UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 000-24915
GOLDEN STATE HOLDINGS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4669792
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
135 MAIN STREET, SAN FRANCISCO, CALIFORNIA 94105
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 415-904-1100
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: N/A
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: N/A
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes ___ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [Not applicable.]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of the close of business on February 28, 2002: N/A.
The number of shares outstanding of the registrant's $1.00 par value common
stock, as of the close of business on February 28, 2002: 1,000 shares of common
stock.
DOCUMENTS INCORPORATED BY REFERENCE:
None
Registrant meets the conditions set forth in General Instruction (I) (1)
(a) and (b) of Form 10-K and is therefore filing this Form with certain reduced
disclosures, as permitted by General Instruction (I) (2).
Page 1
GOLDEN STATE HOLDINGS INC.
2001 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. Business............................................................ 3
General...................................................... 3
Business Strategy............................................ 4
Factors That May Affect Future Results....................... 5
Employees.................................................... 8
Competition.................................................. 9
Regulation and Supervision................................... 9
ITEM 2. Properties..........................................................13
ITEM 3. Legal Proceedings...................................................14
ITEM 4. Submission of Matters to a Vote of Security Holders................. *
PART II
ITEM 5. Market for the Registrant's Common Equity and Related
Stockholder Matters..........................................16
ITEM 6. Selected Financial Data............................................. *
ITEM 7. Management's Narrative Analysis of Results of Operations............17
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk..........26
ITEM 8. Financial Statements and Supplementary Data.........................27
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.....................................27
PART III
ITEM 10. Directors and Executive Officers of the Registrant.................. *
ITEM 11. Executive Compensation.............................................. *
ITEM 12. Security Ownership of Certain Beneficial Owners and Management...... *
ITEM 13. Certain Relationships and Related Transactions...................... *
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....28
Glossary of Defined Terms....................................................31
Signatures...................................................................35
Audited Financial Statements.................................................F-1
* Items 4, 6, 10, 11, 12 and 13 are not included as per conditions met by
Registrant set forth in General Instructions I (1) (a) and (b) of Form 10-K.
Golden State Holdings Inc. is a wholly owned subsidiary of Golden State
Bancorp Inc. For more information, refer to Golden State Bancorp Inc.'s
Annual Report on Form 10-K for the year ended December 31, 2001.
Page 2
FORWARD-LOOKING STATEMENTS. THIS REPORT CONTAINS FORWARD-LOOKING
STATEMENTS, WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995, THAT PERTAIN TO OUR FUTURE OPERATING RESULTS. WORDS SUCH AS
"ANTICIPATE," "BELIEVE," "EXPECT," "INTEND" AND OTHER SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY THESE STATEMENTS. FORWARD-LOOKING STATEMENTS ARE NOT
HISTORICAL FACTS AND ARE INHERENTLY SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC
AND COMPETITIVE UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND OUR
CONTROL. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE IN THE
FORWARD-LOOKING STATEMENTS DUE TO SUCH FACTORS AS (I) PORTFOLIO CONCENTRATIONS;
(II) INTEREST RATE CHANGES, INCLUDING CHANGES IN SHORT-TERM INTEREST RATES, THE
SHAPE OF THE YIELD CURVE AND THE TREASURY-EURODOLLAR SPREAD; (III) CHANGES IN
ASSET PREPAYMENT SPEEDS; (IV) CHANGES IN OUR COMPETITIVE AND REGULATORY
ENVIRONMENTS; AND (V) CHANGES IN THE AVAILABILITY OF NET OPERATING LOSS
CARRYOVERS AND DEFERRED TAX LIABILITIES. SEE "BUSINESS--FACTORS THAT MAY AFFECT
FUTURE RESULTS" FOR A DISCUSSION OF THESE FACTORS IN GREATER DETAIL. WE ASSUME
NO OBLIGATION TO UPDATE ANY OF OUR FORWARD-LOOKING STATEMENTS.
A glossary of defined terms appears on page 31.
PART I
ITEM 1. BUSINESS
GENERAL
GS Holdings, formerly FN 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.
The Company, headquartered in San Francisco, California, provides
diversified financial services to consumers and small businesses in California
and Nevada, primarily:
(a) retail branches that provide deposit products such as demand,
transaction and savings accounts, and investment products such as
mutual funds, annuities and insurance; and
(b) mortgage banking activities, including originating and purchasing 1-4
unit residential loans for sale or retention, servicing loans for
itself and others and, to a lesser extent, originating and/or
purchasing commercial real estate, commercial and consumer loans for
investment.
These activities are financed principally with customer deposits, secured
short-term and long-term borrowings, including FHLB advances, collections on
loans, asset sales and retained earnings. Refer to note 21 of the Company's
Notes to Consolidated Financial Statements for additional information about the
Company's business segments.
The Bank is chartered as a federal stock savings bank under the HOLA and is
principally regulated by the OTS. The FDIC insures the deposit accounts of the
Bank up to applicable limits through the SAIF. The Bank is also a member of the
FHLB System. The Bank has three principal subsidiaries:
(a) FNMC, its mortgage banking subsidiary;
(b) Auto One, its indirect prime and sub-prime auto financing subsidiary;
and
(c) CFI, its securities and insurance brokerage subsidiary.
CFI is subject to the guidelines established by the OTS for broker-dealer
subsidiaries of savings associations, and is a member of the National
Association of Securities Dealers. In addition, CFI is registered as a
broker-dealer with the SEC and the Securities Investor Protection Corporation.
CFI receives commission revenue for acting as a broker on behalf of its
customers, but does not maintain customer accounts or take possession of
customer securities.
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The Company's revenues are derived from:
(a) interest earned on loans and securities;
(b) gains on sales of loans and other investments, fees received in
connection with loan servicing and securities brokerage; and
(c) other customer service transactions.
Expenses primarily consist of interest on customer deposit accounts and
borrowings, and general and administrative expenses including compensation and
benefits, occupancy and equipment, professional fees and other general
administrative expenses.
As of December 31, 2001, the Company had total assets of $56.5 billion,
deposits of $25.1 billion and 356 retail branch offices in California and
Nevada.
OWNERSHIP STRUCTURE
Golden State holds all of the common stock of the Company. Prior to the
Golden State Acquisition, Parent Holdings owned 80% of the common stock of FN
Holdings, and Hunter's Glen, a limited partnership controlled by Gerald J. Ford,
Chairman of the Board, Chief Executive Officer and a Director of the Company,
owned 20% of the common stock of FN Holdings. Parent Holdings was indirectly
owned by Mafco Holdings, a corporation controlled by Ronald O. Perelman, a
Director of the Company. In the Golden State Acquisition, Parent Holdings was
merged into Golden State and FN Holdings was merged into GS Holdings. As
consideration, Golden State issued 41,067,270 shares of common stock to a
subsidiary of Mafco Holdings that directly owned Parent Holdings and 15,655,718
shares of common stock to Hunter's Glen which, in aggregate, constituted 47.9%
of the common stock outstanding immediately after the Golden State Acquisition.
Subsequent to the Golden State Acquisition, Mafco Holdings transferred the
41,067,270 shares to another of its indirectly owned subsidiaries, GSB
Investments. In addition, the Golden State Merger agreement provided that Mafco
Holdings and Hunter's Glen, or their successors, were entitled to receive
additional shares of common stock under certain circumstances, which could cause
the actual ownership percentages of Mafco Holdings and Hunter's Glen to change.
Through its ownership of all of the Bank's common and preferred stock, GS
Holdings has 97% of the voting power of all outstanding Bank securities. Two
classes of publicly traded Bank securities, the CALGZs and the CALGLs, have in
the aggregate the remaining 3% of the voting power. All outstanding Bank
securities vote together as a single class.
BUSINESS STRATEGY
Merger, acquisition, and divestiture activities have played a major role in
the Company's business strategy in prior years. (Refer to note 3 of the
Company's Notes to Consolidated Financial Statements for specific information
about these mergers, acquisitions, and divestitures.) More recently, the Company
has focused on:
o Increased profitability;
o Revenue diversity; and
o Growth while preserving credit quality.
As a result of this strategic plan, during 2001 the Bank has grown earnings
by 17%, grown retail checking deposits by 10% and increased non-single family
residential loans to 25% of the portfolio, while improving the Bank's overall
credit quality.
Page 4
The Company's current strategic plan aims at continued focus on
profitability, revenue diversity and maintenance of credit quality. Key elements
of the business plan include:
o California Federal intends to maintain its core competencies,
including strong risk management, firm expense control and operating
efficiency and effective capital management.
o California Federal plans to continue to improve profitability as it
becomes a more "bank-like" institution. This plan contemplates a
further increase in demand deposit and transaction accounts, as well
as growth of various retail and commercial products. In addition, the
Bank will continue to focus on increasing its percentage of non-
single family residential loans.
o The Company expects to continue to build franchise value by focusing on
customer service and cross-selling opportunities, further development
of its sales force, enhanced product offerings and improved channel
delivery. The Company intends to seek to maintain its mortgage banking
efficiency while reducing the costs to service each account. In addition,
the Bank intends to continue its strong and prudent growth of its core
banking businesses including the sale of mutual funds and insurance
annuity products, commercial banking, and auto, home equity and
commercial real estate lending.
o California Federal may make opportunistic acquisitions of other
companies or business lines which complement the Bank and where
efficiencies and economies of scale could be realized to produce
higher returns on investment.
FACTORS THAT MAY AFFECT FUTURE RESULTS
A number of factors could cause the Company's actual results to differ
materially from those in the forward-looking statements made in this Form 10-K,
in other documents filed by the Company with the SEC or by the Company's senior
management verbally to analysts, investors, the media and others. Some of these
factors are described below.
CONCENTRATION OF BUSINESS IN CALIFORNIA; EFFECT ON ASSET QUALITY
The Bank's loan portfolio is concentrated in California. As a result, the
financial condition of the Bank will be subject to general economic conditions
in California and, in particular, to conditions in the California real estate
market. As of December 31, 2001, the Bank had 80.3% of its loan portfolio
secured by real estate located in California. The Bank may find it difficult to
originate a sufficient volume of high-quality real estate loans or maintain its
asset quality, either of which could negatively impact future performance. In
addition, any downturn in the economy generally, and in California in
particular, could further reduce real estate values and the volume of loans
originated. Real estate values in California could also be affected by
earthquakes or other catastrophic events.
SUB-PRIME LENDING
Through Auto One, the Bank is engaged indirectly in sub-prime and prime
auto financing activities. At December 31, 2001, the Bank's sub-prime auto loan
portfolio totalled $1.2 billion, or 2.9% of the Bank's total loan portfolio. A
loan may be considered sub-prime primarily for one, or both, of two reasons:
borrower credit and collateral considerations. Sub-prime borrowers are likely to
be relatively weak credits. A borrower may be considered sub-prime due to
limited income, tarnished credit history (for example, prior bankruptcy or
history of delinquent payments on other types of installment credit) or lack of
credit history (for example, a relatively young individual who has not yet
developed a credit history profile). Sub-prime loans may also have less valuable
collateral. Collateral considerations in the sub-prime market primarily result
from the financing, in many cases, of used vehicles. Although depreciation also
affects new automobiles, the market value of an automobile which is several
years old may be more difficult to ascertain than for a new vehicle, since such
value will depend on mileage and general condition, which may vary substantially
for different vehicles of a similar model year. As a result of these factors,
the performance of a sub-prime portfolio may be more susceptible to performance
deterioration than a prime portfolio, since sub-prime borrowers are likely to be
disproportionately affected by economic downturns and the collateral may be more
difficult to value correctly.
