UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2001
-------------------------------------------------
or
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from N/A to N/A
--------------------- --------------------
Commission File Number: 333-64597
--------------------------------------------------------
Golden State Holdings Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-4669792
- ------------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
135 Main Street, San Francisco, CA 94105
- ------------------------------------------------- -----------------------------
(Address of principal executive offices) (Zip Code)
415-904-1100
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
--- ---
The number of shares outstanding of registrant's $1.00 par value common
stock, as of the close of business on July 31, 2001: 1,000 shares.
Registrant meets the conditions set forth in General Instruction H (1)(a)
and (b) of Form 10-Q and is therefore filing this Form with certain reduced
disclosures, as permitted by General Instruction H (2).
Page 1
GOLDEN STATE HOLDINGS INC.
SECOND QUARTER 2001 REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Unaudited Consolidated Balance Sheets
June 30, 2001 and December 31, 2000............................ 3
Unaudited Consolidated Statements of Income
Six Months Ended June 30, 2001 and 2000........................ 4
Unaudited Consolidated Statements of Income
Three Months Ended June 30, 2001 and 2000...................... 5
Unaudited Consolidated Statements of Comprehensive Income
Six Months Ended June 30, 2001 and 2000........................ 6
Unaudited Consolidated Statements of Comprehensive Income
Three Months Ended June 30, 2001 and 2000...................... 7
Unaudited Consolidated Statement of Stockholder's Equity
Six Months Ended June 30, 2001................................. 8
Unaudited Consolidated Statements of Cash Flows
Six Months Ended June 30, 2001 and 2000........................ 9
Notes to Unaudited Consolidated Financial Statements...........11
Item 2. Management's Narrative Analysis of Results of Operations....24
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. *
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................43
Item 2. Changes in Securities....................................... *
Item 3. Defaults Upon Senior Securities............................. *
Item 4. Submission of Matters to a Vote of Security Holders......... *
Item 5. Other Information...........................................44
Item 6. Exhibits and Reports on Form 8-K............................44
Glossary of Defined Terms...............................................45
Signatures..............................................................47
* Item 3 of Part I and Items 2, 3 and 4 of Part II are not included as per
conditions met by Registrant set forth in General Instruction H (1) (a) and
(b) of Form 10-Q.
Golden State Holdings Inc. is a wholly owned subsidiary of Golden State
Bancorp Inc. For more information, refer to Golden State Bancorp Inc.'s
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001.
Page 2
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND DECEMBER 31, 2000
(Unaudited)
(dollars in thousands, except per share data)
June 30, December 31,
ASSETS 2001 2000
------ ----------- ------------
Cash and due from banks $ 779,750 $ 697,441
Interest-bearing deposits in other banks 30,105 123
Short-term investments 78,730 85,510
----------- -----------
Cash and cash equivalents 888,585 783,074
Securities available-for-sale, at fair value 160,594 637,070
Securities held-to-maturity 445,008 587,503
Mortgage-backed securities available-for-sale, at fair value 9,610,187 9,866,823
Mortgage-backed securities held-to-maturity 1,589,039 2,886,612
Loans held for sale, net 2,304,092 845,763
Loans receivable, net 41,316,066 39,592,814
Investment in FHLB System 1,406,933 1,361,066
Premises and equipment, net 284,272 290,899
Foreclosed real estate, net 21,489 19,080
Accrued interest receivable 341,813 364,414
Intangible assets (net of accumulated amortization of $276,030
at June 30, 2001 and $246,150 at December 31, 2000) 661,408 691,288
Mortgage servicing rights, net of valuation allowance 1,513,557 1,559,323
Derivative assets 193,430 --
Other assets 567,317 1,029,082
----------- -----------
Total assets $61,303,790 $60,514,811
=========== ===========
LIABILITIES, MINORITY INTEREST AND STOCKHOLDER'S EQUITY
-------------------------------------------------------
Deposits $24,365,511 $23,462,372
Securities sold under agreements to repurchase 3,914,931 4,511,309
Borrowings 28,753,608 28,800,557
Derivative liabilities 126,624 --
Other liabilities 1,161,855 942,397
----------- -----------
Total liabilities 58,322,529 57,716,635
----------- -----------
Commitments and contingencies -- --
Minority interest 500,000 500,000
Stockholder's equity:
Common stock, $1.00 par value, 1,000 shares authorized,
issued and outstanding 1 1
Additional paid-in capital 1,568,097 1,564,821
Accumulated other comprehensive loss (60,753) (91,405)
Retained earnings (substantially restricted) 973,916 824,759
----------- -----------
Total stockholder's equity 2,481,261 2,298,176
----------- -----------
Total liabilities, minority interest and stockholder's equity $61,303,790 $60,514,811
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
Page 3
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(Unaudited)
(in thousands)
Six Months Ended June 30,
--------------------------
2001 2000
---------- ----------
Interest income:
Loans receivable $1,541,014 $1,343,507
Mortgage-backed securities available-for-sale 344,977 435,545
Mortgage-backed securities held-to-maturity 70,983 90,836
Loans held for sale 52,676 28,686
Securities available-for-sale 14,575 32,975
Securities held-to-maturity 16,452 9,482
Interest-bearing deposits in other banks 539 3,384
Dividends on FHLB stock 45,372 45,110
---------- ----------
Total interest income 2,086,588 1,989,525
---------- ----------
Interest expense:
Deposits 464,489 443,146
Securities sold under agreements to repurchase 121,392 172,734
Borrowings 853,847 796,225
---------- ----------
Total interest expense 1,439,728 1,412,105
---------- ----------
Net interest income 646,860 577,420
---------- ----------
Provision for loan losses -- --
---------- ----------
Net interest income after provision for loan losses 646,860 577,420
---------- ----------
Noninterest income:
Loan servicing fees, net (6,906) 85,823
Customer banking fees and service charges 105,820 98,724
Gain on sale, settlement and transfer of loans, net 21,885 27,062
Gain (loss) on sale of assets, net 16,221 (16,036)
Other income 36,440 17,804
---------- ----------
Total noninterest income 173,460 213,377
---------- ----------
Noninterest expense:
Compensation and employee benefits 231,197 214,948
Occupancy and equipment 77,801 73,508
Professional fees 14,650 17,606
Loan expense 8,569 9,234
Foreclosed real estate operations, net (853) (3,378)
Amortization of intangible assets 29,880 31,907
Other expense 111,164 103,012
---------- ----------
Total noninterest expense 472,408 446,837
---------- ----------
Income before income taxes, minority interest, extraordinary items and
cumulative effect of change in accounting principle 347,912 343,960
Income tax expense (benefit) 123,709 (7,890)
Minority interest 13,494 13,394
---------- ----------
Income before extraordinary items and cumulative effect of change in
accounting principle 210,709 338,456
Extraordinary items - gains on early extinguishment of debt,
net of applicable taxes of $2,083 in 2000 -- 3,014
Cumulative effect of change in accounting principle, net of applicable taxes of $1,072 in (1,552) --
---------- ----------
Net income $ 209,157 $ 341,470
========== ==========
See accompanying notes to unaudited consolidated financial statements.
Page 4
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 2001 AND 2000
(Unaudited)
(in thousands)
Three Months Ended June 30,
---------------------------
2001 2000
---------- ----------
Interest income:
Loans receivable $ 763,224 $ 697,314
Mortgage-backed securities available-for-sale 163,994 206,483
Mortgage-backed securities held-to-maturity 33,572 51,457
Loans held for sale 32,549 15,368
Securities available-for-sale 3,795 13,972
Securities held-to-maturity 7,951 7,331
Interest-bearing deposits in other banks 120 2,983
Dividends on FHLB stock 22,326 27,963
---------- ----------
Total interest income 1,027,531 1,022,871
---------- ----------
Interest expense:
Deposits 223,652 224,354
Securities sold under agreements to repurchase 53,447 89,828
Borrowings 414,044 418,372
---------- ----------
Total interest expense 691,143 732,554
---------- ----------
Net interest income 336,388 290,317
---------- ----------
Provision for loan losses -- --
Net interest income after provision for loan losses 336,388 290,317
---------- ----------
Noninterest income:
Loan servicing fees, net 19,746 43,031
Customer banking fees and service charges 54,559 50,065
Gain on sale, settlement and transfer of loans, net 16,961 20,400
Gain (loss) on sale of assets, net 15,782 (16,455)
Other income 7,181 8,238
---------- ----------
Total noninterest income 114,229 105,279
---------- ----------
Noninterest expense:
Compensation and employee benefits 113,462 107,194
Occupancy and equipment 39,951 36,137
Professional fees 9,802 8,850
Loan expense 4,367 5,274
Foreclosed real estate operations, net (455) (1,145)
Amortization of intangible assets 14,940 15,464
Other expense 59,203 51,814
---------- ----------
Total noninterest expense 241,270 223,588
---------- ----------
Income before income taxes, minority interest, extraordinary items and
cumulative effect of change in accounting principle 209,347 172,008
Income tax expense 87,526 75,057
Minority interest 6,747 6,795
---------- ----------
Income before extraordinary items and cumulative effect of change in
accounting principle 115,074 90,156
Extraordinary items - gains on early extinguishment of debt, net of applicable
taxes of $1,204 in 2000 -- 1,808
Cumulative effect of change in accounting principle, net of applicable taxes of (1,552) --
$1,072 in 2001 ---------- ----------
Net income $ 113,522 $ 91,964
========== ==========
See accompanying notes to unaudited consolidated financial statements.
Page 5
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(Unaudited)
(in thousands)
Six Months Ended June 30,
---------------------------
2001 2000
-------- --------
Net income $209,157 $341,470
Other comprehensive income (loss), net of tax:
Unrealized holding gain (loss) on securities available-for-sale:
Unrealized holding gain (loss) arising during the period 98,165 (19,427)
Less: reclassification adjustment for (gain) loss
included in net income (9,572) 10,846
-------- --------
88,593 (8,581)
Amortization of market adjustment for securities
transferred from available-for-sale to held-to-maturity 3,466 670
Transition adjustment upon adoption of SFAS No. 133 (44,647) --
Change in fair value of derivatives used for cash flow hedges,
net of applicable taxes of $11,574 (16,760) --
-------- --------
Other comprehensive income (loss) 30,652 (7,911)
-------- --------
Comprehensive income $239,809 $333,559
======== ========
See accompanying notes to unaudited consolidated financial statements.
Page 6
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED JUNE 30, 2001 AND 2000
(Unaudited)
(in thousands)
Three Months Ended June 30,
---------------------------
2001 2000
-------- --------
Net income $113,522 $ 91,964
Other comprehensive income, net of tax:
Unrealized holding (loss) gain on securities available-for-sale:
Unrealized holding (loss) gain arising during the period (1,050) 1,118
Less: reclassification adjustment for (gain) loss included
in net income (9,490) 10,846
------- --------
(10,540) 11,964
Amortization of market adjustment for securities
transferred from available-for-sale to held-to-maturity 1,989 670
Change in fair value of derivatives used for cash flow hedges,
net of applicable taxes of $14,114 20,437 --
-------- --------
Other comprehensive income 11,886 12,634
-------- --------
Comprehensive income $125,408 $104,598
======== ========
See accompanying notes to unaudited consolidated financial statements.
Page 7
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
SIX MONTHS ENDED JUNE 30, 2001
(Unaudited)
(in thousands)
Accumulated Other Retained
Additional Comprehensive (Loss) Income Earnings Total
Common Paid-in ----------------------------------- (Substantially Stockholder's
Stock Capital Securities Derivatives Total Restricted) Equity
----- ------- ---------- ----------- ----- ----------- ------
Balance at December 31, 2000 $1 $1,564,821 $(91,405) $ -- $(91,405) $824,759 $2,298,176
Net income -- -- -- -- -- 209,157 209,157
Change in net unrealized holding gain
(loss) on securities available-for-sale -- -- 58,219 -- 58,219 -- 58,219
Change in net unrealized holding loss
on derivatives -- -- -- (16,760) (16,760) -- (16,760)
Amortization of unrealized holding
loss on securities held-to-maturity -- -- 3,466 -- 3,466 -- 3,466
Unrealized loss on securities reclassified
to available-for-sale, net of tax -- -- 30,374 -- 30,374 -- 30,374
Transition adjustment upon adoption
of SFAS No. 133 -- -- -- (44,647) (44,647) -- (44,647)
Dividends to parent -- -- -- -- -- (60,000) (60,000)
Impact of Golden State restricted
common stock -- 2,531 -- -- -- -- 2,531
Tax benefits on exercise of stock options -- 745 -- -- -- -- 745
-- ---------- -------- ------- -------- -------- ----------
Balance at June 30, 2001 $1 $1,568,097 $ 654 $61,407 $(60,753) $973,916 $2,481,261
== ========== ======== ======= ======== ======== ==========
See accompanying notes to unaudited consolidated financial statements.
