company Act of 1956.
The Bank's qualified thrift investments primarily consist of residential
mortgage loans and mortgage securities, home equity loans, small business loans
and FHLB stock and accrued dividends. At December 31, 2000, approximately 93.13%
of the Bank's portfolio assets were qualified thrift investments. At that date,
the Bank also met the asset composition test under the Internal Revenue Code for
a domestic building and loan association.
FDIC ASSESSMENTS
The deposits of the Bank are insured by the SAIF of the FDIC, up to
applicable limits, and are subject to deposit premium assessments by the SAIF.
Under the FDIC's risk-based insurance system, SAIF-assessed deposits are
currently subject to insurance premiums of between 0 and 27 basis points,
depending upon the institution's capital position and other supervisory factors.
The rate applicable to the Bank at December 31, 2000 was 0 basis points.
Since January 1997, institutions with BIF deposits have been required to
share the cost of funding debt obligations issued by the FICO, a corporation
established by the federal government in 1987 to finance the recapitalization of
the FSLIC. Until December 31, 1999, the FICO assessment rate for BIF deposits
was only one-fifth of the rate applicable to SAIF deposits. Consequently, the
annual FICO assessments added to deposit insurance premiums were 5.0 basis
points for SAIF deposits during 1999. Since January 1, 1997, FICO payments have
been paid directly by SAIF and BIF institutions in addition to deposit insurance
assessments. Effective January 1, 2000, the FICO assessment rate is equal for
SAIF and BIF deposits. The Bank's SAIF plus FICO assessment during 2000 was
approximately 2.04 basis points (annualized).
AFFILIATE RESTRICTIONS
Transactions between a savings association and its "affiliates" are subject
to quantitative and qualitative restrictions under Sections 23A and 23B of the
Federal Reserve Act. Affiliates of a savings association include the savings
association's holding companies and companies under common control with the
savings association, but generally exclude the association's subsidiaries.
Sections 23A and 23B require generally that all transactions between a
savings association and its affiliates be on terms and conditions and under
circumstances that are at least as favorable to the savings association as those
prevailing at the time for comparable transactions with non-affiliated
companies. Section 23A also limits the extent to which a savings association or
its subsidiaries may engage in certain "covered transactions" with its
affiliates. A "covered transaction" is defined to include a loan or extension of
credit to an affiliate; a purchase of investment securities issued by an
affiliate; with certain exceptions, a purchase of assets from an affiliate; the
acceptance of securities issued by an affiliate as collateral for a loan or
extension of credit to any party; or the issuance of a guarantee, acceptance or
letter of credit on behalf of an affiliate. During 2000, 1999, and 1998, the
Bank had no covered transactions.
NON-INVESTMENT GRADE DEBT SECURITIES
Savings associations and their subsidiaries are prohibited from investing
in any corporate debt security that, at the time of acquisition, is not rated in
one of the four highest rating categories by at least one nationally recognized
statistical rating organization. The Bank does not own any non-investment grade
corporate debt securities.
Page 9
COMMUNITY REINVESTMENT ACT AND THE FAIR LENDING LAWS
Savings associations have a responsibility under the CRA and related OTS
regulations to help meet the credit needs of their communities, including low-
and moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act
and the Fair Housing Act (together, the "Fair Lending Laws") prohibit lenders
from discriminating in their lending practices on the basis of characteristics
specified in those statutes. An association's failure to comply with the Fair
Lending Laws could result in enforcement actions by the OTS, as well as other
federal regulatory agencies and the Department of Justice. The Bank received an
"Outstanding" rating in its most recently completed July 1998 CRA examination.
PROPOSED REGULATORY LEGISLATION
From time to time, Congress has considered proposed legislation that could
substantially alter the regulation of the Bank and the Company. These proposals
have included the merger of the BIF and SAIF, the merger of the OTS with the
Office of the Comptroller of the Currency, and the conversion of savings
associations to national bank charters. The Company cannot determine whether, or
in what form, such legislation may eventually be enacted and there can be no
assurance that any legislation that is enacted would contain adequate
grandfather rights for the Bank and its parent holding companies.
ITEM 2. PROPERTIES
The executive offices of the Bank and the Company are located at 135 Main
Street, San Francisco, California, 94105, and its telephone number is (415)
904-1100. The Bank leases approximately 97,000 square feet in the building in
which its executive offices are located, under a lease expiring in 2006. The
Bank maintains its Data Center in a portion of a 216,000 square foot facility in
West Sacramento, California under a lease expiring in 2001. The five-year option
to extend this lease to 2006 is expected to be exercised.
The Company and its subsidiaries occupied additional executive,
administrative and operational space at 26 sites in California, Maryland, Texas
and Montana as of December 31, 2000. These sites included approximately 413,000
owned square feet (4 sites) and 417,000 leased square feet (22 sites) with lease
expirations ranging from 2001 to 2011. During 2000, administrative operations
were consolidated out of approximately 136,000 square feet of which 106,000
square feet was sold and 30,000 square feet was terminated under lease
expiration.
At December 31, 2000, the Bank operated a total of 354 retail branches in
California and Nevada which included approximately 1,003,000 owned square feet
(127 branches) and 1,206,000 leased square feet (227 branches) with lease
expirations ranging from 2001 to 2034. Some of these retail branches were
multi-purpose facilities, housing loan production and administrative space in
addition to retail space. FNMC operated seven loan production offices in
California, Maryland, Nevada and Pennsylvania. These offices were independent of
branch facilities and included approximately 52,000 leased square feet with
expirations ranging from 2001 to 2006.
The Bank is responsible for various facilities not occupied by the Company
or its subsidiaries as a result of branch and operational consolidations from
the 1996 Acquisitions, the Cal Fed Acquisition, the Glen Fed Merger and certain
branch purchases. During 2000, 16 sites were disposed of and included
approximately 58,000 square feet. Of this, 8,000 owned square feet were sold and
50,000 leased square feet were terminated. As of December 31, 2000, there were
39 branch sites not occupied by the Company or its subsidiaries, of which 27
sites were leased or subleased generating income, leaving 12 sites unoccupied.
In addition, there were three administrative facilities not occupied by the
Company or its subsidiaries. All three of the sites were leased or subleased,
generating income.
Page 10
A state-by-state breakdown of all retail branches, administrative
facilities and loan production offices operated by the Bank at December 31, 2000
is shown in the following table:
Branches Administrative Facilities Loan Production Facilities
--------------------------- -------------------------- ---------------------------
Owned Leased Vacant Owned Leased Vacant Owned Leased Vacant
----- ------ ------ ----- ------ ------ ----- ------ ------
Arizona --- --- -- -- 1 -- -- -- --
California 120 218 39 3 18 2 -- 5 --
Florida --- --- -- -- -- 1 -- -- --
Maryland --- --- -- 1 1 -- -- -- --
Montana --- --- -- -- 1 -- -- -- --
Nevada 7 9 -- -- -- -- -- 1 --
Pennsylvania --- --- -- -- 1 -- -- -- --
Texas --- --- -- -- 4 -- -- 1 --
--- --- -- -- -- -- -- -- --
Total 127 227 39 4 26 3 -- 7 --
=== === == == == == == == ==
ITEM 3. LEGAL PROCEEDINGS
CALIFORNIA FEDERAL GOODWILL LITIGATION
The Bank is the plaintiff in the California Federal Goodwill Litigation
against the Government. In the California Federal Goodwill Litigation, the Bank
alleged, among other things, that the Government breached certain contractual
commitments regarding the computation of its regulatory capital for which the
Bank sought damages and restitution. The Bank's claims arose from changes,
mandated by the FIRREA, with respect to the rules for computing Old California
Federal's regulatory capital.
In late 1997, a Claims Court Judge ruled in favor of the Bank's motion for
partial summary judgment as to the Government's liability to the Bank for breach
of contract, and a formal order in that regard was subsequently issued. In late
1998, a second Claims Court Judge ruled that California Federal could not meet
its burden for proving lost profits damages and ordered that the case proceed to
trial on the damage issue of restitution and reliance. The trial began in
January 1999 and concluded in March 1999.
On April 16, 1999, the Claims Court issued its decision on the damages
claim against the Government in the California Federal Goodwill Litigation,
ruling that the Government must compensate the Bank in the sum of $23.0 million.
The summary judgment liability decision by the first Court of Claims Judge has
been appealed by the Government and the damage award by the second Court of
Claims Judge has been appealed by the Bank. 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, but the Court of Appeals has not yet rendered a decision.
GLENDALE GOODWILL LITIGATION
By virtue of the Glen Fed Merger, the Bank is also a plaintiff in a claim
against the United States in a second lawsuit, the Glendale Goodwill Litigation.
In the Glendale Goodwill Litigation, Glendale Federal sued the Government
contending that FIRREA's treatment of supervisory goodwill constituted a breach
by the Government of its 1981 contract with the Bank, under which the Bank had
merged with a Florida thrift and was permitted to include the goodwill resulting
from the merger in its regulatory capital. In 1992, the Claims Court found in
favor of Glendale Federal's position, ruling that the Government breached its
express contractual commitment to permit Glendale Federal to include supervisory
goodwill in its regulatory capital and that Glendale Federal is entitled to seek
financial compensation.
Page 11
The trial began in February 1997 and concluded in September 1998. On April
9, 1999, the Claims Court issued its decision in the Glendale Goodwill
Litigation, ruling that the Government must compensate the Bank in the sum of
$908.9 million. This decision was appealed by the Government and the Bank, and
on February 16, 2001 the Court of Appeals for the Federal Circuit vacated the
trial court's award of damages and remanded the case back to the trial court for
determination of total reliance damages to which the Bank might be entitled. No
further proceedings have been taken in the case since the Court of Appeals'
February 16 decision, and the Bank continues to pursue vigorously its case for
damages against the Government.
BARTOLD V. GLENDALE FEDERAL BANK ET AL
On September 18, 1995, four plaintiffs commenced an action in Superior
Court of California, County of Orange, alleging that the defendants Glendale
Federal, to which the Bank is a successor by merger, and Verdugo Trustee Service
Corporation ("Verdugo"), a wholly owned subsidiary of the Bank, failed timely to
record their release of the mortgage interest following payoffs of residential
mortgage loans and, in at least some instances, improperly required borrowers to
pay fees for these releases. The plaintiffs' complaint seeks relief for the
named plaintiffs, as well as purportedly for all others similarly situated in
California and throughout the United States and the general public, on causes of
action for violation of California Civil Code Section 2941 and California
Business and Professions Code Section 17200, breach of contract, fraud and
unjust enrichment. The plaintiffs seek statutory damages of $300 for each
supposed, separate violation of Section 2941 by Glendale Federal and Verdugo,
restitution, punitive damages, injunctive relief and attorney's fees, among
other things.
In October 1997, the trial court granted summary judgment for the
defendants. In June 2000, the California Court of Appeals reversed this decision
and remanded for further proceedings, including further development of class
certification issues. On March 2, 2001, the trial court held that a California
class had been certified. The Bank believes that it has meritorious defenses to
the claim and intends to continue to contest it vigorously.
OTHER LITIGATION
In addition to the matters described above, GS Holdings and its
subsidiaries are involved in other legal proceedings and 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.
Page 12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
GS Holdings is a wholly owned subsidiary of Golden State. All of the
Company's common shares are owned by Golden State. There is no public trading
market for the Company's common stock.
Ronald O. Perelman, a Director of GS Holdings, 35 East 62nd Street, New
York, New York 10021, through GSB Investments Corp., beneficially owns 31.8% of
the Golden State common stock outstanding as of January 31, 2001. Hunter's Glen,
a limited partnership controlled by Gerald J. Ford, Chairman of the Board, Chief
Executive Officer and a Director of the Bank and GS Holdings, 200 Crescent
Court, Suite 1350, Dallas, Texas 75201, owns 14.3% of the Golden State common
stock outstanding as of January 31, 2001. The balance of the common stock of
Golden State is publicly held. In addition, pursuant to the agreement and plan
of merger related to the Golden State Acquisition, GSB Investments and Hunter's
Glen are entitled to receive additional shares of Golden State common stock
under certain circumstances, which could cause the actual ownership percentages
of GSB Investments and Hunter's Glen to change.
DIVIDENDS
During 2000, 1999 and 1998, dividends on GS Holdings' common stock totalled
$96.0 million, $225.5 million and $874.2 million, respectively. See discussion
of dividend restrictions in note 27 of the Company's Notes to Consolidated
Financial Statements.
Page 13
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
The Management's Narrative Analysis of Results of Operations should be read
in conjunction with the Consolidated Financial Statements of GS Holdings and the
notes thereto included elsewhere in this Form 10-K. The following discussion
includes historical information relating to GS Holdings, including the effect of
the Golden State Acquisition, which was consummated on September 11, 1998. For
specific information regarding this acquisition, see note 3 of the Company's
Notes to Consolidated Financial Statements.
For a discussion of the impact to the Company of recent accounting changes,
refer to note 2 of the Company's Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
Based in San Francisco, GS Holdings is the parent of California Federal, a
full-service, community oriented bank, that serves consumers and small
businesses in California and Nevada. At December 31, 2000, it was the second
largest thrift in the U.S. with $60.5 billion in assets and 354 branches.
GS Holdings reported net income for 2000 of $524.8 million, compared with
net income of $341.1 million in 1999. Net income for 2000 included gains on the
early extinguishment of debt, net of tax, of $3.0 million.
Net income for 1999 included the following non-recurring items, net of tax:
a $9.4 million gain from the 1999 Servicing Sale, $3.2 million in minority
interest expense related to the redemption of the Bank Preferred Stock and a
$2.5 million gain on early extinguishment of debt.
Excluding these non-recurring items, operating net income for 2000 was
$521.8 million, compared with operating net income for 1999 of $332.4 million.
Page 14
The following table shows GS Holdings' consolidated average balance sheet
for the past three years, with the related interest income, interest expense,
and average interest rates for the periods presented. Average balances are
calculated on a daily basis. The year-to-year comparisons set forth below
include the effect of the Company's acquisitions and dispositions during the
periods involved.
Year Ended December 31,
-----------------------------------------------------------------------------------
2000 1999 1998
------------------------- ------------------------- -------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
(dollars in millions)
ASSETS
Interest-earning assets (1):
Securities and interst-
bearing deposits in
banks (2) $ 1,424 $ 90 6.34% $ 1,554 $ 100 6.44% $ 1,121 $ 77 6.84%
Mortgage-backed securities
available for sale 12,017 800 6.66 13,706 873 6.37 7,952 483 6.07
Mortgage-backed securities
held to maturity 2,730 206 7.56 2,392 178 7.43 1,753 134 7.67
Loans held for sale 837 63 7.48 1,659 110 6.60 1,652 116 7.01
Loans receivable, net:
Residential 29,800 2,108 7.07 24,723 1,726 6.98 16,583 1,221 7.36
Commercial real estate 5,711 465 8.13 5,427 416 7.67 5,019 401 7.99
Commercial banking 519 52 9.96 514 48 9.40 174 17 9.77
Consumer 763 78 10.27 649 62 9.59 549 52 9.54
Auto 1,294 151 11.64 635 80 12.50 447 48 10.58
------- ------ ------- ------ ------- ------
Loans receivable, net 38,087 2,854 7.49 31,948 2,332 7.30 22,772 1,739 7.64
FHLB stock 1,301 93 7.14 1,113 60 5.36 623 36 5.78
------- ------ ------- ------ ------- ------
Total interest-earning
assets 56,396 4,106 7.28% 52,372 3,653 6.97% 35,873 2,585 7.21%
Noninterest-earning assets 3,088 ------ 3,692 ------ 3,394 ------
------- ------- -------
Total assets $59,484 $56,064 $39,267
======= ======= =======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits $23,265 $ 928 3.99% $23,948 $ 888 3.71% $18,866 $ 791 4.19%
Securities sold under
agreements to
repurchase (3) 5,380 352 6.45 5,057 266 5.18 2,805 154 5.40
Borrowings (3) 27,406 1,678 6.10 23,613 1,313 5.56 14,084 829 5.89
------- ------ ------- ------ ------- ------
Total interest-bearing
liabilities 56,051 2,958 5.26% 52,618 2,467 4.69% 35,755 1,774 4.96%
Noninterest-bearing ------ ------ ------
liabilities 1,023 1,194 1,204
Minority interest 498 540 878
Stockholder's equity 1,912 1,712 1,430
------- ------- -------
Total liabilities, minority
interest and stockholder's
equity $59,484 $56,064 $39,267
======= ======= =======
Net interest income $1,148 $1,186 $ 811
====== ====== ======
Interest rate spread 2.02% 2.28% 2.25%
==== ==== ====
Net interest margin 2.06% 2.26% 2.26%
==== ==== ====
Average equity to average assets 3.21% 3.05% 3.64%
==== ==== ====
- ------------------
(1) Non-performing assets are included in the average balances for the periods
indicated.
(2) Includes interest-bearing deposits in other banks and securities purchased
under agreements to resell.
(3) Interest and average rate include the impact of interest rate swaps.
Page 15
The following table shows what portion of the changes in interest income
and interest expense were due to changes in rate and volume. For each category
of interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to volume (change in average outstanding
balance multiplied by the prior year's rate) and rate (change in average
interest rate multiplied by the prior year's volume). Changes attributable to
both volume and rate have been allocated proportionately.
Year Ended December 31, 2000 vs 1999
------------------------------------------
Increase (Decrease) Due to
------------------------------------------
Volume Rate Net
------ ---- ---
(in millions)
INTEREST INCOME:
Securities and interest-bearing deposits in banks $ (8) $ (2) $(10)
Mortgage-backed securities available for sale (116) 43 (73)
Mortgage-backed securities held to maturity 25 3 28
Loans held for sale (63) 16 (47)
Loans receivable, net 460 62 522
FHLB stock 11 22 33
----- ----- ----
Total 309 144 453
----- ----- ----
INTEREST EXPENSE:
Deposits (24) 64 40
Securities sold under agreements to repurchase 18 68 86
Borrowings 227 138 365
----- ----- ----
Total 221 270 491
----- ----- ----
Change in net interest income $ 88 $(126) $(38)
===== ===== ====
YEAR ENDED DECEMBER 31, 2000 VERSUS YEAR ENDED DECEMBER 31, 1999
INTEREST INCOME. Total interest income was $4.1 billion for 2000, an
increase of $453.6 million from 1999. Total interest-earning assets for 2000
averaged $56.4 billion, compared to $52.4 billion for the corresponding period
in 1999, primarily as a result of increased loan volume, partially offset by a
decline in mortgage-backed securities. The yield on total interest-earning
assets during 2000 increased to 7.28% from 6.97% for 1999, primarily due to a
higher percentage of loans to total earning assets and the repricing of
variable-rate earning assets.
GS Holdings earned $2.9 billion of interest income on loans receivable for
2000, an increase of $520.5 million from 1999. The average balance of loans
receivable was $38.1 billion for 2000, compared to $31.9 billion for 1999. The
weighted average rate on loans receivable increased to 7.49% for 2000 from 7.30%
for 1999. The increase in the average balance reflects an increase in loan
origination activity and new auto loan production from the Downey Acquisition.
The increase in the weighted average rate reflects the repricing of
variable-rate loans, an increase in the prime rate on commercial banking loans
and comparatively higher market rates in 2000, partially offset by lower rates
on new purchases of prime auto loans, including those purchased in the Downey
Acquisition.
GS Holdings earned $62.6 million of interest income on loans held for sale
for 2000, a decrease of $46.9 million from 1999. The average balance of loans
held for sale was $837 million for 2000, a decrease of $822 million from 1999,
primarily attributed to a reduction in fixed-rate originations due to higher
interest rates, coupled with longer holding periods for loans held for sale in
1999. The weighted average rate on loans held for sale increased to 7.48% for
2000 from 6.60% for 1999, primarily due to higher market interest rates.
Interest income on mortgage-backed securities available for sale was $800.4
million in 2000, a decrease of $72.4 million from 1999. The average portfolio
balance decreased during 2000 by $1.7 billion, to $12.0 billion for 2000. The
weighted average yield on these assets increased from 6.37% for 1999 to 6.66%
for 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 $1.4 billion in
mortgage-backed securities during 2000, partially offset by the impact of
purchases.
Page 16
Interest income on mortgage-backed securities held to maturity was $206.5
million for 2000, an increase of $28.8 million from 1999. The average portfolio
balance increased during 2000 by $338.0 million, to $2.7 billion for 2000,
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 yields for 2000 and 1999 were
7.56% and 7.43%, respectively.
Interest income on securities and interest-bearing deposits in other banks
was $90.5 million for 2000, a decrease of $9.7 million from 1999. The average
portfolio balance was $1.4 billion for 2000 and $1.6 billion for 1999. The lower
weighted average yield of 6.34% for 2000, compared to 6.44% for 1999, reflects
$2.4 million and $7.7 million, respectively, in interest income on federal
income tax refunds related to Old California Federal for periods prior to the
Golden State Acquisition for which there are no corresponding assets.
Dividends on FHLB stock were $92.9 million for 2000, an increase of
$33.2 million from 1999. The average balance outstanding during 2000 and 1999
was $1.3 billion and $1.1 billion, respectively. The weighted average dividend
on FHLB stock increased to 7.14% for 2000 from 5.36% for 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 $3.0 billion for 2000, an
increase of $491.6 million from 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 average deposit
balances, coupled with an overall higher interest rate environment.
Interest expense on deposits, including Brokered Deposits, was $928.4
million for 2000, an increase of $40.1 million from 1999. The average balance of
deposits outstanding decreased from $23.9 billion for 1999 to $23.3 billion for
2000. The decrease in the average balance includes declines in the average
balance of certificates of deposit, custodial accounts, passbook savings and
money market accounts, offset in part by an increase in the average balance of
customer checking accounts. These changes reflect the Company's focus during
2000 on consumer checking account growth. The overall weighted average cost of
deposits increased to 3.99% for 2000 from 3.71% for 1999, primarily due to
rising market interest rates.
Interest expense on securities sold under agreements to repurchase totalled
$352.1 million for 2000, an increase of $86.6 million from 1999. The average
balance of such borrowings for 2000 and 1999 was $5.4 billion and $5.1 billion,
respectively. The increase is primarily attributed to the funding of loans and
the purchase of mortgage-backed securities during 1999, as well as deposit
run-off. The weighted average interest rate on these instruments increased to
6.45% for 2000 from 5.18% for 1999, primarily due to an increase in market
interest rates on new borrowings in 2000 compared to 1999.
Interest expense on borrowings totalled $1.7 billion for 2000, an increase
of $364.9 million from 1999. The average balance outstanding for 2000 and 1999
was $27.4 billion and $23.6 billion, respectively. The weighted average interest
rate on these instruments increased to 6.10% for 2000 from 5.56% for 1999,
primarily due to higher prevailing market interest rates in 2000. The higher
volume reflects the increase in FHLB advances used to fund loans and the
purchase of mortgage-backed securities during 1999.
NET INTEREST INCOME. Net interest income was $1.1 billion for 2000, a
decrease of $38.0 million from 1999. The interest rate spread declined to 2.02%
for 2000 from 2.28% for 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.
Page 17
NONINTEREST INCOME. Total noninterest income, consisting primarily of loan
servicing fees, customer banking fees and gains on sales of assets, was $443.6
million for 2000, representing an increase of $40.7 million from 1999.
Noninterest income includes the following components in each of the years ended
December 31, 2000 and 1999:
Year Ended December 31,
----------------------------
2000 1999
-------- --------
(in thousands)
Noninterest income:
Loan servicing fees, net $176,159 $127,834
Customer banking fees and service charges 196,969 187,022
Gain on sale, settlement and transfer of loans, net 49,730 32,885
(Loss) gain on sale of assets, net (13,424) 21,699
Gain on sale of branches, net -- 2,343
Other income 34,161 31,096
-------- --------
Total noninterest income $443,595 $402,879
======== ========
Loan servicing fees, net of amortization of MSR and pass-through interest
expense, were $176.2 million for 2000, compared to $127.8 million for 1999. The
single-family residential loan servicing portfolio, excluding loans serviced for
the Bank, increased from $72.9 billion at December 31, 1999 to $84.1 billion at
December 31, 2000. Incremental loan servicing fees were partially offset by
amortization of MSRs and pass-through interest expense. MSR amortization for
2000 decreased by $8.3 million from 1999 due to a reduction in the estimated
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% during 2000, compared
to 17% during 1999. Interest pass-through expense declined $8.4 million in 2000
compared to 1999 as a result of these lower prepayments on loans serviced for
others.
Customer banking fees were $197.0 million for 2000 compared to $187.0
million for 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 $49.7 million
for 2000, an increase of $16.8 million from 1999. During 2000, the Company
recorded $20.5 million of reductions 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 $20.5
million. Gains attributed to early payoffs and settlement of commercial loans
with unamortized discounts were $9.8 million lower in 2000 compared to 1999.
During 2000, California Federal sold $5.1 billion in single-family mortgage
loans originated for sale with servicing rights retained as part of its ongoing
mortgage banking operations compared to $9.7 billion of such sales for 1999,
while the gains on such sales increased $3.5 million between the two periods. In
addition, the gain on sale was reduced in 1999 by $2.7 million, reflecting lower
of cost or market adjustments.
Net loss on sale of assets totalled $13.4 million for 2000, compared to a
net gain of $21.7 million for 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 and a $0.9 million loss from the sale of $187.6 million of
mortgage-backed securities with an average yield of 6.59% during the third
quarter, partially offset by a $1.5 million gain from the sale of $699.2 million
mortgage-backed securities with an average yield of 7.27% during the fourth
quarter and a $1.3 million gain from the sale of interest rate swaps with a
notional amount of $150.0 million in August 2000. It is expected that these
sales will benefit both the net interest margin and the Company's interest rate
sensitivity in future periods. The $21.7 million gain reported in 1999 primarily
relates to the $16.3 million gain on the Servicing Sale.
Page 18
Net gain on sale of branches of $2.3 million in 1999 relates to the sale of
the Eureka and Ukiah branches. There were no branch sales in 2000.
Other noninterest income was $34.2 million for 2000, an increase of $3.1
million from 1999, primarily attributed to IPS float commissions for property
tax payments.
NONINTEREST EXPENSE. Total noninterest expense was $898.4 million for 2000,
an increase of $6.5 million from 1999. Noninterest expense for 2000 included
increases of $35.4 million in compensation expense and $11.5 million in
occupancy and equipment expense. These increases were partially offset by
decreases of $15.6 million in other noninterest expense, $11.6 million in
professional fees, $7.7 million in specific merger and integration costs
incurred in 1999 in connection with the Golden State Acquisition and $7.0
million in amortization of intangible assets. Noninterest expense includes the
following components in each of the years ended December 31, 2000 and 1999:
Year Ended December 31,
----------------------------
2000 1999
-------- --------
(in thousands)
Noninterest expense:
Compensation and employee benefits $425,327 $389,904
Occupancy and equipment 153,223 141,696
Professional fees 40,852 52,493
Loan expense 17,018 17,200
Foreclosed real estate operations, net (4,690) (6,411)
Amortization of intangible assets 62,717 69,724
Merger and integration costs -- 7,747
Other expense 203,981 219,582
-------- --------
Total noninterest expense $898,428 $891,935
======== ========
Compensation and employee benefits expense was $425.3 million for 2000, an
increase of $35.4 million from 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 $153.2 million for 2000, an increase of
$11.5 million from 1999, primarily attributed to increased depreciation expense
related to a change in the depreciable lives of personal computers and an
increase in rent expense on leased facilities.
Professional fees were $40.9 million for 2000, a decrease of $11.6 million
from 1999, primarily due to legal and consulting fee expenses incurred in 1999
related to the two goodwill litigation cases and the Y2K project.
Amortization of intangible assets was $62.7 million for 2000, a decrease of
$7.0 million from 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.
Merger and integration costs were $7.7 million in 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.
Other noninterest expense was $204.0 million in 2000 compared to $219.6
million in 1999. The decline in operating expenses is primarily attributed to
management's continued expense reduction efforts.
Page 19
PROVISION FOR LOAN LOSSES. The provision for loan losses was zero in 2000,
down from $10 million in 1999. The decrease in 2000 reflects management's
evaluation of the adequacy of the allowance based on, among other things, past
loan loss experience and known and inherent risks in the portfolio, evidenced in
part by the continued decline in the Bank's level of non-performing assets.
PROVISION FOR INCOME TAX. In 2000 and 1999, GS Holdings recorded net income
tax expense of $144.2 million and $234.3 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 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.
During 1999, a federal income tax benefit of $79.0 million was recognized
and was offset by a corresponding increase to minority interest: provision in
lieu of income taxes. This federal income tax benefit relates to pre-merger tax
benefits, in the form of net operating loss carryovers and other items, which
are retained by the previous owners of FN Holdings. To the extent these tax
benefits are recognized, there is a reduction in income tax expense, which is
offset by an increase in minority interest: provision in lieu of income tax
expense. These adjustments resulted from 1998 tax filings in 1999. GS Holdings'
effective federal income tax rate was 14% and 38% during 2000 and 1999,
respectively, while its statutory federal income tax rate was 35% during both
periods. In 2000, the difference between the effective and statutory rates was
primarily the result of a reduction in the deferred tax asset valuation
allowance, partially offset by non-deductible goodwill amortization. For the
year ended December 31, 1999, 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 2000 and 1999,
respectively. The effective tax rate declined during 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 $45.6
million were recorded during 2000. Minority interest expense relative to the
REIT Preferred Stock is reflected net of related income tax benefit of $18.6
million, which will inure to the Company as a result of the deductibility of
such dividends for income tax purposes.
Minority interest for 1999 included a $79.0 million provision in lieu of
income taxes, representing pre-merger tax benefits retained by the previous
owners of FN Holdings and $5.0 million in net premiums paid in connection with
the redemption of the Bank 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 $26.4
million, respectively. Minority interest expense relative to the REIT Preferred
Stock is reflected net of related income tax benefit of $19.2 million, which
will inure to the Company as a result of the deductibility of such dividends for
income tax purposes. The reduction in minority interest relative to the Bank
Preferred Stock reflects the impact of the $60.7 million in Bank Preferred Stock
redeemed on April 1, 1999 and the $31.8 million redeemed on September 1, 1999.
Minority interest expense for 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.
EXTRAORDINARY ITEMS. During 2000, the FHLB called and the Bank prepaid $400
million in FHLB advances, resulting in an extraordinary gain of $3.0 million,
net of income taxes of $2.1 million, on the early extinguishment of such
borrowings. Also during 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 1999, the Bank repurchased all of the remaining $6.0 million
outstanding principal amount of the 11.20% Senior Notes, resulting in an
extraordinary loss of $0.2 million, net of income taxes of $0.1 million, on the
early extinguishment of debt. In addition during 1999, the FHLB called and the
Bank prepaid $500 million in FHLB advances, resulting in an extraordinary gain
of $2.7 million, net of income taxes of $1.9 million, on the early
extinguishment of such borrowings.