Page 5
INTEREST RATE RISK
It is expected that the Bank will continue to realize income primarily from
the differential or "spread" between the interest earned on loans, securities
and other interest-earning assets, and interest paid on deposits, borrowings and
other interest-bearing liabilities. Net interest spreads are affected by the
difference between the maturities and repricing characteristics of
interest-earning assets and interest-bearing liabilities. Loan volume and yields
are affected by market interest rates on loans, and rising interest rates
generally are associated with a lower volume of loan originations, whereas
declining interest rates generally are associated with a higher volume of loan
originations. Declining rates are also associated with increased mortgage loan
prepayments. There can be no assurances that management will be able to reinvest
the cash from mortgage loan prepayments in assets earning yields comparable to
the yields on the prepaid mortgages. It is expected that a substantial majority
of the Bank's assets will continue to be indexed to changes in market interest
rates and a substantial majority of its liabilities will continue to be short
term. Although the Bank's management believes that this fact should mitigate the
negative effect of a decline in yield on its assets, there can be no assurance
that the Bank's interest rate risk will be minimized or eliminated. GS Holdings
also maintains a significant portfolio of mortgage-backed securities which tend
to fluctuate in value in rapidly changing interest rate environments. At
December 31, 2001, the Bank had $35.3 billion in assets indexed to changes in
market rates and $40.0 billion in liabilities maturing or repricing within one
year. The lag in implementing repricing terms on the Bank's adjustable rate
assets may result in a decline in net interest income in a rising rate
environment. In addition, an increase in the general level of interest rates may
adversely affect the ability of certain borrowers to pay the interest on and
principal of their obligations. Accordingly, changes in levels of market
interest rates could materially adversely affect the Bank's net interest spread,
asset quality, loan origination volume and overall results of operations.
MORTGAGE SERVICING RIGHTS
At December 31, 2001, the Bank held MSRs on a 1-4 unit residential loan
portfolio with outstanding loan balances totalling approximately $85.2 billion,
excluding loans owned by the Bank that are serviced by FNMC. The Bank's MSRs and
related derivative assets had a carrying value of $1.9 billion at December 31,
2001. A decline in long-term mortgage interest rates generally results in an
acceleration in mortgage loan repayments, and higher than anticipated levels of
repayments generally cause the accelerated amortization of MSRs and generally
will result in reductions in the market value of the MSRs. In order to mitigate
some of the potential loss in value of the MSRs, the Bank has purchased, or
entered into contracts for, financial derivatives that could hedge some of the
potential loss in the MSRs and should generally increase in value as mortgage
interest rates decline. There can be no assurances that the rate of mortgage
loan prepayments will not exceed management's estimates, resulting in reductions
in net income from accelerated amortization of MSRs and possible additional
impairment of the carrying value of the MSRs due to reductions in the market
value of the MSRs. Furthermore, there can be no assurances that the financial
derivatives purchased as hedges to the MSRs will perform as anticipated and
that, if mortgage interest rates decline, the derivatives will increase in value
in an amount sufficient to offset the decline in the value of the MSRs or, if
long-term mortgage interest rates rise, that the derivatives will lose value
equal to or less than the increase in the value of the MSRs. A large percentage
of the instruments used to hedge the MSRs change in value based on changes in
LIBOR-based rates. While long-term mortgage interest rates and LIBOR-based rates
are highly correlated, a change in one may be different from a change in the
other for any given period. Therefore, it is possible that there may be
impairment in the value of the MSRs even if long-term mortgage interest rates
remain the same or increase from period to period.
The valuation of MSRs involves a number of assumptions, in addition to
changes in prepayment rates, which may change from period to period. These
assumptions include discount rates, custodial balance earnings rates, funding
costs, late charges, other ancillary income, foreclosure costs, cost to service,
escrow balances, remittance balances, remittance types and foreclosure rates,
among others. In analyzing future prepayments, consideration is given to rates
currently offered to borrowers versus rates required by the secondary market,
the average note rate of the portfolio and the Mortgage Bankers Association
Mortgage Refinance Index as well as other available information. Changes in
these assumptions and changes in their relationship to each other will cause
volatility in the value of MSRs from period to period. Further, the market for
MSRs is generally less liquid than markets for other fixed income instruments,
and there is limited public information available describing characteristics of
traded portfolios for use in comparing values. Since there may well be periods
of time during which no purchases or sales of MSRs with characteristics similar
to those to be valued have occurred, alternative valuation methods need to be
Page 6
employed. These methods may involve surveying firms engaged in buying and
selling mortgage-related assets, engaging independent firms to conduct
appraisals, or using any number of mathematical models which have been
developed. In the process of determining the valuation at any future period end,
the Company may determine that alternate methods of valuation are more
appropriate as valuation techniques evolve. These methods may yield results
different from those obtained using prior measurement techniques, and hence may
have the effect of lowering the carrying value of MSRs.
COMPETITION
GS Holdings faces substantial competition for loans and deposits throughout
its market areas. It competes on a daily basis with commercial banks, other
savings institutions, thrift and loans, credit unions, finance companies, retail
investment brokerage houses, mortgage banks, money market and mutual funds and
other investment alternatives and other financial intermediaries. GS Holdings
faces competition throughout its market area from local institutions, which have
a large presence in its market areas, as well as from out-of-state financial
institutions which have offices in its market areas. Many of these other
institutions offer services which GS Holdings does not offer, including trust
services. Furthermore, banks with a larger capital base and financial firms not
subject to the restrictions imposed by banking regulations have larger lending
limits and can therefore serve the needs of larger customers.
REGULATION
The financial institutions industry is subject to extensive regulation,
which materially affects the business of GS Holdings and the Bank. Statutes and
regulations to which the Bank and its parent companies are subject may be
changed at any time, and the interpretation of these regulations is also subject
to change. There can be no assurance that future changes in such regulations or
in their interpretation will not adversely affect the business of GS Holdings
and the Bank.
PROPOSED LEGISLATION
From time to time, Congress considers legislative proposals that could
substantially alter the regulation of GS Holdings and the Bank. These proposals
have included the merger of the two FDIC deposit insurance funds and the merger
of the OTS with the Office of the Comptroller of the Currency. We can not
determine whether, or in what form, such legislation may eventually be enacted
and the possible impact of such changes.
TAX SHARING AGREEMENT; AVAILABILITY OF NET OPERATING LOSS CARRYOVERS
For federal income tax purposes, the Bank, GS Holdings and Golden State
Bancorp are parties to a Tax Sharing Agreement, pursuant to which:
(a) the Bank pays to GS Holdings amounts equal to the income taxes that
the Bank would be required to pay if it were to file a return
separately from the Golden State Bancorp consolidated group,
(b) GS Holdings pays to Golden State amounts equal to the income taxes
that GS Holdings would be required to pay if it were to file a
consolidated return on behalf of itself and the Bank separately from
the Golden State Bancorp consolidated group, and
(c) in connection with the Golden State Acquisition, Mafco Holdings
continues to be bound for all obligations accruing for taxable
periods on or prior to September 11, 1998.
As a result of the deconsolidation of the Bank and GS Holdings from the
Mafco Group due to the Golden State Acquisition, only the amount of net
operating losses of the Bank and GS Holdings not utilized by the Mafco Group on
or before December 31, 1998 are available to offset taxable income of the Golden
State Group. Similarly, if for any reason the Bank and GS Holdings were to
deconsolidate from the Golden State Group, only the amount of the net operating
loss carryovers of the Bank and GS Holdings not utilized by the Golden State
Group up to the end of the taxable year in which the deconsolidation took place
would be available to offset the taxable income of the Bank and GS Holdings
subsequent to the date of deconsolidation. It cannot be predicted to what extent
the Golden
Page 7
State Group will utilize the net operating loss carryovers of GS Holdings
and/or the Bank in the future or the amount, if any, of net operating loss
carryforwards that GS Holdings or the Bank may have upon deconsolidation. The
net operating loss carryovers are subject to review and potential disallowance,
in whole or in part, by the IRS. Any disallowance of the Bank's net operating
loss carryovers may increase the amounts that the Bank would be required to pay
to GS Holdings under the Tax Sharing Agreement and that GS Holdings would be
required to pay to the Golden State Group, and would therefore decrease the
earnings of the Bank available for distribution.
Under federal tax law, the parties subject to the tax sharing agreement in
effect prior to the Golden State Acquisition are subject to several liability
with respect to the consolidated federal income tax liabilities of the Mafco
Group for any taxable period during which Parent Holdings, FN Holdings or the
Bank is, as the case may be, a member of such group. Therefore, Parent Holdings,
FN Holdings or the Bank may be required to pay Mafco Holdings' consolidated
federal tax liability notwithstanding prior payments made under the Tax Sharing
Agreement by FN Holdings or the Bank to Mafco Holdings. Mafco Holdings has
agreed, however, under the Tax Sharing Agreement, to indemnify FN Holdings and
the Bank for any such federal income tax liability (and certain state and local
tax liabilities) of Mafco Holdings or any of its subsidiaries (other than FN
Holdings and the Bank) that FN Holdings or the Bank is actually required to pay.
TAXATION OF THE BANK
The Small Business Job Protection Act of 1996 provided that base year bad
debt reserves are not recaptured into income unless certain events occur.
Circumstances that may require recognition of the base year reserves of the Bank
are (i) dividend payments in excess of the greater of current or accumulated
earnings and profits, or (ii) other distributions, dissolution, liquidation or
redemption of stock excluding preferred stock meeting certain conditions. The
base year reserves are generally the balance of tax bad debt reserves as of
December 31, 1987, reduced proportionately for reductions in the Bank's loan
portfolio since that date. In accordance with SFAS No. 109, a deferred tax
liability has not been recognized for the base year reserves of the Bank. At
December 31, 2001, the amount of the base year reserves was approximately $305
million. The amount of unrecognized deferred tax liability at December 31, 2001
was approximately $107 million.
TAX EFFECTS OF DIVIDEND PAYMENTS BY THE BANK
Certain dividend distributions discussed above made to GS Holdings, as the
sole owner of the Bank's common stock and its preferred stock, may cause the
Bank to recognize a portion of its base year reserves as income. Accordingly,
the Bank may be required to make payments to GS Holdings under the Tax Sharing
Agreement. Likewise, GS Holdings may be required to make payments to Golden
State under the Tax Sharing Agreement if GS Holdings has insufficient expenses
and losses to offset such income.
RESTRICTIONS ON ABILITY OF SUBSIDIARIES TO PAY DIVIDENDS
GS Holdings is a holding company with no significant business operations of
its own. The Company's only significant asset is the common stock of the Bank.
The Company's only sources of cash to pay dividends and make debt payments are
dividends and other distributions from the Bank and in turn from GS Holdings.
The federal banking laws and OTS regulations limit the Bank's ability to
pay dividends. The Bank generally may not declare dividends or make any other
capital distribution if, after the payment of such dividend or other
distribution, it would fall within any of the three undercapitalized categories
under the prompt corrective action regulation of the FDICIA of 1991. Other
limitations apply to California Federal's ability to pay dividends, the
magnitude of which depends upon current earnings and the extent to which
California Federal meets its regulatory capital requirements. In addition, the
HOLA requires every savings association subsidiary of an SLHC to give the OTS at
least 30 days' advance notice of any proposed dividends to be made on its stock.
Further, the OTS may prohibit any Bank capital distribution that it determines
would constitute an unsafe or unsound practice.
Page 8
SIGNIFICANT STOCKHOLDERS
All of the common stock of the Company is held by Golden State.
As of December 31, 2001, Ronald O. Perelman, through GSB Investments, had
beneficial ownership of 42,949,525 shares or 31.64% of Golden State, and Gerald
J. Ford, the Chairman of the Board, Chief Executive Officer and a Director of
the Bank, GS Holdings and Golden State, individually and through Hunter's
Glen/Ford, Ltd., a limited partnership controlled by Mr. Ford, beneficially
owned 19,961,408 shares or 14.68% of Golden State. As a result, GSB Investments,
through the election of directors or otherwise, may be able to direct and
control the policies of GS Holdings and its subsidiaries, including mergers,
sales of assets and similar transactions. See "Market for the Registrant's
Common Equity and Related Stockholder Matters."