Page 8
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(Unaudited)
(in thousands)
Six Months Ended June 30,
-----------------------------
2001 2000
------------ -----------
Cash flows from operating activities:
Net income $ 209,157 $ 341,470
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of intangible assets 29,880 31,907
Amortization (accretion) of purchase accounting premiums and
discounts, net 4,308 (343)
Accretion of discount on borrowings 573 535
Amortization of mortgage servicing rights 147,013 97,236
(Gain) loss on sale of assets, net (16,221) 16,036
Gain on sale of foreclosed real estate, net (1,717) (6,324)
Loss on sale, settlement and transfer of loans, net 109,487 27,416
Capitalization of originated mortgage servicing rights (131,372) (54,478)
Extraordinary items - gains on early extinguishment of debt, net -- (3,014)
Depreciation and amortization of premises and equipment 26,084 23,766
Amortization of deferred debt issuance costs 3,676 3,674
FHLB stock dividends (45,372) (45,110)
Purchases and originations of loans held for sale (7,060,801) (2,289,613)
Net proceeds from the sale of loans held for sale 5,478,985 2,156,218
Change in fair value of MSRs/MSR derivatives (8,957) --
MSR valuation provision 77,000 --
Decrease (increase) in other assets 367,547 (53,679)
Decrease (increase) in accrued interest receivable 22,601 (22,913)
Increase in other liabilities 332,142 210,338
Amortization of deferred compensation expense - Golden State
restricted common stock 992 1,103
Reduction in accrued liability for state income taxes (25,805) --
Minority interest: other 13,494 13,394
Other operating activity 35 --
------------ -----------
Net cash (used) provided by operating activities $ (467,271) $ 447,619
------------ -----------
(Continued)
See accompanying notes to unaudited consolidated financial statements.
Page 9
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(Unaudited)
(in thousands)
Six Months Ended June 30,
------------------------------
2001 2000
------------ ------------
Cash flows from investing activities:
Downey Acquisition $ -- $ (379,314)
Purchases of securities available-for-sale (12,202) (33,082)
Proceeds from maturities of securities available-for-sale 586,733 35,469
Purchases of securities held-to-maturity (4,992) (1,734)
Principal payments and proceeds from maturities
of securities held-to-maturity 68,363 23,809
Purchases of mortgage-backed securities available-for-sale (120,810) (58,340)
Principal payments on mortgage-backed securities available-for-sale 1,290,937 953,057
Principal payments on mortgage-backed securities held-to-maturity 229,638 188,014
Proceeds from sales of mortgage-backed securities available-for-sale 304,365 480,159
Proceeds from sales of loans 51,358 32,820
Net decrease (increase) in loans receivable 557,082 (3,304,202)
Purchases of loans receivable (2,349,144) (811,740)
Purchases of FHLB stock, net (23,193) (107,570)
Purchases of premises and equipment (20,485) (20,201)
Proceeds from disposal of premises and equipment 6,639 719
Proceeds from sales of foreclosed real estate 17,131 48,641
Purchases of mortgage servicing rights (128,085) (173,109)
Hedge receipts (14,533) (6,025)
Purchases of derivatives (272,589) (24,739)
Proceeds from sales of derivatives 215,420 11,875
Proceeds from sales of mortgage servicing rights -- 689
------------ ------------
Net cash provided (used )in investing activities 381,633 (3,144,804)
------------ ------------
Cash flows from financing activities:
Net increase in deposits 903,555 228,661
Proceeds from additional borrowings 59,921,714 20,055,022
Principal payments on borrowings (59,964,993) (17,531,143)
Net (decrease) increase in securities sold under agreements to
repurchase (596,378) 127,798
Dividends on common stock (60,000) (71,000)
Dividends paid to minority stockholders of subsidiary, net of taxes (13,494) (13,394)
Tax benefit on exercise of stock options 745 9
------------ ------------
Net cash provided by financing activities 191,149 2,795,953
------------ ------------
Net change in cash and cash equivalents 105,511 98,768
Cash and cash equivalents at beginning of period 783,074 592,878
------------ ------------
Cash and cash equivalents at end of period $ 888,585 $ 691,646
============ ============
See accompanying notes to unaudited consolidated financial statements.
Page 10
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were prepared
in accordance with generally accepted accounting principles for interim
financial information and the requirements of Regulation S-X, Article 10 and
therefore do not include all disclosures necessary for complete financial
statements. In the opinion of management, all adjustments have been made that
are necessary for a fair presentation of the financial position and results of
operations and cash flows as of and for the periods presented. All such
adjustments are of a normal recurring nature. The results of operations for the
three and six months ended June 30, 2001 are not necessarily indicative of the
results that may be expected for the entire fiscal year or any other interim
period. Certain amounts for the three and six-month periods in the prior year
have been reclassified to conform to the current period's presentation.
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
the Bank and therefore, activities for the consolidated entity are primarily
carried out by the Bank and its operating subsidiaries.
The accompanying unaudited consolidated financial statements include the
accounts of GS Holdings, the Bank and the Bank's wholly owned subsidiaries.
Unless the context otherwise indicates, "GS Holdings" or "Company" refers to
Golden State Holdings Inc. as the surviving entity after the consummation of the
Golden State Acquisition, and as the surviving entity in the GS Escrow Merger
for periods after the GS Escrow Merger. On September 11, 1998, Glendale Federal
merged with and into the Bank pursuant to the Glen Fed Merger. Unless the
context otherwise indicates, "California Federal" or "Bank" refers to California
Federal Bank as the surviving entity after the consummation of the Glen Fed
Merger.
Other minority interest represents amounts attributable to (a) the REIT
Preferred Stock of California Federal Preferred Capital Corporation, a wholly
owned subsidiary of the Bank, and (b) that portion of stockholders' equity of
Auto One, a subsidiary of the Bank, attributable to 20% of its common stock.
All significant intercompany balances and transactions have been eliminated
in consolidation. These financial statements should be read in conjunction with
the consolidated financial statements of GS Holdings included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2000. A glossary of
defined terms begins on page 45 of this document. All terms used but not defined
elsewhere herein have meanings ascribed to them in the Company's Annual Report
on Form 10-K.
As GS Holdings' common stock is wholly owned by Golden State, earnings per
share data is not presented.
(2) RECLASSIFICATION OF SECURITIES
On January 1, 2001, the Company reclassified $1.1 billion and $85.0 million
carrying value of mortgage-backed securities and U.S. government and agency
securities, respectively, from securities held-to-maturity to their respective
available-for-sale portfolios, as permitted upon the adoption of SFAS No. 133.
The net unrealized loss related to these securities of $30.4 million, which was
recorded in OCI upon their initial transfer to the held-to-maturity portfolio in
April 2000, was reclassified from accumulated other comprehensive loss, and the
securities were subsequently marked to market, in accordance with SFAS No. 115.
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 comprised securities
required as part of the Bank's regulatory liquidity portfolio. The net
unrealized loss related to these securities of $64.0 million, included as a
component of equity (accumulated other comprehensive loss), is being amortized
to interest income over the remaining life of the securities as an adjustment of
yield. 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.
Page 11
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(3) CASH, CASH EQUIVALENTS, AND STATEMENTS OF CASH FLOWS
Cash paid (including interest credited) for interest on deposits and other
interest-bearing liabilities during the six months ended June 30, 2001 and 2000
was $1.5 billion and $1.4 billion, respectively. Net cash paid for income taxes
during the six months ended June 30, 2001 and 2000 was $100.8 million and $12.0
million, respectively.
During the six months ended June 30, 2001, noncash activity consisted of
the reclassification of $1.1 billion and $85.0 million of mortgage-backed
securities and U. S. government and agency securities, respectively, from
securities held-to-maturity to their respective available-for-sale portfolios,
as permitted upon the adoption of SFAS No. 133, the reclassification of $164.8
million from mortgage servicing rights to derivative assets ($173.6 million) and
derivative liabilities ($8.8 million) related to the adoption of SFAS No. 133,
transfers of $5.2 million from loans held for sale (at lower of cost or market)
to loans receivable, transfers of $17.8 million from loans receivable to
foreclosed real estate and $0.2 million of loans made to facilitate sales of
real estate owned.
Noncash activity during the six months ended June 30, 2001 also included an
increase of $2.5 million in additional paid-in capital reflecting the impact of
Golden State restricted common stock outstanding under an employee incentive
plan.
During the six months ended June 30, 2000, noncash activity consisted of
the reclassification of $1.1 billion and $445.0 million of mortgage-backed
securities and U.S. government and agency securities, respectively, from
securities available-for-sale to their respective held-to-maturity portfolios,
transfers of $31.9 million from loans receivable to foreclosed real estate,
transfers of $24.2 million from loans held for sale (at lower of cost or market)
to loans receivable and $5.4 million of loans made to facilitate sales of real
estate owned.
Noncash activity during the six months ended June 30, 2000 also included a
$211.7 million reduction of the valuation allowance of the Company's deferred
tax asset representing pre-merger tax benefits, of which $161.7 million was
retained by the previous owners of FN Holdings and an increase of $2.4 million
in additional paid-in capital reflecting the impact of Golden State restricted
common stock outstanding under an employee incentive plan.
Page 12
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(4) SEGMENT REPORTING
Since the Company derives a significant portion of its revenues from
interest income, and interest expense is the most significant expense, the
segments are reported below using net interest income. Because the Company also
evaluates performance based on noninterest income and noninterest expense goals,
these measures of segment profit and loss are also presented. The Company does
not allocate income taxes to the segments.
Six Months Ended June 30, Three Months Ended June 30,
------------------------------------ ------------------------------------
Community Mortgage Community Mortgage
Banking Banking Total Banking Banking Total
------- ------- ----- ------- ------- -----
(in thousands)
Net interest income: (a)
2001 $673,654 $ 41,788 $715,442 $341,625 $ 33,760 $375,385
2000 625,332 2,096 627,428 316,261 1,716 317,977
Noninterest income: (b)
2001 $166,868 $ 22,125 $188,993 $ 83,609 $ 37,665 $121,274
2000 118,225 119,649 237,874 57,949 59,671 117,620
Noninterest expense: (c)
2001 $397,711 $77,017 $474,728 $203,317 $ 39,113 $242,430
2000 373,139 76,018 449,157 187,457 37,291 224,748
Pre-tax contribution:
2001 $442,811 $(13,104) $429,707 $221,917 $ 32,312 $254,229
2000 370,418 45,727 416,145 186,753 24,096 210,849
_____________
(a) Includes $68.6 million and $50.0 million for the six months ended June
30, 2001 and 2000, respectively, in earnings credit provided to FNMC by
the Bank, primarily for custodial bank account balances generated by
FNMC. Also includes $134.1 million and $122.3 million for the six months
ended June 30, 2001 and 2000, respectively, in interest income and
expense on intercompany loans.
Includes $39.0 million and $27.7 million for the three months ended June
30, 2001 and 2000, respectively, in earnings credit provided to FNMC by
the Bank, primarily for custodial bank account balances generated by
FNMC. Also includes $75.9 million and $69.0 million for the three months
ended June 30, 2001 and 2000, respectively, in interest income and
expense on intercompany loans.
(b) Includes $15.5 million and $24.5 million for the six months ended June
30, 2001 and 2000, respectively, in intercompany servicing fees. Includes
$7.0 million and $12.3 million for the three months ended June 30, 2001
and 2000, respectively, in intercompany servicing fees.
(c) Includes $2.3 million for each of the six months ended June 30, 2001 and
2000, in intercompany noninterest expense. Includes $1.2 million for each
of the three months ended June 30, 2001 and 2000, in intercompany
noninterest expense.