Page 20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company is exposed to interest rate
risk, which is the potential for loss due to changes in interest rates.
Financial products that expose the Company to interest rate risk include
securities, loans, deposits, debt and derivative financial instruments such as
swaps, swaptions and floors.
ALCO, which includes senior management representatives, monitors and
considers methods of managing the rate and sensitivity repricing characteristics
of the balance sheet components consistent with maintaining acceptable levels of
changes in the NPV ratio and net interest income. A primary purpose of the
Company's asset and liability management is to manage interest rate risk to
effectively invest the Company's capital and to preserve the value created by
its core business operations. As such, certain management monitoring processes
discussed below are designed to minimize the impact of sudden and sustained
changes in interest rates on the NPV ratio and net interest income.
The Company's exposure to interest rate risk is reviewed on at least a
quarterly basis by the Board of Directors and ALCO. Interest rate risk exposure
is measured using interest rate sensitivity analysis to determine the Bank's
change in the NPV ratio and net interest income in the event of hypothetical
changes in interest rates, and interest rate sensitivity gap analysis is used to
determine the repricing characteristics of the Bank's assets and liabilities. If
estimated changes to the NPV ratio and net interest income are not within the
limits established by the Board, the Board may direct management to adjust its
asset and liability mix to bring interest rate risk within Board-approved
limits.
In order to reduce the exposures to interest rate fluctuations, the Company
has developed strategies to manage its liquidity, shorten its effective
maturities of certain interest-earning assets, and increase the ability of its
asset base to respond to changes in interest rates. Management has sought to
decrease the average maturity of its assets by emphasizing the origination of
adjustable-rate residential mortgage loans and consumer loans, which are
retained by the Company for its portfolio. In addition, long-term, fixed-rate
single-family residential mortgage loans are underwritten according to
guidelines of FHLMC, GNMA and FNMA, and are either swapped with FHLMC, GNMA and
FNMA in exchange for mortgage-backed securities secured by such loans which are
then sold or are sold directly for cash in the secondary market, generally with
servicing retained.
Interest rate sensitivity analysis is used to measure the Bank's interest
rate risk by computing estimated changes in NPV ratio of its cash flows from
assets, liabilities and off-balance sheet items in the event of a range of
assumed changes in market interest rates. The NPV ratio is equal to the market
value of assets minus the market value of liabilities, with adjustments made for
off-balance sheet items divided by the market value of assets. This analysis
assesses the risk of loss in market risk sensitive instruments in the event of a
sudden and sustained increase or decrease in market interest rates of one
hundred to three hundred basis points. The Bank's Board of Directors has adopted
an interest rate risk policy which establishes minimum NPV ratios for various
interest rate scenarios.
The following table presents the Bank's NPV ratios for the various rate
shock levels at December 31, 2000. All market risk sensitive instruments
presented in this table are held to maturity or available for sale. The Bank has
no trading securities.
Change in
Interest Rates NPV Ratio
-------------- ---------
300 basis point rise 6.14%
200 basis point rise 6.81
100 basis point rise 7.31
Base Scenario 7.51
100 basis point decline 7.33
200 basis point decline 6.89
300 basis point decline 6.68
Page 21
The preceding table indicates that as of December 31, 2000, the Bank's NPV
ratio would be expected to decrease in the event that prevailing market rates
either increase or decrease in a sudden and sustained manner. The NPV
sensitivity measure, which compares the difference between the base scenario and
the lesser of the 200 basis point rise or decline, as estimated by the Bank's
model is .70%. This sensitivity measure is considered to be a minimal risk as
defined by the OTS regulations and is within the limits established by the Board
of Directors.
The fair market value of portfolio equity decreases in a rising interest
rate environment because the Company's interest-bearing liabilities generally
reprice faster than its interest-earning assets, and certain interest-earning
assets are subject to periodic caps. The reduction in value of the net
interest-earning assets is partially offset by an increase in value of MSRs that
appreciate in value as rates rise. In a declining interest rate environment, the
reduction in value of MSRs generally outweighs the increase in value of the rest
of the portfolio resulting from the repricing differences of interest-earning
assets and interest-bearing liabilities.
The NPV ratio is calculated by the Bank pursuant to guidelines established
by the OTS. The calculation is based on the net present value of estimated
discounted cash flows utilizing market prepayment assumptions and market
interest rates provided by independent broker quotations and other public
sources as of December 31, 2000, with adjustments made to reflect the shift in
the Treasury yield curve as appropriate.
The computation of prospective effects of hypothetical interest rate
changes is based on numerous assumptions, including relative levels of market
interest rates, loan prepayments and deposits decay, and should not be relied
upon as indicative of actual results. Further, the computations do not
contemplate any actions the ALCO could undertake in response to changes in
interest rates.
Certain shortcomings are inherent in the method of analysis presented in
the computation of NPV. Actual values may differ from those projections
presented, should market conditions vary from assumptions used in the
calculation of the NPV ratio. Certain assets, such as adjustable-rate loans,
which represent one of the Bank's primary loan products, have features which
restrict changes in interest rates on a short-term basis and over the life of
the assets. In addition, the proportion of adjustable-rate loans in the Bank's
portfolio could decrease in future periods if market interest rates remain at or
decrease below current levels due to refinance activity. Further, in the event
of a change in interest rates, prepayment and early withdrawal levels would
likely deviate significantly from those assumed in the NPV. Finally, the ability
of many borrowers to repay their adjustable-rate mortgage loans may decrease in
the event of interest rate increases.
In addition, the Bank uses interest rate sensitivity gap analysis to
monitor the relationship between the maturity and repricing of its
interest-earning assets and interest-bearing liabilities, while maintaining an
acceptable interest rate spread.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of GS Holdings at December
31, 2000 and 1999 and for the years ended December 31, 2000, 1999 and 1998 are
included in this report at the pages indicated.
Page
----
Independent Auditors' Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Income F-3
Consolidated Statements of Comprehensive Income F-4
Consolidated Statements of Stockholder's Equity F-5
Consolidated Statements of Cash Flows F-8
Notes to Consolidated Financial Statements F-10
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Page 22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENT SCHEDULES
Schedules are omitted because of the absence of conditions under which they
are required or because the required information is provided in the consolidated
financial statements or notes thereto.
(b) EXHIBITS
2.1 Agreement and Plan of Reorganization, dated as of February 4, 1998,
by and among First Nationwide (Parent) Holdings Inc., First Gibraltar
Holdings, Inc., Hunter's Glen/Ford, Ltd., Golden State Bancorp Inc.
and Golden State Financial Corporation. (Incorporated by reference
to Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated
February 4, 1998 (the "February 1998 Form 8-K").)
2.2 Amendment No. 1 dated as of July 31, 1998, by and among First
Nationwide (Parent) Holdings Inc., First Nationwide Holdings Inc.,
Golden State Bancorp Inc., Golden State Financial Corporation, First
Gibraltar Holdings Inc. and Hunter's Glen/Ford Ltd., to the Agreement
and Plan of Reorganization, dated as of February 4, 1998, by and
among the Parties. (Incorporated by reference to Exhibit 2.2 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1998 (the "1998 Form 10-K").)
2.3 Agreement dated as of August 20, 2000 by and between Golden State
Bancorp Inc. and GSB Investments Corp.
3.1 Certificate of Incorporation of the Registrant. (Incorporated by
reference to Exhibits 3.1 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998.)
3.2 By-laws of the Registrant, as amended. (Incorporated by reference to
Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1998.)
4.1 Indenture, dated as of September 19, 1996, between First Nationwide
Escrow Corp. and The Bank of New York, as trustee, relating to the
10 5/8% Senior Subordinated Exchange Notes Due 2003 (the "10 5/8%
Notes"). (Incorporated by reference to Exhibit 4.1 to Amendment No.
1 to the Registrant's Registration Statement on Form S-1 (File No.
333-21015).)
4.2 First Supplemental Indenture, dated as of January 3, 1997, among FN
Holdings, First Nationwide Escrow Corp. and The Bank of New York, as
trustee, relating to the 10 5/8% Notes. (Incorporated by reference to
Exhibit 4.2 to Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (File No. 333-21015).)
4.3 Second Supplemental Indenture dated September 11, 1998, supplementing
the Indenture, dated as of September 19, 1996, as supplemented,
between First Nationwide Holdings Inc. and The Bank of New York, as
Trustee, relating to the 10 5/8% Senior Subordinated Exchange Notes
Due 2003. (Incorporated by reference to Exhibit 4.3 to the
Registrant's 1998 Form 10-K.)
4.4 Third Supplemental Indenture dated September 14, 1998, between Golden
State Holdings Inc. (formerly known as New First Nationwide Holdings
Inc.), as successor to First Nationwide Holdings Inc., and The Bank of
New York, as Trustee, relating to the 10 5/8% Senior Subordinated
Exchange Notes Due 2003. (Incorporated by reference to Exhibit 4.4 to
the Registrant's 1998 Form 10-K.)
Page 23
4.5 Indenture, dated as of October 1, 1986, between First Nationwide Bank,
A Federal Savings Bank, and Bank of America National Trust and Savings
Association Re: $100,000,000 10% Subordinated Debentures due 2006
(the "2006 Indenture"). (Incorporated by reference to Exhibit 4.5 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994.)
4.6 First Supplemental Indenture, dated as of September 30, 1994, among
First Madison Bank, FSB, First Nationwide Bank, A Federal Savings
Bank, and Bank of America National Trust and Savings Association,
supplementing the 2006 Indenture. (Incorporated by reference to
Exhibit 4.6 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994.)
4.7 Second Supplemental Indenture, dated as of January 3, 1997, among
First Nationwide Bank, A Federal Savings Bank, California Federal
Bank, A Federal Savings Bank and Bank of America National Trust and
Savings Association, as trustee, supplementing the 2006 Indenture.
(Incorporated by reference to Exhibit 4.8 to Amendment No. 1 to the
Registrant's Registration Statement on Form S-1 (File No. 333-21015).)
4.8 Indenture, dated December 1, 1992, between California Federal Bank,
A Federal Savings Bank and Chemical Bank, as trustee, relating to the
10% Subordinated Debentures Due 2003. (Incorporated by reference to
Exhibit 4.16 to Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (File No. 333-21015).)
4.9 Agreement Regarding Contingent Litigation Recovery Participation
Interests, dated as of June 30, 1995, between California Federal Bank,
and Chemical Trust Company of California, as Interest Agent.
(Incorporated by reference to Exhibit 4.17 to Amendment No. 1 to the
Registrant's Registration Statement on Form S-1 (File No. 333-21015).)
4.10 Agreement Regarding Secondary Contingent Litigation Recovery
Participation Interests, dated as of December 2, 1996, between
California Federal Bank, and Chase Mellon Shareholder Services,
L.L.C., as Interest Agent. (Incorporated by reference to Exhibit
4.18 to Amendment No. 1 to the Registrant's Registration Statement on
Form S-1 (File No. 333-21015).)
4.11 Indenture dated as of August 6, 1998 between GS Escrow Corp. and The
Bank of New York, as Trustee. (Incorporated by reference to Exhibit
4.1 to the Registrant's Registration Statement on Form S-1 (File No.
333-64597).)
4.12 First Supplemental Indenture dated as of August 6, 1998 between GS
Escrow Corp. and The Bank of New York, as Trustee. (Incorporated by
reference to Exhibit 4.2 to the Registrant's Registration Statement on
Form S-1 (File No. 333-64597).)
4.13 Second Supplemental Indenture dated as of August 6, 1998 between GS
Escrow Corp. and The Bank of New York, as Trustee. (Incorporated by
reference to Exhibit 4.3 to the Registrant's Registration Statement on
Form S-1 (File No. 333-64597).)
4.14 Third Supplemental Indenture dated as of August 6, 1998 between GS
Escrow Corp. and The Bank of New York, as Trustee. (Incorporated by
reference to Exhibit 4.4 to the Registrant's Registration Statement on
Form S-1 (File No. 333-64597).)
4.15 Fourth Supplemental Indenture dated as of August 6, 1998 between GS
Escrow Corp. and The Bank of New York, as Trustee (Incorporated by
reference to Exhibit 4.5 to the Registrant's Registration Statement on
Form S-1 (File No. 333-64597).)
4.16 Fifth Supplemental Indenture dated as of September 11, 1998 between
Golden State Holdings Inc. and the Bank of New York, as Trustee
(Incorporated by reference to Exhibit 4.6 to the Registrant's
Registration Statement on Form S-1 (File No. 333-64597).)
Page 24
10.1 Tax Sharing Agreement, effective as of January 1, 1994, by and among
First Madison Bank, FSB, the Registrant's and Mafco Holdings Inc.
(Incorporated by reference to Exhibit 10.10 to the Registrant's
Registration Statement on Form S-1 (File No. 33-82654).)
10.2 Amendment to Tax Sharing Agreement, effective September 11, 1998, by
and among Mafco Holdings Inc., Golden State Bancorp Inc., First
Nationwide Holdings Inc., Glendale Federal Bank, A Federal Savings
Bank, and New First Nationwide Holdings Inc. (Incorporated by
reference to Exhibit 10.2 to the Registrant's 1998 Form 10-K.)
10.3 Tax Sharing Modification Agreement dated as of December 22, 1998,
between Mafco Holdings Inc. and Golden State Bancorp Inc.
(Incorporated by reference to Exhibit 10.3 to the Registrant's 1998
Form 10-K.)
10.4 Office Lease, dated as of November 15, 1990, between Webb/San
Francisco Ventures, Ltd. and First Nationwide Bank, A Federal Savings
Bank. Confidential treatment has been granted for portions of this
document (Incorporated by reference to Exhibit 10.6 to Amendment No.
3 to the Registrant's Registration Statement on Form S-1 (File No.
33-82654).)
10.5 Amendment No. 2 to Lease between First Nationwide Bank, A Federal
Savings Bank, and RNM 135 Main, L.P. dated April 6, 1995.
(Incorporated by reference to Exhibit 10.26 to Post-Effective
Amendment No. 1 to the Registrant's Registration Statement on Form S-1
(File No. 33-82654).)
10.6 Letter dated March 30, 2000 extending the term of the office lease
dated as of November 15, 1990 between RNM 135 Main, L.P., as successor
to Webb/San Francisco Venture, Ltd., and California Federal Bank, as
successor to First Nationwide Bank, A Federal Savings Bank.
10.7 Employment Agreement dated November 22, 1999, between California
Federal Bank, and Gerald J. Ford. (Incorporated by reference to
Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1999 (the "1999 Form 10-K").)
10.8 Employment Agreement, dated as of December 17, 1999, between
California Federal Bank, and Carl B. Webb, II. (Incorporated by
reference to Exhibit 10.10 to the Registrant's 1999 Form 10-K.)
10.9 Employment Agreement, dated as of August 1, 1999, between California
Federal Bank, and Christie S. Flanagan. (Incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999.)
10.10 Employment Agreement, dated as of December 17, 1999, between
California Federal Bank, and J. Randy Staff. (Incorporated by
reference to Exhibit 10.15 to the Registrant's 1999 Form 10-K.)
10.11 Employment Agreement dated as of August 1, 1999, between California
Federal Bank, and Scott A. Kisting. (Incorporated by reference to
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999.)
10.12 1998 Change of Control Plan, dated as of March 25, 1999. (Incorporated
by reference to Exhibit 10.18 to the Registrant's 1999 Form 10-K.)
10.13 Litigation Management Agreement, dated as of February 4, 1998, by and
among Golden State Bancorp, Inc., Glendale Federal Bank, Federal
Savings Bank, California Federal Bank, Stephen J. Trafton and Richard
A. Fink. (Incorporated by reference to Exhibit 99.2 to the February
1998 Form 8-K.)
Page 25
10.14 Reimbursement and Expense Allocation Agreement between Golden State
Bancorp Inc. and California Federal Bank, dated November 23, 1998.
(Incorporated by reference to Exhibit 10.53 to the Registrant's 1998
Form 10-K.)
10.15 Agreement for Provision of Services between California Federal Bank,
A Federal Savings Bank and Golden State Management Inc., dated
November 23, 1998. (Incorporated by reference to Exhibit 10.54 to the
Registrant's 1998 Form 10-K.)
10.16 Amendment No. 1 dated January 1, 2000 to Agreement for Provision of
Services between Mafco Holdings Inc. and Golden State Bancorp Inc.,
dated January 1, 1999.
12.1 Statement regarding the computation of ratio of earnings to combined
fixed charges and minority interest for the Registrant.
21.1 Subsidiaries of the Registrant. This exhibit has been omitted in
accordance with General Instruction I of Form 10-K.
24.1 Power of Attorney executed by Howard Gittis.
24.2 Power of Attorney executed by Ronald O. Perelman.
27.1 Financial Data Schedule.
(c) REPORTS ON FORM 8-K
None.
Page 26
TABLE OF DEFINED TERMS
10 5/8% BANK PREFERRED STOCK - California Federal's 10 5/8% noncumulative
perpetual preferred stock
11 1/2% BANK PREFERRED STOCK - California Federal's 11 1/2% noncumulative
perpetual preferred stock
11.20% SENIOR NOTES - As part of its 1996 acquisition of San Francisco Federal,
California Federal assumed $50 million principal amount of SFFed 11.20%
Senior Notes due September 1, 2004
1996 ACQUISITIONS - 1996 acquisitions of Home Federal Financial Corporation and
San Francisco Federal
ALCO - Asset/Liability Management Committee
AUTO ONE - Auto One Acceptance Corporation
BANK - California Federal Bank Bank
BANK PREFERRED STOCK - the 10 5/8% Bank Preferred Stock together with the 11
1/2% Bank Preferred Stock
BIF - Bank Insurance Fund
BROKERED DEPOSITS - Issued certificates of deposit through direct placement
programs and national investment banking firms
CAL FED ACQUISITION - Agreement and Plan of Merger among FN Holdings, Cal Fed
Bancorp Inc. and California Federal Bank, A Federal Savings Bank. FN
Holdings acquired 100% of the outstanding stock of Cal Fed and Old
California Federal, and First Nationwide merged with and into Old
California Federal in January 1997
CALGL - Secondary Contingent Litigation Recovery Participation Interests
CALGZ - Contingent Litigation Recovery Participation Interests
CALIFORNIA FEDERAL - California Federal Bank
CALIFORNIA FEDERAL GOODWILL LITIGATION - California Federal Bank v. United
Sates, Civil Action 92-138
CFI - Cal Fed Investments
CLAIMS COURT - United States Court of Federal Claims
COMPANY - Golden State Holdings Inc.
CONVERTIBLE SUBORDINATED DEBENTURES DUE 2001 - In 1986, Cal Fed Inc., Old
California Federal's former parent company, issued $125 million of 6.5%
convertible subordinated debentures due February 20, 2001
CRA - Community Reinvestment Act
DOWNEY ACQUISITION - Auto One's acquisition of the Downey Auto Finance
Corporation in February, 2000
FAIR LENDING LAWS - Equal Credit Opportunity and the Fair Housing Act, together
FDIC - Federal Deposit Insurance Corporation
FDICIA - Federal Deposit Insurance Corporation Improvement Act
FHLB - Federal Home Loan Bank
FHLB SYSTEM - Federal Home Loan Bank System
FHLMC - Federal Home Loan Mortgage Corporation
FICO - Financing Corporation
FIRREA - Financial Institutions Reform, Recovery and Enforcement Act of 1989
and its implementing regulations
FN HOLDINGS - First Nationwide Holdings Inc.
FN HOLDINGS ASSET TRANSFER - FN Holdings contributed all of its assets
(including all of the common stock of the Bank) to GS Holdings in
September 1998
FNMA - Federal National Mortgage Association
FNMC - First Nationwide Mortgage Corporation
FSLIC - Federal Savings and Loan Insurance Corporation
GLENDALE FEDERAL - Glendale Federal Bank, Federal Savings Bank
GLENDALE GOODWILL LITIGATION - Glendale Federal Bank v. United States, No. 90-
772C
GLEN FED MERGER - Glendale Federal Bank merged with and into the Bank
GNMA - Government National Mortgage Association
GOLDEN STATE - Golden State Bancorp Inc.
GOLDEN STATE ACQUISITION - FN Holdings Asset Transfer, Holding Company Mergers
and Glen Fed Merger, collectively
GOVERNMENT - United States Government
GS HOLDINGS - Golden State Holdings Inc.
Page 27
GSAC ACQUISITION - Auto One, a subsidiary of the Bank, acquired 100% of the
partnership interests in Gulf States Acceptance Company, a Delaware
limited partnership and its general partner, Gulf States Financial
Services, Inc., a Texas corporation, in February 1998
GSB INVESTMENTS - GSB Investments Corp.
HOLA - Home Owners' Loan Act of 1933
HOLDING COMPANY MERGERS - FN Holdings merged with and into Golden State
Financial Corporation, which owned all of the common stock of Glendale
Federal
HUNTER'S GLEN - Hunter's Glen/Ford Ltd.
LTV - Loan-to-value
MAFCO HOLDINGS - Mafco Holdings Inc.
MSR - Mortgage servicing rights
NEVADA PURCHASE - 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 in April
1999.
NPV - Net portfolio value
OLD CALIFORNIA FEDERAL - California Federal Bank, A Federal Savings Bank prior
to the Cal Fed Acquisition
OTS - Office of Thrift Supervision
PARENT HOLDINGS - First Nationwide (Parent) Holdings Inc.
QTL TEST - Qualified Thrift Lender test
REIT PREFERRED STOCK - 9 1/8% Noncumulative Exchangeable Preferred Stock issued
by California Federal Preferred Capital Corporation in January 1996
SAIF - Savings Association Insurance Fund
SERVICING SALe - FNMC sold servicing rights on approximately 49,000 loans with
an unpaid principal balance of $2.0 billion in April 1999
SFFED ACQUISITION - The acquisition of San Francisco Federal by the Company in
February 1996
TAX SHARING AGREEMENT - Prior to the Golden State Acquisition, for federal
income tax purposes, the Bank, FN Holdings, and Mafco Holdings were
parties to a tax sharing agreement effective as of January 1, 1994
VERDUGO - Verdugo Trustee Service Corporation
Page 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: March 20, 2001
GOLDEN STATE HOLDINGS INC.
By: /s/Gerald J. Ford
---------------------------------
Gerald J. Ford
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Name Title Date
---- ----- ----
/s/Gerald J. Ford Chairman of the Board, Chief March 20, 2001
- --------------------------- Executive Officer and Director
Gerald J. Ford (Principal Executive Officer)
/s/Carl B. Webb President, Chief Operating March 20, 2001
- ---------------------------- Officer and Director
Carl B. Web
/s/Richard H. Terzian Executive Vice President March 20, 2001
- ---------------------------- and Chief Financial Officer
Richard H. Terzian (Principal Financial Officer)
/s/Renee Nichols Tucei Executive Vice President March 20, 2001
- ---------------------------- and Controller
Renee Nichols Tucei (Principal Accounting Officer)
* Director March 20, 2001
- ----------------------------
Howard Gittis
* Director March 20, 2001
- ----------------------------
Ronald O. Perelman
* Vanessa L. Washington, by signing her name, hereto, does hereby execute this
report on Form 10-K on behalf of the directors and officers of the Registrant
indicated above by asterisks, pursuant to powers of attorney duly executed by
such directors and officers and filed as exhibits to this report on Form
10-K.
By: /s/Vanessa L. Washington
---------------------------------
Vanessa L. Washington
Attorney-in-fact
Page 29
INDEPENDENT AUDITORS' REPORT
The Stockholder and Board of Directors
Golden State Holdings Inc.:
We have audited the accompanying consolidated balance sheets of Golden
State Holdings Inc. and subsidiaries (the "Company") as of December 31, 2000 and
1999, and the related consolidated statements of income, comprehensive income,
stockholder's equity and cash flows for each of the years in the three-year
period ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Golden State
Holdings Inc. and subsidiaries as of December 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
San Francisco, California
January 16, 2001
F-1
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2000 and 1999
(dollars in thousands, except per share data)
Assets 2000 1999
------ ----------- -----------
Cash and due from banks $ 697,441 $ 508,812
Interest-bearing deposits in other banks 123 5
Short-term investment securities 85,510 84,061
----------- -----------
Cash and cash equivalents 783,074 592,878
Securities available for sale, at fair value (includes securities pledged to
creditors with the right to sell or repledge of zero and $37,397 at December 31,
2000 and 1999, respectively) 637,070 1,075,734
Securities held to maturity (fair value $590,571 and $180,449 at December 31,
2000 and 1999, respectively) 587,503 185,357
Mortgage-backed securities available for sale, at fair value (includes securities
pledged to creditors with the right to sell or repledge of $2,620,399
and $3,799,962 at December 31, 2000 and 1999, respectively) 9,866,823 13,764,565
Mortgage-backed securities held to maturity (fair value $2,959,677 and
$2,150,014 at December 31, 2000 and 1999, respectively) (includes securities
pledged to creditors with the right to sell or repledge of $2,053,070
and $1,855,163 at December 31, 2000 and 1999, respectively) 2,886,612 2,149,696
Loans held for sale, net 845,763 729,062
Loans receivable, net 39,592,814 33,953,461
Investment in Federal Home Loan Bank ("FHLB") System 1,361,066 1,167,144
Premises and equipment, net 290,899 296,800
Foreclosed real estate, net 19,080 45,091
Accrued interest receivable 364,414 321,596
Intangible assets (net of accumulated amortization of $246,150 and $183,433
at December 31, 2000 and 1999, respectively) 691,288 819,561
Mortgage servicing rights 1,559,323 1,272,393
Other assets 1,029,082 667,793
----------- -----------
Total assets $60,514,811 $57,041,131
=========== ===========
Liabilities, Minority Interest and Stockholder's Equity
-------------------------------------------------------
Deposits $23,462,372 $23,040,571
Securities sold under agreements to repurchase 4,511,309 5,481,747
Borrowings 28,800,557 25,668,626
Other liabilities 942,397 688,870
----------- -----------
Total liabilities 57,716,635 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 at December 31, 2000 and 1999, respectively) 1 1
Additional paid-in capital 1,564,821 1,542,171
Accumulated other comprehensive loss (91,405) (276,832)
Retained earnings (substantially restricted) 824,759 395,977
----------- -----------
Total stockholder's equity 2,298,176 1,661,317
----------- -----------
Total liabilities, minority interest and stockholder's equity $60,514,811 $57,041,131
=========== ===========
See accompanying notes to consolidated financial statements.
F-2
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31, 2000, 1999 and 1998
(in thousands)
2000 1999 1998
---------- ---------- ----------
Interest income:
Loans receivable $2,852,971 $2,332,500 $1,739,294
Mortgage-backed securities available for sale 800,444 872,823 482,567
Mortgage-backed securities held to maturity 206,469 177,644 134,537
Loans held for sale 62,591 109,486 115,714
Securities available for sale 55,917 76,621 49,730
Securities held to maturity 29,499 11,459 4,702
Interest-bearing deposits in other banks 5,034 12,049 22,263
Dividends on FHLB stock 92,872 59,639 36,042
---------- ---------- ----------
Total interest income 4,105,797 3,652,221 2,584,849
---------- ---------- ----------
Interest expense:
Deposits 928,407 888,286 791,112
Securities sold under agreements to repurchase 352,100 265,467 153,697
Borrowings 1,677,498 1,312,629 829,316
---------- ---------- ----------
Total interest expense 2,958,005 2,466,382 1,774,125
---------- ---------- ----------
Net interest income 1,147,792 1,185,839 810,724
Provision for loan losses -- 10,000 40,000
---------- ---------- ----------
Net interest income after provision for loan losses 1,147,792 1,175,839 770,724
---------- ---------- ----------
Noninterest income:
Loan servicing fees, net 176,159 127,834 109,203
Customer banking fees and service charges 196,969 187,022 121,283
Gain on sale, settlement and transfer of loans, net 49,730 32,885 54,217
(Loss) gain on sale of assets, net (13,424) 21,699 193
Gain on sale of branches, net -- 2,343 108,825
Other income 34,161 31,096 23,896
---------- ---------- ----------
Total noninterest income 443,595 402,879 417,617
---------- ---------- ----------
Noninterest expense:
Compensation and employee benefits 425,327 389,904 293,573
Occupancy and equipment 153,223 141,696 97,456
Professional fees 40,852 52,493 56,327
Loan expense 17,018 17,200 24,843
Foreclosed real estate operations, net (4,690) (6,411) (6,152)
Amortization of intangible assets 62,717 69,724 53,415
Merger and integration costs -- 7,747 59,162
Other expense 203,981 219,582 159,360
---------- ---------- ----------
Total noninterest expense 898,428 891,935 737,984
---------- ---------- ----------
Income before income taxes, minority interest and extraordinary items 692,959 686,783 450,357
Income tax expense (benefit) 144,204 234,263 (96,300)
Minority interest: provision in lieu of income tax expense -- 79,005 --
Minority interest: other 26,987 34,936 109,949
---------- ---------- ----------
Income before extraordinary items 521,768 338,579 436,708
Extraordinary item - gain (loss) on early extinguishment of debt,
net of applicable taxes of $2,083, $1,801 and $(68,168) in 2000,
1999 and 1998, respectively 3,014 2,472 (98,706)
---------- ---------- ----------
Net income 524,782 341,051 338,002
Preferred stock dividends -- -- 578
---------- ---------- ----------
Net income available to common stockholder $ 524,782 $ 341,051 $ 337,424
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-3
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2000, 1999 and 1998
(in thousands)
2000 1999 1998
-------- -------- --------
Net income $524,782 $341,051 $338,002
Other comprehensive income (loss), net of tax:
Unrealized holding gain (loss) on securities available for sale:
Unrealized holding gain (loss) arising during the period 170,821 (282,241) (28,167)
Less: reclassification adjustment for loss (gain) included
in net income 9,976 (742) (844)
-------- -------- --------
180,797 (282,983) (29,011)
Amortization of market adjustment for securities
transferred from available for sale to held to maturity 4,630 -- --
-------- -------- --------
Other comprehensive income (loss) 185,427 (282,983) (29,011)
-------- -------- --------
Comprehensive income $710,209 $ 58,068 $308,991
======== ======== ========
See accompanying notes to consolidated financial statements.