EMPLOYEES
GS Holdings has no employees. At December 31, 2001, GS Holdings and its
subsidiaries employed 8,205 FTE, compared with 7,821 at December 31, 2000. The
Company's employees are not represented by any collective bargaining group and
management considers its relations with its employees to be good. The Company
provides a comprehensive employee benefits program including health and welfare
benefits, long and short-term disability insurance, and life insurance. The
Company also offers employees a defined contribution investment plan which is a
qualified plan under Section 401(a) of the Internal Revenue Code.
COMPETITION
The Company experiences significant competition in both attracting and
retaining deposits and in originating real estate and consumer loans. The
Company, through the Bank, competes with other savings associations, commercial
banks, mortgage banking companies, finance companies, insurance companies,
credit unions, money market mutual funds and brokerage firms in attracting and
retaining deposits. Competition for deposits from large commercial banks and
savings associations is particularly strong. Commercial banks and other savings
associations have a significant number of branch offices in the areas in which
the Company operates.
In addition, there is strong competition in originating and purchasing real
estate and consumer loans, principally from other savings associations,
commercial banks, mortgage banking companies, insurance companies, consumer
finance companies, pension funds and commercial finance companies. The primary
factors in competing for loans are the quality and extent of service to
borrowers and brokers, economic factors such as interest rates, interest rate
caps, rate adjustment provisions, loan maturities, LTV ratios, loan fees and the
length of time for loan processing and funding. The Company's future performance
depends on its ability to originate a sufficient volume of mortgage loans and to
purchase a sufficient quantity of high-quality mortgage-backed securities or
loans with adequate yields. There can be no assurance that the Company will be
able to effect such actions on satisfactory terms.
REGULATION AND SUPERVISION
GENERAL
The OTS, an office of the U.S. Department of the Treasury, regulates the
activities of California Federal, as a federal association, and GS Holdings, as
an SLHC. The FDIC, which insures the Bank's deposit accounts, also oversees the
Bank in a backup role. GS Holdings and the Bank are required to comply with
comprehensive federal banking laws and regulations intended to protect the
Bank's depositors, the institution, and the banking system as a whole. The
following summarizes some of the more important ways in which GS Holdings and
the Bank are governed by these laws and regulations. As a summary, it describes
only a few of the rules that affect GS Holdings and the Bank.
Page 9
REGULATION OF GS HOLDINGS
GS Holdings is registered with the OTS as an SLHC. As an SLHC, GS Holdings
must file periodic reports with the OTS and is subject to annual examinations.
GS Holdings is a "unitary" SLHC because it controls only one savings
institution. As a unitary SLHC that existed prior to May 4, 1999, GS Holdings
may generally engage in any financial or non-financial business activity.
However, an SLHC must obtain OTS approval before acquiring ownership or control
of any other savings association or savings and loan holding company, or
substantially all of the assets or more than 5% of its voting shares. An SLHC
must also obtain OTS approval before any party that owns or controls more than
25% of its voting shares acquires control of any savings association that is not
a subsidiary of that SLHC.
REGULATION OF THE BANK
REGULATORY SYSTEM
California Federal must comply with many federal banking laws and
regulations governing its activities. The OTS oversees the Bank's operations and
regularly examines the Bank to insure its safe and sound operation and
compliance with applicable laws and regulations, including consumer protections
and the CRA. The Bank files periodic reports with the OTS concerning its
activities and financial condition. Certain actions, like the payment of a
dividend, require prior OTS notice or approval. While the OTS is the Bank's
primary regulator, the FDIC has "backup enforcement authority" over the Bank as
the insurer (through the SAIF) of the Bank's deposit accounts.
LIQUID ASSETS
The OTS requires that California Federal maintain sufficient liquidity to
ensure its safe and sound operation. The Bank has maintained liquid assets in
compliance with the regulations in effect throughout 2001, 2000 and 1999.
REGULATORY CAPITAL REQUIREMENTS
The OTS requires savings associations to meet each of the following minimum
capital standards: 8% risk-based capital, 4% leverage capital and 1.5% tangible
capital. In addition, the OTS may require a savings association to maintain
capital above the minimum levels. The OTS may deem failing any these tests to be
an unsafe and unsound practice and may subject the failing institution to
enforcement or other supervisory actions. The Bank currently satisfies all
applicable regulatory capital requirements and has not been directed by the OTS
to maintain capital above the minimum levels.
PROMPT CORRECTIVE ACTION
Under the prompt corrective action regulations mandated by the FDICIA, the
OTS must take certain actions against savings associations that fall within
certain undercapitalized capital categories.
The regulation establishes five categories of capital classification: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Under the regulation,
three ratios determine an association's capital classification:
o the ratio of total capital to risk-weighted assets,
o the ratio of core capital to risk-weighted assets and
o the leverage capital ratio.
A "well capitalized" institution must maintain a ratio of total capital to
risk-based assets of 10%, a ratio of core capital to risk-weighted assets of 6%,
a leverage capital ratio of 5%, and must not be subject to an OTS order or
directive to meet a specific higher capital level.
Page 10
In general, the regulation prohibits an insured depository institution from
declaring any dividends, making any other capital distribution, or paying a
management fee to a controlling person if, after the distribution or payment,
the institution would be within any of the three undercapitalized categories. In
addition, adequately capitalized institutions must obtain an FDIC waiver before
accepting Brokered Deposits and are subject to restrictions on the interest
rates that may be paid on those deposits. Institutions that are considered
"undercapitalized," "severely undercapitalized," or "critically
undercapitalized" become subject to increasingly serious supervisory actions (as
capital levels deteriorate) including increased monitoring, mandatory capital
restoration plans, limitations on business activities, and ultimately, the
placement of a "critically undercapitalized" association into conservatorship or
receivership.
The Bank met the capital requirements of a "well capitalized" institution
under the regulation as of December 31, 2001 and is not subject to any capital
related enforcement action or other regulatory proceeding. Management believes
there have been no conditions or events since December 31, 2001 that would
change the Bank's capital classification.
ENFORCEMENT POWERS
The OTS and the FDIC are authorized to bring various enforcement actions
against the institution and affiliated persons. The Bank and Golden State are
not subject to any OTS or FDIC enforcement proceedings.
CAPITAL DISTRIBUTION REGULATION
In addition to the prompt corrective action restrictions, OTS regulations
limit "capital distributions" by savings associations. Capital distributions
include dividends and payments for stock repurchases and cash-out mergers.
A savings institution that is a subsidiary of an SLHC must notify the OTS
of a capital distribution at least 30 days prior to the declaration of a capital
distribution, provided the total of all capital distributions made during that
calendar year (including the proposed distribution) does not exceed the sum of
the institution's year-to-date net income and its retained income for the
preceding two years. A capital distribution in a greater amount requires an
application to the OTS and its prior approval. The OTS may disapprove a capital
distribution notice or application if the institution is undercapitalized or if
the distribution would raise other safety and soundness concerns. The Bank's
capital distributions have complied with the capital distribution rule.
DIVIDEND POLICY
The dividend policy of the Bank complies with applicable legal and
regulatory restrictions. Before declaring any dividend, the directors of the
Bank consider the following factors:
(a) the quality and stability of the Bank's net income,
(b) the availability of liquid assets to make dividend payments,
(c) the impact of the level of earnings retention on the Bank's capital
needs, projected growth and internal and external funding levels, and
(d) the adequacy of capital after the payment of a dividend.
Under the Bank's dividend policy, a dividend will not be declared or paid
which would:
(a) cause the capital level of the Bank to be reduced below "adequately
capitalized" levels, or
(b) exceed 100% of the net income to date for that calendar year plus
retained net income for the preceding two years, when combined with
any other dividends declared during the same calendar year (except as
may be permitted by regulation in extraordinary circumstances).
Page 11
For further information regarding dividend payments, refer to note 24 of
the Company's Notes to Consolidated Financial Statements.
TAX EFFECTS OF DIVIDEND PAYMENTS BY THE BANK
Refer to "Tax Effects of Dividend Payments by the Bank" of "Factors that
May Affect Future Results" for more information.
QUALIFIED THRIFT LENDER TEST
Unless a savings association is a QTL, both it and its holding company are
subject to certain restrictions on their activities. In order to be a QTL,
either (a) at least 65% of the savings association's portfolio assets must be
qualified thrift investments or (b) the savings association must meet the asset
composition test under the Internal Revenue Code for a "domestic building and
loan association." Non-QTL savings associations are subject to restrictions on
obtaining advances from the FHLB, establishing branches and paying dividends. A
holding company whose savings association is not a QTL must register as a bank
holding company and be subject to all of the restrictions of the Bank Holding
Company Act of 1956.
The Bank's qualified thrift investments primarily consist of residential
mortgage loans and mortgage securities, home equity loans, small business loans,
FHLB stock and accrued dividends. At December 31, 2001, approximately 94.17% of
the Bank's portfolio assets were qualified thrift investments. At that date, the
Bank also met the asset composition test under the Internal Revenue Code for a
domestic building and loan association.
FDIC ASSESSMENTS
The SAIF of the FDIC insures the deposits of the Bank up to applicable
limits, and assesses deposit premiums. Under the FDIC's risk-based insurance
system, SAIF-assessed deposits are currently subject to insurance premiums of
between 0 and 27 basis points, depending upon the institution's capital position
and other supervisory factors. The rate applicable to the Bank at December 31,
2001 was 0 basis points.
Institutions with BIF deposits are required to share the cost of funding
debt obligations issued by the FICO, a corporation established by the federal
government in 1987 to finance the recapitalization of the FSLIC. The annual FICO
assessments added to deposit insurance premiums were 5.0 basis points for SAIF
deposits during 1999. Effective January 1, 2000, the FICO assessment rate is
equal for SAIF and BIF deposits. The Bank's SAIF plus FICO assessment during
2001 and 2000 was approximately 1.90 and 2.04 basis points, respectively
(annualized).
AFFILIATE RESTRICTIONS
Sections 23A and 23B of the Federal Reserve Act restrict transactions
between a savings association and its "affiliates." Affiliates of a savings
association include the savings association's holding companies and companies
under common control with the savings association, but generally exclude the
institution's subsidiaries.
Sections 23A and 23B generally require that all transactions between a
savings association and its affiliates be on terms that are at least as
favorable to the savings association as those prevailing at the time for
comparable transactions with non-affiliated companies. Section 23A also limits
the extent to which a savings association or its subsidiaries may engage in
certain "covered transactions" with its affiliates. A "covered transaction" is
defined to include:
o a loan or extension of credit to an affiliate;
o a purchase of investment securities issued by an affiliate;
o a purchase of assets from an affiliate (with certain exceptions);
Page 12
o the acceptance of securities issued by an affiliate as collateral for a
loan or extension of credit to any party; or
o the issuance of a guarantee, acceptance or letter of credit on behalf of
an affiliate.
During 2001, 2000, and 1999, the Bank had no covered transactions.
NON-INVESTMENT GRADE DEBT SECURITIES
Savings associations are prohibited from investing in a corporate debt
security that, when acquired, is not rated in one of the four highest rating
categories by at least one nationally recognized statistical rating
organization. The Bank does not own any non-investment grade corporate debt
securities.
COMMUNITY REINVESTMENT ACT AND THE FAIR LENDING LAWS
Savings associations are responsible under the CRA to help meet the credit
needs of their communities, including low- and moderate-income neighborhoods. In
addition, the Fair Lending Laws prohibit lenders from discriminating on the
basis of specified characteristics. The OTS and the Department of Justice may
take enforcement actions against a savings association that fails to comply with
the Fair Lending Laws. The Bank received an "Outstanding" rating in its most
recent CRA examination completed in July 2001.