Page 13
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
The following reconciles the above table to the amounts shown on the
consolidated financial statements for the six and three months ended June 30,
2001 and 2000 (in thousands):
Six Months Ended June 30, Three Months Ended June 30,
------------------------- ---------------------------
2001 2000 2001 2000
---- ---- ---- ----
Net interest income:
Total net interest income for reportable segments $715,442 $627,428 $375,385 $317,977
Elimination of intersegment net interest income (68,582) (50,008) (38,997) (27,660)
-------- -------- -------- --------
Total $646,860 $577,420 $336,388 $290,317
======== ======== ======== ========
Noninterest income:
Total noninterest income for reportable segments $188,993 $237,874 $121,274 $117,620
Elimination of intersegment servicing fees (15,533) (24,497) (7,045) (12,341)
-------- -------- -------- --------
Total $173,460 $213,377 $114,229 $105,279
======== ======== ======== ========
Noninterest expense:
Total noninterest expense for reportable segments $474,728 $449,157 $242,430 $224,748
Elimination of intersegment expense (2,320) (2,320) (1,160) (1,160)
-------- -------- -------- --------
Total $472,408 $446,837 $241,270 $223,588
======== ======== ======== ========
Pre-tax contribution
Total contribution for reportable segments $429,707 $416,145 $254,229 $210,849
Elimination of intersegment contributions (81,795) (72,185) (44,882) (38,841)
--------- -------- -------- --------
Total $347,912 $343,960 $209,347 $172,008
======== ======== ======== ========
(5) LOANS RECEIVABLE, NET
The following details the components of loans receivable, net, at June 30,
2001 and December 31, 2000 (in thousands):
June 30, 2001 December 31, 2000
------------- -----------------
Loan Portfolio:
1-4 unit residential $31,778,010 $30,828,368
Multi-family residential 3,963,298 3,569,228
Commercial real estate 2,470,338 2,487,093
Land 19,410 22,384
Construction 6,984 7,416
----------- -----------
Total real estate loans 38,238,040 36,914,489
----------- -----------
Equity-line 566,411 538,524
Other consumer loans 311,101 302,559
Auto loans, net 1,808,634 1,567,257
Commercial loans 654,750 557,796
----------- -----------
Total loans receivable 41,578,936 39,880,625
----------- -----------
Deferred loan fees, costs, discounts and premiums, net 246,216 229,962
Allowance for loan losses (515,979) (526,308)
Purchase accounting adjustments, net 6,893 8,535
----------- -----------
Loans receivable, net $41,316,066 $39,592,814
=========== ===========
Page 14
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(6) DEPOSITS
Deposits at June 30, 2001 and December 31, 2000 are comprised of the
following (dollars in thousands):
June 30, 2001 December 31, 2000
------------- -----------------
Transaction Accounts:
Non-interest checking $ 1,869,598 $ 1,749,359
Interest-bearing checking 2,032,122 2,063,185
----------- -----------
Subtotal checking 3,901,720 3,812,544
Money market 4,100,378 2,948,853
Passbook savings 2,998,400 3,086,851
----------- -----------
Total transaction accounts 11,000,498 9,848,248
Certificates of deposit 11,232,122 12,241,809
----------- -----------
Subtotal retail deposits 22,232,620 22,090,057
Custodial accounts 1,885,850 825,438
Accrued interest payable 64,225 80,225
Purchase accounting 654 1,009
----------- -----------
Total retail deposits 24,183,349 22,996,729
Brokered deposits 182,162 465,643
----------- -----------
Total deposits $24,365,511 $23,462,372
=========== ===========
Demand deposits as a % of retail deposits
(including custodials) 24.0% 20.2%
Transaction accounts as a % of retail deposits
(including custodials) 53.4% 46.6%
(7) ACCRUED TERMINATION AND FACILITIES COSTS
In connection with the Golden State Acquisition, the Company recorded
liabilities resulting from (a) branch consolidations due to duplicate
facilities; (b) employee severance and termination benefits due to a planned
reduction in force; and (c) expenses incurred under a contractual obligation to
terminate services provided by outside service providers (principally relating
to 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 since December 31, 2000 (in thousands):
Severance and
Branch Termination Contract
Consolidations Benefits Terminations Total
-------------- -------- ------------ -----
Balance at December 31, 2000 $16,044 $12,529 $-- $28,573
Additional liabilities recorded -- -- -- --
Charges to liability account (2,144) (29) -- (2,173)
------- ------- --- -------
Balance at June 30, 2001 $13,900 $12,500 $-- $26,400
======= ======= === =======
Page 15
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(8) INCOME TAXES
During the six months ended June 30, 2001, GS Holdings recorded net income
tax expense of $123.7 million, which included net tax benefits of $29.0 million.
In prior years, an accrued liability was established for the purpose of
satisfying assessments that may result from issues arising during audits with
various state taxing authorities. As a result of the completion and settlement
of audits in various state taxing jurisdictions, additional guidance on the
deductibility of covered asset losses, and the current assessment of exposure
for tax strategies employed for prior years, management reduced its accrued
state tax liability by $39.7 million. The Company also recorded additional
Federal tax expense of $13.9 million due to the reduction of the state tax
expense.
In addition, an income tax benefit was recorded for $3.2 million due to the
utilization of net operating losses of a subsidiary made available as a result
of the subsidiary's liquidation into California Federal Bank.
During the six months ended June 30, 2000, GS Holdings recorded a net
income tax benefit of $7.9 million, which included a tax benefit of $161.7
million. Based on favorable resolutions of federal income tax audits of Old
California Federal and Glendale Federal, and based on the status of Mafco
Holdings', including the Company's, audits for the years 1991 through 1995,
management changed its judgment about the realizability of the Company's
deferred tax asset and reduced its valuation allowance by $211.7 million during
the six-month period ended June 30, 2000. As a result of reducing the valuation
allowance, income tax expense was reduced by $161.7 million and goodwill was
reduced by $50.0 million.
(9) STOCKHOLDER'S EQUITY
At June 30, 2001, there were 1,000 shares of GS Holdings common stock
issued and outstanding.
Dividends on common stock during the six months ended June 30, 2001 and
2000 totalled $60.0 million and $71.0 million, respectively.
(10) EXECUTIVE AND STOCK COMPENSATION
In the first quarter of 2001, Golden State granted to its employees
non-qualified stock options equivalent to 851,000 shares of common stock at a
weighted average price of $25.67 per share under the Golden State Bancorp Inc.
Omnibus Stock Plan. In the second quarter of 2001, Golden State granted an
additional 560,100 non-qualified stock options at a weighted average price of
$30.75 per share. These shares generally vest over three years in one-third
increments on the anniversary of the grant date. The options generally expire 10
years from the date of grant. No compensation cost was recognized by the Company
for these stock options during the six months ended June 30, 2001, 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.
During the three months ended June 30, 2001, 91,101 options were exercised
and 4,432 options were cancelled or expired under all plans. During the six
months ended June 30, 2001, 154,617 options were exercised and 21,677 options
were cancelled or expired under all plans. During the three and six months ended
June 30, 2000, 14,307 options were exercised and 45,116 and 64,366 options,
respectively, were cancelled or expired under all plans.
At June 30, 2001 and 2000, options to acquire an equivalent of 4,906,205
and 3,828,259 shares and 966,166 and 1,177,775 LTW (TM)s, respectively, remained
outstanding under all plans.
Page 16
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
On January 22, 2001, Golden State awarded to certain of its employees
99,108 shares of restricted stock under the Golden State Bancorp Inc. Executive
Compensation Plan. The market value on the date of the awards was $26.38 per
share. These shares generally vest over two years in one-half increments on the
anniversary of the grant date, based upon the continued service of the employee.
During the three and six months ended June 30, 2001, 5,911 and 115,045
restricted shares were vested. No restricted stock vested during the three and
six months ended June 30, 2000. At June 30, 2001, a total of 230,819 restricted
shares was outstanding. The compensation expense based on the stock price on the
date of these awards was recognized on a straight-line basis over the vesting
period for each tranche of the award with a corresponding increase to additional
paid-in capital. During the three and six months ended June 30, 2001, $0.5
million and $1.0 million, respectively, in compensation expense was recognized
related to such awards. During the three and six months ended June 30, 2000,
$0.5 million and $1.1 million, respectively, in compensation expense was
recognized related to such awards. These restricted shares have full voting and
dividend rights.
(11) EXTRAORDINARY ITEMS
During the first quarter of 2000, the FHLB called and the Bank prepaid $200
million in FHLB advances, resulting in an extraordinary gain of $1.2 million,
net of income taxes of $0.8 million, on the early extinguishment of such
borrowings.
Also during the first quarter of 2000, the Bank repurchased $2.5 million
outstanding principal amount of the Convertible Subordinated Debentures due
2001, resulting in an extraordinary gain of $41 thousand, net of income taxes of
$30 thousand, on the early extinguishment of debt.
During the second quarter of 2000, the FHLB called and the Bank prepaid
$200 million in FHLB advances, resulting in an extraordinary gain of $1.8
million, net of income taxes of $1.2 million, on the early extinguishment of
such borrowings.
(12) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
On September 21, 2000, the EITF issued EITF No. 99-20. This document, which
was effective on April 1, 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.
On April 1, 2001, the Company identified a portfolio of securities with a
total book value of $80.7 million which are subject to the impairment provisions
of EITF No. 99-20. All of these securities had previously been reported as
available-for-sale securities, with changes in fair value reflected in OCI. As a
result of its implementation of EITF No. 99-20, the Company recorded a loss of
$1.6 million, net of income tax credits of $1.1 million, representing the
cumulative effect of a change in accounting principle.
Page 17
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(13) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
INTEREST RATE RISK MANAGEMENT - RISK MANAGEMENT POLICIES - CASH FLOW
HEDGING INSTRUMENTS AND FAIR VALUE HEDGING INSTRUMENTS
The primary focus of the Company's asset/liability management program is to
monitor the sensitivity of the Company's net portfolio value and net income
under varying interest rate scenarios in order to take steps to control its
risks. 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 the levels of
interest-earning assets and interest-bearing liabilities and on mortgage
prepayment speeds (which affect the mortgage servicing rights asset) during the
measurement period. Based upon the outcome of the simulation analysis, the
Company considers 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.
INTEREST RATE RISK MANAGEMENT - CASH FLOW HEDGING INSTRUMENTS - BALANCE
SHEET HEDGES
OBJECTIVES AND CONTEXT
The Company uses variable rate debt as a source of funds for use in the
Company's lending and investment activities and other general business purposes.
It has received short-term variable-rate FHLB advances and Repos. These debt
obligations expose the Company to variability in interest payments due to
changes in interest rates. If interest rates increase, interest expense
increases. Conversely, if interest rates decrease, interest expense decreases.
Management believes it is prudent to limit the variability of a portion of
its interest payments, and therefore, generally hedges a significant portion of
its variable-rate interest payments.
STRATEGIES
To meet this objective, management enters into derivative instrument
agreements to manage fluctuations in cash flows resulting from interest rate
risk. These instruments include interest rate swaps.
The interest rate swaps change the variable-rate cash flow exposure on the
short-term FHLB advances and Repos to fixed rate cash flows by entering into
receive-variable, pay-fixed interest rate swaps. Under the interest rate swaps,
the Company receives variable interest rate payments and makes fixed interest
rate payments, thereby creating fixed rate FHLB advances and Repos.
RESULTS
Risk management results for the quarter ended June 30, 2001 related to the
balance sheet hedging of FHLB advances and Repos indicate that the hedges were
100% effective and that there was no component of the derivative instruments'
gain or loss which was excluded from the assessment of hedge effectiveness.
Changes in the fair value of interest rate swaps designated as hedging
instruments of the variability of cash flows associated with FHLB advances and
Repos are reported in OCI. These amounts subsequently are reclassified into
interest expense as a yield adjustment in the same period in which the related
interest on the FHLB advances and Repos affects earnings. The net amount of OCI
reclassified into interest expense during the three and six months ended June
30, 2001 was $14.7 million and $20.1 million, respectively.
Page 18
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
As of the date of the initial application of SFAS No. 133, January 1, 2001,
approximately $18.1 million of losses reported in OCI and associated with the
transition adjustment related to the interest rate swaps were expected to be
reclassified into interest expense as a yield adjustment of the hedged FHLB
advances and Repos during the twelve month period ending December 31, 2001.
As of June 30, 2001, approximately $30.4 million of losses reported in OCI
related to the interest rate swaps were expected to be reclassified into
interest expense as a yield adjustment of the hedged FHLB advances and Repos
during the twelve month period ending June 30, 2002.
INTEREST RATE RISK MANAGEMENT - FAIR VALUE HEDGING INSTRUMENTS - MORTGAGE
SERVICING RIGHTS HEDGES
OBJECTIVES AND CONTEXT
The Company either purchases or originates mortgage servicing rights as a
source of fee income. These mortgage-servicing rights expose the Company to
variability in their fair value due to changes in the level of prepayments.
Mortgage servicing rights are generally recorded in the financial statements at
the lesser of their amortized cost or their fair value, unless they are
designated as a fair value hedge, in accordance with SFAS No. 133. The carrying
value of mortgage servicing rights in a designated hedging relationship will be
adjusted upwards or downwards depending upon the effectiveness of the hedge.
Management believes that it is prudent to limit the variability in the fair
value of a portion of its MSR asset. It is the Company's objective to hedge the
servicing rights asset associated with fixed rate, non-prepayment penalty loans
for which it has recorded mortgage servicing rights, at coverage levels that are
appropriate, given anticipated or existing interest rate levels and other market
considerations, as well as the relationship of change in this asset to other
assets of the Company.
STRATEGIES
To meet this objective, the Company utilizes interest rate swaps, principal
only swaps, interest rate floors, and swaptions as an asset/liability management
strategy to hedge against prepayment risk in its mortgage servicing portfolio
caused by declining interest rates. Although the Company hedges the change in
value of its MSRs, its hedge coverage ratio does not equate to 100%.
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 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.
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. 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. 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.
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 Swap), 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 the 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).
Page 19
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
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 nature and strategies associated
with swaptions are similar to the other derivative instruments described above.
RESULTS
Risk management results related to the hedging of mortgage servicing rights
for the quarter ended June 30, 2001 are summarized below and are included in the
caption entitled "Loan servicing fees, net" in the accompanying consolidated
statements of income (in thousands):
Loss on designated derivative contracts $(108,198)
Increase in value of designated mortgage servicing rights 114,750
---------
Net hedge ineffectiveness $ 6,552
=========
INTEREST RATE RISK MANAGEMENT - FAIR VALUE HEDGING INSTRUMENTS - WAREHOUSE
LOANS
OBJECTIVES AND CONTEXT
The Company, as part of its traditional real estate lending activities,
originates fixed-rate 1-4 unit residential loans for sale in the secondary
market. At the time of origination, management identifies loans that are
expected to be sold in the near future. These warehoused loans have been
classified as loans held for sale, net, in the consolidated balance sheet and
are recorded at the lower of aggregate amortized cost or market value. These
loans expose the Company to variability in their fair value due to changes in
interest rates. If interest rates increase, the value of the loans decreases.