F-4
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Stockholder's Equity
Years Ended December 31, 2000, 1999 and 1998
(in thousands)
Accumulated Retained
Additional Other Earnings Total
Preferred Common Paid-in Comprehensive (Substantially Stockholder's
Stock Stock Capital Income (Loss) Restricted) Equity
----- ----- ------- ------------- ----------- ------
Balance at December 31, 1997 $ 25,680 $ 1 $ 31,890 $ 35,162 $ 750,774 $ 843,507
Net income -- -- -- -- 338,002 338,002
Redemption of FN Holdings
Preferred Stock (25,787) -- 787 -- -- (25,000)
Golden State Acquisition -- -- 1,482,760 -- -- 1,482,760
GS Escrow Merger -- -- (3,535) -- -- (3,535)
Capital contribution of Trans
Network Insurance Services -- -- 56 -- -- 56
Tax benefit on exercise of stock options -- -- 103 -- -- 103
Dividends on common stock -- -- -- -- (874,155) (874,155)
Cash dividends on FN Holdings
Preferred Stock -- -- -- -- (471) (471)
Preferred Stock dividends 107 -- -- -- (107) --
Change in net unrealized holding gain
on securities available for sale -- -- -- (29,011) -- (29,011)
-------- --- ---------- ---------- --------- ----------
Balance at December 31, 1998 -- 1 1,512,061 6,151 214,043 1,732,256
Net income -- -- -- -- 341,051 341,051
Golden State Acquisition - see note 3 -- -- (12,380) -- -- (12,380)
Adjustment to initial dividend of tax
benefits to parent due to
deconsolidation -- -- -- -- 66,383 66,383
Impact of Golden State restricted
common stock -- -- 477 -- -- 477
Tax benefit on exercise of stock options -- -- 2,013 -- -- 2,013
Dividends to parent -- -- -- -- (225,500) (225,500)
Contributions from parent -- -- 40,000 -- -- 40,000
Change in net unrealized holding gain (loss)
on securities available for sale -- -- -- (282,983) -- (282,983)
-------- --- ---------- ---------- --------- ----------
Balance at December 31, 1999 -- 1 1,542,171 (276,832) 395,977 1,661,317
Net income -- -- -- -- 524,782 524,782
Change in unrealized holding loss
on securities available for sale -- -- -- 180,797 -- 180,797
Amortization of unrealized holding
loss on securities held to maturity -- -- -- 4,630 -- 4,630
Dividends to parent -- -- -- -- (96,000) (96,000)
Contributions from parent -- -- 19,000 -- -- 19,000
Impact of Golden State restricted
common stock -- -- 3,175 -- -- 3,175
Tax benefit on exercise of stock options -- -- 475 -- -- 475
-------- --- ---------- ---------- --------- ----------
Balance at December 31, 2000 $ -- $ 1 $1,564,821 $ (91,405) $ 824,759 $2,298,176
======== === ========== ========== ========= ==========
See accompanying notes to consolidated financial statements.
F-5
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 2000, 1999 and 1998
(in thousands)
2000 1999 1998
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 524,782 $ 341,051 $ 338,002
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Amortization of intangible assets 62,717 69,724 53,415
Provision (benefit) for deferred income taxes 30,991 146,373 (212,993)
Accretion of discount on borrowings 1,093 1,018 285
Amortization (accretion) of purchase accounting
premiums and discounts, net 269 7,541 (236)
Amortization of mortgage servicing rights 204,032 212,310 158,163
Provision for loan losses -- 10,000 40,000
Loss (gain) on sale of assets, net 13,424 (21,699) (193)
Gain on sale of branches, net -- (2,343) (108,825)
Gain on sale of foreclosed real estate, net (8,950) (13,069) (13,559)
Loss on sale, settlement and transfer of loans, net 76,918 160,970 115,755
Capitalization of originated mortgage servicing rights (126,648) (193,855) (169,972)
Extraordinary items - (gain) loss on early
extinguishment of debt, net (3,014) (2,472) 98,706
Depreciation and amortization of premises and
equipment 51,067 37,465 26,458
Amortization of deferred debt issuance costs 7,354 7,295 6,958
FHLB stock dividends (92,872) (59,639) (36,042)
Purchases and originations of loans held for sale (5,344,219) (8,345,470) (8,843,499)
Net proceeds from the sale of loans held for sale 5,059,241 9,703,072 7,892,122
(Increase) decrease in other assets (459,836) 69,397 161,485
Increase in accrued interest receivable (41,580) (4,141) (17,630)
Increase (decrease) in other liabilities 272,812 (263,027) (95,754)
Amortization of deferred compensation expense -
Golden State restricted common stock 1,897 477 --
Minority interest: provision in lieu of income taxes -- 79,005 --
Minority interest: other 26,987 34,936 109,949
Other operating activity 36 -- --
----------- ----------- -----------
Net cash provided by (used in) operating activities 256,501 1,974,919 (497,405)
----------- ----------- -----------
Cash flows from investing activities:
Acquisitions and divestitures:
Downey Acquisition (379,314) -- --
Nevada Purchase -- 458,943 --
Golden State Acquisition -- 792,127
GSAC Acquisition -- (13,577)
(Continued)
See accompanying notes to consolidated financial statements.
F-6
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
Years Ended December 31, 2000, 1999 and 1998
(in thousands)
2000 1999 1998
------------ ------------ ------------
Cash flows from investing activities (continued):
Purchases of securities available for sale $ (50,691) $ (807,690) $ (891,643)
Proceeds from maturities of securities available for sale 58,022 431,934 975,288
Purchases of securities held to maturity (4,199) (28,869) (384)
Principal payments and proceeds from maturities of securities
held to maturity 51,289 94,820 2,827
Purchases of mortgage-backed securities available for sale (115,256) (4,832,344) (8,955,882)
Principal payments on mortgage-backed securities available for sale 1,878,401 3,623,918 3,261,363
Proceeds from sales of mortgage-backed securities available for sale 1,367,666 193,732 25,292
Principal payments on mortgage-backed securities held to maturity 428,067 621,179 468,544
Proceeds from sales of loans 68,713 18,528 10,875
Net (increase) decrease in loans receivable (3,774,409) (1,694,325) 2,280,576
Purchases of loans receivable (1,648,599) (2,197,573) (593,378)
Purchases of FHLB stock, net (107,570) (110,477) (278,955)
Purchases of premises and equipment (48,718) (44,331) (71,361)
Proceeds from disposal of premises and equipment 4,146 14,549 30,634
Proceeds from sales of foreclosed real estate 75,312 136,565 164,278
Purchases of mortgage servicing rights (364,754) (357,557) (157,224)
Proceeds from sales of mortgage servicing rights 774 30,802 --
------------ ------------ ------------
Net cash used in investing activities (2,561,120) (4,448,196) (2,950,600)
------------ ------------ ------------
Cash flows from financing activities:
Branch sales -- (69,340) (1,267,517)
Net increase (decrease) in deposits 423,216 (2,074,736) (1,426,963)
Proceeds from additional borrowings 43,513,455 33,029,009 25,559,922
Principal payments on borrowings (40,367,906) (29,717,967) (20,496,018)
Net (decrease) increase in securities sold under agreements
to repurchase (970,438) 1,243,352 1,945,646
Proceeds from the GS Escrow Merger -- -- 1,970,285
Bank Preferred Stock Tender Offers -- (97,621) (423,509)
Debt Tender Offers -- (253) (1,089,885)
Redemption of FN Holdings Preferred Stock -- -- (25,000)
Dividends on common stock (96,000) (225,500) (662,914)
Dividends on preferred stock -- -- (471)
Dividends paid to minority stockholders, net of taxes (26,987) (30,752) (80,035)
Tax benefit on exercise of stock options 475 2,013 103
Capital contribution from parent 19,000 40,000 --
------------ ------------ ------------
Net cash provided by financing activities 2,494,815 2,098,205 4,003,644
------------ ------------ ------------
Net change in cash and cash equivalents 190,196 (375,072) 555,639
Cash and cash equivalents at beginning of year 592,878 967,950 412,311
------------ ------------ ------------
Cash and cash equivalents at end of year $ 783,074 $ 592,878 $ 967,950
============ ============ ============
See accompanying notes to consolidated financial statements.
F-7
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) ORGANIZATION
Golden State Holdings Inc. (the "Company" or "GS Holdings"), a wholly owned
subsidiary of Golden State Bancorp Inc. ("Golden State"), is a holding company
whose only significant asset is all of the common and preferred stock of
California Federal Bank. GS Holdings was formed to acquire all of the assets of
First Nationwide Holdings Inc. ("FN Holdings") (including all of the common and
preferred stock of California Federal Bank) as part of the Golden State
Acquisition (as defined herein). FN Holdings was a holding company whose only
significant asset was all of the common stock of California Federal Bank. As
such, the principal business operations of FN Holdings were, and the principal
business operations of GS Holdings are, primarily carried out by California
Federal Bank and its operating subsidiaries ("California Federal" or "Bank").
The Bank is a diversified financial services company that primarily serves
consumers in California and, to a lesser extent, in Nevada. The Bank's principal
business consists of operating retail branches that provide deposit products
such as demand, transaction and savings accounts, and selling 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 Bank originates and/or purchases commercial real estate,
commercial banking 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.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform to generally
accepted accounting principles ("GAAP") and prevailing practices within the
banking and thrift industries. The following summarizes the more significant of
these policies.
(a) Basis of Presentation
The accompanying consolidated financial statements include the accounts of
GS Holdings, the Bank and the Bank's wholly owned subsidiaries. Unless the
context otherwise indicates, "GS Holdings" or "Company" refers to Golden State
Holdings Inc. as the surviving entity after the consummation of the Golden State
Acquisition and as the surviving corporation in the GS Escrow Merger (as defined
herein) for periods after the GS Escrow Merger. On September 11, 1998, Glendale
Federal Bank, Federal Savings Bank ("Glendale Federal") merged with and into the
Bank pursuant to the Glen Fed Merger (as defined herein). Unless the context
otherwise indicates, "California Federal" or "Bank" refers to California Federal
as the surviving entity after the consummation of the Golden State Merger (as
defined herein). All significant intercompany balances and transactions have
been eliminated in consolidation. Certain amounts in the prior years have been
reclassified to conform to the current year's presentation.
As GS Holdings' common stock is wholly owned by Golden State, earnings per
share data is not presented.
(b) Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash and due from banks, interest-bearing deposits in other
banks, and other short-term investment securities with original maturities of
three months or less. Savings and loan associations are required by the Federal
Reserve System to maintain non-interest bearing cash reserves equal to a
percentage of certain deposits. The reserve requirement for California Federal
at December 31, 2000 was $57.8 million, which was met with vault cash of $108.5
million and cash reserves of $21.6 million.
F-8
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(c) Securities and Mortgage-backed Securities
The Company's investment in securities consists primarily of U.S.
government and agency securities and mortgage-backed securities. The Company
classifies debt and equity securities, including mortgage-backed securities,
into one of three categories: held to maturity, available for sale or trading
securities. Securities held to maturity represent securities which management
has the positive intent and ability to hold to maturity and are carried at
amortized cost. Securities bought and held principally for the purpose of
selling them in the near term are classified as trading securities and reported
at fair value, with unrealized gains and losses included in income. All other
securities including equity securities with readily determinable fair values are
classified as available for sale and are carried at fair value, with unrealized
holding gains and losses, net of tax, reported as a separate component of
stockholder's equity until realized. Declines in the value of held-to-maturity
and available-for-sale securities below their cost that are deemed to be other
than temporary are reflected in earnings as realized losses. Realized gains and
losses on securities available for sale are computed on a specific
identification basis and are accounted for on a trade-date basis.
Amortization and accretion of premiums and discounts relating to
mortgage-backed securities is recognized using the interest method over the
estimated lives of the underlying mortgages.
(d) Loans Held for Sale, Net
One-to-four unit residential loans originated and intended for sale in the
secondary market are carried at the lower of aggregate cost or market value as
determined by outstanding commitments from investors or current investor yield
requirements calculated on an aggregate basis. Net unrealized losses are
recognized in a valuation allowance by charges to income.
(e) Loans Receivable, Net
Loans receivable, net, is stated at unpaid principal balances, less the
allowance for loan losses, and net of deferred loan origination fees or costs
and purchase discounts or premiums.
Discounts or premiums on 1-4 unit residential loans are accreted or
amortized to income using the interest method, generally over the remaining
contractual loan period. Discounts or premiums on consumer and other loans are
recognized over the lives of the loans using the interest method.
A significant portion of the Company's real estate loan portfolio is
comprised of adjustable-rate mortgages. The interest rate and payment terms of
these mortgages adjust on a periodic basis in accordance with various published
indices. The majority of these adjustable-rate mortgages have terms which limit
the amount of interest rate adjustment that can occur each year and over the
life of the mortgage. When such limits are applied, negative amortization occurs
on certain adjustable-rate mortgages. See note 34.
The allowance for loan losses is adjusted by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic evaluation
of the adequacy of the allowance is based on such factors as the Company's past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that have occurred but are not yet known that may affect the
borrower's ability to repay, the estimated value of underlying collateral, and
economic conditions. Management's methodology for assessing the adequacy of the
allowance includes the evaluation of the following three key elements: (a) the
formula allowance, (b) specific allowances for identified problem loans and (c)
the unallocated allowance. As management utilizes information currently
available to make such evaluation, the allowance for loan losses is subjective
and may be adjusted in the future depending on changes in economic conditions or
other factors. Additionally, regulatory authorities, as an integral part of
their regular examination process, review the Bank's allowance for estimated
losses on a periodic basis. These authorities may require the Bank to recognize
adjustments to the allowance based on their judgment of information available to
them at the time of their examination.
F-9
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Uncollectible interest on loans that are contractually ninety days or more
past due is charged off, or an allowance is established, based on management's
periodic evaluation. The allowance is established by a charge to interest income
equal to all interest previously accrued, and income is subsequently recognized
only to the extent that cash payments are received. When, in management's
judgment, the borrower's ability to make periodic interest and principal
payments resumes, the loan is returned to accrual status.
(f) Securitized Loan Sales
When the Company has sold receivables in securitizations of residential
mortgage loans, it has retained one or more subordinated tranches and servicing
rights, both of which are retained interests in the securitized receivables.
Gain or loss on sale of the receivables depends in part on the previous carrying
amount of the financial assets involved in the transfer, allocated between the
assets sold and the retained interests based on their relative fair values at
the date of transfer. To obtain fair values, quoted market prices are used if
available. However, quotes are generally not available for retained interests,
so the Company generally estimates fair value based on the present value of
future expected cash flows estimated using management's best estimates of the
key assumptions (credit losses, prepayment speeds and discount rates
commensurate with the risks involved) applied by an independent company in its
valuation analysis.
(g) Auto One Loans
The Company, through its 80% owned subsidiary, Auto One (as defined
herein), originates loans and also purchases loans individually and in groups.
Purchased loans are grouped and accounted for in homogeneous pools based upon
certain risk characteristics, including interest coupon rate, credit quality,
and period of origination. At acquisition, the Company estimates the amount and
timing of undiscounted expected principal and interest cash flows ("Expected
Cash Flows") for each pool. For certain purchased pools of loans, the amount
paid reflects the Company's determination that it is probable the Company will
be unable to collect all amounts due according to the contractual terms of the
underlying loans in the pool. Accordingly, at acquisition, the Company
recognizes the excess of the pool's scheduled contractual principal and
contractual interest payments over its Expected Cash Flows as an amount that
should not be accreted ("Nonaccretable Contractual Cash Flows"). The remaining
amount - representing the excess of the pool's Expected Cash Flows over the
amount paid - is accreted into interest income over the remaining life of each
pool ("Accretable Yield").
Over the life of each pool of loans, the Company continues to estimate
Expected Cash Flows. In the event a pool's actual cash flows plus the expected
cash payments are less than the Expected Cash Flows estimated at the time of the
purchase, the amount by which the current carrying value of the pool exceeds the
present value of the expected cash flows discounted at the originally estimated
internal rate of return is an impairment and requires an allocation of the
allowance for loan losses established by provisions for loan losses. If the
present value of a pool's expected remaining cash flows discounted at the
originally estimated internal rate of return exceeds the current carrying value
of the pool, the amount of the Accretable Yield is increased and the amount of
the Nonaccretable Contractual Cash Flows is decreased by the amount the sum of a
pool's expected remaining cash flows exceeds the sum of the remaining payments
less the Nonaccretable Contractual Cash Flows. The adjusted Accretable Yield is
accreted into interest income over the pool's remaining life using the interest
method.
(h) Impaired Loans
The Company considers a loan impaired when, based on current information
and events, it is "probable" that it will be unable to collect all amounts due
(i.e., both principal and interest) according to the contractual terms of the
loan agreement. Any insignificant delay or insignificant shortfall in amount of
payments will not cause a loan to be considered impaired. In determining
impairment, the Company considers large non-homogeneous loans including
nonaccrual loans, troubled debt restructurings and performing loans that
exhibit, among other characteristics, high loan-to-value ratios, low
debt-coverage ratios, or other indications that the borrowers are experiencing
increased levels of financial difficulty. Loans collectively reviewed for
impairment by the Company include all single-family loans, commercial banking
loans under $100,000 and performing multi-family and commercial real estate
loans under $500,000, excluding loans which have entered the workout process.
F-10
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
(i) Loan Origination and Commitment Fees and Related Costs
Loan origination fees, net of loan origination costs, are deferred and
amortized to interest income using the interest method, generally over the
contractual term of the loan, adjusted for actual loan prepayment experience.
Unamortized fees, net of loan origination costs on loans sold or paid in full,
are recognized as income or expense, as appropriate. Adjustable-rate loans with
lower initial interest rates during the introductory period result in the
amortization of a substantial portion of the net deferred fees during the
introductory period.
Fees received in connection with loan commitments are deferred and
recognized as fee revenue on a straight-line basis over the term of the
commitment. If the commitment is subsequently exercised during the commitment
period, the remaining unamortized commitment fee at the time of exercise is
recognized over the term of the loan using the interest method.
Commitment fees paid to investors, for the right to deliver residential
loans in the future to the investors at specified yield, are deferred. Amounts
are included in the recognition of gain (loss) on sale of loans as loans are
delivered to the investor in proportion to the percentage relationship of loans
delivered to the total commitment amount. Any unused fees are recognized as an
expense at the expiration of the commitment date, or earlier, if it is
determined the commitment will not be filled.
Other loan fees and charges, which represent income from the prepayment of
loans, delinquent payment charges, and miscellaneous loan services, are
recognized as income when collected.
(j) Premises and Equipment, Net
Land is carried at cost. Premises, equipment and leasehold improvements are
stated at cost, less accumulated depreciation. Premises, equipment and leasehold
improvements are depreciated on a straight-line basis over the lesser of the
lease term or the estimated useful lives of the various classes of assets.
Maintenance and repairs on premises and equipment are charged to expense in the
period incurred.
Closed facilities of the Company and its subsidiaries are carried at fair
value. In the case of leased premises that are vacated by the Company, a
liability is recorded representing the difference between the net present value
of future lease payments plus holding costs and the net present value of
anticipated sublease income, if any, for the remaining term of the lease.
(k) Foreclosed Real Estate, Net
Real estate acquired through, or in lieu of, loan foreclosure is initially
recorded at fair value less estimated disposal costs at the time of foreclosure.
Subsequent to foreclosure, the Company charges current earnings with a provision
for estimated losses if the carrying value of the collateral property exceeds
its fair value. Gains or losses on the sale of real estate are recognized upon
disposition of the property. Carrying costs such as maintenance and property
taxes are expensed as incurred.
F-11
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(l) Intangible Assets
Intangible assets, which primarily consist of the excess of cost over fair
value of net assets acquired in business combinations accounted for as a
purchase, are amortized on a straight-line basis over the expected period to be
benefited of 15 years. The Company periodically reviews the operations of the
businesses acquired to determine that income from operations continues to
support the recoverability of its intangible assets and the amortization periods
used.
(m) Mortgage Servicing Rights
The Company purchases mortgage servicing rights separately and acquires
mortgage servicing rights through the sale of loans it purchases or originates.
Generally, purchased mortgage servicing rights are capitalized at the cost to
acquire the rights and are carried at the lower of cost, net of accumulated
amortization, or fair value. Originated mortgage servicing rights are
capitalized based on the relative fair value of the servicing right to the fair
value of the loan and the servicing right and are carried at the lower of the
capitalized amount, net of accumulated amortization, or fair value.
A portion of the cost of originating a mortgage loan is allocated to the
mortgage servicing right based on its relative fair value. To determine the fair
value of mortgage servicing rights the Company uses market prices for comparable
mortgage servicing contracts, when available, or alternatively, uses a valuation
model that calculates the present value of future net servicing income. In using
this valuation method, the Company incorporates assumptions that market
participants would use in estimating future net servicing income, which includes
estimates of the cost to service, the discount rate, custodial earnings rate, an
inflation rate, ancillary income, prepayment speeds and default rates and
losses.
Mortgage servicing rights are amortized in proportion to, and over the
period of, estimated net servicing income. The amortization of the mortgage
servicing rights is analyzed periodically and is adjusted to reflect changes in
prepayment rates and other estimates.
The Company evaluates the possible impairment of servicing rights based on
the difference between the carrying amount and current fair value of the
servicing rights. In determining impairment, the Company aggregates all mortgage
servicing rights and stratifies them based on the predominant risk
characteristics of interest rate, loan type and investor type. If impairment
were to exist, a valuation allowance would be established for any excess of
amortized cost over the current fair value, by risk stratification, by a charge
to income.
The Company employs hedging techniques through the use of interest rate
floors, interest rate swaptions, interest rate swaps and principal-only swaps to
reduce the sensitivity of its earnings and value of its servicing rights to
declining interest rates and borrower prepayments as further discussed in note
37. The Company uses hedge accounting because mortgage servicing rights expose
the Company to interest rate risk. At the inception of the hedge and throughout
the hedge period, high correlation of changes in the market value of the hedge
instruments and the fair value of the mortgage servicing rights due to the
designated hedge risk is probable. Therefore, changes in the market value of the
hedge instruments due to interest rate changes will substantially offset changes
in the market value of mortgage servicing rights due to interest rate changes.
If high correlation does not exist, the hedge instruments would be considered
speculative and would be marked to market with changes in market value reflected
in current income.
The premium paid by the Company on the interest rate floors and swaptions
is amortized over the life of the contract. Amounts receivable or payable under
the interest rate swaps and principal only swaps, as well as amounts receivable
under the interest rate floors, interest rate swaptions or terminated hedges are
included in the carrying value of mortgage servicing rights and are amortized as
part of the basis in mortgage servicing rights.
F-12
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(n) Gains/Losses on Sales, Settlement and Transfer of Loans, Net
Mortgage loans are generally sold with the mortgage servicing rights
retained by the Company. The carrying value of mortgage loans sold is reduced by
the cost allocated to the associated mortgage servicing rights. Gains or losses
on sales of mortgage loans are recognized based on the difference between the
selling price and the carrying value of the related mortgage loans sold.
Deferred origination fees and expenses, net of commitment fees paid in
connection with the sale of the loans, are recognized at the time of sale in the
gain or loss determination.
In the normal course of business, the Company purchases loans held for
investment at a discount. Proceeds received in settlement of loans in excess of
the carrying value are included in gain on sale and settlement of loans, net.
(o) Servicing Fee Income
Servicing fee income is recorded for fees earned for servicing mortgage
loans under servicing agreements with Fannie Mae ("FNMA"), Freddie Mac
("FHLMC"), the Government National Mortgage Association ("GNMA") and certain
private investors. The fees are based on a contractual percentage of the
outstanding principal balance or a fixed amount per loan and are recorded as
income when received. The amortization of mortgage servicing rights and
pass-through interest expense are netted against servicing fee income.
(p) Derivatives
The Company uses interest rate derivative financial instruments (interest
rate swaps, interest rate floors, interest rate swaptions and principal only
swaps) primarily to hedge against prepayment risk in its mortgage servicing
portfolio caused by declining interest rates and to hedge against the interest
rate risk inherent in fixed-rate FHLB advances. These instruments serve to
reduce the Company's exposure to movements in interest rates, both at inception
and throughout the hedge period. At the inception of the hedge, the Company
identifies an individual asset or liability, or an identifiable group of
essentially similar assets or liabilities, that expose the Company to interest
rate risk at the consolidated level.
Interest rate derivative financial instruments receive hedge accounting
treatment only if they are designated as a hedge and are expected to be, and
are, effective in substantially reducing interest rate risk arising from the
assets and liabilities identified as exposing the Company to risk. Those
derivative financial instruments that do not meet the hedging criteria discussed
below would be classified as trading activities and would be recorded at fair
value with changes in fair value recorded in income. Derivative hedge contracts
must meet specific correlation tests (i.e., over time the change in their fair
values due to the designated hedge risk must be within 80 to 125 percent of the
opposite change in the fair values of the hedged assets or liabilities). Changes
in fair value of the derivative financial instruments must be effective at
offsetting changes in the fair value of the hedged items due to the designated
hedge risk during the term of the hedge. Further, if the underlying financial
instrument differs from the hedged asset or liability, there must be a clear
economic relationship between the prices of the two financial instruments.
If periodic assessment indicates derivatives no longer provide an effective
hedge, the derivatives contracts would be closed out and settled or classified
as a trading activity. For hedges of borrowings, the net settlement (upon close
out or termination) that offsets changes in the value of the hedged borrowing is
deferred and amortized into net interest income over the life of the hedged
asset or liability. For hedges of MSRs, the net settlement (upon close out or
termination) that offsets changes in the value of the MSRs adjusts the basis of
the MSRs and is deferred and amortized to loan servicing income over the life of
the MSRs. The portion, if any, of the net settlement amount that did not offset
changes in the value of the hedge asset or liability is recognized immediately
in noninterest income.
F-13
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Interest rate swaps that hedge borrowings are accounted for under the
"accrual method." Interest rate floors, swaptions, principal only swaps and
interest rate swaps that hedge MSRs are accounted for under the "deferral
method." Under the accrual method, the net interest payment due or owed under
the instrument is recognized over the life of the contract in net interest
income. Under the deferral method, realized gains or losses, or payments made or
received on the derivative financial instrument, are reported as adjustments to
the carrying value of the hedged asset or liability. There is no recognition
under either method on the balance sheet for changes in the derivative's fair
value.
Except for contracts designated as a hedge of an available-for-sale
security, derivative financial instruments are not carried at fair value. If
there were contracts that were designated as a hedge of an available-for-sale
security, in addition to the accrual method and deferral method of accounting,
these contracts would be carried at fair value with the resulting gain or loss
recognized in other comprehensive income.
Interest rate swaptions and interest rate floor premiums are classified on
the balance sheet with the hedged asset or liability at the time the premium is
paid. These premiums are amortized to net loan servicing fee income over the
life of the contract.
Cash flows resulting from the derivative financial instruments that are
accounted for as hedges of assets and liabilities are classified in the cash
flow statement in the same category as the cash flows of the items being hedged.
(q) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
A valuation allowance is maintained against the deferred tax asset in an
amount representing the amount of such asset which is more likely than not that
the Company will be unable to utilize. The deferred tax asset is continually
evaluated for realizability. To the extent that management's judgment regarding
the realization of the deferred tax asset changes, an adjustment to the
allowance is recorded, with an offsetting increase or decrease, as appropriate,
in income tax expense. Such adjustments are recorded in the period in which
management's estimate as to the realizability of the asset changed.
Prior to the Golden State Merger, for federal income tax purposes, the
Company was a member of the Mafco Holdings Inc. affiliated group, ("Mafco
Group"), and accordingly, its federal taxable income or loss prior to the Golden
State Acquisition was included in the consolidated federal income tax return
filed by Mafco. The Company was also included in certain state and local income
tax returns of Mafco or its subsidiaries. The Company's tax sharing agreement
with Mafco provided that income taxes be based on the separate results of the
Company. The agreement generally provided that the Company would pay Mafco
amounts equal to the taxes that the Company would be required to pay if it were
to file a return separately from the affiliated group. Furthermore, the
agreement provided that the Company would be entitled to take into account any
net operating loss carryovers in determining its tax liability. The agreement
also provided that Mafco pay the Company amounts equal to tax refunds the
Company would be entitled to if it had always filed a separate company tax
return.
In connection with the Golden State Acquisition, the tax sharing agreement
with FN Holdings was assumed by GS Holdings and the Company and its subsidiaries
became part of the Golden State affiliated group. Accordingly, the Company and
its subsidiaries file consolidated federal income tax returns and certain state
and local income tax returns for periods subsequent to September 11, 1998.
F-14
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(r) Stock Compensation Plan
The Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
encourages all entities to adopt a fair value based method of accounting for
employee stock compensation plans, whereby compensation cost is measured at the
grant date based on the value of the award and is recognized over the service
period, which is usually the vesting period. However, it also allows an entity
to continue to measure compensation cost for those plans using the intrinsic
value based method of accounting prescribed by Accounting Principles Board
("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, whereby
compensation cost is the excess, if any, of the quoted market price of the stock
at the grant date (or other measurement date) over the amount an employee must
pay to acquire the stock. Stock options issued under Golden State's stock option
plan established for the benefit of the Bank's employees have no intrinsic value
at the grant date, and under APB Opinion No. 25, no compensation cost was
recognized for them. Compensation expense related to restricted stock issued
under Golden State's stock plan is recognized on a straight line basis over the
vesting period for each tranche of the award, with a corresponding increase to
additional paid-in capital. Dividends on unvested restricted stock are recorded
as compensation expense with a corresponding increase to additional paid-in
capital. The Company has elected to continue with the accounting methodology
prescribed in APB Opinion No. 25 and complies with the disclosure requirements
of SFAS No. 123.
(s) Management's Use of Estimates
The preparation of the consolidated financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect (a) the
reported amounts of assets and liabilities, (b) disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and (c) the
reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
(t) Recent Accounting Pronouncements
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS No.
133"). SFAS No. 133 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 has also been amended
by Statement of Financial Accounting Standards No. 138, ACCOUNTING FOR CERTAIN
DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES, which addresses certain
implementation issues that arise in the application of SFAS No. 133. 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 over time 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.
F-15
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company has identified various types of instruments which will qualify
as derivatives pursuant to SFAS No. 133. The derivative instruments (interest
rate floors, interest rate swaps, principal only swaps and interest rate
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 Company also hedges
its mortgage loans held for sale and its rate-locked pipeline of mortgage loans,
primarily with mandatory forward loan commitments which will be reported as fair
value hedges. The rate-locked pipeline is a derivative pursuant to SFAS No. 133
and will be reported in the financial statements at fair value. 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.
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 ("EITF").
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 are
issued or earnings are reported by the Company.
Generally, the high-effectiveness requirement has been interpreted to mean
that the cumulative changes in the value of the hedging instrument since hedge
inception due to the hedged risk 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. Alternatively, a regression analysis that yields an r squared of
0.8 or greater is considered to meet the high effectiveness requirement.
SFAS No. 133, as amended, will significantly change the accounting
treatment of derivative instruments used by the Company. Depending on the
underlying risk management strategy, these accounting changes will affect
reported net income, assets, liabilities and stockholder's equity. As a result,
the Company has reviewed 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. SFAS No. 133 will be adopted by the Company
effective January 1, 2001 and will not be applied retroactively to financial
statements of prior periods.
The transition adjustment recorded on January 1, 2001 did not have a
material impact on net income and resulted in a decrease in other comprehensive
income of $45 million. As of January 1, 2001, derivatives of $16 million were
recorded as assets and $90 million as liabilities as a result of the
implementation of SFAS No. 133.