PROPOSED REGULATORY LEGISLATION
From time to time, Congress considers legislative proposals that could
substantially alter the regulation of the Bank and Golden State. These proposals
have included the merger of the BIF and SAIF and the merger of the OTS with the
Office of the Comptroller of the Currency. The Company cannot determine whether,
or in what form, such legislation might be enacted and what impact such changes
might have on GS Holdings and the Bank.
ITEM 2. PROPERTIES
The executive offices of the Bank and the Company are located at 135 Main
Street, San Francisco, California, 94105, and its telephone number is (415)
904-1100. The Bank leases approximately 97,000 square feet in the building in
which its executive offices are located, under a lease expiring in 2006. The
Bank maintains its Data Center in a portion of a 252,000 square foot facility in
West Sacramento, California under a lease expiring in 2006.
The Company and its subsidiaries occupied additional executive,
administrative and operational space at 24 sites in California, Maryland, Texas
and Arizona as of December 31, 2001. These sites included approximately 413,000
owned square feet (four sites) and 351,000 leased square feet (twenty sites)
with lease expirations ranging from 2002 to 2008.
At December 31, 2001, the Bank operated 356 retail branches in California
and Nevada, which included approximately 988,000 owned square feet (125
branches) and 1,200,000 leased square feet (231 branches) with lease expirations
ranging from 2002 to 2034. Some of these retail branches also housed loan
production and administrative space. FNMC operated eight loan production offices
in California, Montana and Nevada. These offices were independent of branch
facilities and included approximately 100,000 leased square feet with
expirations ranging from 2002 to 2006.
The Bank is responsible for various facilities not occupied by the Company
or its subsidiaries as a result of branch and operational consolidations from
the 1996 Acquisitions, the Cal Fed Acquisition, the merger with Glendale Federal
and certain branch purchases. During 2001, leases on six sites totalling
approximately 84,000 square feet were terminated. As of December 31, 2001, there
were 33 branch sites not occupied by the Company or its subsidiaries, of which
29 sites were leased or subleased generating income, leaving four sites
unoccupied. In addition, there was one administrative facility not occupied by
the Company or its subsidiaries. This facility was subleased, generating income.
Page 13
The following table presents a state-by-state breakdown of all retail
branches, administrative facilities and loan production offices operated by the
Bank at December 31, 2001:
Branches Administrative Facilities Loan Production Facilities
--------------------------- -------------------------- ---------------------------
Owned Leased Vacant Owned Leased Vacant Owned Leased Vacant
----- ------ ------ ----- ------ ------ ----- ------ ------
Arizona -- -- -- -- 1 -- -- -- --
California 118 221 33 3 16 1 -- 6 --
Maryland -- -- -- 1 1 -- -- -- --
Montana -- -- -- -- -- -- -- 1 --
Nevada 7 10 -- -- -- -- -- 1 --
Texas -- -- -- -- 4 -- -- -- --
--- --- -- -- -- -- -- -- --
Total 125 231 33 4 22 1 -- 8 --
=== === == == == == == == ==
ITEM 3. 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.
Page 14
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.
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 September 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.
Page 15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Golden State owns all of the Company's common shares. There is no public
trading market for the Company's common stock.
Ronald O. Perelman, a Director of GS Holdings, 35 East 62nd Street, New
York, New York 10021, through GSB Investments Corp., beneficially owns 31.60% of
the Golden State common stock outstanding as of March 1, 2002. Gerald J. Ford,
Chairman of the Board, Chief Executive Officer and a Director of the Bank, GS
Holdings and Golden State, 200 Crescent Court, Suite 1350, Dallas, Texas 75201,
individually and through a limited partnership he controls, Hunter's Glen/Ford,
Ltd., beneficially owns 14.76% of the Golden State common stock at March 1,
2002. The balance of the common stock of Golden State is publicly held. In
addition, pursuant to the agreement and plan of merger related to the Golden
State Acquisition, GSB Investments and Hunter's Glen are entitled to receive
additional shares of Golden State common stock under certain circumstances,
which could cause the actual ownership percentages of GSB Investments and
Hunter's Glen to change.
DIVIDENDS
During 2001, 2000 and 1999, dividends on GS Holdings' common stock totalled
$135.0 million, $96.0 million and $225.5 million, respectively. See discussion
of dividend restrictions in note 24 of the Company's Notes to Consolidated
Financial Statements.
Page 16
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
Please read the Management's Narrative Analysis of Results of Operations in
conjunction with the Consolidated Financial Statements of GS Holdings and the
notes included elsewhere in this Form 10-K. The following discussion includes
historical information relating to GS Holdings.
For a discussion of the impact to the Company of recent accounting changes,
refer to note 2 of the Company's Notes to Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES
The Company believes the critical accounting policies related to certain
activities affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements. Refer to notes 2(e) and
2(m) in the Company's Notes to Consolidated Financial Statements for a
discussion of the accounting policies for the allowance for loan losses and
MSRs.
RESULTS OF OPERATIONS
Based in San Francisco, GS Holdings is the parent of California Federal, a
community oriented bank that provides diversified financial services for
consumers and small businesses in California and Nevada. At December 31, 2001,
it was the third largest thrift in the U.S. with $56.5 billion in assets and 356
branches.
GS Holdings reported net income of $428.5 million for 2001. Net income for
2001 includes a loss of $1.6 million, net of tax, from the cumulative effect of
change in accounting principle related to the adoption of EITF No. 99-20. Income
before cumulative effect of change in accounting principle was $430.0 million.
On a pre-tax basis, net income for 2001 also included a $153.3 million
valuation provision on the Company's MSR asset that related to revised estimates
of future loan payoffs as a result of lower mortgage interest rates. This amount
was partially offset by a $79.9 million gain from the Company's MSR hedging
activities in accordance with SFAS No. 133. Net income for 2001 also included
MSR amortization expense of $361.1 million, and a $6.1 million unrealized loss
from the application of SFAS No. 133 on the derivative rate locks, forward loan
sale commitments and closed loan inventory. Cash flow hedging related activities
resulted in net interest rate swap expense on FHLB advances of $67.3 million,
and net interest rate swap expense on reverse repurchase agreements of $8.2
million.
Net income for 2000 was $524.8 million, which includes gains on the early
extinguishment of debt, net of tax, of $3.0 million. The Bank's efficiency ratio
was 48.35% for the year ended December 31, 2001, compared to 47.85% for the
comparable period in 2000.
On a pre-tax basis, net income for 2000 also included the effect of hedging
activities resulting in net interest rate swap expense on FHLB advances of $7.2
million and net interest rate swap expense on reverse repurchase agreements of
$0.9 million. Amortization expense on the MSRs was $204.0 million. During 2000,
hedging-related activities on the MSRs were not accounted for in accordance with
SFAS No. 133, which was prospective in application.
Page 17
The following table presents GS Holdings' consolidated average balance
sheet for the past three years, with the related interest income, interest
expense, and average interest rates for the periods presented. Average balances
are calculated on a daily basis.
Year Ended December 31,
------------------------------------------------------------------------------------
2001 2000 1999
-------------------------- -------------------------- -------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Intreest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
(dollars in millions)
ASSETS
Interest-earning assets (1):
Securities and interest-bearing
deposits in banks (2) $ 749 $ 43 5.81% $ 1,424 $ 90 6.34% $ 1,554 $ 100 6.44%
Mortgage-backed securities
available for sale 9,278 603 6.50 12,017 800 6.66 13,706 873 6.37
Mortgage-backed securities
held to maturity 1,572 124 7.89 2,730 206 7.56 2,392 178 7.43
Loans held for sale 2,026 138 6.78 837 63 7.48 1,659 110 6.60
Loans receivable, net:
Residential 31,428 2,142 6.81 29,800 2,108 7.07 24,723 1,726 6.98
Commercial real estate 6,273 506 8.06 5,711 465 8.13 5,427 416 7.67
Consumer 896 75 8.40 763 78 10.27 649 62 9.59
Automobile 1,800 212 11.76 1,294 151 11.64 635 80 12.50
Commercial banking 610 47 7.69 519 52 9.96 514 48 9.40
------- ------ ------- ------ ------- ------
Loans receivable, net 41,007 2,982 7.27 38,087 2,854 7.49 31,948 2,332 7.30
FHLB stock 1,412 79 5.63 1,301 93 7.14 1,113 60 5.36
------- ------ ------- ------ ------- ------
Total interest-earning assets 56,044 3,969 7.08% 56,396 4,106 7.28% 52,372 3,653 6.97%
Noninterest-earning assets 3,823 ------ 3,088 3,692 ------
------- ------- -------
Total assets $59,867 $59,484 $56,064
======= ======= =======
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits $24,394 $ 832 3.41% $23,265 $ 928 3.99% $23,948 $ 888 3.71%
Securities sold under
agreements to
repurchase (3) 3,590 196 5.41 5,380 352 6.45 5,057 266 5.18
Borrowings (3) 27,727 1,578 5.67 27,406 1,678 6.10 23,613 1,313 5.56
Other 55 1 2.80 -- -- -- -- -- --
------- ------ ------- ------ ------- ------
Total interest-bearing
liabilities 55,766 2,607 4.66% 56,051 2,958 5.26% 52,618 2,467 4.69%
Noninterest-bearing liabilities 1,215 1,023 1,194
Minority interest 497 498 540
Stockholder's equity 2,389 1,912 1,712
------- ------- -------
Total liabilities, minority
interest and stockholder's
equity $59,867 $59,484 $56,064
======= ======= =======
Net interest income $1,362 $1,148 $1,186
====== ====== ======
Interest rate spread (4) 2.42% 2.02% 2.28%
===== ===== =====
Net interest margin 2.44% 2.06% 2.26%
===== ===== =====
Return on average assets 0.72% 0.88% 0.61%
===== ===== =====
Return on average equity 17.94% 27.45% 19.92%
===== ===== =====
Return on tangible common equity 28.28% 50.72% 50.83%
===== ===== =====
Average equity to average assets 3.99% 3.21% 3.05%
===== ===== =====
------------------
(1) Non-performing assets are included in the average balances for the periods
indicated.
(2) Includes interest-bearing deposits in other banks and securities purchased
under agreements to resell.
(3) Interest and average rate include the impact of interest rate swaps.
(4) Interest rate spread represents the difference between the average rates
of total interest-earning assets and total interest-bearing liabilities.
Page 18
The following table shows the changes in interest income and expense due to
changes in rate and volume. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
volume (change in average outstanding balance multiplied by the prior year's
rate) and rate (change in average interest rate multiplied by the prior year's
volume). Changes attributable to both volume and rate have been allocated
proportionately.
Year Ended December 31, 2001 vs 2000
------------------------------------------
Increase (Decrease) Due to
------------------------------------------
VOLUME RATE NET
------ ---- ---
(in millions)
INTEREST INCOME:
Securities and interest-bearing deposits in banks $ (40) $ (7) $ (47)
Mortgage-backed securities available for sale (178) (19) (197)
Mortgage-backed securities held to maturity (91) 9 (82)
Loans held for sale 80 (5) 75
Loans receivable, net 301 (173) 128
FHLB stock 9 (23) (14)
----- ----- -----
Total 81 (218) (137)
----- ----- -----
INTEREST EXPENSE:
Deposits (23) (73) (96)
Securities sold under agreements to repurchase (105) (51) (156)
Borrowings 13 (113) (100)
Other 1 -- 1
----- ----- -----
Total (114) (237) (351)
----- ----- -----
Change in net interest income $ 195 $ 19 $ 214
===== ===== =====
YEAR ENDED DECEMBER 31, 2001 VERSUS YEAR ENDED DECEMBER 31, 2000
INTEREST INCOME. Total interest income was $4.0 billion for 2001, a
decrease of $137.1 million from 2000. Total interest-earning assets for 2001
averaged $56.0 billion, compared to $56.4 billion for 2000. The decrease in
interest-earning assets is primarily a result of a decline in mortgage-backed
securities, principally due to management's decision to sharply reduce
purchases. This decrease was partially offset by increased loan volume and an
increase in loans held for sale due to significant refinancing activity during
2001 as a result of 40-year record low mortgage interest rates. The change in
net interest income attributed to changes in volume increased despite a decrease
in total average interest-earning assets because the volume of average
interest-earning assets with higher rates increased more than the offsetting
decrease in the volume of average interest-earning assets with lower rates. The
yield on total interest-earning assets for 2001 decreased to 7.08% from 7.28%
for 2000, primarily due to the repricing of loans and securities available for
sale at lower rates, partially offset by a higher percentage of loans to total
earning assets during 2001. At December 31, 2001, 13% of the Company's portfolio
loans were tied to COFI indices, 13% to Treasury-based indices and 47% were
"hybrid" ARMs - fixed for three to ten years and then adjusting annually.