Conversely, if interest rates decrease, the value of the loans increases.
Management believes it is prudent to limit the variability of a major
portion of the change in fair value of its loans held for sale. It is the
Company's objective to hedge primarily all of its warehoused loans held for sale
to third parties.
STRATEGIES
To meet this objective, management employs forward loan sale hedging
techniques to minimize the interest rate and pricing risks associated with the
origination and sale of such warehoused loans.
The forward loan sales lock in the price for the sale of either the
specific loans classified as held for sale or for a generic group of loans
similar to the specific loans classified as held for sale.
RESULTS
Risk management results related to the hedging of warehouse loans for the
quarter ended June 30, 2001 are summarized below and are included in the caption
entitled "Gain on sale, settlement and transfer of loans, net" in the
accompanying consolidated statements of income (in thousands):
Gain on designated forward loan sale commitments $ 12,080
Decrease in value of warehouse loans (10,443)
--------
Net hedge ineffectiveness $ 1,637
========
Page 20
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
DERIVATIVE INSTRUMENTS NOT DESIGNATED AS HEDGING INSTRUMENTS
PURPOSE - INTEREST RATE LOCK COMMITMENTS AND FORWARD LOAN SALE COMMITMENTS
The Company enters into rate lock commitments to extend credit to borrowers
for generally a 30-day period. Some of these rate lock commitments will
ultimately expire without being completed. During discussions leading to the
implementation of SFAS No. 133, the DIG, a committee organized by FASB to advise
it on initial implementation issues, concluded that rate lock commitments for
mortgages that would be held for sale should be accounted for as derivative
instruments and valued, therefore, at fair market value. In determining the fair
market value of the rate lock commitments, the Bank excludes the fair market
value of any future servicing rights.
To the extent that a loan is ultimately granted and the borrower ultimately
accepts the terms of the loan, these rate lock commitments expose the Company to
variability in their fair value due to changes in interest rates. If interest
rates increase, the value of these rate lock commitments decreases. Conversely,
if interest rates decrease, the value of these rate lock commitments increases.
To mitigate the effect of this interest rate risk, the Company enters into
offsetting derivative contracts, primarily forward loan sale commitments. The
forward loan sale commitments lock in an interest rate and price for the sale of
loans similar to the specific rate lock loan commitments classified as
derivatives. Both the rate lock commitments and the forward loan sale
commitments are undesignated derivatives, and accordingly are marked to market
through earnings.
Risk management results related to the undesignated hedging of interest
rate lock commitments with undesignated forward loan sale commitments for the
quarter ended June 30, 2001 are summarized below and are included in the caption
entitled "Gain on sale, settlement and transfer of loans, net" in the
consolidated statements of income (in thousands):
Gain on undesignated forward loan sale commitments recognized to income $11,096
Loss on undesignated interest rate loan commitments recognized to income (9,093)
-------
Net gain on derivatives $ 2,003
=======
(14) RECENT ACCOUNTING PRONOUNCEMENTS
BUSINESS COMBINATIONS
On July 20, 2001, the FASB issued SFAS No. 141 which defines a business
combination as a transaction through which an enterprise acquires all or a
portion of the net assets that constitute a business or equity interests of one
or more enterprises and obtains control over those enterprises. This definition
is not substantively different from the APB Opinion No. 16 definition.
SFAS No. 141 requires that all business combinations be accounted for using
the purchase method. Use of the pooling-of-interests method to account for
business combinations, which APB Opinion No. 16 required to be used when certain
criteria were met, is prohibited. SFAS No. 141 provides guidance for determining
the acquired enterprise. In addition, SFAS No. 141 requires that additional
information be disclosed about business combination transactions.
The accounting, disclosure and financial statement provisions of SFAS No.
141 are effective for business combinations initiated after June 30, 2001.
The implementation of SFAS No. 141 is not expected to materially impact the
Company's financial condition or operating results.
Page 21
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
GOODWILL AND OTHER INTANGIBLE ASSETS
On July 20, 2001, the FASB also issued SFAS No. 142. SFAS No. 142
supersedes APB Opinion No. 17 and establishes new accounting standards for both
identifiable and unidentifiable intangible assets acquired in a business
combination, including goodwill, but does not address internally developed
intangible assets. It would continue to require recognition of goodwill as an
asset but would not permit amortization of goodwill as currently required by APB
Opinion No. 17. Instead, goodwill would be tested for impairment at a level
referred to as a reporting unit. A reporting unit is the same level as, or one
level below, an operating segment (as that term is used in SFAS No. 131).
Goodwill would be tested for impairment annually and on an interim basis if
an event or circumstance occurs between annual tests that might reduce the fair
value of a reporting unit below its carrying value. An example of such an event
or circumstance may include an adverse change in the business climate or market,
a legal factor, an action by regulators, an introduction of competition, or a
loss of key personnel. Goodwill would also be tested for impairment on an
interim basis when (a) a more-likely-than-not expectation exists that a
reporting unit or a significant portion of a reporting unit will be sold or
otherwise disposed of, (b) a significant asset group within a reporting unit is
tested for recoverability under SFAS No. 121, or (c) a subsidiary of that
reporting unit has recognized a goodwill impairment loss. The fair value of each
reporting unit would not have to be recomputed every year if the components of
the reporting unit had not changed since the previous fair value computation,
the previous fair value amount exceeded the carrying amount of the reporting
unit by a substantial margin, and no evidence exists indicating that the current
fair value of the reporting unit may be less than its current carrying amount.
Goodwill would be tested for impairment using a two-step approach. The
first step is a comparison of the fair value of a reporting unit to its carrying
amount, including goodwill. If the fair value of the reporting unit is greater
than its carrying amount, goodwill is not considered impaired and no further
work is required. If the fair value of the reporting unit is less than its
carrying amount, the second step of the impairment test must be performed. The
second step of the impairment test is a comparison of the implied fair value of
goodwill to its carrying amount. If the implied fair value of goodwill is less
than its carrying amount, goodwill is considered impaired and an impairment loss
recognized. The impairment loss would be measured as the amount by which the
carrying amount of goodwill exceeds its implied fair value.
An acquired intangible asset other than goodwill would be amortized over
its useful economic life and reviewed for impairment in accordance with SFAS No.
121.
The aggregate amount of goodwill would be presented as a separate line item
in the balance sheet. The aggregate amount of goodwill impairment losses would
be presented as a separate line item in the operating section of the income
statement unless a goodwill impairment loss is associated with a discontinued
operation. At a minimum, intangible assets would be aggregated and presented as
a separate line item in the statement of financial position. Amortization
expense and impairment losses for intangible assets other than goodwill would be
presented in income statement line items as deemed appropriate for each entity.
SFAS No. 142 is effective for the Company on January 1, 2002.
Management is in the process of reviewing the records from the Company's
various acquisitions. At present, it appears that at least 90% of the Company's
intangible asset represents goodwill and will cease to be amortized as of
January 1, 2002 pursuant to SFAS No. 142. As a result, management expects GAAP
earnings to increase by $13.8 million per quarter in 2002.
Page 22
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
ACCOUNTING FOR TRANSFERS AND SERVICING FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES
On September 29, 2000, the FASB issued 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 was
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 on April 1, 2001 (incremental provisions
that were not previously part of SFAS No. 125) did not materially impact the
Company's financial condition or operating results.
Page 23
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS. THIS QUARTERLY 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.
OVERVIEW
GS Holdings, through California Federal, operates retail branches that
provide deposit products such as demand, transaction and savings accounts, and
sells investment products such as mutual funds, annuities and insurance. In
addition, it engages in mortgage banking activities, including originating and
purchasing 1-4 unit residential loans for sale to various investors in the
secondary market or for retention in its own portfolio, and servicing loans for
itself and others. To a lesser extent, the Company originates and/or purchases
commercial real estate, commercial and consumer loans for investment. Revenues
are derived primarily from interest earned on loans, interest received on
government and agency securities and mortgage-backed securities, gains on sales
of loans and other investments and fees received in connection with loan
servicing, securities brokerage and other customer service transactions.
Expenses primarily consist of interest on customer deposit accounts, interest on
short-term and long-term borrowings, general and administrative expenses
consisting of compensation and benefits, data processing, occupancy and
equipment, communications, deposit insurance assessments, advertising and
marketing, professional fees and other general and administrative expenses.
NET INCOME
GS Holdings reported income before the cumulative effect of change in
accounting principle of $210.7 million for the six months ended June 30, 2001.
Income before extraordinary items was $338.5 million for the six months ended
June 30, 2000. Net income for the six months ended June 30, 2001 was $209.2
million compared with net income of $341.5 million for the corresponding period
in 2000. Net income for the six months ended June 30, 2001 includes a loss of
$1.6 million, net of tax, from the cumulative effect of a change in accounting
principle. Net income for the six months ended June 30, 2000 includes a tax
benefit of $161.7 million and gains on the early extinguishment of debt, net of
tax, of $3.0 million.
GS Holdings reported income before the cumulative effect of change in
accounting principle of $115.1 million for the three months ended June 30, 2001.
Income before extraordinary items was $90.2 million for the three months ended
June 30, 2000. Net income for the three months ended June 30, 2001 was $113.5
million compared with net income of $92.0 million for the corresponding period
in 2000. Net income for the three months ended June 30, 2001 includes a loss of
$1.6 million, net of tax, from the cumulative effect of a change in accounting
principle. Net income for the three months ended June 30, 2000 includes gains on
the early extinguishment of debt, net of tax, of $1.8 million.
Page 24
FINANCIAL CONDITION
During the six months ended June 30, 2001, consolidated total assets
increased $789.0 million from December 31, 2000, to $61.3 billion, and total
liabilities increased from $57.7 billion to $58.3 billion. Loans receivable and
loans held for sale increased $1.7 billion and $1.5 billion, respectively,
during the six month period, while securities and mortgage-backed securities
declined $619 million and $1.6 billion, respectively, during the same period.
This shift represents strong loan production by the Company coupled with high
repayment rates for both loans and securities in light of the current declining
interest rate environment. Deposits increased $903 million during the six months
ended June 30, 2001, reflecting an increase of $1.2 billion in transaction
accounts, offset by a $1.0 billion decline in certificates of deposit - part of
management's goal to become more "bank-like" and to lower its cost of funds.
Custodial accounts increased $1.1 billion, or 128%, over December 31, 2000
balances, a direct result of the increase in repayments in the loan servicing
portfolio. Total borrowings, including securities sold under agreements to
repurchase, FHLB advances and other borrowings, declined $643 million during the
six months ended June 30, 2001.
During the six months ended June 30, 2001, stockholder's equity increased
$183.1 million to $2.5 billion. The increase in stockholder's equity is
principally the net result of $209.2 million in net income for the period, a
$58.2 million improvement in net unrealized gain/loss, after tax, on securities
available-for-sale and $30.4 million in unrealized loss on securities
reclassified from held-to-maturity to available-for-sale, partially offset by
$60.0 million in common stock dividends, a $44.6 million transition adjustment
recorded upon the adoption of SFAS No. 133 and $16.8 million in net unrealized
losses, after tax, on derivatives.
GS Holdings' non-performing assets, consisting of non-performing loans, net
of purchase accounting adjustments, foreclosed real estate, net, and repossessed
assets, decreased to $127.2 million at June 30, 2001 compared with $140.9
million at December 31, 2000. Total non-performing assets as a percentage of the
Bank's total assets decreased to 0.21% at June 30, 2001 from 0.23% at December
31, 2000.
Page 25
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2001 VERSUS SIX MONTHS ENDED JUNE 30, 2000
The following table shows the Company's consolidated average balance
sheets, with the related interest income, interest expense and the average
interest rates for the periods presented. Average balances are calculated on a
daily basis.