ACCOUNTING FOR TRANSFERS AND SERVICING FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES
On September 29, 2000, the FASB issued Statement of Financial Accounting
Standards No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS
AND EXTINGUISHMENTS OF LIABILITIES ("SFAS No. 140"). SFAS No. 140 replaces SFAS
No. 125, which was issued in June of 1996. It revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of the
provisions of SFAS No. 125 without reconsideration. In general, SFAS No. 140 is
effective for transfers of financial assets occurring after March 31, 2001 and
for disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000.
The implementation of SFAS No. 140 is not expected to materially impact the
Company's financial results.
F-16
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
RECOGNITION OF INTEREST INCOME AND IMPAIRMENT ON PURCHASED AND RETURNED
BENEFICIAL INTERESTS IN SECURITIZED FINANCIAL ASSETS
On September 21, 2000, the EITF issued EITF No. 99-20, RECOGNITION OF
INTEREST INCOME AND IMPAIRMENT ON PURCHASED AND RETAINED BENEFICIAL INTERESTS IN
SECURITIZED FINANCIAL ASSETS ("EITF No. 99-20"). This document, which is
effective in the second quarter of 2001, establishes guidance for (1)
recognizing interest income (including amortization of premiums or discounts) on
(a) all credit-sensitive mortgage and asset-backed securities and (b) certain
prepayment-sensitive securities including agency interest-only strips and (2)
determining when these securities must be written down to fair value because of
impairment. Existing GAAP did not provide interest recognition and impairment
guidance for securities on which cash flows change as a result of both
prepayments and credit losses and, in some cases interest rate adjustments.
The implementation of EITF No. 99-20 is not expected to materially impact
the Company's financial results.
(3) ACQUISITIONS AND DIVESTITURES
GOLDEN STATE ACQUISITION
On September 11, 1998, First Nationwide (Parent) Holdings Inc. ("Parent
Holdings") and Hunter's Glen/Ford Ltd. ("Hunter's Glen") completed the merger
with Golden State, the publicly traded parent company of Glendale Federal, in a
tax-free exchange of shares (the "Golden State Merger"), accounted for under the
purchase method of accounting. Pursuant to the Golden State Merger agreement,
(a) FN Holdings contributed all of its assets (including all of the common stock
of the Bank) to GS Holdings (the "FN Holdings Asset Transfer"), (b) Parent
Holdings, which then owned all of the common stock of FN Holdings as a result of
the extinguishment of the Hunter's Glen minority interest, merged with and into
Golden State, which indirectly owned 100% of the common stock of Glendale
Federal, (c) FN Holdings merged with and into Golden State Financial Corporation
("GS Financial"), which owned all of the common stock of Glendale Federal (the
"FN Holdings Merger," and together with the Golden State Merger, the "Holding
Company Mergers") and (d) Glendale Federal merged with and into the Bank (the
"Glen Fed Merger"). The FN Holdings Asset Transfer, the Holding Company Mergers
and the Glen Fed Merger are referred to collectively as the "Golden State
Acquisition."
Pursuant to the Golden State Merger agreement, First Gibraltar Holdings
Inc. ("First Gibraltar"), the parent company of Parent Holdings, and Hunter's
Glen, a 20% minority shareholder of FN Holdings, received at the closing of the
Golden State Acquisition, in consideration of their interests as stockholders of
Parent Holdings and FN Holdings, 56,722,988 shares of common stock, par value
$1.00 (the "Golden State Common Stock"), that constituted, in the aggregate,
47.9% of the common stock outstanding, immediately after giving effect to the
Golden State Acquisition. In connection with the Golden State Merger, the
Hunter's Glen minority interest in FN Holdings was extinguished. Subsequent to
the Golden State Merger, GSB Investments Corp. ("GSB Investments"), an indirect
subsidiary of Mafco Holdings Inc., became the successor to First Gibraltar under
the Golden State Merger agreement and the owner of the shares of common stock
previously held by First Gibraltar.
F-17
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At September 11, 1998, Glendale Federal had total assets of approximately
$18.9 billion and deposits of $11.3 billion and operated 181 branches and 26
loan offices in California. The following is a summary of assets acquired and
liabilities assumed in connection with the Golden State Acquisition at September
11, 1998.
Estimated
Carrying Fair Value Fair Remaining
Value Adjustments Value Lives
----- ----------- ----- -----
(dollars in thousands) (in years)
Cash and cash equivalents $ 782,233 $ $ 782,233 --
Securities and mortgage-backed securities 2,354,263 16,015 2,370,278 1-5
Loans receivable, net 14,432,389 129,718 14,562,107 6-9
Office premises and equipment, net 158,446 (9,692) 148,754 2-12
Investment in FHLB System 314,591 -- 314,591 --
Foreclosed real estate, net 47,504 -- 47,504 --
Accrued interest receivable 115,165 -- 115,165 --
Mortgage servicing rights 230,764 (17,831) 212,933 2-7
Goodwill 271,743 (271,743) -- --
Other assets 204,372 77,709 282,081 2-5
Deposits (11,293,173) (10,547) (11,303,720) 1-8
Borrowings (5,877,574) (45,310) (5,922,884) 1-5
Other liabilities (399,737) (65,017) (464,754) 1-10
------------ --------- ------------
$ 1,340,986 $(196,698) 1,144,288
============ =========
Purchase price 1,451,982
------------
Excess cost over fair value of net assets acquired $ 307,694 15
============
The Golden State Acquisition was accounted for as a purchase and
accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed in the transaction based on estimates of fair value at the
date of purchase. Since the date of purchase, the results of operations related
to such assets and liabilities have been included in the Company's consolidated
statements of income.
Merger and integration costs associated with the Golden State Acquisition
were $7.7 million and $59.2 million for the years ended December 31, 1999 and
1998, respectively, including severance for terminated California Federal
employees, expenses for California Federal branch closures, and conversion and
consolidation costs, as well as transition expenses for duplicate personnel,
facilities and computer systems during the integration period. No such expenses
were incurred during 2000.
During the year ended December 31, 2000, the Company recorded adjustments
to reduce intangible assets by $2.3 million related to a tax refund for periods
prior to the Golden State Acquisition and to increase intangible assets by $2.1
million to "true-up" the deferred tax asset.
During the year ended December 31, 1999, the Company recorded fair value
and other adjustments to increase intangible assets in the Golden State
Acquisition by $0.3 million, increasing a previously recorded vacant facility
accrual. In addition, intangible assets were reduced by $16.6 million, $18.1
million and $12.4 million related to (a) previously accrued severance and
termination costs (which had not been utilized upon completion of the
integration plan), (b) a "true-up" adjustment of the deferred tax asset and (c)
the purchase price, respectively.
DOWNEY ACQUISITION
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.
F-18
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NEVADA BRANCH PURCHASE
On April 16, 1999, the Bank acquired twelve retail branches located in
Nevada with deposits of approximately $543 million from Norwest Bank, Nevada, a
subsidiary of Norwest Corporation, and Wells Fargo Bank, N.A (the "Nevada
Purchase"). Intangible assets of $50.7 million were recorded in connection with
this acquisition, principally representing the deposit premium paid in the
transaction.
FLORIDA BRANCH SALE
On September 11, 1998, the Bank consummated the sale of its Florida bank
franchise (consisting of 24 branches with deposits of $1.4 billion) to Union
Planters Bank of Florida, a wholly owned subsidiary of Union Planters Corp. (the
"Florida Branch Sale"). The Company recorded a pre-tax gain of approximately
$108.9 million in connection with the Florida Branch Sale, representing a
deposit premium of approximately 7.92%.
GSAC ACQUISITION
On February 4, 1998, Auto One, a subsidiary of the Bank, acquired 100% of
the partnership interests in Gulf States Acceptance Company, a Delaware limited
partnership ("GSAC") and its general partner, Gulf States Financial Services,
Inc., a Texas corporation. GSAC was liquidated and its assets and liabilities
were transferred to Auto One (the "GSAC Acquisition"). The aggregate
consideration paid by Auto One in connection with the GSAC Acquisition was
approximately $13.6 million plus 250 shares of its common stock, par value $1.00
per share, representing a 20% interest in the common stock of Auto One. This
interest is reflected in the Company's consolidated balance sheet as minority
interest.
CAL FED ACQUISITION
On January 3, 1997, pursuant to an Agreement and Plan of Merger (the
"Merger Agreement") among FN Holdings, Cal Fed Bancorp Inc. ("Cal Fed") and
California Federal Bank, A Federal Savings Bank ("Old California Federal"), FN
Holdings acquired 100% of the outstanding stock of Cal Fed and Old California
Federal, and First Nationwide merged with and into Old California Federal (the
"Cal Fed Acquisition"). At December 31, 1996, Old California Federal had total
assets of approximately $14.1 billion and deposits of $8.9 billion, and operated
119 branches in California and Nevada. 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.
Excess cost over fair value of net assets acquired in the Cal Fed
Acquisition totalled $397.6 million. During 1998, the Company recorded fair
value adjustments to reduce other liabilities and excess cost over fair value of
net assets acquired by $71.2 million related to (a) to receipt of a tax refund
related to periods prior to January 3, 1997 and (b) previously accrued severance
and contract termination costs (which had not been utilized upon completion of
the integration plan). During 1999, the Company recorded an adjustment to reduce
other liabilities and excess cost over fair value of net assets acquired by
$38.2 million, also related to a tax refund for periods prior to January 3,
1997. During 2000, the Company recorded adjustments to reduce other liabilities
and excess cost over fair value of net assets acquired by $52.1 million as a
result of a "true-up" the deferred tax asset, $21.0 million related to the
reversal of state deferred taxes and $180 thousand related to receipt of a tax
refund for periods prior to the Cal Fed Acquisition.
SERVICING SALE
During April 1999, the Bank's wholly-owned mortgage banking subsidiary,
First Nationwide Mortgage Corporation ("FNMC"), sold servicing rights on
approximately 49,000 loans with an unpaid principal balance of $2.0 billion,
recognizing a pre-tax gain of $16.3 million (the "Servicing Sale").
F-19
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information combines the
historical results of the Company as if the Golden State Acquisition, the
issuance of the GS Holdings Notes (as defined herein) and the Refinancing
Transactions (as defined herein) had occurred as of the beginning of 1998 (in
thousands):
Year Ended
December 31, 1998
-----------------
Net interest income $1,054,324
Net income 558,652
The pro forma information does not include the effect of the GSAC
Acquisition, the Servicing Sale, or the Florida Branch Sale because such effect
is not significant. The pro forma results are not necessarily indicative of the
results which would have actually been obtained if the Golden State Acquisition,
the issuance of the GS Holdings Notes or the Refinancing Transactions had been
consummated in the past nor do they project the results of operations in any
future period.
PURCHASE ACCOUNTING ADJUSTMENTS
Premiums and discounts related to interest-earning assets acquired and
interest-bearing liabilities assumed are amortized (accreted) to operations
using the interest method over the estimated remaining lives of the respective
assets and liabilities.
(4) ISSUANCE OF DEBT SECURITIES
On August 6, 1998, GS Escrow Corp, ("GS Escrow"), an affiliate of GS
Holdings, issued $2 billion in debt securities (the "GS Holdings Notes"). The GS
Holdings Notes were issued to fund, in part, the cash tender offers discussed
below, that occurred following the Golden State Acquisition. The GS Holdings
Notes consist of (a) $250 million aggregate principal amount of its Floating
Rate Notes Due 2003 (the "Floating Rate Notes"), (b) $350 million aggregate
principal amount of its 6 3/4% Senior Notes due 2001 (the "2001 Notes"), (c)
$600 million aggregate principal amount of its 7% Senior Notes Due 2003 (the
"2003 Notes") and (d) $800 million aggregate principal amount of its 7 1/8%
Senior Notes Due 2005 (the "2005 Notes" and, together with the 2001 Notes and
the 2003 Notes, the "Fixed Rates Notes" and, together with the Floating Rates
Notes, the "GS Holdings Notes"). Interest on the Fixed Rate Notes is payable
semi-annually in arrears on February 1 and August 1 of each year, commencing on
February 1, 1999. The Floating Rate Notes bear interest at a rate equal to the
three-month LIBOR plus 100 basis point per annum, except that the initial rate
was 6 3/4% per annum, based on six-month LIBOR (which initial interest rate
resets on the first interest payment date, and, thereafter, on a quarterly
basis). The first interest payment date for the Floating Rate Notes was February
1, 1999. Thereafter, interest is payable, and the interest rate resets,
quarterly on each May 1, August 1, November 1 and February 1. The weighted
average interest rate on the Floating Rate Notes during 2000 was 7.43%. The 2001
Notes, 2003 Notes and 2005 Notes will mature on August 1 of the respective year.
The GS Holdings Notes were issued to fund, in part, the Refinancing
Transactions that occurred following the Golden State Acquisition. Deferred
issuance costs of $38.6 million related to the GS Holdings Notes are included in
the Company's other assets and are being amortized over the life of such notes.
See note 22.
F-20
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) REFINANCING TRANSACTIONS
On August 17, 1998, FN Holdings commenced cash tender offers (the "Bank
Preferred Stock Tender Offers") for each of the Bank's two outstanding series of
Bank Preferred Stock (as defined herein), which had a total aggregate
liquidation preference of $473.2 million. The Bank Preferred Stock Tender Offers
expired on September 14, 1998, at which time 222,721 shares of the 10 5/8%
Preferred Stock (as defined herein) and 995,437 shares of the 11 1/2% Preferred
Stock (as defined herein) were purchased for an aggregate purchase price of
$135.8 million. During the remainder of 1998 and 1999, GS Holdings continued to
purchase Bank Preferred Stock through privately negotiated transactions. Through
December 31, 1998, 894,980 additional shares of the 10 5/8% Preferred Stock and
1,693,522 shares of the 11 1/2% Preferred Stock had been purchased for an
aggregate purchase price of $287.7 million. On April 1, 1999, GS Holdings
redeemed all of the remaining 607,299 outstanding shares of the Bank's 10 5/8%
Preferred Stock not already owned by it for $105.313 per share, for a total
redemption price of $63.9 million. On September 1, 1999, GS Holdings redeemed
all of the remaining 318,341 outstanding shares of the Bank's 11 1/2% Preferred
Stock not already owned by it for $105.75 per share for a total redemption price
of $33.7 million. The net tender premiums and expenses paid in connection with
the Bank Preferred Stock Tender Offers totalled $5.1 million and $36.9 million
for the years ended December 31, 1999 and 1998, respectively, and are reflected
as minority interest on the Company's consolidated statements of income. See
note 26.
On September 14, 1998, GS Holdings commenced cash tender offers (the "Debt
Tender Offers" and together with the Bank Preferred Stock Tender Offers and the
Parent Holdings Defeasance (as defined herein), the "Refinancing Transactions")
for the FN Holdings 12 1/4% Senior Notes, the FN Holdings 9 1/8% Senior Sub
Notes and the FN Holdings 10 5/8% Notes (each as defined herein and
collectively, the "FN Holdings Notes"), which together had a total aggregate
principal amount of $915 million. Through December 31, 1998, GS Holdings
purchased $914.5 million aggregate principal amount of the FN Holdings Notes for
an aggregate purchase price, including accrued interest payable, of $1.1
billion. On May 15, 1999, GS Holdings redeemed the remaining $0.2 million
aggregate principal amount of the FN Holdings 12 1/4% Senior Notes for an
aggregate redemption price, including accrued interest payable, of $252.6
thousand. At December 31, 2000, only $0.3 million of the FN Holdings 10 5/8%
Notes remained outstanding. The after tax tender premiums and expenses paid in
connection with the Debt Tender Offers totalled $98.7 million and are reflected
as an extraordinary loss, net of taxes, on the Company's consolidated statement
of income for the year ended December 31, 1998.
Concurrently with the closing of the Debt Tender Offers, GS Financial, as
the successor obligor, gave a 30-day notice of redemption for all the
outstanding $455 million aggregate principal amount of 12 1/2% Senior Notes Due
2003 of Parent Holdings (the "Parent Holdings Notes"), and irrevocably deposited
money or government obligations in trust in an amount sufficient to pay the
redemption price therefor, together with any accrued and unpaid interest to the
date of redemption, for the purpose of defeasing the Parent Holdings Notes (the
"Parent Holdings Defeasance"). The Parent Holdings Defeasance was completed on
October 14, 1998. The after-tax redemption premiums and expenses paid in
connection with the Parent Holdings Defeasance totalled $51.6 million and are
reflected as extraordinary loss, net of taxes, on the consolidated statement of
income for the year ended December 31, 1998.
(6) GS ESCROW MERGER
On September 14, 1998, GS Escrow was merged with and into GS Holdings,
pursuant to a merger agreement by and between GS Escrow and GS Holdings (the "GS
Escrow Merger"). In connection therewith, GS Holdings acquired the net proceeds
of $2.0 billion from the Refinancing Transactions and became successor obligor
on the GS Holdings Notes. GS Escrow was a newly formed subsidiary of GSB
Investments, an indirect parent company of FN Holdings, and had no significant
assets. GS Escrow had not engaged in any business operations, acquired any
assets or incurred any liabilities, other than in connection with the issuance
of the GS Holdings Notes.
F-21
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Year Ended December 31,
--------- ---- ---------- ----- ----------
2000 1999 1998
--------- ---------- ----------
(in thousands)
Cash paid (received) for:
Interest $2,881,679 $2,255,685 $1,725,769
Income taxes, net (9,012) 64,318 (142,012)
Non-cash activities:
Reclassification of mortgage-backed securities from the
available-for-sale portfolio to the held-to-maturity portfolio 1,055,611 -- --
Reclassification of securities from the available-for-sale
portfolio to the held-to-maturity portfolio 445,000 -- --
Principal reductions to loans due to foreclosure 47,175 101,692 118,801
Loans made to facilitate the sale of real estate 5,433 10,039 10,898
Loans exchanged for mortgage-backed securities 116,517 227,099 1,905,274
Reclassification of loans from loans held
for sale to loans receivable 77,913 110,313 --
Reclassification of mortgage-backed securities to loans
held for sale 1,052 -- --
Reduction of previously accrued severance
and contract termination costs -- 18,908 --
Reduction of valuation allowance of deferred tax asset 211,738 -- --
True-up of deferred tax asset -- 18,146 --
Initial dividend of tax benefits to former parent
due to deconsolidation -- -- 211,242
Adjustment to initial dividend of tax benefits to
former parent due to deconsolidation -- 66,383 --
Impact of Golden State restricted common stock 3,175 477 --
Adjustment to Golden State Acquisition
purchase price -- (12,380) --
Preferred stock dividends reinvested -- -- 107
(8) RECLASSIFICATION OF SECURITIES
On April 30, 2000, the Company reclassified $1.1 billion and $445.0 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 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 interest
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.
F-22
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) SECURITIES AVAILABLE FOR SALE
At December 31, 2000 and 1999, securities available for sale and the
related unrealized gain or loss consisted of the following (in thousands):
December 31, 2000
--------------------------------------------------------------------
Gross Gross Net
Amortized Unrealized Unrealized Unrealized Carrying
Cost Gains Losses Gain (Loss) Value
---- ----- ------ ---------- -----
Marketable equity securities $ 640 $325 $ -- $ 325 $ 965
U.S. government and agency obligations 638,488 36 (2,419) (2,383) 636,105
-------- ---- ------- ------- --------
Total $639,128 $361 $(2,419) (2,058) $637,070
======== ==== ======= ------- ========
Estimated tax effect 841
Net unrealized holding loss in -------
stockholder's equity $(1,217)
=======
December 31, 1999
--------------------------------------------------------------------
Gross Gross Net
Amortized Unrealized Unrealized Unrealized Carrying
Cost Gains Losses Gain Value
---- ----- ------ ---------- -----
Marketable equity securities $ 336 $811 $ -- $ 811 $ 1,147
U.S. government and agency obligations 1,143,665 47 (69,125) (69,078) 1,074,587
---------- ---- -------- -------- ----------
Total $1,144,001 $858 $(69,125) (68,267) $1,075,734
========== ==== ======== ==========
Estimated tax effect 28,774
--------
Net unrealized holding loss in
stockholder's equity $(39,493)
========
The weighted average stated interest rates on securities available for sale
were 6.21% and 6.24% at December 31, 2000 and 1999, respectively.
The following represents a summary of the amortized cost, estimated fair
value (carrying value) and weighted average yield of securities available for
sale with related maturities (dollars in thousands):
December 31, 2000
------------------------------------------
Estimated Weighted
Amortized Fair Average
Cost Value Yield
---- ----- -----
Marketable equity securities $ 640 $ 965 3.96%
U.S. government and agency obligations:
Maturing within 1 year 36,685 36,720 6.87
Maturing after 1 year but within 5 years 601,803 599,385 6.21
-------- --------
Total $639,128 $637,070 6.25%
======== ========
At December 31, 2000, U.S. government and agency obligations available for
sale of $40.4 million were pledged as collateral for various obligations. See
notes 22 and 34.
F-23
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) SECURITIES HELD TO MATURITY
At December 31, 2000 and 1999, securities held to maturity consisted of the
following (in thousands):
December 31, 2000
----------------------------------------------------------------------
Net
Amortized Unrealized Unrealized Unrealized Estimated
Cost Gains Losses Gain (Loss) Fair Value
---- ----- ------ ----------- ----------
Municipal securities $511,532 $6,153 $ (3,085) $ 3,068 $514,600
Commercial paper 75,971 -- -- -- 75,971
-------- ----- ------- -------- --------
Total $587,503 $6,153 $ (3,085) $ 3,068 $590,571
======== ====== ======== ======== ========
Securities included above transferred
from available for sale $497,894 $ -- $(52,894) $(52,894) $445,000
======== ====== ======== ========
Estimated tax effect 21,607
Amortization of unrealized holding loss 2,289
Net unrealized holding loss in --------
stockholder's equity $(28,998)
========
December 31, 1999
--------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---- ----- ------ ----------
Municipal securities $ 84,727 $415 $(5,323) $ 79,819
Commercial paper 100,630 -- -- 100,630
-------- ---- ------- --------
Total $185,357 $415 $(5,323) $180,449
======== ==== ======= ========
The weighted average stated interest rates on securities held to maturity
were 5.95% and 4.89% at December 2000 and 1999, respectively.
The following represents a summary of the amortized cost (carrying value),
estimated fair value, and weighted average yield of securities held to maturity
with related maturities (dollars in thousands):
December 31, 2000
-------------------------------------------
Estimated Weighted
Amortized Fair Average
Cost Value Yield
---- ----- -----
Municipal securities
Maturing after 5 years
through 10 years $ 4,640 $ 4,627 4.66%
Maturing after 10 years 506,892 509,973 7.48
Commercial paper
Maturing within 1 year 75,971 75,971 6.21
-------- --------
Total $587,503 $590,571 7.29%
======== ========
At December 31, 2000, commercial paper investments of $75.7 million were
held in reserve with third-party trustees to guarantee credit enhancements on
loans transferred as part of securitization transactions by the Bank. See note
34.
F-24
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
At December 31, 2000 and 1999, mortgage-backed securities available for
sale and the related unrealized gain or loss consisted of the following (in
thousands):
December 31, 2000
-------------------------------------------------------------------------
Gross Gross Net
Amortized Unrealized Unrealized Unrealized Carrying
Cost Gains Losses Loss Value
---- ----- ------ ---- -----
GNMA $ 385,906 $ 152 $ (4,050) $ (3,898) $ 382,008
FNMA 1,327,352 3,429 (7,648) (4,219) 1,323,133
FHLMC 534,498 2,395 (467) 1,928 536,426
Other mortgage-backed securities 338,405 1,156 (2,053) (897) 337,508
Collateralized mortgage obligations 7,330,167 11,679 (54,098) (42,419) 7,287,748
---------- ------- -------- -------- ----------
Total $9,916,328 $18,811 $(68,316) (49,505) $9,866,823
========== ======= ======== ==========
Estimated tax effect 20,223
--------
Net unrealized holding loss in
stockholder's equity $(29,282)
========
December 31, 1999
--------------------------------------------------------------------------
Gross Gross Net
Amortized Unrealized Unrealized Unrealized Carrying
Cost Gains Losses Loss Value
---- ----- ------ ---- -----
GNMA $ 645,299 $ 402 $ (12,897) $ (12,495) $ 632,804
FNMA 2,554,242 5,087 (56,767) (51,680) 2,502,562
FHLMC 910,543 4,958 (8,553) (3,595) 906,948
Other mortgage-backed securities 499,117 6,845 (10,018) (3,173) 495,944
Collateralized mortgage obligations 9,562,817 1,778 (338,288) (336,510) 9,226,307
----------- ------- --------- --------- -----------
Total $14,172,018 $19,070 $(426,523) (407,453) $13,764,565
=========== ======= ========= ===========
Estimated tax effect 171,741
---------
Net unrealized holding loss in
stockholder's equity $(235,712)
=========
The following represents a summary of the amortized cost, estimated fair
value (carrying value) and weighted average yield of mortgage-backed securities
available for sale (dollars in thousands):
December 31, 2000
--------------------------------------------------
Estimated Weighted
Amortized Fair Average
Cost Value Yield
---- ----- -----
GNMA $ 385,906 $ 382,008 7.24%
FNMA 1,327,352 1,323,133 7.38
FHLMC 534,498 536,426 7.70
Other mortgage-backed securities 338,405 337,508 7.50
Collateralized mortgage obligations 7,330,167 7,287,748 6.64
---------- ----------
Total $9,916,328 $9,866,823 6.84%
========== ==========
F-25
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The weighted average stated interest rates on mortgage-backed securities
available for sale were 6.89% and 6.62% at December 31, 2000 and 1999,
respectively. At December 31, 2000 and 1999, mortgage-backed securities
available for sale included securities totalling $0.7 billion and $0.9 billion,
respectively, which resulted from the securitization of certain qualifying
mortgage loans from the Bank's, Old California Federal's, Glendale Federal's and
San Francisco Federal's loan portfolios.
At December 31, 2000 and 1999, mortgage-backed securities available for
sale included $3.0 billion and $4.3 billion, respectively, of variable-rate
securities.
At December 31, 2000, mortgage-backed securities available for sale of $6.5
billion were pledged as collateral for FHLB advances and securities sold under
agreements to repurchase, $2.6 billion of which were pledged to creditors who
have the right to sell or repledge the collateral. See notes 21, 22 and 34.
Further, at December 31, 2000, mortgage-backed securities available for sale
with a carrying value of $525 million were pledged for various other obligations
and include $135 million in securities pledged to FNMA associated with the sales
of certain securitized multi-family loans as further discussed in note 34.
(12) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
At December 31, 2000 and 1999, mortgage-backed securities held to maturity
consisted of the following (in thousands):
December 31, 2000
------------------------------------------------------------------------
Net
Amortized Unrealized Unrealized Unrealized Estimated
Cost Gains Losses Gain(Loss) Fair Value
---- ----- ------ ---------- ----------
GNMA $ 237,437 $ 6,309 $ (1,204) $ 5,105 $ 242,542
FHLMC 234,969 7,785 (2) 7,783 242,752
FNMA 2,413,331 60,771 (589) 60,182 2,473,513
Other mortgage-backed securities 875 -- (5) (5) 870
---------- ------- -------- -------- ----------
Total $2,886,612 $74,865 $ (1,800) $ 73,065 $2,959,677
========== ======= ======== ======== ==========
Securities included above transferred
from available for sale $1,110,920 $ 628 $(55,937) $(55,309) $1,055,611
========== ======= ======== ==========
Estimated tax effect 22,594
Amortization of unrealized holding loss 2,341
--------
Net unrealized holding loss in
stockholder's equity $(30,374)
========
December 31, 1999
-----------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---- ----- ------ ----------
FHLMC $ 161,129 $ 3,801 $ -- $ 164,930
FNMA 1,987,428 16,687 (20,170) 1,983,945
Other mortgage-backed securities 1,139 -- -- 1,139
---------- ------- -------- ----------
Total $2,149,696 $20,488 $(20,170) $2,150,014
========== ======= ======== ==========
F-26
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following represents a summary of the amortized cost (carrying value),
estimated fair value and weighted average yield of mortgage-backed securities
held to maturity (dollars in thousands):
December 31, 2000
--------------------------------------------
Estimated Weighted
Amortized Fair Average
Cost Value Yield
---- ----- -----
GNMA $ 237,437 $ 242,542 7.11%
FHLMC 234,969 242,752 8.12
FNMA 2,413,331 2,473,513 7.73
Other mortgage-backed securities 875 870 14.15
---------- ----------
Total $2,886,612 $2,959,677 7.71%
========== ==========
The weighted average stated interest rates on mortgage-backed securities
held to maturity were 7.45% and 6.92% at December 31, 2000 and 1999,
respectively. At December 31, 2000 and 1999, mortgage-backed securities held to
maturity included securities with carrying values totalling $1.8 billion and
$2.1 billion, respectively, which resulted from the securitization with FNMA and
FHLMC of certain qualifying mortgage loans from the Bank's, Old California
Federal's, Glendale Federal's and San Francisco Federal's loan portfolio with
full recourse to the Bank.
At December 31, 2000 and 1999, mortgage-backed securities held to maturity
included $1.8 billion and $2.1 billion, respectively, of variable-rate
securities.
At December 31, 2000, mortgage-backed securities held to maturity of $2.1
billion were pledged as collateral for various obligations, substantially all of
which were pledged to creditors who have the right to sell or repledge the
collateral. See notes 21, 22 and 34. Further, at December 31, 2000,
mortgage-backed securities held to maturity with a carrying value of $298
million were pledged for various other obligations. See note 34.
(13) LOANS RECEIVABLE, NET
At December 31, 2000 and 1999, loans receivable, net, included the
following (in thousands):
2000 1999
----------- -----------
Real estate loans:
1-4 unit residential $30,828,368 $26,965,684
Multi-family residential 3,569,228 2,881,462
Commercial real estate 2,487,093 2,564,644
Land 22,384 32,421
Construction 7,416 7,804
----------- -----------
Total real estate loans 36,914,489 32,452,015
=========== ===========
Equity-line 538,524 433,366
Other consumer loans 302,559 237,090
Auto loans, net 1,567,257 697,667
Commercial loans 557,796 507,082
----------- -----------
Total consumer and other loans 2,966,136 1,875,205
----------- -----------
Total loans receivable 39,880,625 34,327,220
Deferred loan fees, costs, discounts and premiums, net 229,962 173,719
Allowance for loan losses (526,308) (554,893)
Purchase accounting adjustments, net 8,535 7,415
----------- -----------
Total loans receivable, net $39,592,814 $33,953,461
=========== ===========
F-27
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 31, 2000, $27.2 billion in residential loans, $3.0 billion in
multi-family loans and $1.7 billion in commercial real estate loans were pledged
as collateral for FHLB advances as discussed in notes 22 and 34.