Twenty-three percent of the portfolio is fixed. The remaining 4% of the
portfolio is in other adjustable-rate products.
GS Holdings earned $3.0 billion of interest income on loans receivable for
2001, an increase of $127.9 million from 2000. The average balance of loans
receivable was $41.0 billion for 2001, compared to $38.1 billion for 2000. The
weighted average yield on loans receivable decreased to 7.27% for 2001 from
7.49% for 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, primarily due to lower interest rates during 2001 and new
product offerings. The decrease in the weighted average yield reflects the
repricing of variable-rate loans, a decrease in the prime rate on commercial
banking loans and comparatively lower market interest rates in 2001, partially
offset by a higher yield on auto loans purchased after July 1, 2001, which are
recorded on a gross-coupon basis, rather than a credit-adjusted yield basis. The
impact of this change on net interest income during the year ended December 31,
2001 was an increase of $10.1 million.
Page 19
Loan production is detailed in the table below (in thousands):
Year Ended December 31,
-------------------------------------------------
2001 2000 1999
---- ---- ----
Loans funded:
Residential real estate loans:
Adjustable-rate $ 6,765,133 $ 7,259,633 $ 6,959,519
Fixed-rate 18,748,809 5,841,362 8,755,853
----------- ----------- -----------
Total residential real estate loans 25,513,942 13,100,995 15,715,372
Commercial real estate loans 1,652,885 1,287,732 781,042
Commercial loans 1,043,144 701,023 610,385
Consumer nonmortgage loans 803,997 736,416 573,844
Auto loans (directly originated) 20,175 12,145 --
Other -- 124 353
----------- ----------- -----------
Total loans funded $29,034,143 $15,838,435 $17,680,996
=========== =========== ===========
Loans purchased:
Residential real estate loans $ 3,148,581 $ 594,639 $ 2,048,315
Auto loans (a) 1,150,013 1,053,960 485,802
----------- ----------- -----------
Total loans purchased $ 4,298,594 $ 1,648,599 $ 2,534,117
=========== =========== ===========
------------
(a) Approximately 41%, 43% and zero percent of this volume was in prime
product; 59%, 57% and 100% was in sub-prime product for the years
ended December 31, 2001, 2000 and 1999, respectively.
GS Holdings earned $137.4 million of interest income on loans held for sale
for 2001, an increase of $74.8 million from 2000. The average balance of loans
held for sale was $2.0 billion for 2001, an increase of $1.2 billion from 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 $17.6 billion
during the year ended December 31, 2001, an increase of 230% over the $5.3
billion originated during 2000. The weighted average yield on loans held for
sale decreased to 6.78% for 2001 from 7.48% for 2000, primarily due to declining
market interest rates.
Interest income on mortgage-backed securities available-for-sale was $603.1
million in 2001, a decrease of $197.3 million from 2000. The average portfolio
balance decreased $2.7 billion, to $9.3 billion for 2001. The weighted average
yield on these assets decreased from 6.66% for 2000 to 6.50% for 2001. The
decrease in the volume is primarily attributed to management's decision to
sharply reduce purchases, coupled with high repayments and sales of
mortgage-backed securities, partially offset by the $1.1 billion
reclassification 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 primarily reflects the repricing of
variable-rate securities at lower rates.
Interest income on mortgage-backed securities held-to-maturity was $124.1
million for 2001, a decrease of $82.4 million from 2000. The average portfolio
balance decreased $1.2 billion, to $1.6 billion for 2001, 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 2001 and 2000 were 7.89% and
7.56%, respectively. The increase in the weighted average yield is primarily the
result of the aforementioned $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 $43.6 million for 2001, a decrease of $46.9 million from 2000. The average
portfolio balance was $0.7 billion for 2001 and $1.4 billion for 2000. The
decrease in the volume is primarily attributed to payments and maturities of
securities. The lower weighted average yield of 5.81% for 2001 compared to 6.34%
for 2000 is primarily due to $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 2001.
Page 20
Dividends on FHLB stock were $79.5 million for 2001, a decrease of $13.4
million from 2000. The average balance outstanding during 2001 and 2000 was $1.4
billion and $1.3 billion, respectively. The weighted average dividend on FHLB
stock declined to 5.63% for 2001 from 7.14% for 2000. The increase in the
average balance is due to an overall increase in average 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 $2.6 billion for 2001, a
decrease of $351.0 million from 2000. The decrease is primarily due to declining
market interest rates and a reduction in securities sold under agreements to
repurchase, partially offset by additional borrowings under FHLB advances and
deposits used to fund total assets.
Interest expense on deposits, including Brokered Deposits, was $831.5
million for 2001, a decrease of $96.9 million from 2000. The average balance of
deposits outstanding increased from $23.3 billion for 2000 to $24.4 billion for
2001. Deposit interest expense attributed to changes in volume decreased despite
an increase in average volume because the volume of the average individual
deposit categories with lower or zero rates (such as transaction and custodial
accounts) increased significantly, while those with higher rates (such as CDs)
decreased. The increase in the average balance is primarily attributed to
increases in the average balances of money market accounts, custodial accounts
and retail customer checking accounts, partially offset by declines in CDs and
savings account balances. The overall weighted average cost of deposits
decreased to 3.41% for 2001 from 3.99% for 2000, primarily due to a higher
average balance of lower rate money market, custodial and checking accounts and
a lower average balance of higher rate CDs in 2001.
Interest expense on securities sold under agreements to repurchase totalled
$196.4 million for 2001, a decrease of $155.7 million from 2000. The average
balance of such borrowings for 2001 and 2000 was $3.6 billion and $5.4 billion,
respectively. The decrease in the average balance is primarily the result of
maturities during the year ended December 31, 2001. The weighted average
interest rate on these instruments decreased to 5.41% for 2001 from 6.45% for
2000, primarily due to maturities of higher rate fixed-rate borrowings and the
repricing of variable-rate borrowings at lower rates during 2001.
Interest expense on borrowings totalled $1.6 billion for 2001, a decrease
of $100.0 million from 2000. The average balance outstanding for 2001 and 2000
was $27.7 billion and $27.4 billion, respectively. The weighted average interest
rate on these instruments decreased to 5.67% for 2001 from 6.10% for 2000. The
increase in the average volume is the result of additional FHLB borrowings used
to replace securities sold under agreements to repurchase, while the decrease in
the weighted average rate is primarily due to declining market interest rates in
2001.
NET INTEREST INCOME. Net interest income was $1.4 billion for 2001, an
increase of $213.8 million from 2000. The interest rate spread increased to
2.42% for 2001 from 2.02% for 2000, primarily as a result of declining market
interest rates reducing costs of liabilities at a faster rate than the decline
in the yield on assets. Lower-costing liabilities were the result of the
replacement of higher-rate borrowings and deposits with lower-rate borrowings
and deposits as these instruments came due or were repaid. The net interest
margin increased to 2.44% for the year ended December 31, 2001, up 38 basis
points from the 2.06% reported during the year 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 $357.4 million for
2001, representing a decrease of $86.2 million from 2000. Noninterest income
includes the following components (in thousands):
Year Ended December 31,
-------------------------------------------
2001 2000 1999
---- ---- ----
Noninterest income:
Loan servicing fees, net $(14,393) $176,159 $127,834
Customer banking fees and servicing charges 221,796 196,969 187,022
Gain on sale, settlement and transfer of loans, net 78,440 49,730 32,885
Gain (loss) on sale of assets, net 21,942 (13,424) 24,042
Other income 49,618 34,161 31,096
-------- -------- --------
Total noninterest income $357,403 $443,595 $402,879
======== ======== ========
Page 21
Loan servicing fees for the Company were $(14.4) million for the year ended
December 31, 2001, compared to $176.2 million in 2000 and $127.8 million for
1999. The following table details the components of loan servicing fees, net
(dollars in thousands):
Year Ended December 31,
------------------------------------------
2001 2000 1999
---- ---- ----
Components of loan servicing fees, net:
Loan servicing fees $ 457,542 $ 390,616 $ 358,992
Amortization of MSRs (361,076) (204,032) (212,310)
Pass-through Interest Expense (37,462) (10,425) (18,848)
Net gain on MSRs/MSR derivatives (SFAS No. 133) 79,948 -- --
MSR valuation provision (153,345) -- --
--------- --------- ---------
Total loan servicing fees, net $ (14,393) $ 176,159 $ 127,834
========= ========= =========
Portfolio run off rate (residential portfolio only) 30.1% 12.3% 20.7%
Run off rate of MSR value (residential portfolio only) 23.9 11.2 N/A
MSR amortization rate (residential portfolio only) 24.1 13.6 18.1
As the table reflects, gross loan servicing fees increased $66.9 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 $84.1 billion at December 31, 2000 to $85.2 billion at December
31, 2001. The portfolio runoff rate, representing the percentage of the
residential portfolio that has been paid off during the year, influences MSR
amortization, which increased $157.0 million in 2001 over the same period in
2000. MSR amortization was also affected by a higher average MSR balance for the
year ended December 31, 2001 compared to the same period in 2000. Pass-through
Interest Expense increased $27.0 million (259%) year over year, also influenced
by higher runoff rates. Servicing fee income includes a $79.9 million pre-tax
gain from the impact of SFAS No. 133 pertaining to the MSR fair value hedges. A
$153.3 million pre-tax valuation provision on the MSRs was recorded during the
year ended December 31, 2001.
Customer banking fees were $221.8 million for 2001 compared to $197.0
million for 2000. The increase is primarily attributed to increased emphasis by
management on transaction account growth and higher fee income on mutual fund,
annuity and other investment and insurance product sales through Cal Fed
Investments. 2001 also includes a $3.3 million reclassification to reflect gross
revenues from customer check printing fees rather than net revenues. Transaction
accounts (including custodial accounts) as a percentage of retail deposits
increased to 57.5% at December 31, 2001, from 46.6% at December 31, 2000. The
following table details the components of customer banking fees (in thousands):
Year ended December 31,
----------------------------------------
2001 2000 1999
---- ---- ----
Components of customer banking fees and service charges:
Transaction account fees $146,580 $120,992 $117,500
Other retail customer fees 2,548 3,179 2,633
Investment sales income 61,994 55,435 51,608
Insurance commissions 10,674 17,363 15,281
-------- -------- --------
Total customer banking fees and service charges $221,796 $196,969 $187,022
======== ======== ========
Gain on sale, settlement and transfer of loans, net totalled $78.4 million
for 2001, an increase of $28.7 million from 2000. During the years ended
December 31, 2001 and 2000, the Company recorded reductions in its recourse
liability of $24.5 million and $20.5 million, respectively, which is included in
this income category. This liability is a life-of-loan accrual which has
experienced favorable performance over the past several years. The Company's
revised loss estimate is lower than previously expected, primarily for three
reasons:
(a) The historical performance of these loans since they were sold has been
better than initial estimates and expectations, with only minimal
losses experienced over the past four years.
Page 22
(b) These loans are generally over 10 years old. This seasoning has
contributed to lower LTVs, and hence, lower loss exposure.