Six Months Ended June 30, 2001
---------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
(dollars in millions)
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,051 $ 32 6.01%
Mortgage-backed securities available-for-sale 10,385 345 6.64
Mortgage-backed securities held-to-maturity 1,685 71 8.43
Loans held for sale, net 1,565 53 6.73
Loans receivable, net:
Residential 31,761 1,124 7.08
Commercial real estate 6,130 256 8.36
Commercial banking 570 25 8.69
Consumer 875 40 9.31
Auto 1,700 96 11.38
------- ------
Total loans receivable, net 41,036 1,541 7.52
FHLB stock 1,391 45 6.58
------- ------
Total interest-earning assets 57,113 2,087 7.31%
------
Noninterest-earning assets 3,593
-------
Total assets $60,706
=======
LIABILITIES, MINORITY INTEREST AND STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits $23,996 465 3.90%
Securities sold under agreements to repurchase (3) 3,992 121 6.05
Borrowings (3) 28,784 854 5.96
------- ------
Total interest-bearing liabilities 56,772 1,440 5.09%
------
Noninterest-bearing liabilities 1,123
Minority interest 497
Stockholder's equity 2,314
-------
Total liabilities, minority interest
and stockholder's equity $60,706
=======
Net interest income $ 647
======
Interest rate spread 2.22%
=====
Net interest margin 2.25%
=====
Return on average assets 0.69%
=====
Return on average equity 18.08%
=====
Average equity to average assets 3.81%
=====
Page 26
Six Months Ended June 30, 2000
-----------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
(dollars in millions)
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,429 $ 46 6.42%
Mortgage-backed securities available-for-sale 13,158 435 6.62
Mortgage-backed securities held-to-maturity 2,390 91 7.60
Loans held for sale, net 764 29 7.51
Loans receivable, net:
Residential 28,667 992 6.92
Commercial real estate 5,553 227 8.20
Commercial banking 506 24 9.68
Consumer 716 36 9.99
Auto 1,073 64 11.96
------- ------
Total loans receivable, net 36,515 1,343 7.36
FHLB stock 1,250 45 7.26
------- ------
Total interest-earning assets 55,506 1,989 7.17%
------
Noninterest-earning assets 2,887
-------
Total assets $58,393
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits $22,920 443 3.89%
Securities sold under agreements to repurchase (3) 5,606 173 6.09
Borrowings (3) 26,729 796 5.97
-------- ------
Total interest-bearing liabilities 55,255 1,412 5.12%
------
Noninterest-bearing liabilities 912
Minority interest 497
Stockholder's equity 1,729
---------
Total liabilities, minority interest
and stockholder's equity $58,393
=======
Net interest income $ 577
======
Interest rate spread 2.05%
=====
Net interest margin 2.07%
=====
Return on average assets 1.17%
=====
Return on average equity 39.50%
=====
Average equity to average assets 2.96%
=====
- ----------------
(1) Non-performing assets are included in the average balances for the periods
indicated.
(2) Includes securities held-to-maturity, securities available-for-sale and
interest-bearing deposits in other banks.
(3) Interest and average rate include the impact of interest rate swaps.
Page 27
The following table shows what portion of the changes in interest income
and interest expense were due to changes in rate and volume. For each category
of interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to volume (change in average outstanding
balance multiplied by the prior period's rate) and rate (change in average
interest rate multiplied by the prior period's volume). Changes attributable to
both volume and rate have been allocated proportionately.
Six Months Ended June 30, 2001 vs. 2000
Increase (Decrease) Due to
---------------------------------------
Volume Rate Net
------ ---- ---
INTEREST INCOME: (in millions)
Securities and interest-bearing deposits in banks $(11) $(3) $(14)
Mortgage-backed securities available-for-sale (92) 1 (91)
Mortgage-backed securities held-to-maturity (31) 11 (20)
Loans held for sale, net 27 (3) 24
Loans receivable, net 169 29 198
---- --- ----
Total 62 35 97
---- --- ----
INTEREST EXPENSE:
Deposits 19 2 21
Securities sold under agreements to repurchase (50) (1) (51)
Borrowings 60 (2) 58
---- --- ----
Total 29 (1) 28
---- --- ----
Change in net interest income $ 33 $36 $ 69
==== === ====
INTEREST INCOME. Total interest income was $2.1 billion for the six months
ended June 30, 2001, an increase of $97.1 million from the six months ended June
30, 2000. Total interest-earning assets for the six months ended June 30, 2001
averaged $57.1 billion, compared to $55.5 billion for the corresponding period
in 2000, 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 the six months ended June 30, 2001 increased to 7.31% from 7.17%
for the six months ended June 30, 2000, primarily due to a higher percentage of
loans to total earning assets and the lagging effect of the repricing of
higher-rate variable-rate loans and securities. At June 30, 2001, 14% of the
Company's portfolio loans were tied to COFI indices, 14% to Treasury-based
indices and 44% were "hybrid" ARMS - fixed for three to ten years and then
adjusting annually. Twenty-four percent of the portfolio is fixed. The remaining
4% of the portfolio is in other adjustable-rate products.
Page 28
GS Holdings earned $1.5 billion of interest income on loans receivable for
the six months ended June 30, 2001, an increase of $197.5 million from the six
months ended June 30, 2000. The average balance of loans receivable was $41.0
billion for the six months ended June 30, 2001, compared to $36.5 billion for
the same period in 2000. The weighted average yield on loans receivable
increased to 7.52% for the six months ended June 30, 2001 from 7.36% for the six
months ended June 30, 2000. The increase in the average balance reflects a net
increase in residential and commercial real estate loan origination activities
and new auto loan production from the Downey Acquisition. Loan production during
the six months ended June 30, 2001 and 2000 is detailed in the table below (in
thousands):
Six Months Ended June 30,
-------------------------
2001 2000
---- ----
Loans funded:
Residential real estate loans $11,313,830 $7,387,065
Commercial real estate loans 886,836 623,956
Commercial loans 523,254 343,056
Consumer nonmortgage loans 403,546 354,117
Other -- 124
----------- ----------
Total loans funded $13,127,466 $8,708,318
=========== ==========
Loans purchased:
Residential real estate loans $ 1,723,576 $ 335,845
Auto loans 625,568 475,895
----------- ----------
Total loans purchased $ 2,349,144 $ 811,740
=========== ==========
The increase in the weighted average yield is primarily due to the lagging
effect of the repricing of variable-rate loans at higher rates, partially offset
by lower rates on new purchases of prime auto loans.
GS Holdings earned $52.7 million of interest income on loans held for sale
for the six months ended June 30, 2001, an increase of $24.0 million from the
six months ended June 30, 2000. The average balance of loans held for sale was
$1.6 billion for the six months ended June 30, 2001, an increase of $801.0
million from the comparable period in 2000, primarily attributed to increased
originations of residential, fixed-rate loans as a result of heightened borrower
refinancing activity in the current declining interest rate environment.
Fixed-rate production for sale totalled $7.5 billion during the six months ended
June 30, 2001, an increase of more than 200% over the $2.4 billion originated
during the comparable period in 2000. The weighted average yield on loans held
for sale decreased to 6.73% for the six months ended June 30, 2001 from 7.51%
for the six months ended June 30, 2000, primarily due to declining market
interest rates.
Page 29
Interest income on mortgage-backed securities available-for-sale was $345.0
million for the six months ended June 30, 2001, a decrease of $90.6 million from
the six months ended June 30, 2000. The average portfolio balance decreased $2.8
billion, to $10.4 billion, for the six months ended June 30, 2001 compared to
the same period in 2000. The weighted average yield on these assets increased
from 6.62% for the six months ended June 30, 2000 to 6.64% for the six months
ended June 30, 2001. The decrease in the volume is primarily attributed to
payments and sales of mortgage-backed securities, partially offset by the
reclassification of $1.1 billion in mortgage-backed securities from the
held-to-maturity portfolio, as permitted upon the adoption of SFAS No. 133 on
January 1, 2001. The increase in the weighted average yield is primarily due to
a lagging effect of the repricing of variable-rate securities at higher rates.
Interest income on mortgage-backed securities held-to-maturity was $71.0
million for the six months ended June 30, 2001, a decrease of $19.9 million from
the six months ended June 30, 2000. The average portfolio balance decreased $0.7
billion, to $1.7 billion, for the six months ended June 30, 2001 compared to the
same period in 2000, primarily due to the $1.1 billion reclassification in
mortgage-backed securities to the available-for-sale portfolio, as permitted
upon the adoption of SFAS No. 133 on January 1, 2001. The weighted average
yields for the six months ended June 30, 2001 and 2000 were 8.43% and 7.60%,
respectively. The increase in the weighted average yield is primarily the result
of a lagging effect of the repricing of variable-rate securities at higher rates
and the $1.1 billion reclassification of securities with a weighted average rate
of 6.84%.
Interest income on securities and interest-bearing deposits in other banks
was $31.6 million for the six months ended June 30, 2001, a decrease of $14.3
million from the six months ended June 30, 2000. The average portfolio balance
was $1.1 billion and $1.4 billion for the six months ended June 30, 2001 and
2000, respectively. The lower weighted average yield of 6.01% for the six months
ended June 30, 2001 compared to 6.42% for the six months ended June 30, 2000 is
primarily due to the $2.4 million in interest income on a federal income tax
refund related to Old California Federal, received in the first half of 2000
(for which there is no corresponding earning asset), and the repricing of
securities at lower rates during the first half of 2001.
Dividends on FHLB stock were $45.4 million for the six months ended June
30, 2001, an increase of $0.3 million from the six months ended June 30, 2000.
The average balance outstanding during the six months ended June 30, 2001 and
2000 was $1.4 billion and $1.3 billion, respectively. The weighted average
dividend on FHLB stock declined to 6.58% for the six months ended June 30, 2001
from 7.26% for the six months ended June 30, 2000. The increase in the average
balance is due to an increase in borrowings from the FHLB, while the decrease in
the weighted average yield is the result of a reduction in the dividend rate on
FHLB stock.
INTEREST EXPENSE. Total interest expense was $1.4 billion for the six
months ended June 30, 2001, an increase of $27.6 million from the six months
ended June 30, 2000. The increase is primarily the result of additional FHLB
borrowings and deposits used to fund the increase in total assets.
Interest expense on deposits, including Brokered Deposits, was $464.5
million for the six months ended June 30, 2001, an increase of $21.3 million
from the six months ended June 30, 2000. The average balance of deposits
outstanding increased from $22.9 billion for the six months ended June 30, 2000
to $24.0 billion for the six months ended June 30, 2001. The increase in the
average balance is primarily attributed to increases in the average balances of
custodial accounts, money market accounts, retail customer checking and
certificates of deposit, partially offset by a decline in savings account
balances. The overall weighted average cost of deposits increased to 3.90% for
the six months ended June 30, 2001 from 3.89% for the six months ended June 30,
2000, primarily due to a higher average balance of higher rate certificates of
deposit in the first half of 2001, as a result of a major CD campaign undertaken
during the fourth quarter of 2000.
Interest expense on securities sold under agreements to repurchase totalled
$121.4 million for the six months ended June 30, 2001, a decrease of $51.3
million from the six months ended June 30, 2000. The average balance of such
borrowings for the six months ended June 30, 2001 and 2000 was $4.0 billion and
$5.6 billion, respectively. The decrease in the average balance is primarily the
result of maturities during the first half of 2001. The weighted average
interest rate on these instruments decreased to 6.05% for the six months ended
June 30, 2001 from 6.09% for the six months ended June 30, 2000, primarily due
to maturities of higher rate fixed-rate borrowings and repricing of
variable-rate borrowings at lower rates during the first half of 2001.
Page 30
Interest expense on borrowings totalled $853.8 million for the six months
ended June 30, 2001, an increase of $57.6 million from the six months ended June
30, 2000. The average balance outstanding for the six months ended June 30, 2001
and 2000 was $28.8 billion and $26.7 billion, respectively. The weighted average
interest rate on these instruments decreased to 5.96% for the six months ended
June 30, 2001 from 5.97% for the six months ended June 30, 2000. The change in
the average volume is the result of additional FHLB borrowings used to fund the
increase in total assets.
NET INTEREST INCOME. Net interest income was $646.9 million for the six
months ended June 30, 2001, an increase of $69.4 million from the six months
ended June 30, 2000. The interest rate spread increased to 2.22% for the six
months ended June 30, 2001 from 2.05% for the six months ended June 30, 2000,
primarily as a result of the higher percentage of loans to total earning assets
and the lagging effect of the repricing of higher-rate variable-rate loans and
securities, coupled with the replacement of maturities and the repricing of
higher rate interest-bearing liabilities with lower costing instruments. The net
interest margin increased to 2.25% for the six months ended June 30, 2001, up 18
basis points, from the 2.07% reported during the first half of 2000.
NONINTEREST INCOME. Total noninterest income, consisting primarily of loan
servicing fees, customer banking fees, gain on sale, settlement and transfer of
loans, net, gain on sale of assets, net and other income was $173.5 million for
the six months ended June 30, 2001, representing a decrease of $39.9 million
from the six months ended June 30, 2000.
Loan servicing fees for the Company, net of amortization of MSRs,
pass-through interest expense, net unrealized gains on MSRs/MSR derivatives and
valuation provision were $(6.9) million for the six months ended June 30, 2001,
compared to $85.8 million for the six months ended June 30, 2000. The following
table details the components of loan servicing fees, net (in thousands):
For the Six Months Ended June 30,
---------------------------------
2001 2000
---- ----
Components of loan servicing fees, net:
Loan servicing fees $ 224,292 $187,828
Amortization of mortgage servicing rights (147,013) (97,236)
Pass-through interest expense (16,142) (4,769)
Net gain on MSRs/MSR derivatives 8,957 --
MSR valuation provision (77,000) --
--------- --------
Total loan servicing fees, net $ (6,906) $ 85,823
========= ========
As the table reflects, loan servicing fees increased $36.5 million from
year-ago levels, which is primarily attributable to the growth of the Company's
servicing portfolio and higher ancillary fees. The single-family residential
loan servicing portfolio, excluding loans serviced for the Bank, increased from
$78.6 billion at June 30, 2000 to $83.3 billion at June 30, 2001. The annualized
runoff rate on the Company's portfolio of mortgages serviced for others was
25.6% for the six months ended June 30, 2001 compared to 11.8% for the six
months ended June 30, 2000. This runoff rate also influences MSR amortization,
which increased $49.8 million in the first six months of 2001 over the same
period in 2000; the MSR amortization rate averaged 20.3% for the six months
ended June 30, 2001 compared to 14.0% during the same period in 2000. MSR
amortization was also affected by a higher average MSR balance for the six
months ended June 30, 2001 compared to the same period in 2000. Pass-through
interest expense increased $11.4 million (238%) year over year, also influenced
by higher runoff rates. Servicing fee income includes a $9.0 million pre-tax
gain from the impact of SFAS No. 133 pertaining to the MSR fair value hedges. A
$77.0 million pre-tax valuation allowance was recorded during the six months
ended June 30, 2001. On an aggregate basis, in all ten tranches, at June 30,
2001, the estimated fair value of the MSRs was $47.5 million higher than book
value (net of valuation allowance).