As a result of the Golden State and Cal Fed Acquisitions, the Bank assumed
obligations for certain loans sold with recourse. The outstanding balances of
loans sold with recourse at December 31, 2000 totalled $2.5 billion. No loans
were sold with recourse during the years ended December 31, 2000, 1999 and 1998.
The Bank evaluates the credit risk of loans sold with recourse and, if
necessary, records a liability (included in other liabilities) for estimated
losses related to these potential obligations. At December 31, 2000, such
liability totalled $48.9 million.
Auto loans purchased at a discount related to credit quality are included
in the balance sheet amount of loans receivable as follows (in thousands):
December 31,
------------------------------
2000 1999
---------- ---------
Auto loans: contractual payments receivable $2,124,182 $1,024,612
Accretable Yield (232,635) (123,944)
Nonaccretable Contractual Cash Flows (334,878) (203,001)
---------- ----------
Loans purchased at a discount relating to credit quality, net $1,556,669 $ 697,667
========== ==========
Nonaccretable Contractual Cash Flows represents contractual principal and
interest cash flows that the Company determined, at acquisition, it was probable
the Company would be unable to collect. The increase in Nonaccretable
Contractual Cash Flows in 1999 includes $7.3 million, representing an allocation
from the allowance for loan losses. The actual cash flows for one of the
purchased pools plus the expected cash payments were determined to be less than
the expected cash flows estimated at the time of purchase. Accordingly, an
allocation from the allowance for loan losses was made in the amount by which
the carrying value of this purchased pool exceeded the present value of the
expected cash flows from such pool. The increase in Accretable Yield in 2000
includes $6.4 million representing charge-offs as a result of pool impairment.
Nonaccretable
Accretable Contractual
Yield Cash Flows
----- ----------
(in thousands)
Balance at December 31, 1998 $ (88,145) $(121,334)
Addition - purchases (114,640) (163,816)
Accretion 80,432 --
Allocation from allowance for loan losses -- (7,339)
Eliminations (1,591) 89,488
--------- ---------
Balance at December 31, 1999 (123,944) (203,001)
Addition - purchases (266,800) (267,155)
Accretion 145,942 --
Reclassification 18,565 (18,565)
Charge-offs (6,398) --
Eliminations -- 153,843
--------- ---------
Balance at December 31, 2000 $(232,635) $(334,878)
========= =========
During the fourth quarter of 1999, the Company incurred losses of $7.3
million on loans purchased at a discount by increasing the allocated allowance
for loan losses relative to such loans. Throughout the year 2000, the Company
incurred losses totalling $6.4 million on loans purchased at a discount as a
result of pool impairment. These losses are reflected as charge-offs. No loss
allowance was acquired from predecessor institutions in connection with the
Downey Acquisition. No loss accruals were reversed in 2000 or 1999.
F-28
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents loans which have been placed on nonaccrual
status as of the dates indicated (in thousands):
At December 31,
-----------------------------
2000 1999
---- ----
Nonaccrual loans:
Real estate loans:
1-4 unit residential $ 88,650 $125,238
Multi-family residential 3,253 5,820
Commercial and other 1,509 8,279
Land 84 --
Construction 68 150
-------- --------
Total real estate 93,564 139,487
Non-real estate 21,475 11,267
-------- --------
Total nonaccrual loans $115,039 $150,754
======== ========
At December 31, 2000, $31.5 billion, or 85.3%, of the Company's real estate
loan portfolio was collateralized by properties located in California. The
financial condition of the Company is subject to general economic conditions
such as the volatility of interest rates and real estate market conditions and,
in particular, to conditions in the California residential real estate market.
Any downturn in the economy generally, and in California in particular, could
reduce real estate values. An increase in the general level of interest rates
may adversely affect the ability of certain borrowers to pay the interest on and
principal of their obligations. Accordingly, in the event interest rates rise or
real estate market values decline, particularly in California, the Company and
the Bank may find it difficult to maintain its asset quality and may require
additional allowances for loss above the amounts currently estimated by
management.
For nonaccrual loans, the following table summarizes the interest income
recognized ("Recognized") and total interest income that would have been
recognized had the borrowers performed under the original terms of the loans
("Contractual") for the years ended December 31, 2000 and 1999 (in thousands):
2000 1999
------------------------------ --------------------------
Recognized Contractual Recognized Contractual
---------- ----------- ---------- -----------
Nonaccrual loans $6,752 $7,478 $7,111 $10,937
Activity in the allowance for loan losses for the years ended December 31,
2000, 1999 and 1998 is summarized as follows (in thousands):
2000 1999 1998
---------- --------- ----------
Balance - beginning of year $554,893 $588,533 $418,674
Purchases, net -- -- 170,014
Provision for loan losses -- 10,000 40,000
Charge-offs (33,477) (40,312) (46,126)
Recoveries 4,892 4,681 5,971
Reclassifications -- (670) --
Allocation to Nonaccretable Contractual
Cash Flows of purchased auto loan portfolio -- (7,339) --
-------- -------- --------
Balance - end of year $526,308 $554,893 $588,533
======== =======- ========
F-29
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) SECURITIZED LOAN SALES
At December 31, 2000, key economic assumptions and sensitivity of the
current fair value of residual cash flows to immediate 10 percent and 20 percent
adverse changes in those assumptions are as follows (dollars in thousands):
Residential Adjustable-Rate
Mortgage Loans
--------------
Carrying amount/fair value of retained interests (a) $222,206
Weighted average life (in years) 3.73
Prepayment speed assumption (annual rate) 16.55%
Impact on fair value of 10% adverse change $ (128)
Impact on fair value of 20% adverse change $ (267)
Expected credit losses (annual rate) 0.63%
Impact on fair value of 10% adverse change $ (235)
Impact on fair value of 20% adverse change $ (375)
Bond equivalent effective yield discount rate (semi-annual) 7.06%
Impact on fair value of 10% adverse change $ (1,349)
Impact on fair value of 20% adverse change $ (2,653)
____________
(a) Excludes cash reserve accounts of $75,689.
The following table presents quantitative information about delinquencies,
net credit losses and components of securitized financial assets and other
assets managed together with them (dollars in thousands):
Principal Amount of
Total Principal Loans 60 Days or Net Credit
Amount of Loans More Past Due (a) Losses (b)
--------------- ------------------- ----------------------------------
At December 31, During the Year Ended December 31,
---------------------------------------- ----------------------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Residential adjustable-rate
mortgage loans managed
or securitized (c):
Total $304,366 $381,068 $10,402 $13,023 -- 12
Loans held in portfolio $223,632 $279,988 $7,643 $9,569 -- 12
____________
(a) Loans 60 days or more past due are based on end-of-period total loans.
(b) Net credit losses are charge-offs and are based on total loans outstanding.
(c) Owned and securitized loans are mortgage loans in which the transferor
retains a subordinate interest or retains any risk of loss.
F-30
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(15) IMPAIRED LOANS
At December 31, 2000 and 1999, the balance of loans that are considered to
be impaired totalled $97.2 million and $123.6 million, respectively (of which
$19.5 million and $18.9 million, respectively, were on nonaccrual status). The
average recorded investment in impaired loans during the years ended December
31, 2000, 1999 and 1998 was approximately $91.3 million, $139.3 million and
$137.1 million, respectively. For the years ended December 31, 2000, 1999 and
1998, the Company recognized interest income on those impaired loans of $8.3
million, $9.5 million and $9.0 million, respectively, which included $1.6
million, $2.7 million and $1.2 million of interest income recognized using the
cash basis method of income recognition.
Generally, allowances for loan losses relative to impaired loans have not
been allocated from the general allowance because the carrying value of such
loans, net of purchase accounting adjustments, exceeds the loans' related
collateral values less estimated selling costs.
(16) INVESTMENT IN FHLB
The Company's investment in FHLB stock is carried at cost. The FHLB
provides a central credit facility for member institutions. As a member of the
FHLB system, the Bank is required to own capital stock in the FHLB in an amount
equal to the greater of (a) 1% of the aggregate outstanding principal amount of
its residential mortgage loans, home purchase contracts and similar obligations
at the beginning of each calendar year, (b) .3% of total assets, or (c) 5% of
its advances (borrowings) from the FHLB of San Francisco. The Bank was in
compliance with this requirement at December 31, 2000, 1999 and 1998. At
December 31, 2000, the Bank's investment in FHLB stock was pledged as collateral
for FHLB advances as further discussed in note 22.
(17) PREMISES AND EQUIPMENT, NET
Premises and equipment, net, at December 31, 2000 and 1999 is summarized as
follows (dollars in thousands):
Estimated
Depreciable Lives at
2000 1999 December 31, 2000
---------- ---------- -----------------------
Land $ 46,155 $ 47,266 --
Buildings and leasehold improvements 157,482 144,739 1 - 39
Furniture and equipment 205,986 182,987 1 - 7
Construction in progress 12,169 4,496 --
-------- --------
421,792 379,488
Accumulated depreciation and amortization (130,893) (82,688)
-------- --------
Total premises and equipment, net $290,899 $296,800
======== ========
Depreciation and amortization expense related to premises and equipment for
the years ended December 31, 2000, 1999 and 1998 totaled $51.1 million, $37.5
million and $26.5 million, respectively.
T-31
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company rents certain premises and equipment under long-term,
noncancellable operating leases expiring at various dates through the year 2034.
Rental expenses under such operating leases, included in occupancy and equipment
expense, for the years ended December 31, 2000, 1999 and 1998 totalled $38.6
million, $41.1 million and $36.0 million, respectively. Rental income from
sublease agreements for the years ended December 31, 2000, 1999 and 1998
totalled $5.1 million, $5.6 million and $3.0 million, respectively. At December
31, 2000, the projected minimum rental commitments, net of sublease agreements,
under terms of the leases were as follows (in thousands):
Cash Effect on
Commitment Net Income
---------- ----------
Year Ending
2001 $ 43,608 $ 25,794
2002 39,772 23,525
2003 36,770 21,749
2004 32,508 19,228
2005 28,246 16,708
Thereafter 73,165 43,277
-------- --------
Total $254,069 $150,281
======== ========
The effect of lease commitments on net income is different from the cash
commitment primarily as a result of lease commitments assumed in acquisitions
with related purchase accounting adjustments and accrued facilities costs
recorded in connection with branch consolidations. See note 23.
On November 15, 1999, the Bank sold a complex consisting of a retail
branch, a parking lot and administrative offices totalling approximately 139,608
square feet. As part of the sale agreement, the Bank agreed to lease back 16,253
square feet under two separate lease agreements. The lease covering the branch
and parking lot is cancellable with six months notice with a final termination
date of November, 2009. The lease covering the administrative offices is
non-cancellable with a termination date of November, 2004. It is the Bank's
intent to occupy these facilities until the lease termination.
At December 31, 2000, the projected minimum rental commitments under the
terms of the leases were as follows (in thousands):
Branch and Administrative
Parking Lot Offices Total
Year Ending ------------- -------------- ----------
-----------
2001 $ 116 $205 $ 321
2002 116 205 321
2003 116 205 321
2004 116 188 304
2005 116 -- 116
Thereafter 453 -- 453
------ ---- ------
Total $1,033 $803 $1,836
====== ==== ======
The sale discussed above resulted in a gain of $5.3 million. Approximately
$1.8 million of this gain was deferred and will be recognized using the interest
method over the life of the respective leases.
F-32
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(18) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31, 2000 and 1999 is summarized as
follows (in thousands):
2000 1999
--------- ---------
Cash and cash equivalents and securities $ 54,637 $ 65,443
Mortgage-backed securities 38,858 43,492
Loans receivable and loans held for sale 270,919 212,661
-------- --------
Total accrued interest receivable $364,414 $321,596
======== ========
(19) MORTGAGE SERVICING RIGHTS
The following is a summary of activity for mortgage servicing rights
("MSRs") and the hedge against the change in value of the mortgage servicing
rights ("MSR Hedge") for the years ended December 31, 2000, 1999 and 1998 (in
thousands):
MSR
MSR Hedge Total
---------- --------- ----------
Balance at December 31, 1997 $ 529,691 $ 7,012 $ 536,703
Additions from Glen Fed Merger 212,933 -- 212,933
Originated servicing 169,972 -- 169,972
Additions - other purchases 160,619 -- 160,619
Sales (1,057) -- (1,057)
Gain on termination (16,089) -- (16,089)
Interest rate floor sales (43,924) (16,141) (60,065)
Premiums paid -- 107,412 107,412
Payments received from counterparties, net (8,684) -- (8,684)
Amortization (147,734) (10,429) (158,163)
---------- -------- ----------
Balance at December 31, 1998 855,727 87,854 943,581
Additions - purchases 334,842 -- 334,842
Originated servicing 193,855 -- 193,855
Sales (18,604) -- (18,604)
Swaption sales 28,727 (58,553) (29,826)
Interest rate floor sales 21,208 (38,242) (17,034)
Premiums paid -- 67,698 67,698
Payments made to counterparties, net 10,191 -- 10,191
Amortization (193,710) (18,600) (212,310)
---------- -------- ----------
Balance at December 31, 1999 1,232,236 40,157 1,272,393
Additions - purchases 344,262 -- 344,262
Originated servicing 126,648 -- 126,648
Sales (440) -- (440)
Swaption sales (20,088) (30,417) (50,505)
Interest rate floor sales (25,675) (24,934) (50,609)
Interest rate floor receipts (224) -- (224)
Premiums paid -- 127,199 127,199
Payments received from counterparties, net (5,369) -- (5,369)
Amortization (187,040) (16,992) (204,032)
---------- -------- ----------
Balance at December 31, 2000 $1,464,310 $ 95,013 $1,559,323
========== ======== ==========
F-33
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 31, 2000, 1999 and 1998, the outstanding balance of 1-4 unit
residential loan participations, whole loans and mortgage pass-through
securities serviced for other investors (not including the Bank) by FNMC
totalled $84.1 billion, $72.9 billion and $65.4 billion, respectively. In
addition, FNMC had $11.1 billion, $10.4 billion and $10.4 billion of master
servicing at December 31, 2000, 1999 and 1998, respectively.
The percentage of principal outstanding in the Company's portfolio of loans
serviced for others, secured by properties located in California, Texas, and
Florida was 46%, 7% and 6%, respectively, at December 31, 2000 and 53%, 7% and
7%, respectively, at December 31, 1999.
The estimated fair value of the MSRs was $1.5 billion for the years ended
December 31, 2000 and 1999. See discussion of valuation assumptions at note 38.
The estimated market value of interest rate floors, interest rate swaps,
principal only swaps and interest rate swaptions designated as hedges against
MSRs at December 31, 2000 were $52.8 million, $5.1 million, $1.2 million and
$105.6 million, respectively. The estimated market value of interest rate floor
contracts, principal only swaps and swaptions designated as hedges against MSRs
at December 31, 1999 were $10.4 million, $(15.8) million, and $24.3 million,
respectively. At December 31, 1999, there were no interest rate swaps
outstanding to hedge MSRs. At December 31, 2000 and 1999, no allowance for
impairment of the MSRs was necessary.
A decline in long-term interest rates generally results in an acceleration
of mortgage loan prepayments. Higher than anticipated levels of prepayments
generally cause the accelerated amortization of mortgage servicing rights and
generally will result in a reduction of the market value of the mortgage
servicing rights and in the Company's servicing fee income. To reduce the
sensitivity of its earnings to interest rate and market value fluctuations, the
Company hedged the change in value of its servicing rights based on changes in
interest rates.
At December 31, 2000, the Company, through FNMC, was a party to several
interest rate floors maturing in 2005. The Company paid counterparties a premium
in exchange for cash payments in the event that the 10-year Constant Maturity
Swap rate fell below the strike prices. At December 31, 2000, the notional
amount of the interest rate floors was $2.3 billion and the strike prices were
between 5.9% and 6.6%. In addition, the Company, through FNMC, held interest
rate swap agreements and principal only swap agreements with notional amounts of
$1.3 billion and $193.1 million, respectively. Further, at December 31, 2000,
the Company, through FNMC, was a party to swaption contracts in which the
Company paid to the counterparties premiums in exchange for the right, but not
the obligation, to purchase an interest rate swap. At December 31, 2000, the
notional amount of the underlying interest rate swaps was $2.2 billion. At
December 31, 2000, the Company through FNMC, was a party to several interest
rate swap contracts maturing in 2010 and 2011. These contracts require the
Company to make a series of floating rate payments in exchange for receiving a
series of fixed-rate payments. The notional amount of these contracts was $1.3
billion at December 31, 2000. See note 37 for further discussion.
Servicing advances and other receivables (included in other assets) related
to 1-4 unit residential loan servicing, net of valuation allowances of $16.1
million and $20.1 million in 2000 and 1999, respectively, consisted of the
following (in thousands):
December 31,
------------------------------
2000 1999
---- ----
Servicing advances $106,120 $138,071
Checks in process of collection 745 1,123
Other 6,287 8,393
-------- --------
$113,152 $147,587
======== ========
F-34
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(20) DEPOSITS
A summary of the carrying value of deposits at December 31, 2000 and 1999
follows (in thousands):
2000 1999
----------- -----------
Passbook accounts $ 3,086,852 $ 3,666,206
Demand deposits:
Interest-bearing 2,063,185 1,974,119
Noninterest-bearing 2,574,797 2,202,505
Money market deposit accounts 3,033,008 3,144,084
Term accounts 12,611,389 11,989,664
----------- -----------
23,369,231 22,976,578
Accrued interest payable 91,878 61,313
Purchase accounting adjustments 1,263 2,680
----------- -----------
Total deposits $23,462,372 $23,040,571
=========== ===========
The aggregate amount of jumbo certificates of deposit (term deposits) with
a minimum denomination of $100,000 was approximately $3.3 billion and $2.7
billion at December 31, 2000 and 1999, respectively. Brokered certificates of
deposit totalling $454 million and $390 million were included in deposits at
December 31, 2000 and 1999, respectively. Total deposits at December 31, 2000
and 1999 include escrow balances for loans serviced for others of $825 million
and $814 million, respectively.
Total deposits include deposits of Golden State of $32.6 million and $4.8
million at December 31, 2000 and 1999, respectively.
A summary of interest expense by deposit category follows (in thousands):
2000 1999 1998
-------- -------- --------
Passbook accounts $116,321 $124,618 $ 96,942
Interest-bearing demand deposits 13,914 17,772 13,770
Money market deposit accounts 120,683 124,368 65,234
Term accounts 677,489 621,528 615,166
-------- -------- --------
Total $928,407 $888,286 $791,112
======== ======== ========
At December 31, 2000, term accounts had scheduled maturities as follows (in
thousands):
Year Ending
-----------
2001 $11,082,911
2002 1,197,543
2003 87,151
2004 49,354
2005 192,311
Thereafter 2,119
-----------
Total $12,611,389
===========
F-35
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(21) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
A summary of information regarding securities sold under agreements to
repurchase follows (dollars in thousands):
December 31, 2000
-----------------------------------------------------------------
Underlying Collateral Repurchase Liability
--------------------------- ----------------------
Recorded Market Interest
Value (a) Value Amount Rate
--------- ----- ------ ----
Maturing within 30 days $ 980,736 $ 981,379 $ 888,748 6.61%
Maturing in 30 to 90 days 477,528 481,113 423,597 6.63
Maturing after 90 days to 1 year 1,315,377 1,317,242 1,284,115 6.74
Maturing over 1 year 1,931,155 1,943,241 1,850,000 7.28
---------- ---------- ----------
Total (b) 4,704,796 4,722,975 4,446,460 6.93%
Accrued interest payable -- -- 64,849
---------- ---------- ----------
$4,704,796 $4,722,975 $4,511,309
========== ========== ==========
December 31, 1999
-----------------------------------------------------------------
Underlying Collateral Repurchase Liability
--------------------------- ----------------------
Recorded Market Interest
Value (a) Value Amount Rate
--------- ----- ------ ----
Maturing within 30 days $ 33,564 $ 34,044 $ -- --%
Maturing in 30 to 90 days 2,731,295 2,709,851 2,573,574 5.35
Maturing after 90 days to 1 year 2,796,083 2,781,442 2,633,514 5.61
Maturing over 1 year 167,214 165,972 150,000 6.13
---------- ---------- ----------
Total (b) 5,728,156 5,691,309 5,357,088 5.50%
Accrued interest payable -- -- 124,659
---------- ---------- ----------
$5,728,156 $5,691,309 $5,481,747
========== ========== ==========
______________
(a) Recorded value includes accrued interest at December 31, 2000 and 1999. In
addition, the recorded values at December 31, 2000 and 1999 include
adjustments for the unrealized gain or loss on mortgage-backed securities
available for sale.
(b) Total mortgage-backed securities collateral at December 31, 2000 and 1999
includes $1.7 billion and $2.1 billion, respectively, in outstanding
balances of loans securitized with full recourse to the Bank. The market
value of such collateral was $1.7 billion and $2.1 billion at December 31,
2000 and 1999, respectively.
At December 31, 2000 and 1999, these agreements had weighted average stated
interest rates of 6.93% and 5.50%, respectively. The underlying securities were
delivered to, and are being held under the control of, third party securities
dealers. These dealers may have loaned the securities to other parties in the
normal course of their operations, but all agreements require the dealers to
resell to California Federal the identical securities at the maturities of the
agreements. The average daily balance of securities sold under agreements to
repurchase was $5.4 billion and $5.1 billion during 2000 and 1999, respectively,
the weighted average rate was 6.45% and 5.18% during 2000 and 1999,
respectively, and the maximum amount outstanding at any month-end during these
periods was $8.5 billion and $6.2 billion, respectively.
At December 31, 2000, securities sold under agreements to repurchase were
collateralized with $2.6 billion of mortgage-backed securities available for
sale and $2.1 billion of mortgage-backed securities held to maturity.
F-36
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(22) BORROWINGS
Borrowings are summarized as follows (dollars in thousands):
December 31,
---------------------------------------------------------
2000 1999
--------------------------- -------------------------
Carrying Average Carrying Average
Value Rate Value Rate
----- ---- ----- ----
Fixed-rate borrowings from FHLB $21,337,878 6.08% $19,977,878 5.61%
Variable-rate borrowings from FHLB 5,090,000 6.71 3,365,000 6.04
10% Subordinated Debentures due 2006 92,100 10.00 92,100 10.00
FN Holdings 10 5/8% Senior Subordinated
Notes due 2003 250 10.63 250 10.63
6 1/2% Convertible Subordinated
Debentures due 2001 160 6.50 2,635 6.50
10% Subordinated Debentures due 2003 4,299 10.00 4,299 10.00
Floating Rate Notes due 2003 250,000 7.76 250,000 7.21
6 3/4% Senior Notes due 2001 350,000 6.75 350,000 6.75
7% Senior Notes due 2003 600,000 7.00 600,000 7.00
7 1/8% Senior Notes due 2005 800,000 7.13 800,000 7.13
Federal funds purchased -- -- 55,000 5.50
Other borrowings 406 7.57 209 6.69
----------- -----------
Total borrowings 28,525,093 6.28 25,497,371 5.79
Discount on borrowings (8,564) (11,481)
Purchase accounting adjustments, net 7,420 21,742
----------- -----------
Subtotal 28,523,949 6.28% 25,507,632 5.79%
Accrued interest payable 276,608 160,994
----------- -----------
$28,800,557 $25,668,626
=========== ===========
Maturities and weighted average stated interest rates of borrowings at
December 31, 2000, not including discounts, accrued interest payable or purchase
accounting adjustments, are as follows (dollars in thousands):
Weighted
Balances Maturing Average Rates
Maturities during the Years --------------------------- --------------------------
Ending December 31, FHLB Other FHLB Other
------------------- ---- ----- ---- -----
2001 $ 8,790,833 $ 350,465 6.56% 6.75%
2002 5,985,000 37 5.87 8.58
2003 8,650,000 854,299 6.11 7.24
2004 2,350,000 -- 5.84 --
2005 651,625 800,250 6.99 7.13
Thereafter 420 92,164 7.74 10.00
----------- ----------
Total $26,427,878 $2,097,215 6.20% 7.24%
=========== ==========
F-37
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Interest expense on borrowings for the years ended December 31, 2000, 1999
and 1998 is summarized as follows (in thousands):
Year Ended December 31,
---------------------------------------------
2000 1999 1998
---- ---- ----
FHLB advances $1,521,806 $1,165,010 $706,299
Interest rate swap agreements 7,188 5,940 (2,536)
10% Subordinated Debentures due 2006 9,210 9,210 9,209
11.20% Senior Notes due 2004 -- 651 672
FN Holdings 12 1/4% Senior Notes due 2001 -- -- 18,093
FN Holdings 9 1/8% Senior Subordinated Notes
due 2003 -- -- 9,337
FN Holdings 10 5/8% Senior Subordinated Notes
due 2003 27 26 44,353
10.668% Subordinated Notes due 1998 -- -- 5,203
6 1/2% Convertible Subordinated Debentures due 2001 32 172 171
10% Subordinated Debentures due 2003 430 430 430
Floating Rate Notes due 2003 18,942 15,931 5,006
6 3/4% Senior Notes due 2001 23,625 23,625 7,031
7% Senior Notes due 2003 42,000 42,000 12,441
7 1/8% Senior Notes due 2005 57,000 57,000 16,882
Federal funds purchased 4,747 2,750 3,987
Other borrowings 28 25 271
Discount accretion 1,092 1,031 --
Purchase accounting adjustments (8,629) (11,172) (7,533)
---------- ---------- --------
Total $1,677,498 $1,312,629 $829,316
========== ========== ========
The following is a summary of the carrying value of assets pledged as
collateral for FHLB advances (in thousands):
December 31, 2000
-----------------
Loans receivable $31,950,508
Mortgage-backed securities available for sale 3,898,334
Mortgage-backed securities held to maturity 13,411
Securities available for sale 19,993
FHLB stock 1,361,066
-----------
Total $37,243,312
===========
FHLB ADVANCES
During 2000, the FHLB called and the Bank prepaid $400 million in FHLB
advances, resulting in extraordinary gains of $3.0 million, net of income taxes
of $2.1 million, on the early extinguishment of such borrowings.
10% SUBORDINATED DEBENTURES DUE 2006
As part of its 1994 acquisition of First Nationwide ("FN Acquisition"),
California Federal assumed $92.1 million principal amount of subordinated
debentures, which bear interest at 10% per annum and mature on October 1, 2006
(the "10% Subordinated Debentures Due 2006").
F-38
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Events of Default under the indenture governing the 10% Subordinated
Debentures Due 2006 (the "Old FNB Indenture") include, among other things: (a) a
default in the payment of interest when due and such default continues for 30
days, (b) a default in the payment of any principal when due, (c) the failure to
comply with covenants in the Old FNB Indenture, provided that the trustee or
holders of at least 25% in principal amount of the outstanding 10% Subordinated
Debentures Due 2006 notify the Bank of the Default and the Bank does not cure
the default within 60 days after receipt of such notice, (d) certain events of
bankruptcy, insolvency or reorganization of the Bank, (e) the FSLIC/RF (or a
comparable entity) is appointed to act as conservator, liquidator, receiver or
other legal custodian for the Bank and (f) a default under other indebtedness of
the Bank in excess of $10 million resulting in such indebtedness becoming due
and payable, and such default or acceleration has not been rescinded or annulled
within 60 days after the date on which written notice of such failure has been
given by the trustee to the Bank or by holders of at least 25% in principal
amount of the outstanding 10% Subordinated Debentures Due 2006 to the Bank and
the trustee.
11.20% SENIOR NOTES DUE 2004
As part of its 1996 acquisition of San Francisco Federal ("SFFed") ("SFFed
Acquisition"), California Federal assumed $50 million principal amount of SFFed
11.20% Senior Notes due September 1, 2004 (the "11.20% Senior Notes"). On
December 20, 1999, the Bank repurchased all of the remaining $6.0 million
outstanding principal amount of the 11.20% Senior Notes at a price of 113.9% of
the principal amount, plus the accrued interest thereon. The Bank recorded an
extraordinary loss, net of tax, of $0.2 million in connection with this
repurchase.
FN HOLDINGS 12 1/4% SENIOR NOTES DUE 2001
In connection with the FN Acquisition, the Company issued $200 million
principal amount of 12 1/4% Senior Notes due 2001 ("FN Holdings 12 1/4% Senior
Notes"), including $5.5 million principal amount of FN Holdings 12 1/4% Senior
Notes to certain directors and officers of the Bank.
During 1998, a total of $199.8 million aggregate principal amount of the FN
Holdings 12 1/4% Senior Notes were redeemed in connection with the Debt Tender
Offers for an aggregate redemption price, including accrued interest payable, of
$228.3 million. On May 15, 1999, GS Holdings redeemed the remaining $0.2 million
aggregate principal amount of the FN Holdings 12 1/4% Senior Notes for an
aggregate redemption price, including accrued interest payable, of $252.6
thousand.
FN HOLDINGS 9 1/8% SENIOR SUBORDINATED NOTES DUE 2003
On January 31, 1996, FN Holdings issued $140 million principal amount of
the 9 1/8% Senior Sub Notes due 2003 (the "FN Holdings 9 1/8% Senior Sub
Notes").
During 1998, all of the FN Holdings 9 1/8% Senior Sub Notes were redeemed
in connection with the Debt Tender Offers for an aggregate purchase price,
including accrued interest payable, of $159.9 million.
FN HOLDINGS 10 5/8% SENIOR SUBORDINATED NOTES DUE 2003
In connection with the Cal Fed Acquisition, GS Holdings acquired the net
proceeds from the issuance of $575 million principal amount of FN Escrow"s 10
5/8% Senior Sub Notes due 2003 (the "FN Holdings 10 5/8% Notes") and assumed FN
Escrow's obligations under the FN Holdings 10 5/8% Notes and indenture. During
1998, a total of $574.8 million aggregate principal amount of the FN Holdings 10
5/8% Notes were redeemed in connection with the Debt Tender Offers for an
aggregate purchase price, including accrued interest payable, of $692.7 million.
At December 31, 2000, $0.3 million of the FN Holdings 10 5/8% Notes remain
outstanding.
The FN Holdings 10 5/8% Notes are redeemable at the option of GS Holdings,
in whole or in part, during the twelve-month period beginning January 1, 2001,
at a redemption price of 105.313% plus accrued and unpaid interest to the date
of redemption, during the twelve-month period beginning January 1, 2002 at a
redemption price of 102.656% plus accrued and unpaid interest to the date of
redemption, and thereafter at 100% plus accrued and unpaid interest to the date
of redemption.
F-39
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The FN Holdings 10 5/8% Notes are subordinate in right of payment to all
existing and future subordinated debt, if any is issued, of GS Holdings. The FN
Holdings 10 5/8% Notes are subordinated to all existing and future liabilities,
including deposits, indebtedness and trade payables, of the subsidiaries of GS
Holdings, including California Federal and all preferred stock issued by the
Bank, including the Bank Preferred Stock.