(c) Interest rates have been relatively low over the past few years, and
have continued to decline. Because substantially all of these loans
are adjustable-rate loans, borrowers have enjoyed lower payments. The
lag associated with adjustable-rate indices assures that borrowers'
payments will continue to decline.
During 2001, California Federal sold $16.3 billion in single-family
mortgage loans originated for sale with servicing rights retained as part of its
ongoing mortgage banking operations at gains of $48.7 million compared to $5.2
billion of such sales for the corresponding period in 2000 at gains of $21.1
million. The results in 2001 include $4.2 million related to the gain on sale of
$136.2 million in government-insured loans that were previously seriously
delinquent and had become performing (GNMA reperformers). The overall increase
in the volume of loans sold and the related gain is a result of the 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 in 2001
also includes a $6.1 million unrealized loss from the application of SFAS No.
133 on the derivative rate locks, forward loan sale commitments and closed loan
inventory.
Gain on sale of assets, net totalled $21.9 million for 2001, compared to a
net loss of $13.4 million for 2000. The gain during 2001 includes a $17.3
million gain on the sale of $777.9 million in mortgage-backed securities and a
gain of $9.3 million on the sale of the Company's Concord EFS stock, partially
offset by a $5.8 million loss on the mark-to-market of the Company's portfolio
of IO strip and "B" tranche mortgage securities pursuant to EITF No. 99-20. The
loss during 2000 is primarily attributed to an $18.7 million loss from the sale
of approximately $500 million of mortgage-backed securities with an average
yield of 6.64% during the second quarter and a $0.9 million loss from the sale
of $187.6 million of mortgage-backed securities with an average yield of 6.59%
during the third quarter, partially offset by a $1.5 million gain from the sale
of $699.2 million mortgage-backed securities with an average yield of 7.27%
during the fourth quarter and a $1.3 million gain from the sale of interest rate
swaps with a notional amount of $150.0 million in August 2000.
Other income totalled $49.6 million for 2001, an increase of $15.5 million
from 2000, primarily attributed 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 Systems.
NONINTEREST EXPENSE. Total noninterest expense was $959.3 million for 2001,
an increase of $60.9 million from 2000. Noninterest expense for 2001 included
increases of $28.1 million in other noninterest expense, $27.4 million in
compensation and employee benefit expense, $8.7 million in occupancy and
equipment expense and $3.8 million in foreclosed real estate operations, net.
These increases were partially offset by decreases of $4.0 million in
professional fees and $2.9 million in amortization of intangible assets.
Noninterest expense includes the following components (in thousands):
Year Ended December 31,
--------- ------ --- -------
2001 2000
-------- --------
Noninterest expense:
Compensation and employee benefits $452,721 $425,327
Occupancy and equipment 161,931 153,223
Professional fees 36,821 40,852
Loan expense 16,828 17,018
Foreclosed real estate operations, net (905) (4,690)
Amortization of intangible assets 59,861 62,717
Other expense 232,089 203,981
-------- --------
Total noninterest expense $959,346 $898,428
======== ========
Compensation and employee benefits expense was $452.7 million for 2001, an
increase of $27.4 million from 2000. The increase is primarily attributed to an
increase in staff (from 7,821 FTE at December 31, 2000 to 8,205 at December 31,
2001), primarily in volume-related operating groups, as well as normal salary
adjustments. In addition,
Page 23
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 $161.9 million for 2001, an increase of
$8.7 million from 2000, primarily due to an increase in depreciation expense as
a result of purchases of furniture and equipment, mainly computers with
depreciable lives of 36 months, as well as higher contract maintenance and
repair fees and increased rent expense.
Professional fees were $36.8 million for 2001, a decrease of $4.0 million
from 2000, primarily due to a decrease in consulting fees related to various
data processing systems projects.
Foreclosed real estate operations, net totalled $0.9 million in income for
the year ended 2001, compared to $4.7 million in income for 2000, primarily due
to fewer gains on sale of REO properties during 2001.
Amortization of intangible assets was $59.9 million for 2001, a decrease of
$2.9 million from 2000, primarily attributed to a $50.0 million reduction in the
goodwill balance in December 2000 due to the reversal of Old California Federal
state deferred taxes.
Other noninterest expense was $232.1 million in 2001 compared to $204.0
million in 2000. The increase in expenses relates to increases in a number of
operating expense categories, including retail back office operations, bank
charges, telephone, marketing, courier service and charitable contributions.
PROVISION FOR LOAN LOSSES. The provision for loan losses was zero for both
2001 and 2000. This reflects management's evaluation of the adequacy of the
allowance based on, among other things, past loan loss experience and known and
inherent risks in the portfolio, evidenced in part by the continued decline in
the Bank's level of non-performing assets.
PROVISION FOR INCOME TAX. During 2001, GS Holdings recorded net income tax
expense of $302.7 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, during 2001,
an income benefit of $3.2 million was recorded due to the utilization of net
operating losses of a subsidiary made available as a result of the subsidiary's
liquidation into California Federal.
During 2000, GS Holdings recorded net income tax expense of $144.2 million.
Based on favorable resolutions of federal income tax audits of Old California
Federal and Glendale Federal, and the current status of Mafco's, including the
Company's, audits for the years 1991 through 1995. During 2000, management
changed its judgment about the realizability of the Company's deferred tax asset
and reduced its valuation allowance by $211.7 million. 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 gross federal income tax rate was 39% and 14% during
2001 and 2000, respectively, while its federal statutory income tax rate was 35%
during both periods. In 2001, the difference between the effective and statutory
rates was primarily the result of a reduction in the accrued state tax liability
and non-deductible goodwill amortization. In 2000, the difference between the
effective and statutory rates was primarily the result of the reduction in the
deferred tax asset valuation allowance, partially offset by non-deductible
goodwill amortization. GS Holdings' effective state tax rate was 1% and 6%
during 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. For each of the years ended December 31, 2001 and 2000,
dividends on the REIT Preferred Stock were recorded totalling $27.0 million, net
of the income tax benefit, which will inure to the Bank as a result of the
deductibility of such dividends for income tax purposes.
Page 24
EXTRAORDINARY ITEMS. During 2000, the FHLB called and the Bank prepaid $400
million in 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 year ended December 31, 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 31 of the Company's Notes to Consolidated Financial
Statements.
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 -- 66,416 69,856 (56,324) -- -- (79,948) --
Warehouse loans (33,562) -- -- -- -- -- -- 33,562
Interest rate locks -- -- (2,911) (13,269) -- -- -- 16,180
FLSC hedges -- -- 36,878 5,697 -- -- -- (42,575)
Cash flow hedges - swaps -- -- -- (126,343) 51,611 74,732 -- --
-------- --------- --------- --------- ------- -------- -------- --------
FAIR VALUE ADJUSTMENTS -
YEAR ENDED
DECEMBER 31, 2001 (33,562) 66,416 103,823 (190,239) 51,611 74,732 (79,948) 7,167
Other Activity - Year ended
December 31, 2001:
MSR hedge additions -- -- 713,575 -- -- -- -- --
MSR hedge sales and
maturities -- -- (660,726) 37,963 -- -- -- --
Hedge receipts and
payments -- (121) 15,820 (8,401) -- -- -- --
-------- --------- --------- --------- ------- -------- -------- --------
TOTAL OTHER ACTIVITY - YEAR
ENDED DECEMBER 31, 2001 -- (121) 68,669 29,562 -- -- -- --
======== ========= ========= ========= ======= ======== ======== ========
TOTAL IMPACT FROM
SFAS NO. 133 - YEAR
ENDED DECEMBER 31, 2001 $(29,728) $ (98,472) $ 349,026 $(250,711) $82,446 $119,379 $(79,948) $ 6,118
======== ========= ========= ========= ======= ======== ======== ========
For additional discussion of the Company's hedging activities, please see
note 35 of the Company's Notes to Consolidated Financial Statements.
Page 25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company is exposed to interest rate
risk, which is the potential for loss due to changes in interest rates.
Financial products that expose the Company to interest rate risk include
securities, loans, deposits, debt and derivative financial instruments such as
swaps, swaptions, caps and floors.
ALCO, which includes senior management representatives, monitors and
considers methods of managing the sensitivity of rate and repricing
characteristics of the balance sheet components to maintain acceptable levels of
changes in the NPV ratio and net interest income due to changes in interest
rates. The Company's goal is to effectively invest its capital and to preserve
the value created by its core business operations. The management monitoring
processes discussed below are designed to minimize the impact of sudden and
sustained changes in interest rates on the NPV ratio and net interest income.
The Company's exposure to interest rate risk is reviewed at least quarterly
by the Board of Directors and ALCO. Interest rate risk exposure is measured
using interest rate sensitivity analysis to determine the Bank's change in the
NPV ratio and net interest income in the event of hypothetical changes in
interest rates. Interest rate sensitivity gap analysis is used to determine
impact of the repricing characteristics of the Bank's assets and liabilities.
The Board may direct management to adjust its asset and liability mix to keep
interest rate risk within Board-approved limits.
To reduce exposure to interest rate fluctuations, the Company developed
strategies to manage its liquidity, shorten its effective maturities of certain
interest-earning assets, and increase the ability of its asset base to respond
to changes in interest rates. Management has sought to decrease the average
maturity of its assets by originating primarily adjustable-rate residential
mortgage loans and consumer loans, which are retained by the Company for its
portfolio. Any long-term, fixed-rate single-family residential mortgage loans
are either exchanged for mortgage-backed securities secured by such loans and
are then sold or are sold directly for cash in the secondary market, generally
with servicing retained.
Interest rate sensitivity analysis measures the Bank's interest rate risk
by computing estimated changes in the NPV ratio in the event of a range of
assumed changes in market interest rates. The NPV ratio is a market value
adjusted capital to asset ratio and is computed by taking the market value of
assets minus the market value of liabilities, divided by the market value of
assets. This analysis assesses the risk of loss in value in the event of a
sudden and sustained increase or decrease in market interest rates of one
hundred to three hundred basis points. The Bank's Board of Directors has adopted
an interest rate risk policy which establishes minimum NPV ratios for various
interest rate scenarios.
The following table presents the Bank's NPV ratios for the various rate
shock levels at December 31, 2001.
Change in
Interest Rates NPV Ratio
-------------- ---------
300 basis point rise 5.65%
200 basis point rise 6.90%
100 basis point rise 7.77%
Base Scenario 8.26%
100 basis point decline 8.01%
200 basis point decline 8.16%
NPV Sensitivity Measure (1.36)%
Page 26
The preceding table indicates that as of December 31, 2001, the Bank's NPV
ratio would be expected to decrease in the event that prevailing market rates
increase in a sudden and sustained manner. The NPV sensitivity measure, which
compares the difference between the base scenario and the lesser of the 200
basis point rise or decline, as estimated by the Bank's model is (1.36)%. The
NPV sensitivity measure of (1.36)% when combined with the Bank's NPV ratio of
6.90% in the 200 basis point rise results in a "minimal risk" rating as defined
by the OTS policies, the lowest, or best, of four risk ratings.
The fair market value of the Company's equity decreases in a rising
interest rate environment because the Company's interest-bearing liabilities
generally reprice faster than its interest-earning assets, some of which are
subject to periodic caps. The reduction in value of the net interest-earning
assets is partially offset by an increase in value of MSRs that appreciate in
value as rates rise. In the current assumed declining interest rate environment,
the fair market value of the portfolio equity remains relatively stable as the
repricing of assets and liabilities are similar and the decline in value of the
MSRs is more highly offset by the hedges.
The Bank calculates the NPV ratio pursuant to guidelines established by the
OTS. The calculation is based on the net present value of estimated cash flows
considering market prepayment assumptions and interest rates provided by
independent broker quotations and other public sources as of December 31, 2001,
adjusted to reflect shifts in the Treasury yield curve, as appropriate.