Page 31
Customer banking fees were $105.8 million for the six months ended June 30,
2001 compared to $98.7 million for the six months ended June 30, 2000. The
increase is primarily attributed to increased emphasis by management on
transaction account growth. Transaction accounts (including custodial accounts)
as a percentage of retail deposits increased to 53.4% at June 30, 2001, from
48.3% at June 30, 2000.
Gain on sale, settlement and transfer of loans, net totalled $21.9 million
for the six months ended June 30, 2001, a decrease of $5.2 million from the six
months ended June 30, 2000. During the second quarter of 2000, the Company
recorded a $14.5 million reduction in its recourse liability. This liability is
a life-of-asset accrual. Given the paydowns which have occurred on the
underlying loans and the improving credit and real estate market conditions, the
Company determined that the liability balance exceeded its estimate of the
required accrual for the remaining life of the recourse assets by $14.5 million.
During the six months ended June 30, 2001, California Federal sold $5.6 billion
in single-family mortgage loans originated for sale with servicing rights
retained as part of its ongoing mortgage banking operations at gains of $14.1
million compared to $2.2 billion of such sales for the corresponding period in
2000 at gains of $9.1 million. The overall reduction in the rate of gain on sale
relates to channel and product mix differences during the two periods, while the
increase in volume of loans sold relates to a significant increase in fixed-rate
loan originations as a result of the overall decline in market interest rates
and increased mortgage refinancing. Gain on sale also includes a $3.6 million
unrealized gain on forward loan sale commitments related to SFAS No. 133.
Gain on sale of assets, net totalled $16.2 million for the six months ended
June 30, 2001, compared to a net loss of $16.0 million for the six months ended
June 30, 2000, 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 of 2000. The gain during the first half of
2001 includes an additional gain of $9.3 million on the sale of the Company's
Concord EFS stock and a $6.6 million gain on the sale of $298 million in
mortgage-backed securities.
Other income totalled $36.4 million for the six months ended June 30, 2001,
an increase of $18.6 million over the same period in 2000. The increase relates
to a gain of $20.7 million on the non-monetary exchange of Star Systems common
stock for 634,520 shares of Concord EFS common stock which occurred in the first
quarter of 2001 as a result of Concord's acquisition of Star.
NONINTEREST EXPENSE. Total noninterest expense was $472.4 million for the
six months ended June 30, 2001, an increase of $25.6 million compared to the six
months ended June 30, 2000. Noninterest expense for the six months ended June
30, 2001 included increases of $16.2 million in compensation and employee
benefit expense, $8.2 million in other noninterest expense and $4.3 million in
occupancy and equipment expense. These changes were partially offset by
decreases of $3.0 million in professional fees and $2.0 million in amortization
of intangible assets.
Compensation and employee benefits expense was $231.2 million for the six
months ended June 30, 2001, an increase of $16.2 million from the six months
ended June 30, 2000. The increase is primarily attributed to an increase in
staff (from 7,842 FTE at June 30, 2000 to 8,015 at June 30, 2001), primarily in
volume-related operating groups, as well as normal salary adjustments. In
addition, the Company has experienced an increase in group insurance and other
benefit costs that it has elected not to pass on to its employees.
Occupancy and equipment expense was $77.8 million for the six months ended
June 30, 2001, an increase of $4.3 million from the six months ended June 30,
2000, primarily due to an increase in depreciation expense, as well as increased
utility costs and higher contract maintenance and repair fees.
Professional fees were $14.7 million for the six months ended June 30,
2001, a decrease of $3.0 million from the six months ended June 30, 2000,
primarily due to a decrease in consulting fees related to various data
processing systems projects.
Page 32
Amortization of intangible assets was $29.9 million for the six months
ended June 30, 2001, a decrease of $2.0 million from the six months ended June
30, 2000, primarily attributed to a December 2000 reduction in the goodwill
balance due to the reversal of Old California Federal Bank state deferred taxes.
Other noninterest expense was $111.2 million for the six months ended June
30, 2001 compared to $103.0 million during the comparable period in 2000. The
increase in expenses relates to increases in a number of operating expense
categories, including postage, telephone, judgments and settlements, office
supplies and marketing.
PROVISION FOR INCOME TAX. During the six months ended June 30, 2001, GS
Holdings recorded net income tax expense of $123.7 million, which included net
tax benefits of $29.0 million. In prior years, an accrued liability was
established for the purpose of satisfying assessments that may result from
issues arising during audits with various state taxing authorities. As a result
of the completion and settlement of audits in various state taxing
jurisdictions, additional guidance on the deductibility of covered asset losses,
and the current assessment of exposure for tax strategies employed for prior
years, management reduced its accrued state tax liability by $39.7 million. The
Company also recorded additional Federal tax expense of $13.9 million due to the
reduction of the state tax expense.
In addition, an income tax benefit was recorded for $3.2 million due to the
utilization of net operating losses of a subsidiary made available as a result
of the subsidiary's liquidation into California Federal Bank.
During the six months ended June 30, 2000, GS Holdings recorded a net
income tax benefit of $7.9 million, which included a tax benefit of $161.7
million. Based on favorable resolutions of federal income tax audits of Old
California Federal and Glendale Federal, and the current status of Mafco
Holdings', including the Company's, audits for the years 1991 through 1995,
management changed its judgment about the realizability of the Company's
deferred tax asset and reduced its valuation allowance by $211.7 million during
the six-month period ended June 30, 2000. As a result of reducing the valuation
allowance, income tax expense was reduced by $161.7 million and goodwill was
reduced by $50.0 million.
GS Holdings' effective federal tax rate was 41% during the six months ended
June 30, 2001 and (9)% during the six months ended June 30, 2000, while its
federal statutory tax rate was 35% during both periods. In 2001, the difference
between the effective and statutory rate was primarily the result of additional
federal tax liability recorded in conjunction with a reduction in the accrued
state tax liability and non-deductible goodwill amortization, partially offset
by an adjustment to net operating losses from prior periods. In 2000, the
difference between the effective and statutory rates was the result of the
reduction in the deferred tax asset valuation allowance, partially offset by
nondeductible goodwill amortization. GS Holdings' effective state tax rate was
(5)% and 6% during the six months ended June 30, 2001 and 2000, respectively.
The effective state tax rate declined during 2001 as a result of a reduction in
the accrued state tax liability previously discussed.
MINORITY INTEREST. Dividends on the REIT Preferred Stock totalling $22.8
million were recorded during each of the six months ended June 30, 2001 and
2000, and were recorded as minority interest on an after-tax basis for the
respective periods.
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.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Cumulative effect of
change in accounting principle for the six months ended June 30, 2001 includes a
write-down of $1.6 million, net of income taxes of $1.1 million, on certain
securities as a result of the Company's implementation of EITF No. 99-20 on
April 1, 2001. See note 12 of the Company's Notes to Unaudited Consolidated
Financial Statements.
Page 33
IMPACT OF SFAS NO. 133. On January 1, 2001, the Company adopted SFAS No.
133. In connection with the adoption of this pronouncement, the Company
reclassified $1.2 billion in securities from held-to-maturity to
available-for-sale, which had the effect of improving the OCI component of
stockholder's equity by $30.4 million. The pronouncement impacted several other
areas of the financial statements on a year-to-date basis, as summarized below
(debit/(credit); in thousands):
Assets Liabilities and Equity Pre-tax Earnings
-------------------------------- -------------------------------- ---------------------
Loans Taxes- Loan (Gain)/Loss
Held Residential Derivative Derivative Other Servicing on Sale of
for Sale MSRs Assets Liabilities Liabilities OCI Fees, net Loans
-------- ---- ------ ----------- ----------- --- --------- -----
Transfer hedge component
of MSR balance $ -- $ (95,013) $ 95,013 $ -- $ -- $ -- $ -- $ --
Transition adjustment -
(record initial
fair values):
MSRs and MSR hedges -- (69,754) 78,610 (8,856) -- -- -- --
Warehouse loans 3,834 -- -- -- -- -- -- (3,834)
Interest rate locks -- -- 2,911 -- -- -- -- (2,911)
FLSC hedges -- -- -- (5,696) -- -- -- 5,696
Cash flow hedges - swaps -- -- -- (75,482) 30,835 44,647 -- --
------- --------- --------- --------- ------- ------- ------- --------
SUBTOTAL - JANUARY 1, 2001
TRANSITION ENTRIES 3,834 (164,767) 176,534 (90,034) 30,835 44,647 -- (1,049)
Fair value adjustments:
MSRs and MSR hedges -- 83,558 (74,203) (398) -- -- (8,957) --
Warehouse loans (9,038) -- -- -- -- -- -- 9,038
Interest rate locks -- -- (2,911) (6,069) -- -- -- 8,980
FLSC hedges -- -- 14,823 5,697 -- -- -- (20,520)
Cash flow hedges -
swaps -- -- -- (28,334) 11,574 16,760 -- --
------- --------- --------- --------- ------- ------- ------- --------
FAIR VALUE ADJUSTMENTS -
SIX MONTHS ENDED
JUNE 30, 2001 (9,038) 83,558 (62,291) (29,104) 11,574 16,760 (8,957) (2,502)
Other Activity - Six Months
Ended June 30, 2001:
MSR hedge additions -- -- 272,588 -- -- -- -- --
MSR hedge sales and
maturities -- -- (215,420) -- -- -- -- --
Hedge receipts and
payments -- (121) 22,019 (7,486) -- -- -- --
------- --------- --------- --------- ------- ------- ------- --------
TOTAL OTHER ACTIVITY -
SIX MONTHS ENDED
JUNE 30, 2001 -- (121) 79,187 (7,486) -- -- -- --
------- --------- --------- --------- ------- ------- ------- --------
TOTAL IMPACT FROM
SFAS NO. 133 -
SIX MONTHS ENDED
JUNE 30, 2001 $(5,204) $ (81,330) $ 193,430 $(126,624) $42,409 $61,407 $(8,957) $(3,551)
======= ========= ========= ========= ======= ======= ======= ========
Page 34
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 VERSUS THREE MONTHS ENDED JUNE 30, 2000
The following table shows the Company's consolidated average balance
sheets, with the related interest income, interest expense and the average
interest rates for the periods presented. Average balances are calculated on a
daily basis.
Three Months Ended June 30, 2001
---------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
(dollars in millions)
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 811 $ 12 5.85%
Mortgage-backed securities available-for-sale 10,005 164 6.56
Mortgage-backed securities held-to-maturity 1,631 34 8.24
Loans held for sale, net 1,989 33 6.54
Loans receivable, net:
Residential 31,877 554 6.95
Commercial real estate 6,225 128 8.22
Commercial banking 590 13 8.24
Consumer 890 18 8.70
Auto 1,762 50 11.36
------- ------
Total loans receivable, net 41,344 763 7.39
FHLB stock 1,402 22 6.39
------- ------
Total interest-earning assets 57,182 1,028 7.19%
------
Noninterest-earning assets 3,722
-------
Total assets $60,904
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits $24,334 224 3.69%
Securities sold under agreements to repurchase (3) 3,819 53 5.55
Borrowings (3) 28,755 415 5.75
------- ------
Total interest-bearing liabilities 56,908 692 4.86%
------
Noninterest-bearing liabilities 1,146
Minority interest 499
Stockholder's equity 2,351
-------
Total liabilities, minority interest
and stockholder's equity $60,904
=======
Net interest income $ 336
======
Interest rate spread 2.33%
=====
Net interest margin 2.36%
=====
Return on average assets 0.75%
=====
Return on average equity 19.31%
=====
Average equity to average assets 3.86%
=====
Page 35
Three Months Ended June 30, 2001
---------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
(dollars in millions)
ASSETS
Interest-earning assets (1):
Securities and interest-bearing deposits in banks (2) $ 1,431 $ 24 6.79%
Mortgage-backed securities available-for-sale 12,447 207 6.64
Mortgage-backed securities held-to-maturity 2,700 51 7.62
Loans held for sale, net 814 15 7.56
Loans receivable, net:
Residential 29,580 513 6.94
Commercial real estate 5,617 117 8.33
Commercial banking 521 13 9.85
Consumer 738 19 10.17
Auto 1,260 36 11.52
------- ------
Total loans receivable, net 37,716 698 7.40
FHLB stock 1,306 28 8.61
------- ------
Total interest-earning assets 56,414 1,023 7.26%
------
Noninterest-earning assets 3,011
-------
Total assets $59,425
=======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits $22,948 224 3.93%
Securities sold under agreements to repurchase (3) 5,503 90 6.46
Borrowings (3) 27,684 419 6.06
------- ------
Total interest-bearing liabilities 56,135 733 5.22%
------
Noninterest-bearing liabilities 985
Minority interest 498
Stockholder's equity 1,807
-------
Total liabilities, minority interest
and stockholder's equity $59,425
=======
Net interest income $ 290
======
Interest rate spread 2.04%
=====
Net interest margin 2.06%
=====
Return on average assets 0.62%
=====
Return on average equity 20.36%
=====
Average equity to average assets 3.04%
=====
- ----------
(1) Non-performing assets are included in the average balances for the periods
indicated.