As a result of the Cal Fed Acquisition, the Bank is obligated with respect
to the following three outstanding securities of Old California Federal.
10.668% SUBORDINATED NOTES DUE 1998
California Federal assumed $50 million of 10.668% unsecured senior
subordinated notes which matured and were repaid in full on December 22, 1998
(the "10.668% Subordinated Notes").
6 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2001
In 1986, Cal Fed Inc., Old California Federal's former parent company,
issued $125 million of 6.5% convertible subordinated debentures due February 20,
2001 (the "6 1/2% Convertible Subordinated Debentures"). As a result of a
corporate restructuring in December 1992, Cal Fed Inc. was merged with and into
XCF Acceptance Corporation ("XCF"), a subsidiary of Old California Federal. The
6 1/2% Convertible Subordinated Debentures were redeemable at the option of the
holders on February 20, 2000, at 123% of their principal amount. Due to the
purchase of all of the Cal Fed Stock by FN Holdings in the Cal Fed Acquisition
on January 3, 1997, the common stock conversion feature has been eliminated.
During the first quarter of 2000, the Bank repurchased $2.5 million outstanding
principal amount of the 6 1/2% Convertible Subordinated Debentures, resulting in
an extraordinary gain of $41 thousand, net of income taxes of $30 thousand on
the early extinguishment debt.
Events of Default under the indenture governing the 6 1/2% Convertible
Subordinated Debentures include, among other things: (a) any failure to make any
payment of interest when due and such payment is not made within 30 days after
the date such payment was due; (b) failure to make any payment of principal when
due; (c) default in the performance, or breach, of any covenant or warranty in
the indenture, provided that such default or breach continues for more than 60
days after notice is delivered to the Bank; or (d) certain events of bankruptcy,
insolvency, or reorganization of the Bank or its subsidiaries.
10% SUBORDINATED DEBENTURES DUE 2003
On December 16, 1992, Old California Federal issued $13.6 million of 10.0%
unsecured subordinated debentures due 2003 (the "10% Subordinated Debentures").
Events of Default under the indenture governing the 10% Subordinated
Debentures include, among other things: (a) failure to make any payment of
principal when due; (b) any failure to make any payment of interest when due and
such payment is not made within 30 days after the date such payment was due; (c)
failure to comply with certain covenants in the indenture; (d) failure to comply
with certain covenants in the indenture provided that such failure continues for
more than 60 days after notice is delivered to the Bank; (e) certain events of
bankruptcy, insolvency or reorganization of the Bank; or (f) the default or any
event which, with the giving of notice or lapse of time or both, would
constitute a default under any indebtedness of the Bank and cause such
indebtedness with an aggregate principal amount exceeding $15 million to
accelerate.
GS HOLDINGS NOTES
On August 6, 1998, GS Escrow, which subsequently merged into GS Holdings,
issued $2 billion principal amount of fixed and floating rate notes, as
described below. The GS Holdings Notes are unsecured and unsubordinated
obligations of GS Holdings and rank in right of payment with all other
unsubordinated and unsecured indebtedness of GS Holdings. The terms and
conditions of the notes indentures impose restrictions that affect, among other
things, the ability of GS Holdings to incur debt, pay dividends or make
distributions, engage in a business other than holding the common stock of the
Bank and similar banking institutions, make acquisitions, create liens, sell
assets and make certain investments.
F-40
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
FLOATING RATE NOTES DUE 2003
On August 6, 1998, GS Escrow, an affiliate of GS Holdings, issued $250
million principal amount of the Floating Rate Notes Due 2003. The notes will
mature on August 1, 2003 with interest payable quarterly on February 1, May 1,
August 1 and November 1. Interest on the Floating Rate Notes is equal to
three-month LIBOR plus 100 basis points per annum, except that the initial rate
was 6 3/4%, based on six-month LIBOR until the first interest payment date on
February 1, 1999. At December 31, 2000, the interest rate on the Floating Rate
Notes Due 2003 was 6.33%. Deferred costs associated with the issuance of the
Floating Rate Notes totalling $3.1 million were recorded in other assets and are
being amortized over the term of the Floating Rate Notes.
The Floating Rate Notes are redeemable at the option of GS Holdings, in
whole or in part, after August 1, 2000 at a price of 101.5% of the outstanding
principal amount during the twelve-month period beginning August 1, 2000; at a
price of 101% of the outstanding principal amount during the twelve-month period
beginning August 1, 2001; and at a price of 100.5% of the outstanding principal
amount during the twelve-month period beginning August 1, 2002; including
accrued and unpaid interest, if any, to the date of redemption. In the event of
a change in control, the Floating Rate Notes are redeemable in whole at the
option of GS Holdings. The redemption price includes principal plus accrued and
unpaid interest, if any, to the date of redemption, plus the excess, if any, of
(a) the sum of the present value of the redemption price for the Floating Rate
Notes and the remaining scheduled interest payments over (b) the outstanding
principal amount of the Floating Rate Notes to be redeemed.
FIXED RATE NOTES
On August 6, 1998, GS Escrow, an affiliate of GS Holdings, issued $350
million principal amount of the 2001 Notes, $600 million principal amount of the
2003 Notes and $800 million principal amount of the 2005 Notes. The Fixed Rate
Notes will mature on August 1 of the respective year with interest payable
semiannually on February 1 and August 1. Deferred costs associated with the
issuance of the Fixed Rate Notes totalling $3.5 million, $12.5 million and $19.5
million for the 2001 Notes, the 2003 Notes and the 2005 Notes, respectively,
were recorded in other assets and are being amortized over the terms of the
notes.
The Fixed Rate Notes are redeemable at the option of GS Holdings, in whole
or in part, at a redemption price equal to principal plus accrued and unpaid
interest, if any, to the date of redemption, plus the excess, if any, of (a) the
sum of the present value of the redemption price for the notes and the remaining
scheduled interest payments over (b) the outstanding principal amount of the
notes to be redeemed.
F-41
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(23) ACCRUED TERMINATION AND FACILITIES COSTS
In connection with the Golden State Acquisition, the Company recorded
liabilities resulting from (a) branch consolidations due to duplicate
facilities; (b) employee severance and termination benefits due to a planned
reduction in force; and (c) expenses incurred under contractual obligations to
terminate services provided by outside service providers (principally relating
to DP systems expenses). The merger and integration plan relative to the Golden
State Acquisition was in place on September 11, 1998. Certain of these costs
were included in the allocation of purchase price and others were recognized in
net income. The table below reflects a summary of the activity in the liability
for the costs related to such plan (in thousands):
Severance and
Branch Termination Contract
Consolidations Benefits Terminations Total
-------------- ------------- ------------ --------
Balance at December 31, 1997 $ -- $ -- $ -- $ --
Initial liabilities recorded 29,870 48,303 14,455 92,628
Charges to liability account -- (14,823) (2,640) (17,463)
-------- -------- ------- --------
Balance at December 31, 1998 29,870 33,480 11,815 75,165
Additional liabilities recorded 9,401 71 -- 9,472
Charges to liability account (15,220) (4,140) (9,523) (28,883)
Reversal of accrual -- (16,641) (2,267) (18,908)
-------- -------- ------- --------
Balance at December 31, 1999 24,051 12,770 25 36,846
Additional liabilities recorded 2,504 -- -- 2,504
Charges to liability account (10,511) (241) (25) (10,777)
-------- -------- ------- --------
Balance at December 31, 2000 $ 16,044 $ 12,529 $ -- $ 28,573
======== ======== ======= ========
The Bank had identified certain of its retail banking facilities to be
closed and marketed for sale, with the related operations consolidated into
other retail banking facilities acquired in the Golden State Acquisition.
Accordingly, the liabilities established represent the estimated present value
of occupancy expenses, offset by estimates of sub-lease income over the
applicable remaining lease terms. The first group of branches was closed in
November 1998. The final closure was in June 2000. The balance relating to
accrued costs for branch consolidations remaining at December 31, 2000
represents remaining lease obligations, net of sub-lease income.
In connection with the Golden State Acquisition, management identified
approximately 1,100 full-time equivalent positions to be eliminated. During
1999, this estimate was increased to 1,141. These positions spanned all areas
and business units of the Bank. As of December 31, 2000, all positions have been
eliminated. The balance relating to accrued severance and termination benefits
remaining at December 31, 2000 primarily represents a liability for annuity
benefits contractually payable to former senior officers of Golden State.
The Bank had also established additional liabilities for contract
termination costs with outside service providers. As of December 31, 2000, all
such contracts have been terminated.
F-42
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The table below provides detail of the initial liability recorded in 1998,
additional liabilities recorded and subsequent reversals of the excess liability
(see note 3) (in thousands):
Merger Costs Expenses
Included in Recognized in
Allocation of Net Income
Purchase Price (Pre-tax) Total
-------------- ------------- --------
Branch Consolidation $ 22,304 $ 7,566 $ 29,870
Severance and termination benefits 42,211 6,092 48,303
Contract termination 14,455 -- 14,455
-------- ------- --------
Total liability initially established in 1998 78,970 13,658 92,628
Additional liability recorded in 1999 500 8,972 9,472
Excess liability reversed in 1999 (16,641) (2,267) (18,908)
-------- ------- --------
Balance at December 31, 1999 62,829 20,363 83,192
Additional liability recorded in 2000 -- 2,504 2,504
-------- ------- --------
Net liability recorded from
Golden State Acquisition $ 62,829 $22,867 $ 85,696
======== ======= ========
(24) SEGMENT REPORTING
The Company has two reportable segments, the community bank and the
mortgage bank. The community bank operates retail deposit branches in California
and Nevada. The community bank segment provides retail consumer and small
businesses with: (a) deposit products such as demand, transaction and savings
accounts, (b) investment products such as mutual funds, annuities and insurance
and (c) lending products, such as consumer and commercial loans. Further, the
community bank segment invests in residential real estate loans purchased from
FNMC and from others, and also invests in mortgage-backed and other securities.
The mortgage banking segment, conducted by FNMC, operates loan production
facilities throughout the United States and originates or purchases fixed-rate
1-4 unit residential loans for sale to various investors in the secondary market
and services loans for itself and others. The mortgage banking segment also
originates adjustable-rate loans for the community bank segment.
The accounting policies of the segments are the same as those described in
note 2. The Company evaluates performance based on net income, noninterest
income, and noninterest expense. The total of these three items is the
reportable segment's net (pre-tax) contribution.
The Company's reportable segments are strategic business units that offer
different services in different geographic areas. They are managed separately
because each segment appeals to different markets and, accordingly, requires
different technology and marketing strategies.
F-43
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Since the Company derives a significant portion of its revenues from
interest income, and interest expense is the most significant expense, the
segments are reported below using net interest income. Because the Company also
evaluates performance based on noninterest income and noninterest expense goals,
these measures of segment profit and loss are also presented. The Company does
not allocate income taxes to the segments.
Community Mortgage
Banking Banking Total
------- ------- -----
(in thousands)
Net interest income: (1)
2000 $ 1,361,055 $ (102,839) $ 1,258,216
1999 1,357,223 (61,785) 1,295,438
1998 964,926 (52,830) 912,096
Noninterest income: (2)
2000 247,957 242,034 489,991
1999 247,849 201,661 449,510
1998 284,142 168,366 452,508
Noninterest expense: (3)
2000 752,696 150,372 903,068
1999 737,516 159,059 896,575
1998 591,761 150,863 742,624
Segment assets: (4)
2000 60,149,476 3,498,106 63,647,582
1999 56,806,653 3,459,880 60,266,533
1998 54,503,592 4,847,633 59,351,225
- -----------
(1) Includes $110.4 million, $109.6 million and $101.4 million for 2000, 1999
and 1998, respectively, in earnings credit provided to FNMC by the Bank,
primarily for custodial bank account balances generated by FNMC. Also
includes $253.2 million, $235.6 million and $198.9 million for 2000, 1999
and 1998, respectively, in interest income and expense on intercompany
loans.
(2) Includes $46.4 million, $46.6 million and $34.9 million for 2000, 1999 and
1998, respectively, in intercompany servicing fees.
(3) Includes $4.6 million for 2000, 1999 and 1998, respectively, in
intercompany noninterest expense.
(4) Includes $3.1 billion, $3.2 billion and $4.5 billion for 2000, 1999 and
1998, respectively, in intercompany borrowings and $43.6 million, $30.2
million and $29.2 million for 2000, 1999 and 1998, respectively, in
intercompany deposits maintained with the Bank.
F-44
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following reconciles the above table to the amounts shown on the
consolidated financial statements as of and for the years ended December 31, (in
thousands):
2000 1999 1998
----------- ----------- -----------
Net interest income:
Total net interest income for reportable segments $ 1,258,216 $ 1,295,438 $ 912,096
Elimination of intersegment net interest income (110,424) (109,599) (101,372)
----------- ----------- -----------
Total $ 1,147,792 $ 1,185,839 $ 810,724
=========== =========== ===========
Noninterest income:
Total noninterest income for reportable segments $ 489,991 $ 449,510 $ 452,508
Elimination of intersegment servicing fees (46,396) (46,631) (34,891)
----------- ----------- -----------
Total $ 443,595 $ 402,879 $ 417,617
=========== =========== ===========
Noninterest expense:
Total noninterest expense for reportable segments $ 903,068 $ 896,575 $ 742,624
Elimination of intersegment expense (4,640) (4,640) (4,640)
----------- ----------- -----------
Total $ 898,428 $ 891,935 $ 737,984
=========== =========== ===========
Total assets:
Total assets for reportable segments $63,647,582 $60,266,533 $59,351,225
Elimination of intersegment borrowings (3,089,139) (3,195,180) (4,524,072)
Elimination of intersegment deposits (43,632) (30,222) (29,217)
----------- ----------- -----------
Total $60,514,811 $57,041,131 $54,797,936
=========== =========== ===========
The Company typically reviews the results of operations for the mortgage
banking segment based on that segment's contribution as opposed to its income
before income taxes, extraordinary item and minority interest. The main
difference between the two measures of profitability is that contribution for
the mortgage banking segment includes custodial earnings that are reported in
the community banking segment when computing net income and that intercompany
interest expense is computed using an internal cost of funds rate instead of a
market rate. The mortgage banking segment's contribution for the years ended
December 31, 2000, 1999 and 1998 was $99.2 million, $90.4 million and $66.0
million, respectively.
F-45
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(25) COMPREHENSIVE INCOME
Accounting principles generally require that recognized revenue, expenses,
gains, and losses be included in net income. Although certain changes in assets
and liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items along with net income are components of comprehensive
income.
The tax effect associated with unrealized gain (loss) on securities for the
years ended December 31, 2000, 1999 and 1998 is summarized as follows (in
thousands):
Before-tax Tax benefit Net-of-tax
amount (expense) amount
------ --------- ------
2000
----
Unrealized gain (loss) on securities:
Unrealized holding gain (loss) arising during the period $ 299,311 $(128,490) $ 170,821
Less: reclassification adjustments for (losses) gains in net income 16,866 (6,890) 9,976
Amortization of market adjustment for securities transferred
from available for sale to held to maturity 7,826 (3,196) 4,630
--------- --------- ---------
Other comprehensive income (loss) $ 324,003 $(138,576) $ 185,427
========= ========= =========
1999
----
Unrealized (loss) gain on securities:
Unrealized holding (loss) gain arising during the period $(487,673) $ 205,432 $(282,241)
Less: reclassification adjustments for gains in net income (1,283) 541 (742)
--------- --------- ---------
Other comprehensive (loss) income $(488,956) $ 205,973 $(282,983)
========= ========= =========
1998
----
Unrealized (loss) gain on securities:
Unrealized holding (loss) gain arising during the period $ (28,761) $ 594 $ (28,167)
Less: reclassification adjustments for gains in net income (1,131) 287 (844)
--------- --------- ---------
Other comprehensive (loss) income $ (29,892) $ 881 $ (29,011)
========= ========= =========
(26) MINORITY INTEREST
REIT PREFERRED STOCK
In November 1996, the Bank formed California Federal Preferred Capital
Corporation ("Preferred Capital Corp.") for the purpose of acquiring, holding
and managing real estate mortgage assets. Preferred Capital Corp. is a Maryland
corporation and qualifies as a real estate investment trust ("REIT") for federal
income tax purposes. All of Preferred Capital Corp.'s common stock is owned by
the Bank. FNMC services Preferred Capital Corp.'s mortgage assets pursuant to a
subservicing agreement.
On January 31, 1997, Preferred Capital Corp. issued to the public $500
million of its 9 1/8% Noncumulative Exchangeable Preferred Stock ("REIT
Preferred Stock"), which is reflected in the Company's consolidated balance
sheet as minority interest. Preferred Capital Corp. used the proceeds from such
offering to acquire mortgage assets from the Bank. The REIT Preferred Stock has
a stated liquidation value of $25 per share, plus declared and unpaid dividends,
if any. The annual cash dividends on the 20,000,000 shares of REIT Preferred
Stock, assuming such dividends are declared by the Board of Directors of
Preferred Capital Corp., are expected to approximate $45.6 million per year. As
long as Preferred Capital Corp. qualifies as a REIT, a distribution on the REIT
Preferred Stock will be a dividends-paid deduction by Preferred Capital Corp.
for tax purposes. Dividends paid on the REIT Preferred Stock during 2000, 1999
and 1998 were $27.0 million, $26.4 million and $33.1 million, respectively, net
of the income tax benefit.
F-46
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The REIT Preferred Stock ranks prior to the common stock of Preferred
Capital Corp. and to all other classes and series of equity securities
subsequently issued, other than any class or series expressly designated as
being on a parity with or senior to the REIT Preferred Stock as to dividends and
liquidating distributions.
Holders of the REIT Preferred Stock have no voting rights, except as
required by law or certain limited circumstances.
Except in the event of a change of control or upon certain tax events, the
REIT Preferred Stock is not redeemable prior to January 31, 2002. The REIT
Preferred Stock is redeemable solely at the option of Preferred Capital Corp. or
its successor or any acquiring or resulting entity with respect to Preferred
Capital Corp. (including by any parent or subsidiary of Preferred Capital Corp.,
any such successor or any such acquiring or resulting entity), as applicable, at
any time on and after January 31, 2002 in whole or in part, at $26.14 per share
on or after January 31, 2002 and prior to January 31, 2003, and at prices
decreasing pro rata annually thereafter to the stated liquidation value of $25
per share on or after January 31, 2007, plus declared and unpaid dividends, if
any, without interest. Upon change of control, the REIT Preferred Stock is
redeemable on or prior to January 31, 2002 at the option of Preferred Capital
Corp. or its successor or any acquiring or resulting entity with respect to the
Bank (including by any parent or subsidiary of Preferred Capital Corp., any such
successor or any such acquiring or resulting entity), as applicable, in whole,
but not in part, at a price per share equal to: (a) $25, plus (b) an amount
equal to declared and unpaid dividends, if any, to the date fixed for
redemption; without interest and without duplication, an additional amount equal
to the amount of dividends that would be payable on the REIT Preferred Stock in
respect of the period from the first day of the dividend period in which the
date fixed for redemption occurs to the date fixed for redemption (assuming all
such dividends were to be declared), plus (c) a specified make whole premium.
Each share of REIT Preferred Stock will be exchanged automatically for one
newly issued share of preferred stock of the Bank having substantially the same
terms as the REIT Preferred Stock (the "9 1/8% Preferred Stock") if the
appropriate federal regulatory agency directs in writing such exchange because
(a) the Bank becomes "undercapitalized" under prompt corrective action
regulations, (b) the Bank is placed into conservatorship or receivership or (c)
the appropriate federal regulatory agency, in its sole discretion, anticipates
the Bank becoming "undercapitalized" in the near term. If issued, the 9 1/8%
Preferred Stock will rank on a parity with the Bank Preferred Stock.
AUTO ONE COMMON STOCK
In connection with the GSAC Acquisition, Auto One issued 250 shares of its
common stock, par value $1.00 per share, representing a 20% interest in Auto
One. The carrying value of Auto One's common stockholder's equity attributable
to the minority stockholders at December 31, 2000 and 1999 has been reduced to
zero as a result of realized operating losses of Auto One.
11 1/2% PREFERRED STOCK
During the year ended December 31, 1998, in connection with the Bank
Preferred Stock Tender Offers, 2,688,959 shares of California Federal's 11 1/2%
noncumulative perpetual preferred stock ("11 1/2% Preferred Stock") were
purchased by GS Holdings for a total redemption price of $301.3 million. These
transactions reduced minority interest by $268.9 million on the Company's
consolidated balance sheet and resulted in a charge of $32.4 million to minority
interest expense.
During the year ended December 31, 1999, all of the remaining 318,341
outstanding shares of 11 1/2% Preferred Stock were redeemed at $105.75 per
share, for a total redemption price of $33.7 million. This transaction reduced
minority interest by $31.8 million on the Company's consolidated balance sheet
and resulted in a charge of $1.8 million to minority interest expense. See note
5.
F-47
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Dividends are payable quarterly at an annual rate of 11.50% per share when
declared by the Bank's Board of Directors. Dividends paid on the 11 1/2%
Preferred Stock for each year ended December 31, 2000, 1999 and 1998 totalled
$34.6 million, of which $1.8 million and $26.8 million was included in minority
interest expense in 1999 and 1998, respectively.
10 5/8% PREFERRED STOCK
During the year ended December 31, 1998, in connection with the Bank
Preferred Stock Tender Offers, 1,117,701 shares of California Federal's 10 5/8%
noncumulative perpetual preferred stock ("10 5/8% Preferred Stock" and, together
with the 11 1/2% Preferred Stock, the "Bank Preferred Stock") were purchased by
GS Holdings for a total redemption price of $121.7 million. These transactions
reduced minority interest by $111.8 million on the Company's consolidated
balance sheet and resulted in a charge of $9.9 million to minority interest
expense.
During the year ended December 31, 1999, all of the remaining 607,299
outstanding shares of 10 5/8% Preferred Stock were redeemed at $105.313 per
share, for a total redemption price of $63.9 million. This transaction reduced
minority interest by $60.7 million on the Company's consolidated balance sheet
and resulted in a charge of $3.2 million to minority interest expense. See note
5.
Cash dividends on the 10 5/8% Preferred Stock are noncumulative and are
payable at an annual rate of 10 5/8% per share if, when, and as declared by the
Board of Directors of the Bank. Dividends paid on the 10 5/8% Preferred Stock
for each year ended December 31, 2000, 1999 and 1998 totalled $18.3 million, of
which $15.3 million was included in minority interest expense in 1998.
PRE-MERGER TAX BENEFITS
During 1999, minority interest expense of $79.0 million was recorded based
upon changes to estimated pre-merger tax benefits retained by GSB Investments
and Hunter's Glen. This amount was fully offset by income tax benefits to GS
Holdings in the same periods. See note 30.
(27) STOCKHOLDER'S EQUITY
PREFERRED STOCK
In March 1998, the Company redeemed all remaining 1,666.7 outstanding
shares of the floating rate cumulative perpetual preferred stock of FN Holdings
("FN Holdings Preferred Stock"), reducing stockholder's equity by $25.0 million.
The redemption price was equal to the liquidation value of $15,000 per share.
Upon redemption of the FN Holdings Preferred Stock, all remaining 52.5 shares of
another series of the FN Holdings Preferred Stock which had been issued in
conjunction with stock dividends ("Additional FN Holdings Preferred Stock")
totalling $0.8 million liquidation value, was contributed to the capital of the
Company, without any payment therefore. Such shares were retired and cancelled.
Dividends on the FN Holdings Preferred Stock totalled $0.6 million during
1998, including the issuance of Additional FN Holdings Preferred Stock of $0.1
million.
COMMON STOCK
In connection with the Golden State Merger, First Gibraltar, holder of 100%
of class A common stock of the Company and Hunter's Glen, which was controlled
by the Bank's Chairman and was holder of 100% of class B common stock of the
Company, received 56,722,988 shares of Golden State stock in consideration for
all of the shares of class A and class B common stock of the Company. Subsequent
to the Golden State Merger, GSB Investments became the owner of the shares
previously issued to First Gibraltar. Prior to this transaction, class B common
stock represented 20% of the voting common shares of the Company (representing
approximately 15% of the voting power of the common stock). Class A common stock
represented 80% of the voting common shares of the Company (representing
approximately 85% of the voting power of the common stock).
F-48
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In connection with the Golden State Merger, the Company issued 1,000 shares
of its common stock with par value of $1.00 per share. The common stock of the
Company is owned 100% by its parent, Golden State.
Dividends and distributions on the Company's common stock in 2000 and 1999
totalled $96 million and $225.5 million, respectively. During 1999, the Company
also recorded a $66.4 million adjustment to the initial dividend of tax benefits
to parent related to the Company's deconsolidation from its tax reporting group.
See "Retained Earnings." Dividends and distributions on the Company's common
stock in 1998 totalled $874.2 million, consisting of the following: (a) $28.5
million on the class A stock; (b) $7.1 million on the class B stock; (c) $211.2
million related to the Company's deconsolidation from its tax reporting group as
a result of the Golden State Merger; (d) $553.7 million related to the Parent
Holdings Defeasance and (e) $73.7 million on common stock.
ADDITIONAL PAID-IN CAPITAL
During 2000 and 1999, the Company received capital contributions from its
parent of $19 million and $40 million, respectively. In addition, the Company
recorded an adjustment during 1999 to the purchase price in the Golden State
Acquisition of $12.4 million. See note 3.
RETAINED EARNINGS
During 2000, and 1999, the Company paid dividends to its parent of $96
million and $225.5 million, respectively.
During 1999, the Company recorded a $66.4 million increase in retained
earnings representing an adjustment to reduce the initial dividend of tax
benefits to its parent upon the Company's deconsolidation from its tax reporting
group on September 11, 1998. See note 30.
PAYMENT OF DIVIDENDS
The terms of the GS Escrow Notes indenture generally will permit the
Company to make distributions of up to 75% of the Consolidated Net Income (as
defined therein) of GS Holdings since July 1, 1998 if after giving effect to
such distribution, (a) the Bank is "well capitalized" under applicable OTS
regulations and (b) the Consolidated Common Stockholder's Equity (as defined
therein) of the Bank is at least equal to the Minimum Common Equity Amount (as
defined therein). The Federal thrift laws and regulations of the Office of
Thrift Supervision (the "OTS") limit the Bank's ability to pay dividends on its
preferred or common stock. The Bank generally may not pay dividends without the
consent of the OTS if, after the payment of the dividends, it would not be
deemed "adequately capitalized" under the prompt corrective action standards of
the Federal Deposit Insurance Corporation Improvement Act of 1991.
As of December 31, 2000, the Bank could pay dividends of $523.4 million
without the consent of the OTS and it could pay dividends of $777.6 million and
still be "well-capitalized." As of December 31, 2000, the Company could pay
dividends, in addition to those already paid, of $519.9 million without
violating the most restrictive terms of the GS Escrow Notes indenture.
(28) REGULATORY CAPITAL OF THE BANK
The Bank is subject to various regulatory capital requirements administered
by the Federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory - and possibly additional discretionary - actions
by regulators that, if undertaken, could have a direct material effect on the
Company's and the Bank's consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
F-49
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Quantitative measures established by regulation to insure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of tangible and leverage capital to adjusted total assets, and of Tier 1
and total risk-based capital to risk-weighted assets. Management believes, as of
December 31, 2000, that the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 2000 and 1999, the most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum leverage, Tier 1 risk-based and total risk-based ratios as set
forth in the table below. There are no conditions or events since the most
recent notification that management believes have changed the institution's
category.