The computation of the effect of hypothetical interest rate changes is
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposits decay, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the ALCO could undertake in response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented in
the computation of the NPV. Actual values may differ from those projections
presented, based upon market conditions. Certain assets, such as adjustable-rate
loans, which represent one of the Bank's primary loan products, have features
which restrict changes in interest rates on a short-term basis and over the life
of the assets. In addition, the Bank's adjustable-rate loan portfolio could
decrease due to refinancing if market interest rates remain at current levels or
decline further. In the event of a change in interest rates, prepayment and
early withdrawal levels would likely deviate significantly from those assumed in
the NPV. Finally, the ability of many borrowers to repay their adjustable-rate
mortgage loans may decrease in the event of interest rate increases.
In addition, the Bank uses interest rate sensitivity gap analysis to
monitor the relationship between the maturity and repricing of its
interest-earning assets and interest-bearing liabilities, to maintain an
acceptable interest rate spread.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of GS Holdings at December
31, 2001 and 2000 and for the years ended December 31, 2001, 2000 and 1999 are
included in this report at the pages indicated.
PAGE
----
Independent Auditors' Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Income F-3
Consolidated Statements of Comprehensive Income F-4
Consolidated Statements of Stockholder's Equity F-5
Consolidated Statements of Cash Flows F-8
Notes to Consolidated Financial Statements F-10
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Page 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENT SCHEDULES
Schedules are omitted because of the absence of conditions under which they
are required or because the required information is provided in the consolidated
financial statements or notes thereto.
(b) EXHIBITS
2.1 Agreement and Plan of Reorganization, dated as of February 4,
1998, by and among First Nationwide (Parent) Holdings Inc., First
Gibraltar Holdings, Inc., Hunter's Glen/Ford, Ltd., Golden State
Bancorp Inc. and Golden State Financial Corporation. (Incorporated
by reference to Exhibit 2.1 to the Registrant's Current Report on
Form 8-K dated February 4, 1998 (the "February 1998 Form 8-K").)
2.2 Amendment No. 1 dated as of July 31, 1998, by and among First
Nationwide (Parent) Holdings Inc., First Nationwide Holdings
Inc., Golden State Bancorp Inc., Golden State Financial
Corporation, First Gibraltar Holdings Inc. and Hunter's Glen/Ford
Ltd., to the Agreement and Plan of Reorganization, dated as of
February 4, 1998, by and among the Parties. (Incorporated by
reference to Exhibit 2.2 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1998 (the "1998 Form
10-K").)
2.3 Agreement dated as of August 20, 2000 by and between Golden
State Bancorp Inc. and GSB Investments Corp. (Incorporated by
reference to Exhibit 2.3 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 2000.)
2.4 Agreement dated as of July 26, 2001 by and between Golden State
Bancorp Inc. and GSB Investments Corp.
3.1 Certificate of Incorporation of the Registrant. (Incorporated by
reference to Exhibits 3.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998.)
3.2 By-laws of the Registrant, as amended. (Incorporated by
reference to Exhibit 3.2 to the Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1998.)
4.1 Indenture, dated as of October 1, 1986, between First
Nationwide Bank, A Federal Savings Bank, and Bank of America
National Trust and Savings Association re: $100,000,000 10%
Subordinated Debentures due 2006. (Incorporated by reference to
Exhibit 4.5 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994.)
4.2 First Supplemental Indenture, dated as of September 30, 1994,
among First Madison Bank, FSB, First Nationwide Bank, A
Federal Savings Bank, and Bank of America National Trust and
Savings Association, supplementing the 2006 Indenture.
(Incorporated by reference to Exhibit 4.6 to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1994.)
4.3 Second Supplemental Indenture, dated as of January 3, 1997, among
First Nationwide Bank, A Federal Savings Bank, California
Federal Bank, A Federal Savings Bank and Bank of America National
Trust and Savings Association, as trustee, supplementing the 2006
Indenture. (Incorporated by reference to Exhibit 4.8 to
Amendment No. 1 to the Registrant's Registration Statement on Form
S-1 (File No. 333-21015).)
4.4 Agreement Regarding Contingent Litigation Recovery Participation
Interests, dated as of June 30, 1995, between California Federal
Bank, and Chemical Trust Company of California, as Interest Agent.
(Incorporated by reference to Exhibit 4.17 to Amendment No. 1 to
the Registrant's Registration Statement on Form S-1 (File No. 333-
21015).)
Page 28
4.5 Agreement Regarding Secondary Contingent Litigation Recovery
Participation Interests, dated as of December 2, 1996, between
California Federal Bank, and Chase Mellon Shareholder Services,
L.L.C., as Interest Agent. (Incorporated by reference to Exhibit
4.18 to Amendment No. 1 to the Registrant's Registration Statement
on Form S-1 (File No. 333-21015).)
4.6 Indenture dated as of August 6, 1998 between GS Escrow Corp. and
The Bank of New York, as Trustee. (Incorporated by reference to
Exhibit 4.1 to the Registrant's Registration Statement on Form
S-1 (File No. 333-64597).)
4.7 First Supplemental Indenture dated as of August 6, 1998 between GS
Escrow Corp. and The Bank of New York, as Trustee. (Incorporated
by reference to Exhibit 4.2 to the Registrant's Registration
Statement on Form S-1 (File No. 333-64597).)
4.8 Second Supplemental Indenture dated as of August 6, 1998 between
GS Escrow Corp. and The Bank of New York, as Trustee.
(Incorporated by reference to Exhibit 4.3 to the Registrant's
Registration Statement on Form S-1 (File No. 333-64597).)
4.9 Third Supplemental Indenture dated as of August 6, 1998 between GS
Escrow Corp. and The Bank of New York, as Trustee. (Incorporated
by reference to Exhibit 4.4 to the Registrant's Registration
Statement on Form S-1 (File No. 333-64597).)
4.10 Fourth Supplemental Indenture dated as of August 6, 1998 between
GS Escrow Corp. and The Bank of New York, as Trustee (Incorporated
by reference to Exhibit 4.5 to the Registrant's Registration
Statement on Form S-1 (File No. 333-64597).)
4.11 Fifth Supplemental Indenture dated as of September 11, 1998
between Golden State Holdings Inc. and the Bank of New York, as
Trustee (Incorporated by reference to Exhibit 4.6 to the
Registrant's Registration Statement on Form S-1 (File No. 333-
64597).)
10.1 Tax Sharing Agreement, effective as of January 1, 1994, by and
among First Madison Bank, FSB, the Registrant's and Mafco
Holdings Inc. (Incorporated by reference to Exhibit 10.10 to the
Registrant's Registration Statement on Form S-1 (File No. 33-
82654).)
10.2 Amendment to Tax Sharing Agreement, effective September 11, 1998,
by and among Mafco Holdings Inc., Golden State Bancorp Inc., First
Nationwide Holdings Inc., Glendale Federal Bank, A Federal
Savings Bank, and New First Nationwide Holdings Inc.
(Incorporated by reference to Exhibit 10.2 to the Registrant's
1998 Form 10-K.)
10.3 Tax Sharing Modification Agreement dated as of December 22, 1998,
between Mafco Holdings Inc. and Golden State Bancorp Inc.
(Incorporated by reference to Exhibit 10.3 to the Registrant's
1998 Form 10-K.)
10.4 Office Lease, dated as of November 15, 1990, between Webb/San
Francisco Ventures, Ltd. and First Nationwide Bank, A Federal
Savings Bank. Confidential treatment has been granted for
portions of this document (Incorporated by reference to Exhibit
10.6 to Amendment No. 3 to the Registrant's Registration Statement
on Form S-1 (File No. 33-82654).)
10.5 Amendment No. 2 to Lease between First Nationwide Bank, A Federal
Savings Bank, and RNM 135 Main, L.P. dated April 6, 1995.
(Incorporated by reference to Exhibit 10.26 to Post-Effective
Amendment No. 1 to the Registrant's Registration Statement on Form
S-1 (File No. 33-82654).)
10.6 Letter dated March 30, 2000 extending the term of the office lease
dated as of November 15, 1990 between RNM 135 Main, L. P., as
successor to Webb/San Francisco Venture, Ltd., and California
Federal Bank, as successor to First Nationwide Bank, A Federal
Savings Bank. (Incorporated by reference to Exhibit 10.6 to the
Registrant's 2000 Form 10-K.)
Page 29
10.7 Employment Agreement dated November 22, 1999, between
California Federal Bank, and Gerald J. Ford. (Incorporated by
reference to Exhibit 10.8 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1999 (the "1999 Form
10-K").)
10.8 Employment Agreement, dated as of December 17, 1999, between
California Federal Bank, and Carl B. Webb, II. (Incorporated
by reference to Exhibit 10.10 to the Registrant's 1999 Form
10-K.)
10.9 Employment Agreement, dated as of August 1, 1999, between
California Federal Bank, and Christie S. Flanagan. (Incorporated
by reference to Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended September 30,
1999.)
10.10 Employment Agreement, dated as of December 17, 1999, between
California Federal Bank, and J. Randy Staff. (Incorporated by
reference to Exhibit 10.15 to the Registrant's 1999 Form 10-K.)
10.11 Employment Agreement dated as of August 1, 1999, between
California Federal Bank, and Scott A. Kisting. (Incorporated
by reference to Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended September
30, 1999.)
10.12 1998 Change of Control Plan, dated as of March 25, 1999.
(Incorporated by reference to Exhibit 10.18 to the Registrant's
1999 Form 10-K.)
10.13 Litigation Management Agreement, dated as of February 4, 1998, by
and among Golden State Bancorp, Inc., Glendale Federal Bank,
Federal Savings Bank, California Federal Bank, Stephen J. Trafton
and Richard A. Fink. (Incorporated by reference to Exhibit 99.2
to the February 1998 Form 8-K.)
10.14 Reimbursement and Expense Allocation Agreement between Golden
State Bancorp Inc. and California Federal Bank, dated November
23, 1998. (Incorporated by reference to Exhibit 10.53 to the
Registrant's 1998 Form 10-K.)
10.15 Agreement for Provision of Services between California Federal
Bank, A Federal Savings Bank and Golden State Management Inc.,
dated November 23, 1998. (Incorporated by reference to Exhibit
10.54 to the Registrant's 1998 Form 10-K.)
10.16 Amendment No. 1 dated as of January 1, 2000 to Agreement for
Provision of Services between Mafco Holdings Inc. and Golden
State Bancorp Inc., dated January 1, 1999. (Incorporated by
reference to Exhibit 10.16 to the Registrant's 2000 Form 10-K.)
10.17 Amendment No. 2 dated as of December 2, 2001 to Agreement for
Provision of Services between Mafco Holdings Inc. and Golden
State Bancorp Inc., dated January 1, 1999.
12.1 Statement regarding the computation of ratio of earnings to
combined fixed charges and minority interest for the Registrant.
21.1 Subsidiaries of the Registrant. This exhibit has been omitted in
accordance with General Instruction I of Form 10-K.
24.1 Power of Attorney executed by Ronald O. Perelman.
(c) REPORTS ON FORM 8-K
None.
Page 30
GLOSSARY OF DEFINED TERMS
This glossary covers the preceding 10-K as well as the financial statements
beginnin on page F-1 of this document.