(2) Includes securities held-to-maturity, securities available-for-sale and
interest-bearing deposits in other banks.
(3) Interest and average rate include the impact of interest rate swaps.
Page 36
The following table shows what portion of the changes in interest income
and interest expense were due to changes in rate and volume. For each category
of interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to volume (change in average outstanding
balance multiplied by the prior period's rate) and rate (change in average
interest rate multiplied by the prior period's volume). Changes attributable to
both volume and rate have been allocated proportionately.
Three Months Ended June 30, 2001 vs. 2000
Increase (Decrease) Due to
---------------------------------------------
Volume Rate Net
------ ---- ---
INTEREST INCOME: (in millions)
Securities and interest-bearing deposits in banks $ (9) $ (3) $(12)
Mortgage-backed securities available-for-sale (40) (3) (43)
Mortgage-backed securities held-to-maturity (22) 5 (17)
Loans held for sale, net 20 (2) 18
Loans receivable, net 66 (1) 65
FHLB stock 2 (8) (6)
---- ---- ----
Total 17 (12) 5
---- ---- ----
INTEREST EXPENSE:
Deposits 7 (8) (1)
Securities sold under agreements to repurchase (24) (12) (36)
Borrowings 19 (23) (4)
---- ---- ----
Total 2 (43) (41)
---- ---- ----
Change in net interest income $ 15 $ 31 $ 46
==== ==== ====
INTEREST INCOME. Total interest income was $1.0 billion for the three
months ended June 30, 2001, an increase of $4.7 million from the three months
ended June 30, 2000. Total interest-earning assets for the three months ended
June 30, 2001 averaged $57.2 billion, compared to $56.4 billion for the
corresponding period in 2000, 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 the three months ended June 30, 2001 decreased to
7.19% from 7.26% for the three months ended June 30, 2000, primarily due to the
repricing of variable-rate securities at lower rates, partially offset by a
higher percentage of loans to total earning assets during 2001.
Page 37
GS Holdings earned $763.2 million of interest income on loans receivable
for the three months ended June 30, 2001, an increase of $65.9 million from the
three months ended June 30, 2000. The average balance of loans receivable was
$41.3 billion for the three months ended June 30, 2001, compared to $37.7
billion for the same period in 2000. The weighted average yield on loans
receivable decreased to 7.39% for the three months ended June 30, 2001 from
7.40% for the three months ended June 30, 2000. The increase in the average
balance reflects a net increase in residential and commercial real estate loan
origination activities and new auto loan production from the Downey Acquisition.
Loan production during the three months ended June 30, 2001 and 2000 is detailed
in the table below (in thousands):
Three Months Ended June 30,
---------------------------
2001 2000
---- ----
Loans funded:
Residential real estate loans $7,222,122 $4,260,442
Commercial real estate loans 555,456 325,285
Commercial loans 297,011 158,730
Consumer nonmortgage loans 220,802 201,538
---------- ----------
Total loans funded $8,295,391 $4,945,995
========== ==========
Loans purchased:
Residential real estate loans $ 558,081 $ 66,316
Auto loans 304,610 287,938
---------- ----------
Total loans purchased $ 862,691 $ 354,254
========== ==========
The decrease in the weighted average yield primarily reflects the repricing
of variable-rate loans at lower rates during 2001.
GS Holdings earned $32.5 million of interest income on loans held for sale
for the three months ended June 30, 2001, an increase of $17.2 million from the
three months ended June 30, 2000. The average balance of loans held for sale was
$2.0 billion for the three months ended June 30, 2001, an increase of $1.2
billion from the comparable period in 2000, primarily attributed to increased
originations of residential, fixed-rate loans as a result of heightened borrower
refinancing activity in the current declining interest rate environment.
Fixed-rate production for sale totalled $5.0 billion during the quarter ended
June 30, 2001 compared to $1.4 billion originated during the comparable period
in 2000. The weighted average yield on loans held for sale decreased to 6.54%
for the three months ended June 30, 2001 from 7.56% for the three months ended
June 30, 2000, primarily due to declining market interest rates.
Interest income on mortgage-backed securities available-for-sale was $164.0
million for the three months ended June 30, 2001, a decrease of $42.5 million
from the three months ended June 30, 2000. The average portfolio balance
decreased $2.4 billion, to $10.0 billion, for the three months ended June 30,
2001 compared to the same period in 2000. The weighted average yield on these
assets decreased from 6.64% for the three months ended June 30, 2000 to 6.56%
for the three months ended June 30, 2001. The decrease in the volume is
primarily attributed to payments and sales of mortgage-backed securities,
partially offset by the reclassification of $1.1 billion in mortgage-backed
securities from the held-to-maturity portfolio, as permitted upon the adoption
of SFAS No. 133 on January 1, 2001. The decrease in the weighted average yield
reflects the repricing of variable-rate securities at lower rates.
Page 38
Interest income on mortgage-backed securities held-to-maturity was $33.6
million for the three months ended June 30, 2001, a decrease of $17.9 million
from the three months ended June 30, 2000. The average portfolio balance
decreased $1.1 billion, to $1.6 billion, for the three months ended June 30,
2001 compared to the same period in 2000, primarily attributed to the $1.1
billion reclassification in mortgage-backed securities to the available-for-sale
portfolio, as permitted upon the adoption of SFAS No. 133 on January 1, 2001.
The weighted average yields for the three months ended June 30, 2001 and 2000
were 8.24% and 7.62%, respectively. The increase in the weighted average yield
is primarily the result of a lagging effect of the repricing of variable-rate
securities at higher rates during the second quarter of 2000 and the $1.1
billion reclassification of securities with a weighted average rate of 6.84%.
Interest income on securities and interest-bearing deposits in other banks
was $11.9 million for the three months ended June 30, 2001, a decrease of $12.4
million from the three months ended June 30, 2000. The average portfolio balance
was $0.8 billion and $1.4 billion for the three months ended June 30, 2001 and
2000, respectively. The lower weighted average yield of 5.85% for the three
months ended June 30, 2001 compared to 6.79% for the three months ended June 30,
2000 reflects the $2.4 million in interest income on a federal income tax refund
related to Old California Federal (for which there is no corresponding earning
asset), received in the second quarter of 2000, and the repricing of securities
at lower market interest rates during the second quarter of 2001.
Dividends on FHLB stock were $22.3 million for the three months ended June
30, 2001, a decrease of $5.6 million from the three months ended June 30, 2000.
The average balance outstanding during the three months ended June 30, 2001 and
2000 was $1.4 billion and $1.3 billion, respectively. The weighted average
dividend on FHLB stock decreased to 6.39% for the three months ended June 30,
2001 from 8.61% for the three months ended June 30, 2000. The increase in the
average balance is due to an increase in borrowings from the FHLB, while the
decrease in the weighted average yield is the result of a reduction in the
dividend rate on FHLB stock.
INTEREST EXPENSE. Total interest expense was $691.1 million for the three
months ended June 30, 2001, a decrease of $41.4 million from the three months
ended June 30, 2000. The decrease is primarily due to declining market interest
rates. In addition, the decrease is the result of a reduction in higher rate
securities sold under agreements to repurchase, offset by additional borrowings
under lower rate FHLB advances and deposits used to fund loans.
Interest expense on deposits, including Brokered Deposits, was $223.7
million for the three months ended June 30, 2001, a decrease of $0.7 million
from the three months ended June 30, 2000. The average balance of deposits
outstanding increased from $22.9 billion for the three months ended June 30,
2000 to $24.3 billion for the three months ended June 30, 2001. The increase in
the average balance is primarily attributed to increases in the average balances
of custodial accounts, money market accounts and retail customer checking
accounts, partially offset by a decline in savings account balances and
certificates of deposit. The overall weighted average cost of deposits decreased
to 3.69% for the three months ended June 30, 2001 from 3.93% for the three
months ended June 30, 2000, primarily due to a lower average balance of higher
rate certificates of deposit and a higher average balance of lower rate checking
and custodial accounts during the second quarter of 2001.
Interest expense on securities sold under agreements to repurchase totalled
$53.4 million for the three months ended June 30, 2001, a decrease of $36.4
million from the three months ended June 30, 2000. The average balance of such
borrowings for the three months ended June 30, 2001 and 2000 was $3.8 billion
and $5.5 billion, respectively. The decrease in the average balances is
primarily the result of maturities during the second quarter of 2001. The
weighted average interest rate on these instruments decreased to 5.55% for the
three months ended June 30, 2001 from 6.46% for the three months ended June 30,
2000, primarily due to maturities of higher rate fixed-rate borrowings and
repricing of borrowings at lower rates during the second quarter of 2001.
Page 39
Interest expense on borrowings totalled $414.0 million for the three months
ended June 30, 2001, a decrease of $4.3 million from the three months ended June
30, 2000. The average balance outstanding for the three months ended June 30,
2001 and 2000 was $28.8 billion and $27.7 billion, respectively. The weighted
average interest rate on these instruments decreased to 5.75% for the three
months ended June 30, 2001 from 6.06% for the three months ended June 30, 2000.
The changes in the average volume and weighted average rate reflect the increase
in the volume of FHLB advances at market interest rates used to fund loans.
NET INTEREST INCOME. Net interest income was $336.4 million for the three
months ended June 30, 2001, an increase of $46.1 million from the three months
ended June 30, 2000. The interest rate spread increased to 2.33% for the three
months ended June 30, 2001 from 2.04% for the three months ended June 30, 2000,
primarily as a result of the replacement of maturities and the repricing of
higher rate interest-bearing liabilities with lower costing liabilities. The
effect of lower rates on liabilities was partially offset by lower yielding
assets replenishing asset run-off in a declining rate environment and the
downward repricing of variable-rate assets. The net interest margin increased to
2.36% for the three months ended June 30, 2001, up 30 basis points from the
2.06% reported during the second quarter of 2000.
NONINTEREST INCOME. Total noninterest income, consisting primarily of loan
servicing fees, customer banking fees, gain on sale, settlement and transfer of
loans, net, and gain on sale of assets, net was $114.2 million for the three
months ended June 30, 2001, representing an increase of $9.0 million from the
three months ended June 30, 2000.
Loan servicing fees for the Company, net of amortization of MSRs,
pass-through interest expense and net unrealized gains on MSRs/MSR derivatives
were $19.7 million for the three months ended June 30, 2001, compared to $43.0
million for the three months ended June 30, 2000. The following table details
the components of loan servicing fees, net (in thousands):
For the Three Months Ended June 30,
-----------------------------------
2001 2000
---- ----
Components of loan servicing fees, net:
Loan servicing fees $111,050 $ 96,286
Amortization of mortgage servicing rights (88,598) (50,569)
Pass-through interest expense (9,258) (2,686)
Net gain on MSRs/MSR derivatives 6,552 --
-------- --------
Total loan servicing fees, net $ 19,746 $ 43,031
========= ========
As the table reflects, loan servicing fees increased $14.8 million from
year-ago levels, which is primarily attributable to the growth of the Company's
servicing portfolio and higher ancillary fees. The single-family residential
loan servicing portfolio, excluding loans serviced for the Bank, declined
slightly from $83.4 billion at March 31, 2001 to $83.3 billion at June 30, 2001.
The annualized runoff rate on the Company's portfolio of mortgages serviced for
others was 30.5% in the second quarter of 2001 compared to 12.9% during the same
period in 2000. This runoff rate also influences MSR amortization, which
increased $38.0 million in the second quarter of 2001 over the same period in
2000; the MSR amortization rate averaged 23.5% during the quarter ended June 30,
2001 compared to 14.1% during the same period in 2000. MSR amortization was also
affected by a higher average MSR balance during the quarter ended June 30, 2001
compared to the same period in 2000. Pass-through interest expense increased
$6.6 million (245%) compared to the year-ago quarter, also influenced by higher
runoff rates. Servicing fee income includes a $6.6 million pre-tax gain for the
three months ended June 30, 2001 from the impact of SFAS No. 133 pertaining to
the MSR fair value hedges. On an aggregate basis, in all ten tranches, at June
30, 2001, the estimated fair value of the MSRs was $47.5 million higher than
book value (net of valuation allowance).
Page 40
Customer banking fees were $54.6 million for the three months ended June
30, 2001 compared to $50.1 million for the three months ended June 30, 2000. The
increase is primarily attributed to increased emphasis by management on
transaction account growth and higher fee income on mutual fund and annuity
products.