The Bank's actual capital amounts and ratios as of December 31, 2000 and
1999 are presented in the following table (dollars in thousands):
To be Adequately
Actual Capitalized To be Well Capitalized
---------------------- --------------------- ----------------------
As a % of As a % of As a % of
2000 Amount Assets Amount Assets Amount Assets
- -------------------------------- ------ ------ ------ ------ ------ ------
Stockholder's equity of the Bank
per financial statements $4,165,973
Minority interest 500,000
Net unrealized holding loss 89,874
----------
4,755,847
Adjustments for tangible and
leverage capital:
Goodwill litigation assets (158,809)
Non-qualifying MSRs (83,941)
Intangible assets (691,288)
Non-includable subsidiaries (62,592)
----------
Total tangible capital $3,759,217 6.30% $ 894,475 1.50% N/A N/A
========== ==========
Total leverage capital $3,759,217 6.30% $2,385,268 4.00% $2,981,585 5.00%
========== ========== ==========
Tier 1 risk-based capital $3,759,217 11.58% N/A N/A $1,942,330 6.00%
========== ==========
Adjustments for risk-based
capital:
Qualifying subordinated
debt 91,985
General loan loss allowance 405,857
Qualifying portion of
unrealized holding gains 145
Low level recourse (9,994)
Assets required to be
deducted (11,770)
----------
Total risk-based capital $4,235,440 13.08% $2,589,773 8.00% $3,237,216 10.00%
========== ========== ==========
F-50
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
To be Adequately
Actual Capitalized To be Well Capitalized
---------------------- --------------------- ----------------------
As a % of As a % of As a % of
1999 Amount Assets Amount Assets Amount Assets
- -------------------------------- ------ ------ ------ ------ ------ ------
Stockholder's equity of the Bank
per financial statements $3,555,851
Minority interest 500,000
Net unrealized holding loss 275,625
----------
4,331,476
Adjustments for tangible and
leverage capital:
Goodwill litigation assets (158,713)
Intangible assets (819,561)
Non-includable subsidiaries (59,579)
----------
Total tangible capital $3,293,623 5.81% $ 849,649 1.50% N/A N/A
========== ==========
Total leverage capital $3,293,623 5.81% $2,265,731 4.00% $2,832,163 5.00%
========== ========== ==========
Tier 1 risk-based capital $3,293,623 11.36% N/A N/A $1,734,619 6.00%
========== ==========
Adjustments for risk-based
capital:
Qualifying subordinated
debt 92,602
General loan loss allowance 363,328
Qualifying portion of
unrealized holding gains 37
Low level recourse (10,619)
Assets required to be
deducted (13,559)
----------
Total risk-based capital $3,725,412 12.89% $2,312,825 8.00% $2,891,031 10.00%
========== ========== ==========
(29) OTHER NONINTEREST EXPENSE
Other noninterest expense amounts are summarized as follows for the years
ended December 31, 2000, 1999 and 1998 (in thousands):
2000 1999 1998
-------- -------- --------
Other noninterest expense:
Telephone $ 24,530 $ 26,088 $ 19,640
Marketing 35,314 31,814 19,597
DP systems expense 24,836 23,440 15,707
Savings Association Insurance Fund deposit insurance premium 4,792 14,230 11,055
Insurance and surety bonds 6,400 7,412 6,027
Postage 13,001 13,021 10,023
Printing, copying and office supplies 13,418 12,968 11,179
Employee travel 14,170 13,855 10,386
Other losses 8,672 18,703 10,534
Other expense 58,848 58,051 45,212
-------- -------- --------
$203,981 $219,582 $159,360
======== ======== ========
F-51
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(30) INCOME TAXES
Total income tax expense (benefit) for the years ended December 31, 2000,
1999 and 1998 was allocated as follows (in thousands):
2000 1999 1998
-------- --------- ---------
Income before income taxes, extraordinary items
and minority interest $144,204 $ 234,263 $ (96,300)
Extraordinary items 2,083 1,801 (68,168)
Net unrealized holding gain (loss) on securities
available for sale 138,576 (205,973) (881)
Provision in lieu of income taxes - minority interest -- 79,005 --
-------- --------- ---------
$284,863 $ 109,096 $(165,349)
======== ========= =========
Income tax expense (benefit) attributable to income before income taxes,
extraordinary items and minority interest consisted of (in thousands):
2000 1999 1998
-------- -------- ---------
Federal
Current $ 72,889 $ 33,843 $ 66,918
Deferred 3,880 117,796 (223,094)
-------- --------- ---------
76,769 151,639 (156,176)
State and local
Current 47,948 54,047 49,775
Deferred 19,487 28,577 10,101
-------- --------- ---------
67,435 82,624 59,876
-------- --------- ---------
Income tax expense (benefit) before
provision in lieu of income taxes 144,204 234,263 (96,300)
Provision in lieu of income taxes - minority interest -- 79,005 --
-------- --------- ---------
Total income tax expense (benefit) $144,204 $313,268 $ (96,300)
======== ========= =========
F-52
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The consolidated income tax expense (benefit) for the years ended December
31, 2000, 1999 and 1998 differs from the amounts computed by applying the
statutory federal corporate tax rate of 35% for 2000, 1999 and 1998 to income
before income taxes, extraordinary items and minority interest as follows (in
thousands):
2000 1999 1998
--------- -------- ---------
Computed "expected" income tax expense $ 242,535 $240,374 $ 157,625
Increase (decrease) in taxes resulting from:
State income taxes, net of federal income
tax benefit 43,833 53,705 38,919
Tax exempt income (966) (1,010) --
Amortization of excess cost over fair
value of net assets acquired 19,460 22,355 17,613
Adjustment to prior year's tax expense -- (2,693) --
Other 1,030 537 181
Adjustments to deferred tax asset fully offset by
valuation allowance:
Adjustment to deferred tax asset -- (12,169) 17,561
REIT Preferred Stock dividends -- -- (6,700)
Change in the beginning-of-the-year balance of
the valuation allowance for deferred tax assets
allocated to income tax expense (161,688) 12,169 (321,499)
--------- -------- ---------
$ 144,204 $313,268 $ (96,300)
========= ======== =========
The significant components of federal deferred income tax expense (benefit)
attributable to income before income taxes, extraordinary items and minority
interest are as follows (in thousands):
2000 1999 1998
--------- -------- ---------
Deferred tax expense (exclusive of the effects
of other components listed below) $ 165,568 $117,796 $ 87,544
Adjustment to deferred tax asset fully offset by
valuation allowance -- (12,169) 10,861
Increase (decrease) in beginning-of-the-year balance
of the valuation allowance for deferred tax assets (161,688) 12,169 (321,499)
--------- -------- ---------
$ 3,880 $117,796 $(223,094)
========= ======== =========
F-53
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below (in thousands):
2000 1999
-------- ---------
Deferred tax assets:
Net operating loss carryforwards $116,201 $ 258,447
Foreclosed real estate 445 906
Deferred interest -- 2,287
Loans receivable 151,555 140,999
Miscellaneous accruals 48,466 68,333
Accrued liabilities 44,676 43,058
State taxes 77,325 67,056
Purchased mortgage servicing rights 93,723 105,241
Alternative minimum tax credit and other tax
credit carryforwards 126,708 72,980
Unrealized losses on securities available for sale 63,125 201,701
Other 10,537 11,560
-------- ---------
Total gross deferred tax assets 732,761 972,568
Less valuation allowance (39,496) (251,234)
-------- ---------
Net deferred tax assets 693,265 721,334
-------- ---------
Deferred tax liabilities:
Mortgage servicing rights 177,600 182,466
Purchase accounting adjustments 6,242 5,191
FHLB stock 173,338 126,904
Deferred interest 322 --
Goodwill litigation 116,651 111,746
Contractual obligations 19,250 19,250
Deferred loan fees 198,934 161,044
Other 8,957 13,855
-------- ---------
Net deferred tax liabilities 701,294 620,456
-------- ---------
Net deferred tax assets and liabilities $ (8,029) $ 100,878
======== =========
The net change in the total valuation allowance for the year ended December
31, 2000 was a decrease of $211.7 million. 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 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.
In 1998, based on resolutions of federal income tax audits and favorable
future earnings expectations, management changed its judgment about the
realizability of the Company's net deferred tax assets and reduced the valuation
allowance by $250 million.
Management believes that the realization of the resulting deferred tax
asset is more likely than not, based upon the expectation that the Company will
generate the necessary amount of taxable income in future periods.
F-54
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In connection with the Golden State Merger, the Company deconsolidated from
the Mafco Group. As a result, only the amount of the net operating losses
("NOLs") of the Company not utilized by the Mafco Group on or before December
31, 1998 are available to offset taxable income of the Company thereafter. At
September 11, 1998, had the Company filed a consolidated federal income tax
return on behalf of itself and its subsidiaries for each of the years since the
formation of the Company, it would have had regular NOL carryforwards for
federal income tax purposes of approximately $1.7 billion. Upon deconsolidation,
the NOLs available to offset taxable income of the Company was initially
estimated to be reduced by $757 million. This reduction of NOLs and other tax
attributes (the "Deconsolidation Adjustment") resulted in a $211.2 million
reduction in retained earnings during 1998.
Based upon the actual filing of the Mafco Group and Golden State 1998
consolidated federal income tax returns during 1999, tax benefits of $79.0
million were recognized. The tax benefit is fully offset by an increase in
minority interest expense, since under the Golden State Merger agreement, the
tax benefits from any NOLs and other tax attributes of Parent Holdings and its
subsidiaries are retained by GSB Investments and Hunter's Glen.
In addition, the Company recorded an adjustment of $66.4 million to reduce
the initial dividend of tax benefits to GSB Investments and Hunter's Glen due to
its deconsolidation from the Mafco Group, which was recorded as an increase to
retained earnings during 1999.
At December 31, 2000, the Company had regular NOL carryforwards for federal
income tax purposes of approximately $332.0 million which are available to
offset future federal taxable income, if any, through 2018. In addition, the
Company had alternative minimum tax credit carryforwards of approximately $113.5
million which are available to offset future federal regular income taxes, if
any, over an indefinite period. The IRS is examining the 1991 through 1995
federal income tax returns of the Company and any NOL carryforwards are subject
to review and disallowance, in whole or in part, by the IRS.
In accordance with SFAS No. 109, ACCOUNTING FOR INCOME TAXES, a deferred
tax liability has not been recognized for the base year reserves of the Bank.
The base year reserves are generally the balance of the tax bad debt reserve as
of December 31, 1987 reduced proportionately for reductions in the Bank's loan
portfolio since that date. At December 31, 2000, the amount of those reserves
was $305 million. The amount of the unrecognized deferred tax liability at
December 31, 2000 was $107 million. Pursuant to the Act, circumstances that may
require an accrual of this unrecorded tax liability are a failure to meet the
definition of a "bank" for federal income tax purposes, dividend payments in
excess of the greater of current or accumulated earnings and profits, and other
distributions, dissolution, liquidation or redemption of stock, excluding
preferred stock meeting certain conditions.
(31) EMPLOYEE BENEFIT PLANS
POSTRETIREMENT HEALTH CARE AND DEFINED BENEFIT PLANS
The Bank provides certain postretirement medical benefits to certain
eligible employees and their dependents through age 64. In general, early
retirement is age 55 with 10 years of service. Retirees participating in the
plans generally pay Consolidated Omnibus Budget Reduction Act premiums for the
period of time they participate. The estimated cost for postretirement health
care benefits has been accrued on an actuarial net present value basis.
In connection with the Glen Fed Merger, the Bank assumed Glendale Federal's
defined benefit pension plan (the "Glendale Federal Retirement Plan") and the
Redlands Federal Bank defined benefit plan, (collectively "the Glen Fed Pension
Plan"), which covered substantially all employees of Glendale Federal. The Glen
Fed Pension Plan was frozen upon the merger on September 11, 1998 and no
additional benefits accrued after such time. Effective October 15, 1998, the
Glen Fed Pension Plan was merged with and into the Old California Federal
defined benefit plan. The fair value of the assets transferred was $102.0
million.
F-55
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table sets forth the changes in the plan's benefit
obligations and fair value of plan assets, as well as the funded status at
December 31, 2000 and 1999 (in thousands):
Non-Qualified Plans Qualified Plan
Postretirement Benefits Pension Benefits Pension Benefits
----------------------- ------------------- ----------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 8,248 $ 8,166 $ 15,355 $ 15,481 $111,923 $136,818
Service cost 601 612 -- -- --
Interest cost 624 539 1,041 1,000 7,933 8,059
Amendments -- -- -- -- -- --
Actuarial loss (gain) 1,279 (717) 1,229 868 (7,769) (23,792)
Acquisitions -- -- -- -- -- --
Settlements -- -- -- -- -- --
Benefits paid (382) (352) (1,893) (1,994) (8,496) (9,162)
-------- ------- -------- -------- -------- --------
Benefit obligation at end of year $ 10,370 $ 8,248 $ 15,732 $ 15,355 $103,591 $111,923
======== ======= ======== ======== ======== ========
CHANGE IN PLAN ASSETS
Fair value at beginning of year $ -- $ -- $ -- $ -- $145,777 $139,390
Actual return on plan assets -- -- -- -- (3,969) 15,548
Employer contribution -- -- 1,893 1,994 -- --
Benefits paid -- -- (1,893) (1,994) (8,496) (9,161)
-------- ------- -------- -------- -------- --------
Fair value at end of year $ -- $ -- $ -- $ -- $133,312 $145,777
======== ======= ======== ======== ======== ========
Funded status $(10,370) $(8,248) $(15,732) $(15,355) $ 29,721 $ 33,854
Unrecognized actuarial loss -- -- -- -- (1,565) (10,660)
-------- ------- -------- -------- -------- --------
Prepaid (accrued) benefit cost
recognized in the consolidated
balance sheet $(10,370) $(8,248) $(15,732) $(15,355) $ 28,156 $ 23,194
======== ======= ======== ======== ======== ========
Assumptions used in computing the funded status were:
Non-Qualified Plans Qualified Plan
Weighted Average Assumptions as of Postretirement Benefits Pension Benefits Pension Benefits
----------------------- ---------------- ----------------
December 31, 2000 1999 2000 1999 2000 1999
- ---------------------------------- ---- ---- ---- ---- ---- ----
Discount rate 7.75% 6.75% 7.75% 7.25% 7.50% 7.25%
Expected return on plan assets N/A N/A 9.00 9.00 9.00 9.00
Rate of compensation increase 0.00 0.00 0.00 0.00 0.00 0.00
The initial health care cost trend rate for medical benefits in 2001 is
assumed to be 8.5%, the average trend rate is assumed to be 6.8% and the
ultimate trend rate is assumed to be 5.5%, which will be reached in 5 years.
At December 31, 2000, an increase of 1% in the health care cost trend rate
would cause the accumulated postretirement benefit obligation to increase by
$0.7 million, and the service and interest cost to increase by less than $0.1
million. At December 31, 2000, a decrease of 1% in the health care cost trend
rate would cause the accumulated postretirement benefit obligation to decrease
by $0.6 million, and the service and interest costs to decrease by $0.1 million.
F-56
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The net periodic benefit cost for the years ended December 31, 2000, 1999
and 1998 included the following components (in thousands):
Qualified and
Non-Qualified
Postretirement Benefits Pension Benefits
--------------------------- --------------------------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Service cost $ 601 $ 612 $309 $ -- $ -- $ --
Interest cost 624 539 317 8,974 9,059 4,880
Expected return on plan assets -- -- -- (12,895) (12,320) (5,648)
Recognized net actuarial loss (gain) 1,279 (717) 182 1,228 1,164 2,293
Settlement/curtailment gain -- -- -- -- --
------ ----- ---- -------- -------- -------
Net periodic cost (income) $2,504 $ 434 $808 $ (2,693) $ (2,097) $ 1,525
====== ===== ==== ======== ======== =======
DEFINED CONTRIBUTION PLAN
The Bank offers a defined contribution plan, which is available to
substantially all employees with at least six months of employment. Employee
contributions are voluntary. The plan provides for the deferral of up to 12% of
eligible compensation of plan participants not to exceed the maximum allowed by
the Internal Revenue Service. The Bank's matching contribution provides for 100%
of the first 3% of employee deferrals and beginning in January 2000, 50% of the
next 2% of employee deferrals. The annual discretionary employer profit sharing
contribution is a maximum of 2.5% of eligible compensation. It can be declared
at any level in the range from 0% to 2.5%. Prior to January 2000, the maximum
was 3% of employee deferrals. Employees vest immediately in their own deferrals,
employer matching contributions and employer profit sharing contributions. Prior
to January 2000, employer matching contributions vested based on completed years
of service. The Bank's contributions to such plan totalled $16.7 million, $14.6
million and $9.3 million for the years ended December 31, 2000, 1999 and 1998,
respectively.
Effective January 1, 1999, the California Federal Employees' Investment
Plan was amended to provide for automatic enrollment into the plan at a
contribution rate of 3% unless the employee opts, in writing, to participate at
a different deferral rate, or to opt out of the plan. Effective January 15,
1999, the plan was amended to allow the use of certain employer and employee
contributions to purchase Golden State Common Stock at market prices.
Contributions to the plan were used to purchase 343,026 shares for $6.3 million
in 2000 and 341,024 shares for $6.9 million in 1999. Sales by the plan of Golden
State common shares during 2000 were 217,166 shares for $4.5 million; 52,126
shares for $1.1 million were sold by the plan in 1999. Effective March 1, 1999,
the plan was also amended to reduce the length of required service to six months
before an employee can contribute to the plan and to amend the enrollment date
to the first of the applicable month.
In connection with the Glen Fed Merger, the Bank assumed sponsorship of the
Glendale Federal's defined contribution plan. This plan was frozen at the merger
date, therefore no contributions were made to the plan subsequent to the merger
date. In the second quarter of 2000, Glendale Federal's plan was merged with the
Bank's plan. The fair value of the assets transferred was $40 million.
STOCK PLANS
At December 31, 2000 and 1999, the Bank administered the following
stock-based compensation plans: pre-merger stock option plans and the Golden
State Bancorp Inc. Omnibus Stock Plan (the "Omnibus Stock Plan").
In connection with the Glen Fed Merger, the Bank administered stock option
plans that provided for the granting of options of Golden State Common Stock to
employees and directors. All pre-merger stock option plans expired on August 18,
1998 as to the making of additional grants. Upon the consummation of the merger
on September 11, 1998, substantially all options outstanding became exercisable.
F-57
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On May 17, 1999, the Omnibus Stock Plan was approved, providing for the
granting of Golden State stock options and restricted stock, as well as other
instruments, to employees of Golden State and its subsidiaries and affiliates,
non-employee directors and to consultants who provide significant services to
Golden State. The total number of shares available for grant through March 15,
2009 under the Stock Plan is 7,000,000 shares, which may be issued from treasury
or from authorized but unissued shares.
Non-qualified options granted under the stock plan generally vest over
three years in one-third increments on the anniversary of the grant date. The
options generally expire 10 years from the date of grant.
The following is a summary of the transactions under all stock option
plans:
Weighted
Number of Range of Option Average Exercise
Shares Prices Price
--------- -------------- ----------------
Outstanding at December 31, 1998 1,993,787 $9.00 - $35.00 $19.30
Granted 1,352,000 $23.50 - $23.50 $23.50
Cancelled or expired 276,000 $23.50 - $28.50 $28.10
Exercised 508,705 $9.00 - $17.75 $13.44
---------
Outstanding at December 31, 1999 2,561,082 $9.00 - $35.00 $21.74
Granted 1,350,850 $12.94 - $21.31 $14.04
Cancelled or expired 101,200 $14.00 - $28.50 $21.49
Exercised 139,334 $9.00 - $28.50 $17.84
---------
Outstanding at December 31, 2000 3,671,398 $9.00 - $35.00 $19.06
=========
Information about stock options outstanding at December 31, 2000 was as
follows:
Options Outstanding Options Exercisable
------------------------------------------------------- ------------------------------
Options Weighted Average Weighted Shares Weighted
Outstanding Remaining Contractual Average Exercisable Average
Exercise Price Range at End of Year Life (in years) Exercise Price at End of Year Exercise Price
- -------------------- -------------- --------------- -------------- -------------- --------------
$ 9.00 - $12.63 281,750 3.8 $11.24 281,750 $11.24
$12.94 - $17.75 1,681,316 8.2 $14.59 373,666 $16.64
$18.75 - $23.50 1,325,332 8.4 $23.48 465,682 $23.50
$28.50 - $35.00 383,000 6.7 $29.18 383,000 $29.18
No compensation cost was recognized by the Company for stock options
granted during 2000 and 1999, in accordance with the intrinsic value accounting
methodology prescribed in APB Opinion No. 25, whereby compensation expense to
employees is determined based upon the excess, if any, of the market price of
Golden State's common stock at the measurement date over the exercise price of
the award.
If compensation cost during 2000 and 1999 for the Omnibus Stock Plan had
been determined based on the fair value of the awards at the grant dates, net
income would have been $508.5 million and $331.3 million, respectively. The fair
values of the options were estimated at the grant date using the Black-Scholes
option pricing model, which includes the following assumptions used for the
stock options awarded during 2000 and 1999: risk-free interest rate of 6.61% and
5.60%, respectively; expected option life of seven years in both 2000 and 1999;
expected volatility of 48.55% and 41.30%, respectively; expected dividend yield
of 2.86% in 2000 and no expected dividends in 1999; and a forfeiture rate of 5%
in both 2000 and 1999. Since pro forma compensation cost relates to all periods
over which the awards vest, the impact on pro forma net income may not be
representative of compensation cost in subsequent years when the effect of the
amortization of multiple awards would be reflected.
F-58
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The weighted average grant date fair value of the options granted during
2000 and 1999 were $20.34 and $12.45 per share, respectively. The exercise price
of each option equals the market price of Golden State's Common Stock on the
date of the grant.
On January 24, 2000 and July 19, 1999, Golden State awarded to certain of
the Company's employees shares of restricted common stock totalling 220,327 and
56,908, respectively. The market value on the date of each award was $14.00 and
$22.38 per share, respectively. These shares vest over two years in one-half
increments on the anniversary of the grant date, based upon the continued
service of the employee. The compensation expense based on the stock price on
the date of the award is recognized on a straight line basis over the vesting
period for each tranche of the award with a corresponding increase to additional
paid-in capital. In addition, dividends on restricted stock are recorded as
compensation expense with a corresponding increase to additional paid-in
capital. During 2000 and 1999, $1.9 million and $0.5 million, respectively, in
compensation expense was recognized related to such awards. At December 31, 2000
and 1999, 246,756 restricted shares and 56,908 restricted shares, respectively,
were outstanding. These restricted shares have full voting and dividend rights.
(32) INCENTIVE PLANS
On May 17, 1999, the Golden State Bancorp Inc. Executive Compensation Plan
("ECP") was approved, providing for performance-based incentive awards to senior
executives of the Company. Awards may be paid in cash; however up to 50% may be
payable in restricted common stock granted under the Omnibus Stock Plan
discussed in note 31. Compensation expense totalling $8.7 million and $9.1
million relating to the ECP was recorded during the years ended December 31,
2000 and 1999, respectively.
Pursuant to the ECP, the Golden State Bancorp Inc. Long Term Incentive Plan
("LTIP") was approved, providing incentive awards to senior executives of the
Company based solely on the performance of Golden State's Common Stock over a
three-year period. Awards may be paid in cash; however up to 50% may be payable
in restricted common stock granted under the Omnibus Stock Plan discussed in
note 31. Compensation expense totalling $4.1 million and $2.0 million relating
to the LTIP was recorded during the years ended December 31, 2000 and 1999,
respectively.
The Deferred Executive Compensation Plan ("DECP") of the Bank provided for
certain payments to participants in the DECP for annual incentives and in the
event of a change of control of California Federal. The annual incentive feature
of the DECP was terminated in 1998 upon the consummation of the merger of
California Federal and Glendale Federal, and all amounts were paid out. No
payment was made under the change of control provision because the Compensation
Committee of California Federal determined that the merger of California Federal
and Glendale Federal was not a change of control within the meaning of the DECP.
California Federal subsequently entered into a replacement change of control
agreement in 1999 with certain former participants in the DECP, so that amounts
that would have been payable under the change of control provisions of the DECP
would be paid to the former participants in the DECP who remain employed by
California Federal upon the earlier to occur of (1) a change of control of
California Federal subsequent to September 11, 1998 or (2) December 31, 2002.
Compensation expense totaling $2.3 million relating to the DECP was recognized
in each of the years ended December 31, 2000 and 1999.
In addition, effective October 1, 1995, FN Holdings entered into a
management incentive plan ("Incentive Plan") with certain executive officers of
the Bank ("Participants"). Awards under the Incentive Plan were made in the form
of performance units. Each performance unit entitled Incentive Plan Participants
to receive cash and/or stock options ("Bonuses") based upon the Participants'
vested interest in a bonus pool. Generally, the Incentive Plan provided for the
payment of Bonuses, on a quarterly basis, to the Participants upon the
occurrence of certain events. Bonuses vested at 20% per year beginning October
1, 1995 and were subject to a cap of $50 million. Bonuses were recorded by a
charge to compensation and employee benefits and an increase to other
liabilities. The Glen Fed Merger constituted a change of control pursuant to the
terms of the Incentive Plan and, as such, cash payments were made to the
Participants on September 11, 1998.
F-59
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(33) EXTRAORDINARY ITEMS
During 2000, the FHLB called and the Bank prepaid $400 million in FHLB
advances, resulting in extraordinary gains of $3.0 million, net of income taxes
of $2.1 million, on the early extinguishment of such borrowings. Also in 2000,
the Bank repurchased $2.5 million outstanding principal amount of the 6 1/2%
Convertible Subordinated Debentures, resulting in an extraordinary gain of $41
thousand, net of income taxes of $30 thousand, on the early extinguishment of
debt.
During the fourth quarter of 1999, the FHLB called and the Bank prepaid
$500 million in FHLB advances, resulting in an extraordinary gain of $2.7
million, net of income taxes of $1.9 million, on the early extinguishment of
such borrowings.
On December 20, 1999, the Bank repurchased all of the remaining $6.0
million outstanding principal amount of the 11.20% Senior Notes assumed in the
SFFed Acquisition, resulting in an extraordinary loss of $0.2 million, net of
income taxes of $0.1 million, on the early extinguishment of debt.
In connection with the Debt Tender Offers during 1998, GS Holdings
purchased $914.5 million aggregate principal amount of the FN Holdings Notes for
an aggregate purchase price, including accrued interest payable of $1.1 billion,
resulting in an extraordinary loss of $98.7 million, net of income taxes of
$68.2 million, on the early extinguishment of such debt.
(34) COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company has commitments and
contingent liabilities that are not reflected in the accompanying consolidated
financial statements. The Company enters into financial instruments with
off-balance sheet risk through the origination and sale of loans and the
management of the related loss exposure caused by fluctuations in interest
rates. These financial instruments include commitments to extend credit and
purchase loans (including the mortgage loan pipeline) and mandatory and optional
forward commitments to sell loans.
The following is a summary of the Company's pipeline of loans in process
and mandatory forward commitments to sell loans at December 31, 2000 and 1999
(in thousands):
December 31,
----------------------------
2000 1999
---------- ---------
Commitments to originate loans:
Fixed rate $ 914,225 $ 394,923
Variable rate 542,610 1,078,909
Commitments to purchase loans 867,867 1,434,893
Mandatory commitments to sell loans 1,121,604 903,526
The Company's pipeline of loans in process includes loan applications in
various stages of processing. Until all required documentation is provided and
underwritten, there is no credit risk to the Company. There is no interest rate
risk until a rate commitment is extended by the Company to a borrower. Some of
these commitments will ultimately be denied by the Company or declined by the
borrower and therefore the commitment amounts do not necessarily represent
future cash requirements.
Loans in process for which rates were committed to the borrower totalled
approximately $671.4 million at December 31, 2000. On a daily basis, the Company
determines what percentage of the portfolio of loans in process for which rate
commitments have been extended to a borrower to hedge. Both the anticipated
percentage of the pipeline that is expected to fund and the inherent risk
position of the portfolio are considered in making this determination.
F-60
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Mandatory and optional delivery forward commitments to sell loans are used
by the Company to hedge its interest rate exposure from the time a loan has a
committed rate to the time the loan is sold. These instruments involve varying
degrees of credit and interest rate risk. Credit risk on these instruments is
controlled through credit approvals, limits and monitoring procedures. To the
extent that counterparties are not able to fulfill forward commitments, the
Company is at risk for any fluctuations in the market value of the mortgage
loans and locked pipeline.
Realized gains and losses on mandatory and optional-delivery forward
commitments are recognized in the period settlement occurs. At December 31,
2000, unrealized losses resulting from the use of forward commitments to sell
loans were $5.3 million. Unrealized gains and losses on mandatory and
optional-delivery forward commitments are included in the lower of cost or
market valuation adjustment to mortgage loans held for sale.
The Company is party to an agreement with FNMA pursuant to which FNMA
provided credit enhancements for certain bond-financed real estate projects
originated by Old FNB. The agreement requires that the Company pledge to FNMA
collateral in the form of certain eligible securities which are held by a third
party trustee. The collateral requirement varies based on the balance of the
bonds outstanding, losses incurred (if any), as well as other factors. At
December 31, 2000, the Company had pledged as collateral certain securities
available for sale, mortgage-backed securities available for sale and
mortgage-backed securities held to maturity with carrying values of $16.7
million, $14.5 million and $11.1 million, respectively.
At December 31, 2000, the Bank had pledged as collateral certain securities
available for sale, mortgage-backed securities available for sale and held to
maturity with carrying values of $1.0 million, $130.7 million and $49.2 million,
respectively, to guarantee credit enhancements on multi-family bond issues and
loans securitized by FNMA and FHLMC.
At December 31, 2000, commercial paper investments in the amount of $75.7
million were held in reserve with third-party trustees to guarantee credit
enhancements on loans transferred as part of securitization transactions by the
Bank.
At December 31, 2000, the Bank had pledged as collateral certain securities
available for sale, mortgage-backed securities available for sale and held to
maturity with carrying values of $2.7 million, $127.0 million and $121.4
million, respectively, to guarantee state and local agency deposits, and certain
deposits with the Federal Reserve Bank.
At December 31, 2000, the Bank had pledged as collateral certain
mortgage-backed securities available for sale and held to maturity with a
carrying value of $34.9 million and $46.1 million to cover the margin on
interest rate swap agreements.
In addition, the Bank retains principal and interest funds on securitized
loans with appropriate collateral held and monitored by the trustee. The pledge
agreement requires the collateral to be 150% of the average remittances for the
prior twelve months, to be adjusted quarterly. At December 31, 2000, the Bank
had pledged as collateral certain mortgage-backed securities available for sale
and held to maturity with carrying values of $218.0 million and $70.0 million,
respectively.
In addition, at December 31, 2000, securities available for sale,
mortgage-backed securities available for sale and mortgage-backed securities
held to maturity of $20.0 million, $6.5 billion and $2.1 billion, respectively,
were pledged as collateral for various obligations as discussed in notes 9, 11,
12, 21 and 22. At December 31, 1999, mortgage-backed securities available for
sale and mortgage-backed securities held to maturity of $9.9 billion and $1.9
billion, respectively, were pledged as collateral for various obligations.
At December 31, 2000, $27.2 billion in residential loans, $3.0 billion in
multifamily loans and $1.7 billion in commercial real estate loans were pledged
as collateral for FHLB advances.
At December 31, 2000 and 1999, loans receivable included approximately $7.9
billion and $6.4 billion, respectively, of loans that had the potential to
experience negative amortization.
F-61
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(35) LEGAL PROCEEDINGS
CALIFORNIA FEDERAL GOODWILL LITIGATION
The Bank is the plaintiff in a lawsuit against the United States Government
(the "Government"), California Federal Bank v. United States, Civil Action
92-138 (the "California Federal Goodwill Litigation"). In the California Federal
Goodwill Litigation, the Bank alleged, among other things, that the Government
breached certain contractual commitments regarding the computation of its
regulatory capital for which the Bank sought damages and restitution. The Bank's
claims arose from changes, mandated by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA"), with respect to the rules for
computing Old California Federal's regulatory capital.
In late 1997, a United States Court of Federal Claims (the "Claims Court")
Judge ruled in favor of the Bank's motion for partial summary judgment as to the
Government's liability to the Bank for breach of contract, and a formal order in
that regard was subsequently issued. In late 1998, a second U.S. Claims Court
Judge ruled that California Federal cannot meet its burden for proving lost
profits damages and ordered that the case proceed to trial on the damage issue
of restitution and reliance. The trial began in January 1999 and concluded in
March 1999.
On April 16, 1999, the Claims Court issued its decision on the damages
claim against the Government in the California Federal Goodwill Litigation,
ruling that the Government must compensate the Bank in the sum of $23.0 million.
The summary judgment liability decision by the first Court of Claims Judge has
been appealed by the Government and the damage award by the second Court of
Claims Judge has been appealed by the Bank. 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 (as
defined herein) on July 7, 2000, but the Court of Appeals has not yet rendered a
decision.
GLENDALE GOODWILL LITIGATION
By virtue of the Glen Fed Merger, the Bank is also a plaintiff in a claim
against the United States in a second lawsuit, Glendale Federal Bank v. United
States, No. 90-772C (the "Glendale Goodwill Litigation"). In the Glendale
Goodwill Litigation, Glendale Federal sued the Government contending that
FIRREA's treatment of supervisory goodwill constituted a breach by the
Government of its 1981 contract with the Bank, under which the Bank had merged
with a Florida thrift and was permitted to include the goodwill resulting from
the merger in its regulatory capital. In 1992, the Claims Court found in favor
of Glendale Federal's position, ruling that the Government breached its express
contractual commitment to permit Glendale Federal to include supervisory
goodwill in its regulatory capital and that Glendale Federal is entitled to seek
financial compensation.
The trial began in February 1997 and concluded in September 1998. On April
9, 1999, the Claims Court issued its decision in the Glendale Goodwill
Litigation, ruling that the Government must compensate the Bank in the sum of
$908.9 million. This decision was appealed by the Government and the Bank, and
on February 16, 2001 the Court of Appeals for the Federal Circuit vacated the
trial court's award of damages and remanded the case back to the trial court for
determination of total reliance damages to which the Bank might be entitled. No
further proceedings have been taken in the case since the Court of Appeals'
February 16 decision, and the Bank continues to pursue vigorously its case for
damages against the Government under the reliance damages theories as outlined
by the Court of Appeals' decision.