Gain on sale, settlement and transfer of loans, net totalled $17.0 million
for the three months ended June 30, 2001, a decrease of $3.4 million from the
three months ended June 30, 2000. During the second quarter of 2000, the Company
recorded a $14.5 million reduction in its recourse liability. See "- Six Months
Ended June 30, 2001 versus Six Months Ended June 30, 2000 - Noninterest Income."
During the three months ended June 30, 2001, California Federal sold $4.2
billion in single-family mortgage loans originated for sale with servicing
rights retained as part of its ongoing mortgage banking operations at gains of
$10.5 million compared to $1.1 billion of such sales for the corresponding
period in 2000 at gains of $4.5 million. The overall reduction in the rate of
gain on sale relates to channel and product mix differences during the two
periods, while the increase in volume of loans sold relates to a significant
increase in fixed-rate loan originations as a result of the overall decline in
market interest rates and increased mortgage refinancing. Gain on sale also
includes a $3.6 million unrealized gain on forward loan sale commitments related
to SFAS No. 133.
Gain on sale of assets, net totalled $15.8 million for the three months
ended June 30, 2001, compared to a net loss of $16.5 million for the three
months ended June 30, 2000, primarily attributed to an $18.7 million loss from
the sale of approximately $500 million of mortgage-backed securities with the
average yield of 6.64% during the second quarter of 2000. The Company sold its
634,520 shares of Concord EFS common stock during the second quarter of 2001,
realizing a gain of $9.3 million. In addition, the Company recognized a $6.6
million gain on the sale of $298 million in mortgage-backed securities.
NONINTEREST EXPENSE. Total noninterest expense was $241.3 million for the
three months ended June 30, 2001, an increase of $17.7 million compared to the
three months ended June 30, 2000. Noninterest expense for the three months ended
June 30, 2001 included increases of $7.4 million in other noninterest expense,
$6.3 million in compensation and employee benefits and $3.8 million in occupancy
and equipment expense.
Compensation and employee benefits expense was $113.5 million for the three
months ended June 30, 2001, an increase of $6.3 million from the three months
ended June 30, 2000. The increase is primarily attributed to an increase in
staff (from 7,842 FTE at June 30, 2000 to 8,015 at June 30, 2001), primarily in
volume-related operating groups, and normal salary adjustments. In addition, the
Company has experienced an increase in group insurance and other benefit costs
that it has elected not to pass on to its employee.
Occupancy and equipment expense was $40.0 million for the three months
ended June 30, 2001, an increase of $3.8 million from the three months ended
June 30, 2000, primarily due to an increase in depreciation expense, as well as
increased utility costs and higher contract maintenance and rental fees.
Other noninterest expense was $59.2 million for the three months ended June
30, 2001, an increase of $7.4 million from the three months ended June 30, 2000.
The increase in expenses is primarily related to increases in a number of
operating expense categories, including marketing, judgments and settlements,
travel, office supplies, postage and telephone expense.
PROVISION FOR INCOME TAX. During the three months ended June 30, 2001 and
2000, GS Holdings recorded net income tax expense of $87.5 million and $75.1
million, respectively. The expense recorded during the three months ended June
30, 2001, is net of an income tax benefit of $3.2 million recognized due to the
utilization of net operating losses of a subsidiary made available as a result
of the subsidiary's liquidation into California Federal Bank.
Page 41
GS Holdings' effective gross federal tax rate was 36% and 38% during the
three months ended June 30, 2001 and 2000, respectively, while its federal
statutory tax rate was 35% during both periods. In 2001, the difference between
the effective and statutory rates was primarily the result of nondeductible
goodwill amortization, partially offset by an adjustment to net operating losses
from prior periods. In 2000, 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 6% during each of the three months
ended June 30, 2001 and 2000, respectively.
MINORITY INTEREST. Dividends on the REIT Preferred Stock totalling $11.4
million were recorded during each of the three months ended June 30, 2001 and
2000, and were recorded as minority interest on an after-tax basis for the
respective periods.
EXTRAORDINARY ITEMS. During the second quarter of 2000, the FHLB called and
the Bank prepaid $200 million in FHLB advances, resulting in an extraordinary
gain of $1.8 million, net of income taxes of $1.2 million, on the early
extinguishment of such borrowings.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Cumulative effect of
change in accounting principle for the three months ended June 30, 2001 includes
a write-down of $1.6 million, net of income taxes, of $1.1 million, on certain
securities as a result of the Company's implementation of EITF No. 99-20 on
April 1, 2001. See note 12 of the Company's Notes to Unaudited Consolidated
Financial Statements.
IMPACT OF SFAS NO. 133. On January 1, 2001, the Company adopted SFAS No.
133. The pronouncement impacted several other areas of the financial statements
for the three months ended June 30, 2001, as summarized below (debit/(credit);
in thousands):
Assets Liabilities and Equity Pre-tax Earnings
-------------------------------- ------------------------------ ---------------------
Loans Taxes- Loan (Gain)/Loss
Held Residential Derivative Derivative Other Servicing on Sale of
for Sale MSRs Assets Liabilities Liabilities OCI Fees, net Loans
-------- ---- ------ ----------- ----------- --- --------- -----
Fair value adjustments:
MSRs and MSR hedges $ -- $114,750 $(99,527) $(8,671) $ -- $ -- $(6,552) $ --
Warehouse loans (10,443) -- -- -- -- -- -- 10,443
Interest rate locks -- -- (3,024) (6,069) -- -- -- 9,093
FLSC hedges -- -- 14,823 8,353 -- -- -- (23,176)
Cash flow hedges - swaps -- -- -- 34,551 (14,114) (20,437) -- --
-------- -------- -------- ------- -------- -------- ------- --------
FAIR VALUE ADJUSTMENTS -
THREE MONTHS ENDED
JUNE 30, 2001 (10,443) 114,750 (87,728) 28,164 (14,114) (20,437) (6,552) (3,640)
Other Activity - Three
Months Ended
June 30, 2001:
MSR hedge additions -- -- 150,621 -- -- -- -- --
MSR hedge sales and
maturities -- -- (81,708) -- -- -- -- --
Hedge receipts and
payments -- -- 7,582 (3,055) -- -- -- --
-------- -------- -------- ------- -------- -------- ------- --------
TOTAL OTHER ACTIVITY -
THREE MONTHS ENDED
JUNE 30, 2001 -- -- 76,495 (3,055) -- -- -- --
-------- -------- -------- ------- -------- -------- ------- --------
TOTAL IMPACT FROM
SFAS NO. 133 -
THREE MONTHS ENDED
JUNE 30, 2001 $(10,443) $114,750 $(11,233) $25,109 $(14,114) $(20,437) $(6,552) $ (3,640)
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
CALIFORNIA FEDERAL GOODWILL LITIGATION
The Bank is the plaintiff in a lawsuit against the Government, 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 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.
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 $23.4 million.
The summary judgment liability decision by the first Claims Court Judge was
appealed by the Government, and the damage award by the second Claims Court
Judge was appealed by the Bank.
On April 3, 2001, the Court of Appeals for the Federal Circuit upheld the
summary judgment liability decision and ruled that California Federal be allowed
to present evidence regarding damages incurred under the lost profits theory.
The case has been remanded back to the Claims Court for a damages trial under
the lost profits theory. The Bank intends to vigorously pursue its claim against
the Government.
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.
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.
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.
Oral argument before the trial court on that issue took place on June 26, 2001
and the Bank is awaiting the Claims Court's decision. The Bank continues to
vigorously pursue its case for damages against the Government.
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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, 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. On June 7, 2001, the trial court dismissed two of the
four causes of action against the Bank, holding that the OTS pre-empted the
California courts from regulating the Bank's procedures for reconveying deeds.
The Bank believes that it has additional meritorious defenses to plaintiffs'
claims and intends to continue to contest the remaining claims in the lawsuit
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.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3.1 Certificate of Incorporation of the Registrant, as amended.
(Incorporated by reference to Exhibit 3.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998.)
3.2 By-laws of the Registrant, as amended. (Incorporated by reference
to Exhibit 3.2 of the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998.)
(b) Reports on Form 8-K:
None.
Page 44
GLOSSARY OF DEFINED TERMS
APB - Accounting Principles Board
APB OPINION NO. 16 - Business Combinations
APB OPINION NO. 17 - Intangible Assets
APB OPINION NO. 25 - Accounting for Stock Issued to Employees
ARM - Adjustable rate mortgage
AUTO ONE - Auto One Acceptance Corporation
BANK - California Federal Bank
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.
CALIFORNIA FEDERAL - California Federal Bank
CALIFORNIA FEDERAL GOODWILL LITIGATION - California Federal Bank v. United
Sates, Civil Action 92-138
CALIFORNIA FEDERAL GOODWILL LITIGATION ASSET - an asset, related to California
Federal Goodwill Litigation, arising out of the purchase of the Old
California Federal.
CD - Certificate of deposit
CLAIMS COURT - United States Court of Federal Claims
COFI - Cost of Funds Index (tied to the FHLB's 11th District cost of funds)
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.
DIG - Derivatives Implementation Group
DOWNEY ACQUISITION - Auto One's acquisition of the Downey Auto Finance
Corporation in February, 2000.
EITF - Emerging Issues Task Force
EITF NO. 99-20 - Recognition of Interest Income and Impairment on Purchased
and Retained Beneficial Interests in Securitized Financial Assets
FASB - Financial Accounting Standards Board
FDICIA - Federal Deposit Insurance Corporation Improvement Act
FHLB - Federal Home Loan Bank
FHLB SYSTEM - Federal Home Loan Bank System
FIRREA - Financial Institutions Reform, Recovery and Enforcement Act of 1989 and
its implementing regulations.
FLSC - forward loan sale commitments
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.
FNMC - First Nationwide Mortgage Corporation
FTE - Full-time equivalent staff
GAAP - generally accepted accounting principles
GLENDALE FEDERAL - Glendale Federal Bank, Federal Savings Bank
GLENDALE GOODWILL LITIGATION - Glendale Federal Bank v. United States, No.
90-772C
GLENDALE GOODWILL LITIGATION ASSET - an asset, related to the Glendale Goodwill
Litigation, arising out of the purchase of Glendale Federal.
GLEN FED MERGER - Glendale Federal Bank merged with and into the Bank.
GOLDEN STATE - Golden State Bancorp Inc.
GOLDEN STATE ACQUISITION - FN Holdings Asset Transfer, Holding Company Mergers
and Glen Fed Merger, collectively
GOLDEN STATE MERGER - the merger, completed on September 11, 1998, between
Golden State, the publicly traded parent company of Glendale Federal, and
First Nationwide Holdings Inc. and Hunter's Glen/Ford Ltd.
GOODWILL LITIGATION ASSETS - the California Federal Goodwill Litigation Asset
and the Glendale Goodwill Litigation Asset, collectively
GOVERNMENT - United States Government
Page 45
GS ESCROW MERGER - GS Escrow was merged with and into GS Holdings, pursuant to a
merger agreement by and between GS Escrow and GS Holdings in September 1998
GS HOLDINGS - Golden State Holdings Inc.
GSB INVESTMENTS - GSB Investments Corp.
HOLDING COMPANY MERGERS - FN Holdings merged with and into Golden State
Financial Corporation, which owned all of the common stock of Glendale
Federal.
IO - Interest only
LIBOR - London Interbank Offered Rate
LTV - Loan to value
LTW - Litigation Tracking Warrant
MAFCO HOLDINGS - Mafco Holdings Inc.
MSR - Mortgage servicing rights
NOL - Net operating loss
OCI - Other comprehensive income
OLD CALIFORNIA FEDERAL - California Federal Bank, A Federal Savings Bank prior
to the Cal Fed Acquisition.
PO - Principal only
REIT - Real Estate Investment Trust
REIT PREFERRED STOCK - 9 1/8% Noncumulative Exchangeable Preferred Stock, Series
A, issued by California Federal Preferred Capital Corporation in January
1996.
REPOS - short-term securities sold under agreements to repurchase
SEC - Securities and Exchange Commission
SFAS - Statement of Financial Accounting Standards
SFAS NO. 114 - Accounting by Creditors for Impairment of a Loan
SFAS NO. 115 - Accounting for Certain Investments in Debt and Equity Securities
SFAS NO. 121 - Accounting for the Impairment of Long-lived Assets and for Long-
lived Assets to be Disposed of
SFAS NO. 125 - Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities
SFAS NO. 131 - Disclosures about Segments of an Enterprise and Related
Information
SFAS NO. 133 - Accounting for Derivative Instruments and Hedging Activities
SFAS NO. 140 - Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, a replacement of FASB Statement No. 125
SFAS NO. 141 - Accounting for Business Combinations
SFAS NO. 142 - Accounting for Goodwill and Intangible Assets
STOCK PLAN - Golden State Bancorp Inc. Omnibus Stock Plan
VERDUGO - Verdugo Trustee Service Corporation
Page 46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Golden State Holdings Inc.
/s/ Richard H. Terzian
--------------------------------------------
By: Richard H. Terzian
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
/s/ Renee Nichols Tucei
--------------------------------------------
By: Renee Nichols Tucei
Executive Vice President and Controller
(Principal Accounting Officer)
August 8, 2001
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