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.
F-62
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
BARTOLD V. GLENDALE FEDERAL BANK ET Al
On September 18, 1995, four plaintiffs commenced an action in Superior
Court of California, County of Orange, alleging that the defendants Glendale
Federal, to which the Bank is a successor by merger, and Verdugo Trustee Service
Corporation ("Verdugo"), a wholly owned subsidiary of the Bank, failed timely to
record their release of the mortgage interest following payoffs of residential
mortgage loans and, in at least some instances, improperly required borrowers to
pay fees for these releases. The plaintiffs' complaint seeks relief for the
named plaintiffs, as well as purportedly for all others similarly situated in
California and throughout the United States and the general public, on causes of
action for violation of California Civil Code Section 2941 and California
Business and Professions Code Section 17200, breach of contract, fraud and
unjust enrichment. The plaintiffs seek statutory damages of $300 for each
supposed, separate violation of Section 2941 by Glendale Federal and Verdugo,
restitution, punitive damages, injunctive relief and attorney's fees, among
other things.
In October 1997, the trial court granted summary judgment for defendants.
In June 2000, the California Court of Appeals reversed this decision and
remanded for further proceedings, including further development of class
certification issues. On March 2, 2001, the trial court held that a California
class had been certified. The Bank believes that it has meritorious defenses to
the claim and intends to continue to contest it vigorously.
OTHER LITIGATION
In addition to the matters described above, the Company and its
subsidiaries are involved in other legal proceedings and claims incidental to
the normal conduct of business. Although it is impossible to predict the outcome
of any outstanding legal proceedings, management believes that such legal
proceedings and claims, individually or in the aggregate, will not have a
material effect on the Company or the Bank.
(36) GOODWILL LITIGATION ASSETS
In connection with the Cal Fed Acquisition, the Bank recorded as an asset
part of the estimated after-tax cash recovery from the California Federal
Goodwill Litigation that will inure to the Bank, net of amounts payable to
holders of the Contingent Litigation Recovery Participation Interests
("Litigation Interests") and the Secondary Contingent Litigation Recovery
Participation Interests ("Secondary Litigation Interests") in any such recovery
(the "Goodwill Litigation Asset"). In connection with the Glen Fed Merger, the
Bank recorded a second Goodwill Litigation Asset related to the estimated
after-tax cash recovery from the Glendale Goodwill Litigation that will inure to
the Bank, net of amounts payable to holders of the LTWTMs. The Goodwill
Litigation Asset related to the California Federal Goodwill Litigation was
recorded at its estimated fair value of $100 million, net of estimated tax
liabilities, as of January 3, 1997. The Goodwill Litigation Asset related to the
Glendale Goodwill Litigation was recorded at its estimated fair value of $56.9
million, net of estimated tax liabilities, as of September 11, 1998.
(37) OFF-BALANCE-SHEET ACTIVITIES
CREDIT RELATED FINANCIAL INSTRUMENTS
The Company is a party to credit related financial instruments with
off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit, standby letters of credit and commercial letters of credit. Such
commitments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the consolidated balance sheets.
The Company's exposure to credit loss is represented by the contractual
amount of these commitments. The Company uses the same credit policies in making
commitments as it does for on-balance sheet instruments.
F-63
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Listed below are unfunded financial instruments whose contract amounts
represent credit risk at December 31, 2000 and 1999 (in thousands):
Contract Amount
-----------------------------
Commitments to extend credit 2000 1999
---------------------------- ---------- ----------
Unutilized consumer lines of credit $1,225,572 $1,034,913
Unutilized commercial lines of credit 219,219 159,744
Commercial and standby letters of credit 2,112 3,892
Unutilized consumer lines of credit are commitments to extend credit. These
lines are either secured or nonsecured and may be cancelled by the Company if
certain conditions of the contract are not met. Many consumer line of credit
customers are not expected to fully draw down their total lines of credit and,
therefore, the total contractual amount of these lines does not necessarily
represent future cash requirements.
Unutilized commitments under commercial lines of credit are commitments for
possible future extensions of credit to existing customers. These lines of
credit are uncollateralized, usually do not contain a specified maturity date
and may not be drawn upon to the total extent to which the Company is committed.
Commercial and standby letters of credit are conditional commitments issued
by the Company to guarantee the performance of a customer to a third party.
Those letters of credit are primarily issued to support public and private
borrowing arrangements. Essentially, all letters of credit issued have
expiration dates within five years. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loan facilities
to customers. The Company generally holds collateral supporting those
commitments in an amount deemed to be necessary.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes various derivative instruments for other-than-trading
purposes such as asset/liability management. The primary focus of the Company's
asset/liability management program is to measure and monitor the sensitivity of
the Company's net portfolio value and net income under varying interest rate
scenarios. On a quarterly basis, the Company simulates the net portfolio value
and net income expected to be earned over a twelve-month period following the
date of simulation. The simulation is based on a projection of market interest
rates at varying levels and estimates the impact of such market rates on
mortgage prepayment speeds, the levels of interest-earning assets and
interest-bearing liabilities during the measurement period. Based upon the
outcome of the simulation analysis, the Company may consider the use of
derivatives as a means of reducing the volatility of net portfolio value and
projected net income within certain ranges of projected changes in interest
rates. The Company evaluates the effectiveness of entering into any derivative
instrument agreement by measuring the cost of such an agreement in relation to
the reduction in net portfolio value and net income volatility within an assumed
range of interest rates.
Derivative financial instruments include swaps, futures, forwards, and
options contracts, all of which derive their value from underlying interest
rates. These transactions involve both credit and market risk. The notional
amounts are amounts on which calculations, payments, and the value of the
derivative are based. Notional amounts do not represent direct credit exposures.
Direct credit exposure is limited to the net difference between the calculated
amounts to be received and paid, if any.
The Company is exposed to credit-related losses in the event of
nonperformance by the counterparties to those agreements. The Company controls
the credit risk of its financial contracts through credit approvals, limits and
monitoring procedures, but does not expect any counterparties to fail their
obligations. The Company deals only with primary dealers and the FHLB of San
Francisco.
F-64
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Derivative instruments are generally either negotiated over-the-counter
("OTC") contracts or standardized contracts executed on a recognized exchange.
Negotiated OTC derivative contracts are generally entered into between two
counterparties that negotiate specific agreement terms, including the underlying
instrument, amount, exercise prices and maturity.
MSR HEDGES
At December 31, 2000, the Bank held cash collateral in the amount of $20
million related to interest rate derivatives to hedge MSRs.
INTEREST RATE SWAPS
The Company utilizes interest rate swaps as an asset/liability management
strategy to hedge against prepayment risk in its mortgage servicing portfolio
caused by declining interest rates. These interest rate swap agreements are
contracts to make a series of floating rate payments in exchange for receiving a
series of fixed rate payments. Payments related to swap contracts are made
either monthly, quarterly or semi-annually by one of the parties depending on
the specific terms of the related contract. The notional amount of the
contracts, on which the payments are based, are not exchanged. The primary risks
associated with interest rate swaps are the exposure to movements in interest
rates and the ability of the counterparties to meet the terms of the contract.
At December 31, 2000, interest rate swap agreements with a notional amount
of $1.3 billion and a weighted average maturity of 10 years were outstanding.
These agreements provided for the Company to make payments at a variable rate
determined by a specified index (three month LIBOR) in exchange for receiving
payments at a fixed rate. At December 31, 2000, the weighted average pay rate
was 6.40% and the weighted average receive rate was 6.21%. No interest rate swap
agreements were terminated prior to maturity in 2000. At December 31, 2000,
there was a $5.1 million unrealized gain relating to the use of interest rate
swaps.
PRINCIPAL ONLY SWAPS
The Company utilizes principal only ("PO") swap agreements to hedge against
prepayment risk in its mortgage servicing portfolio caused by declining interest
rates. PO swap agreements simulate the ownership of a PO strip, the value of
which is affected directly by prepayment rates themselves in an inverse manner
to the servicing rights, which act in a manner similar to interest only ("IO")
strips. Under the terms of the PO swap agreements, the counterparty to the
transaction purchases a PO strip and places the PO strip in a trust. The
contracts executed prior to December 31, 1998 call for the Company to pay
floating interest to the counterparty based on: (a) an index tied to one month
LIBOR and (b) the amortized notional balance of the swap. The contracts call for
the Company to receive cash from the counterparty based on the cash flows
received from the PO strip. For PO swap agreements executed after December 31,
1998, the agreement also requires the PO swap to be marked to market value. A
decrease in the market value of the PO swap requires the Company to increase the
amount paid to the counterparty and an increase in the market value requires the
counterparty to increase their payment to the Company. The amounts to be paid
and to be received are then netted together each month. The structure of this
instrument results in increased cash flows and positive changes in the value of
the swap during a declining interest rate environment. This positive change in
the value of the swap is highly correlated to prepayment activity. PO swap
agreements present yield curve risk to the extent that short term interest rates
(which impact the cash amount that the Company pays on the swap to the
counterparty) rise while long term rates (which drive prepayment rates) stay the
same. A third type of risk associated with PO swaps is the ability of the
counterparties to meet the terms of the contract.
At December 31, 2000, PO swap agreements with a notional balance of $193.1
million were outstanding. During 2000, the calculated amount to be paid to and
to be received from the PO swap counterparties was $8.4 million and $13.7
million, respectively. At December 31, 1999, PO swap agreements with a notional
balance of $202.3 million were outstanding. During 1999, the calculated amount
to be paid to and to be received from the PO swap counterparties was $29.6
million and $19.2 million, respectively. No PO swap agreements were terminated
prior to maturity in 2000 or 1999.
F-65
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
INTEREST RATE FLOORS
The Company currently uses interest rate floors to hedge against prepayment
risk in its mortgage servicing portfolio caused by declining interest rates.
Interest rate floors are interest rate protection instruments that involve
payment from the seller to the buyer of an interest differential. This
differential represents the difference between a long-term rate (e.g., 10-year
Constant Maturity Swaps in 2000 and 1999, 10-year Constant Maturity Treasury in
1999) and an agreed-upon rate, the strike rate, applied to a notional principal
amount. By purchasing a floor, the Company will be paid the differential by a
counterparty, should the current long-term rate fall below the strike level of
the agreement. The Company generally receives cash monthly on purchased floors
(when the current interest rate falls below the strike rate). The unamortized
premium, if any, paid for interest rate purchased floor agreements is included
with the assets hedged. Interest rate floors are subject to basis risk because
changes in the relationship between prepayment rates and the interest rate may
occur, as well as market volatility and swap spread movement. In addition, a
credit risk associated with purchased interest rate floor agreements is the
ability of the counterparties to meet the terms of the contract.
At December 31, 2000 and 1999, the Company was a party to interest rate
floor contracts with a weighted average maturity of 4.9 years at each year end.
At December 31, 2000, the notional amount of the remaining interest rate floor
contracts was $2.3 billion, the weighted average strike rate was 6.25% and the
monthly floating rate was 6.15%. During 2000, the Company received cash from the
interest rate floor counterparties in the amount of $0.2 million. During 2000,
the Company received proceeds of $50.6 million from sales of interest rate floor
contracts with unamortized premiums of $24.9 million. At December 31, 1999, the
notional amount of the remaining interest rate floor contracts was $950 million,
the weighted average strike rate was 5.84% and the monthly floating rate was
6.44%. During 1999, the Company received cash from the interest rate floor
counterparties in the amount of $0.1 million. During 1999, the Company received
proceeds of $17.0 million from sales of interest rate floor contracts with
unamortized premiums of $38.2 million. The amount of the unamortized premium on
the interest rate floors at December 31, 2000 and 1999 was $36.9 million and
$13.7 million, respectively. At December 31, 2000, the strike rate exceeded the
floating rate by 0.10%. At December 31, 1999, the floating rate exceeded the
strike rate by 0.60%.
INTEREST RATE SWAPTIONS
The Company also uses swaptions to hedge against the prepayment risk in its
mortgage servicing portfolio caused by declining interest rates. A swaption is
an over-the-counter option that provides the right, but not the obligation, to
enter into an interest rate swap agreement at predetermined terms at a specified
time in the future. The unamortized premiums, if any, paid for swaptions are
included with the assets hedged. Swaptions are subject to basis risk because
changes in the relationship between prepayment rates and the interest rate may
occur, as well as market volatility and swap spread movement. In addition,
credit risk associated with swaptions is the ability of the counterparties to
meet the terms of the contract.
At December 31, 2000 and 1999, the Company was a party to swaption
contracts with a weighted average maturity of 2.8 years and 2.7 years,
respectively, in which the Company paid the counterparties premiums in exchange
for the right but not the obligation to purchase an interest rate swap
agreement. Under the terms of the underlying interest rate swap agreement, the
Company would pay the variable rate tied to three month LIBOR and would receive
the fixed rate. At December 31, 2000, the notional amount of the underlying
interest rate swap contract was $2.2 billion, the weighted average strike rate
was 6.44% and the three month LIBOR rate was 6.40%. At December 31, 2000, the
strike rate exceeded the floating rate by 0.04%. The unamortized premium on the
swaptions at December 31, 2000 was $58.1 million. During 2000, the Company
received proceeds of $50.5 million from the sales of swaption contracts with
unamortized premiums of $30.4 million. At December 31, 1999, the notional amount
of the underlying interest rate swap contract was $834 million, the weighted
average strike rate was 6.98% and the three month LIBOR rate was 6.00%. At
December 31, 1999, the strike rate exceeded the floating rate by 0.98%. The
unamortized premium on the swaptions at December 31, 1999 was $26.5 million.
During 1999, the Company received proceeds of $29.8 million from the sales of
swaption contracts with unamortized premiums of $58.6 million.
F-66
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
BALANCE SHEET HEDGES
INTEREST RATE SWAPS
The Company utilizes interest rate swaps primarily as an asset/liability
management strategy to hedge against the interest rate risk inherent in
variable-rate FHLB advances and securities sold under agreements to repurchase.
At December 31, 2000 and 1999, interest rate swap agreements with notional
amounts of $3.2 billion and $2.6 billion, respectively, and weighted average
maturities of 4.1 years and 5.2 years, respectively, were outstanding to hedge
these borrowings. These agreements provided for the Company to receive payments
at a variable rate determined by a specified index (three month LIBOR) in
exchange for making payments at a fixed rate. At December 31, 2000 and 1999, the
weighted average pay rates were 6.76% and 6.60%, respectively, and the weighted
average receive rates were 6.73% and 6.11%, respectively. No interest rate swap
agreements were terminated prior to maturity in 2000 or 1999. At December 31,
2000 and 1999, unrealized (losses) and gains relating to the use of interest
rate swaps were $(75.5) million and $51.9 million, respectively. These gains
(losses) will be recognized over the life of the FHLB advances or securities
sold under agreements to repurchase, as appropriate.
Information pertaining to the notional amounts of the Company's derivative
financial instruments utilized in both MSR and balance sheet hedging is as
follows (in thousands):
December 31, 2000 December 31, 1999
---------------------------------- ---------------------------------
Notional Notional
Amount Credit Risk (1) Amount Credit Risk (1)
---------- --------------- ------ ---------------
Interest rate swaps $4,564,670 $ 5,099 $2,550,000 $51,882
Principal only swaps 193,099 1,202 202,316 --
Interest rate floors 2,338,000 52,839 950,000 10,431
Interest rate swaptions 2,178,000 105,626 834,000 24,294
---------- -------- ---------- -------
Total $9,273,769 $164,766 $4,536,316 $86,607
========== ======== ========== =======
________________
(1) Credit risk represents current replacement cost (effectively fair market
value) after the effects of master netting agreements.
The maturity of derivative financial instruments used for
other-than-trading purposes at December 31, 2000 is as follows (in thousands):
Notional Amounts
---------------------------------------------------------------------------------------
2001 2002 2003 2004 2005 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Interest rate swaps $ -- $ -- $ 300,000 $1,650,000 $ 519,670 $2,095,000 $4,564,670
Principal only swaps 102,663 68,905 -- -- -- 21,531 193,099
Interest rate floors -- -- -- -- 2,338,000 -- 2,338,000
Interest rate swaptions 353,000 1,825,000 -- -- -- 2,178,000
-------- -------- ---------- ---------- ---------- ---------- ----------
Total $102,663 $421,905 $2,125,000 $1,650,000 $2,857,670 $2,116,531 $9,273,769
======== ======== ========== ========== ========== ========== ==========
F-67
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The year-end fair values of derivative financial instruments used for
other-than-trading purposes at December 31, 2000 and 1999 are listed below.
2000 1999
---- ----
(in thousands)
Interest rate swaps hedging borrowings $(75,482) $ 51,882
Interest rate swaps hedging MSRs 5,099 --
Principal only swaps 1,202 (15,792)
Interest rate floors 52,839 10,431
Interest rate swaptions 105,626 24,294
-------- --------
Total $ 89,284 $ 70,815
======== ========
(38) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 2000 and 1999 (in thousands):
2000 1999
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Financial Assets:
Cash and cash equivalents $ 783,074 $ 783,074 $ 592,878 $ 592,878
Securities available for sale 637,070 637,070 1,075,734 1,075,734
Securities held to maturity 587,503 590,571 185,357 180,449
Mortgage-backed securities
available for sale 9,866,823 9,866,823 13,764,565 13,764,565
Mortgage-backed securities
held to maturity 2,886,612 2,959,677 2,149,696 2,150,014
Loans held for sale 845,763 851,856 729,062 727,569
Loans receivable, net 39,592,814 39,262,610 33,953,461 33,125,997
Investment in FHLB 1,361,066 1,361,066 1,167,144 1,167,144
Accrued interest receivable 364,414 364,414 321,596 321,596
Mortgage servicing rights (a) 1,559,323 1,474,096 1,272,393 1,451,451
Financial Liabilities:
Deposits 23,462,372 23,454,791 23,040,571 22,934,191
Securities sold under agreements to
repurchase 4,511,309 4,555,425 5,481,747 5,476,485
Borrowings 28,800,557 28,802,601 25,668,626 25,135,037
Off-balance sheet net unrealized gains (losses):
Forward Commitments:
Commitments to originate loans -- 3,635 -- 834
Commitments to sell loans -- (5,340) -- 3,338
Derivatives:
Interest rate swaps hedging borrowings -- (75,482) -- 51,882
Interest rate swaps hedging MSRs -- 5,099 -- --
Principal only swaps -- 1,202 -- (15,792)
Interest rate floors -- 52,839 -- 10,431
Interest rate swaptions -- 105,626 -- 24,294
(Continued)
F-68
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
__________________
(a) Fair value amounts presented for MSRs do not include the fair values of
interest rate floor contracts, interest rate swaps, principal only swaps
and interest rate swaptions. The MSR carrying value includes unamortized
premiums associated with interest rate floors and interest rate swaptions.
The fair value of MSRs including these related derivatives is $1.7 billion
and $1.5 billion at December 31, 2000 and 1999, respectively.
The following summary presents a description of the methodologies and
assumptions used to estimate the fair value of the Company's financial
instruments. Much of the information used to determine fair value is highly
subjective. When applicable, readily available market information has been
utilized. However, considerable judgment is required in estimating fair value
for certain items. The subjective factors include, among other things, the
estimated timing and amount of cash flows, risk characteristics, and interest
rates, all of which are subject to change.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents are valued at their
carrying amounts included in the consolidated statement of financial condition,
which are reasonable estimates of fair value due to the relatively short period
to maturity of the instruments.
SECURITIES AND MORTGAGE-BACKED SECURITIES: Securities and mortgage-backed
securities are valued at quoted market prices where available. If quoted market
prices are not available, fair values are based on quoted market prices of
comparable instruments.
LOANS HELD FOR SALE: Loans held for sale are valued based on quoted market
prices for mortgage-backed securities backed by similar loans.
LOANS RECEIVABLE, NET: Fair values are estimated for loans in groups with
similar financial and risk characteristics. Loans are segregated by type
including residential, multi-family and commercial. Each loan type is further
segmented into fixed and variable interest rate terms and by performing and
non-performing categories in order to estimate fair values.
For performing residential mortgage loans, fair value is estimated by
forecasting principal and interest payments, both scheduled and prepayments, and
discounting these amounts using factors provided by secondary market sources.
The fair value of performing commercial and multi-family loans is calculated by
discounting scheduled principal and interest cash flows through the estimated
maturity using estimated market discount rates that reflect the credit and
interest rate risk inherent in the respective loan type.
Fair value for non-performing loans is estimated by discounting the
forecasted cash flows using a rate commensurate with the risk associated with
the estimated cash flows, or underlying collateral values, where appropriate.
INVESTMENT IN FHLB: Since no secondary market exists for FHLB stock and the
stock is bought and sold at par by FHLB, fair value of these financial
instruments approximates the carrying value.
ACCRUED INTEREST: The carrying amounts of accrued interest approximate
their fair values.
F-69
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Mortgage servicing rights: The fair value of mortgage servicing rights is
based on market prices for comparable mortgage servicing contracts, when
available, or alternatively a valuation model that calculates the present value
of future net servicing income. In using the valuation model, the Company
incorporates assumptions that market participants would use in estimating future
net servicing income, which include estimates of the cost to service, the
discount rate, custodial earnings rate, an inflation rate, ancillary income,
prepayment speeds and default rates and losses. The following assumptions were
used in estimating the fair value of residential MSRs; the fair value of
commercial real estate and commercial banking MSRs is considered to be
immaterial (whole dollars presented):
December 31,
------------------------
2000 1999
------- -------
Weighted average default rate 0.99% 1.11%
Weighted average prepayment rate (CPR) 12.78% 10.38%
Weighted average discount rate 10.20% 10.60%
DEPOSITS: The fair values of demand deposits, passbook accounts, money
market accounts, and other deposits immediately withdrawable, by definition,
approximate carrying values for the respective financial instruments. For fixed
maturity deposits, the fair value was estimated by discounting expected cash
flows by the current offering rates of deposits with similar terms and
maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE: The fair value of
securities sold under agreements to repurchase is estimated using a discounted
cash flow analysis based on interest rates currently offered on such repurchase
agreements with similar maturities.
BORROWINGS: The fair value of borrowings, other than FHLB advances, is
estimated using discounted cash flow analyses based on current incremental rates
for similar borrowing arrangements. The fair values of FHLB advances are
estimated using a discounted cash flow analysis based on interest rates
currently offered on advances with similar maturities. The fair value of FHLB
advances includes the fair value of embedded options.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
FORWARD COMMITMENTS
Fair values of the Company's commitments to originate loans are estimated
using the fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present creditworthiness
of the counterparties. For fixed-rate commitments, fair value also considers the
difference between current levels of interest rates and the committed rates.
Fair values of forward commitments to sell loans are determined using current
estimated replacement costs.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are recorded at fair value based on the
estimated amounts that the Company would receive or pay to terminate the
contracts at the reporting date (i.e., mark-to-market value). Dealer quotes are
available for those derivative financial instruments hedging the Company's
liabilities. The Company uses an independent consultant to model the value of
the derivative financial instruments hedging MSRs.
F-70
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(39) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected quarterly financial data for the
years ended December 31, 2000 and 1999 (in thousands): Quarter Ended
Quarter Ended
---------------------------------------------------------------------------
December 31, September 30, June 30, March 31,
2000 2000 2000 2000 Total 2000
---- ---- ---- ---- ----------
Total interest income $1,060,382 $1,055,890 $1,022,871 $ 966,654 $ 4,105,797
Total interest expense (775,963) (769,937) (732,554) (679,551) (2,958,005)
---------- ---------- ---------- ---------- -----------
Net interest income 284,419 285,953 290,317 287,103 1,147,792
Provision for loan losses -- -- -- -- --
---------- ---------- ---------- ---------- -----------
Net interest income after
provision for loan losses 284,419 285,953 290,317 287,103 1,147,792
Total noninterest income 117,599 112,619 105,279 108,098 443,595
Total noninterest expense (225,985) (225,606) (223,588) (223,249) (898,428)
---------- ---------- ---------- ---------- -----------
Income before income taxes,
minority interest and
extraordinary items 176,033 172,966 172,008 171,952 692,959
Income tax (expense) benefit (76,673) (75,421) (75,057) 82,947 (144,204)
Minority interest (6,796) (6,797) (6,795) (6,599) (26,987)
---------- ---------- ---------- ---------- -----------
Income before extraordinary items 92,564 90,748 90,156 248,300 521,768
Extraordinary items - gains on
early extinguishment of debt,
net of tax -- -- 1,808 1,206 3,014
---------- ---------- ---------- ---------- -----------
Net income $ 92,564 $ 90,748 $ 91,964 $ 249,506 $ 524,782
========== ========== ========== ========== ===========
Quarter Ended
---------------------------------------------------------------------------
December 31, September 30, June 30, March 31,
1999 1999 1999 1999 Total 1999
---- ---- ---- ---- ----------
Total interest income $ 937,543 $ 917,838 $ 904,003 $ 892,837 $ 3,652,221
Total interest expense (643,808) (630,746) (606,961) (584,867) (2,466,382)
---------- ---------- ---------- ---------- -----------
Net interest income 293,735 287,092 297,042 307,970 1,185,839
Provision for loan losses -- -- (5,000) (5,000) (10,000)
---------- ---------- ---------- ---------- -----------
Net interest income after
provision for loan losses 293,735 287,092 292,042 302,970 1,175,839
Total noninterest income 101,480 99,380 103,036 98,983 402,879
Total noninterest expense (214,296) (214,910) (216,258) (246,471) (891,935)
---------- ---------- ---------- ---------- -----------
Income before income taxes,
minority interest and
extraordinary items 180,919 171,562 178,820 155,482 686,783
Income tax (expense) benefit (82,582) 3,033 (82,296) (72,418) (234,263)
Minority interest: provision in lieu
of income tax expense -- (79,005) -- -- (79,005)
Minority interest: other (6,598) (8,431) (10,740) (9,167) (34,936)
---------- ---------- ---------- ---------- -----------
Income before extraordinary item 91,739 87,159 85,784 73,897 338,579
Extraordinary item - gain on early
extinguishment of debt,
net of tax 2,472 -- -- -- 2,472
---------- ---------- ---------- ---------- -----------
Net income $ 94,211 $ 87,159 $ 85,784 $ 73,897 $ 341,051
========== ========== ========== ========== ===========
F-71
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(40) CONDENSED PARENT COMPANY FINANCIAL INFORMATION
The following represents condensed balance sheets of the Company (parent
company only) at December 31, 2000 and 1999 (in thousands):
2000 1999
---------- ----------
Assets
Cash and cash equivalents $ 80,125 $ 66,581
Investment in the Bank 4,165,973 3,555,851
Other assets 103,159 89,461
---------- ----------
Total assets $4,349,257 $3,711,893
========== ==========
Liabilities, Minority Interest and Stockholder's Equity
GS Holdings Notes $2,000,000 $2,000,000
FN Holdings 10 5/8% Notes 250 250
Discount on borrowings (3,566) (4,659)
Accrued interest payable 54,387 54,102
Other liabilities 10 883
---------- ----------
Total liabilities 2,051,081 2,050,576
Total stockholder's equity 2,298,176 1,661,317
---------- ----------
Total liabilities, minority interest and stockholder's equity $4,349,257 $3,711,893
========== ==========
The following represents parent company only condensed statements of income
for the years ended December 31, 2000, 1999 and 1998 (in thousands):
2000 1999 1998
-------- --------- --------
Interest income $ -- $ 1,444 $ 739
Dividends received from the Bank 192,912 324,582 381,258
-------- --------- --------
Total income 192,912 326,026 381,997
Interest expense 142,686 139,613 113,143
Noninterest expense 7,367 7,625 17,107
-------- --------- --------
Total expense 150,053 147,238 130,250
Income before equity in undistributed
Net income of subsidiaries 42,859 178,788 251,747
Equity in undistributed net income of subsidiaries 420,626 104,613 230,178
-------- --------- --------
Income before income taxes, minority interest and
extraordinary items 463,485 283,401 481,925
Income tax benefit (61,297) (143,545) (33,868)
-------- --------- --------
Income before minority interest and extraordinary items 524,782 426,946 515,793
Minority interest -- 85,895 79,085
-------- --------- --------
Income before extraordinary items 524,782 341,051 436,708
Extraordinary items -- -- 98,706
-------- --------- --------
Net income 524,782 341,051 338,002
Preferred stock dividends -- -- 578
-------- --------- --------
Net income available to common stockholder $524,782 $ 341,051 $337,424
======== ========= ========
F-72
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following represents parent company only statements of cash flows for
the years ended December 31, 2000, 1999 and 1998 (in thousands):
2000 1999 1998
-------- --------- --------
Cash flows from operating activities:
Net income $ 524,782 $ 341,051 $ 338,002
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred issuance costs 7,354 7,295 6,958
Accretion of discount on borrowings 1,093 1,018 285
Extraordinary loss on early extinguishment of debt -- -- 98,706
(Increase) decrease in other assets (21,471) (5,331) 35,700
Decrease in payable to affiliates -- -- (1,204)
Increase (decrease) in accrued interest payable 285 (2,245) 52,708
Decrease in other liabilities (873) (3,376) (57,989)
Equity in undistributed net income of subsidiaries (420,626) (104,613) (230,178)
Minority interest -- 6,887 79,085
--------- --------- -----------
Net cash provided by operating activities 90,544 240,686 322,073
--------- --------- -----------
Proceeds from GS Escrow Merger -- 1,970,285
Bank Preferred Stock Tender Offers -- (97,621) (423,509)
Debt Tender Offers -- (253) (1,089,885)
Redemption of FN Holdings Preferred Stock -- -- (25,000)
Capital contribution 19,000 40,000 --
Dividends on common stock (96,000) (225,500) (662,914)
Dividends on preferred stock -- -- (471)
--------- --------- -----------
Net cash used in financing activities (77,000) (283,374) (231,494)
--------- --------- -----------
Net change in cash and cash equivalents 13,544 (42,688) 90,579
Cash and cash equivalents at beginning of year 66,581 109,269 18,690
--------- --------- -----------
Cash and cash equivalents at end of year $ 80,125 $ 66,581 $ 109,269
========= ========= ===========
Supplemental Disclosure of Cash Flow Information:
Year Ended December 31,
------------------------------------------
2000 1999 1998
---- ---- ----
(in thousands)
Cash paid (received) for:
Interest $142,401 $141,930 $ 80,913
Income taxes, net (39,833) (60,209) (48,895)
Non-cash financing activities:
Preferred stock dividends reinvested -- -- 107
Initial dividend of tax benefits to parent due to
deconsolidation -- -- 211,242
Adjustments to initial dividend of tax benefits
to parent due to deconsolidation -- 66,383 --
Impact of Golden State restricted common stock 3,175 477 --
F-73