6 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2001 - In 1986, Cal Fed Inc., Old
California Federal's former parent company, issued $125 million of 6.5%
convertible subordinated debentures due February 20, 2001
9 1/8% PREFERRED STOCK - One newly issued share of preferred stock of the Bank
having substantially the same terms as the REIT Preferred Stock
10% SUBORDINATED DEBENTURES DUE 2003 - In 1992, Old California Federal issued
$13.6 million of 10.0% unsecured subordinated debentures due 2003
10% SUBORDINATED DEBENTURES DUE 2006 - As part of its 1994 acquisition of
First Nationwide, California Federal assumed $92.1 million principal
amount of subordinated debentures, which bear interest at 10% per annum
and mature on October 1, 2006
10 5/8% BANK PREFERRED STOCK - 10 5/8% noncumulative perpetual preferred stock
issued by California Federal
11 1/2% BANK PREFERRED STOCK - 11 1/2% noncumulative perpetual preferred stock
issued by California Federal
11.20% SENIOR NOTES DUE 2004 - As part of its 1996 acquisition of San Francisco
Federal, California Federal assumed $50 million principal amount of 11.20%
Senior Notes due September 1, 2004
1996 ACQUISITIONS - 1996 acquisitions of Home Federal Financial Corporation and
San Francisco Federal
2001 NOTES - 6 3/4% Senior Notes due 2001 that are part of the GS Holdings Fixed
Rate Notes
2003 NOTES - 7% Senior Notes due 2003 that are part of the GS Holdings Fixed
Rate Notes
2005 NOTES - 7 1/8% Senior Notes due 2005 that are part of the GS Holdings Fixed
Rate Notes
ACCRETABLE YIELD - excess of the pool's Expected Cash Flows over the amount paid
ALCO - Asset/Liability Management Committee
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
APB OPINION NO. 30 - Reporting the Results of Operations-Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions
ARM - Adjustable-rate mortgage
AUTO ONE - Auto One Acceptance Corporation
BANK - California Federal Bank
BANK PREFERRED STOCK - the 10 5/8% Bank Preferred Stock together with the
11 1/2% Bank Preferred Stock
BANK PREFERRED STOCK TENDER OFFERS - FN Holdings commenced cash tender offers
for each of the Bank's two outstanding series of Bank Preferred Stock in
August 1998
BIF - Bank Insurance Fund
BROKERED DEPOSITS - Issued CDs through direct placement programs and national
investment banking firms
CAL FED - Cal Fed Bancorp Inc.
CAL FED ACQUISITION - Agreement and Plan of Merger among FN Holdings, Cal Fed
Bancorp Inc. and California Federal Bank, A Federal Savings Bank. FN
Holdings acquired 100% of the outstanding stock of Cal Fed and Old
California Federal, and First Nationwide merged with and into Old
California Federal in January 1997.
CALGL - Secondary Contingent Litigation Recovery Participation Interests
CALGZ - Contingent Litigation Recovery Participation Interests
CALIFORNIA FEDERAL - California Federal Bank
CALIFORNIA FEDERAL GOODWILL LITIGATION - California Federal Bank v. United
States, 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
CFI - Cal Fed Investments
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.
CRA - Community Reinvestment Act
Page 31
GLOSSARY OF DEFINED TERMS (CONTINUED)
DEBT TENDER OFFERS - On September 14, 1998, GS Holdings commenced cash tender
offers for the FN Holdings Notes
DECP - Deferred Executive Compensation Plan
DOWNEY ACQUISITION - Auto One's acquisition of the Downey Auto Finance
Corporation in February, 2000.
DP - data processing
ECP - Executive Compensation Plan
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
EXPECTED CASH FLOWS - expected principal and interest cash flows
FAIR LENDING LAWS - Equal Credit Opportunity and the Fair Housing Act,
together
FASB - Financial Accounting Standards Board
FDIC - Federal Deposit Insurance Corporation
FDICIA - Federal Deposit Insurance Corporation Improvement Act
FHLB - Federal Home Loan Bank of San Francisco
FHLB SYSTEM - Federal Home Loan Bank System
FHLMC - Federal Home Loan Mortgage Corporation
FICO - Financing Corporation
FIRREA - Financial Institutions Reform, Recovery and Enforcement Act of 1989 and
its implementing regulations
FIRST GIBRALTAR - First Gibraltar Holdings Inc.
FIXED RATE NOTES - The 2001 Notes, 2003 Notes and 2005 Notes, collectively,
which together with the Floating Rate Notes are the GS Holdings Notes
FLOATING RATE NOTES DUE 2003 - GS Holdings Notes consist in part of $250 million
aggregate principal amount of its Floating Rate Notes Due 2003
FLSC - forward loan sale commitments
FN ACQUISITION - California Federal acquired First Nationwide as part of its
1994 acquisition
FN HOLDINGS - First Nationwide Holdings Inc.
FN HOLDINGS 10 5/8% NOTES - In connection with the Cal Fed Acquisition, GS
Holdings acquired the net proceeds from the issuance of $575 million
principal amount of FN Escrow's 10 5/8% Senior Subordinated Notes due 2003
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.
FN HOLDINGS NOTES - FN Holdings 12 1/4% Senior Notes, the FN Holdings 9 1/8%
Senior Sub Notes and the FN Holdings 10 5/8% Notes, collectively
FNMA - Federal National Mortgage Association
FNMC - First Nationwide Mortgage Corporation
FSLIC - Federal Savings and Loan Insurance Corporation
FTE - Full-time equivalent staff
GAAP - accounting principles generally accepted in the United States of America
GLEN FED MERGER - Glendale Federal Bank merged with and into the Bank
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.
GNMA - Government National Mortgage Association
GOLDEN STATE - Golden State Bancorp Inc.
GOLDEN STATE ACQUISITION - FN Holdings Asset Transfer, Holding Company Mergers
and Glen Fed Merger, collectively
GOLDEN STATE COMMON STOCK - Golden State common stock, par value $1.00
GOLDEN STATE GROUP - consolidated group of Golden State Bancorp, Golden State
Holdings and California Federal Bank, for which Golden State is the common
parent
Page 32
GLOSSARY OF DEFINED TERMS (CONTINUED)
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
GSAC - Gulf States Acceptance Company
GSAC ACQUISITION - Auto One, a subsidiary of the Bank, acquired 100% of the
partnership interests in Gulf States Acceptance Company, a Delaware
limited partnership and its general partner, Gulf States Financial
Services, Inc., a Texas corporation, in February 1998
GSB INVESTMENTS - GSB Investments Corp.
GS ESCROW - GS Escrow Corp.
GS HOLDINGS - Golden State Holdings Inc.
GS HOLDINGS NOTES - On August 6, 1998, GS Escrow Corp, which subsequently
merged into GS Holdings, issued $2 billion of fixed and floating rate
notes.
HOLA - Home Owners' Loan Act of 1933
HOLDING COMPANY MERGERS - FN Holdings merged with and into Golden State
Financial Corporation, which owned all of the common stock of Glendale
Federal, together with the Golden State Merger
HUNTER'S GLEN - Hunter's Glen/Ford, Ltd.
IO - Interest only
INCENTIVE PLAN - management incentive plan
IRS - Internal Revenue Service
LIBOR - London Interbank Offered Rate
LOCOM - lower of cost or market
LTIP - Long Term Incentive Plan
LTV - Loan-to-value
MAFCO GROUP - Mafco Holdings Inc. affiliated group
MAFCO HOLDINGS - Mafco Holdings Inc.
MBS - mortgage-backed securities
MERGER AGREEMENT - Agreement and Plan of Merger among FN Holdings, Cal Fed
Bancorp Inc. and California Federal Bank, A Federal Savings Bank
MSR - Mortgage servicing rights
MSR HEDGE - To reduce the sensitivity of its earnings to interest rate and
market value fluctuations, the Company hedges the change in value of its
MSRs based on changes in interest rates
NEVADA PURCHASE - The Bank acquired twelve retail branches located in Nevada
with deposits of approximately $543 million from Norwest Bank, Nevada, a
subsidiary of Norwest Corporation, and Wells Fargo Bank, N.A. in April
1999.
NOL - net operating loss
NONACCRETABLE CONTRACTUAL CASH FLOWS - Excess of the pool's scheduled
contractual principal and contractual interest payments over its Expected
Cash Flows as an amount that should not be accreted
notional amount - the amount on which calculations, payments and the value of a
derivative is based. Notional amounts do not represent direct credit
exposures.
NPV - Net portfolio value
OCI - Other comprehensive income
OLD CALIFORNIA FEDERAL - California Federal Bank, A Federal Savings Bank prior
to the Cal Fed Acquisition
OLD FNB - First Nationwide Bank, A Federal Savings Bank prior to the FN
Acquisition
OLD FNB INDENTURE - Indenture governing the 10% Subordinated Debentures Due 2006
OMNIBUS STOCK PLAN - Golden State Bancorp Inc. Omnibus Stock Plan
OTC - over-the-counter
OTS - Office of Thrift Supervision
PARENT HOLDINGS - First Nationwide (Parent) Holdings Inc.
PARENT HOLDINGS NOTES - 12 1/2% Senior Notes due 2003
PARTICIPANTS - certain executive officers of the Bank eligible for the
management incentive plan
Page 33
GLOSSARY OF DEFINED TERMS (CONTINUED)
PASS-THROUGH INTEREST EXPENSE - represents interest that FNMC pays to the
investor(s) for loans serviced by FNMC, which are paid off by the
borrower(s) before the end of the month. FNMC picks up the shortfall of
interest on the respective loans as a result of the contractual agreement
between the servicer (FNMC) and the investor(s) (i.e., GNMA)
PO - Principal only
QTL - Qualified Thrift Lender
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.
REO - real estate owned
REPOS - short-term securities sold under agreements to repurchase
SAIF - Savings Association Insurance Fund
SCHEDULED CONTRACTUAL CASH FLOWS - the pool's scheduled contractual principal
and contractual interest payments
SEC - Securities and Exchange Commission
SERVICING SALE - During April 1999, the Bank's wholly-owned mortgage banking
subsidiary, First Nationwide Mortgage Corporation sold servicing rights
on approximately 49,000 loans with an UPB of $2.0 billion.
SFAS - Statement of Financial Accounting Standards
SFAS NO. 65 - Accounting for Certain Mortgage Banking Activities
SFAS NO. 72 - Accounting for Certain Acquisitions of Banking or Thrift
Institutions
SFAS NO. 109 - Accounting for Income Taxes
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. 123 - Accounting for Stock-Based Compensation
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
SFAS NO. 143 - Accounting for Asset Retirement Obligations
SFAS NO. 144 - Accounting for the Impairment or Disposal of Long-Lived Assets
SFFED ACQUISITION - The acquisition of San Francisco Federal by the Company in
February 1996
SLHC - savings and loan holding company
STOCK PLAN - Golden State Bancorp Inc. Omnibus Stock Plan
TAX SHARING AGREEMENT - Prior to the Golden State Acquisition, for federal
income tax purposes, the Bank, FN Holdings, and Mafco Holdings were
parties to a tax sharing agreement effective as of January 1, 1994
UPB - Unpaid principal balance
VERDUGO - Verdugo Trustee Service Corporation
XCF - XCF Acceptance Corporation
Page 34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: March 19, 2002
GOLDEN STATE HOLDINGS INC.
By: /S/ GERALD J. FORD
-----------------------------
Gerald J. Ford
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
NAME TITLE DATE
/s/Gerald J. Ford Chairman of the Board, Chief March 19, 2002
- --------------------------------------------- Executive Officer and Director
Gerald J. Ford (Principal Executive Officer)
/s/Carl B. Webb President, Chief Operating Officer March 19, 2002
- --------------------------------------------- and Director
Carl B. Webb
/s/Richard H. Terzian Executive Vice President March 19, 2002
- --------------------------------------------- and Chief Financial Officer
Richard H. Terzian (Principal Financial Officer)
/s/Renee Nichols Tucei Executive Vice President and March 19, 2002
- --------------------------------------------- Controller
Renee Nichols Tucei (Principal Accounting Officer)
/s/Howard Gittis Director March 19, 2002
- ---------------------------------------------
Howard Gittis
* Director March 19, 2002
- ---------------------------------------------
Ronald O. Perelman
* James R. Eller, Jr., by signing his name, hereto, does hereby execute this
report on Form 10-K on behalf of the directors and officers of the Registrant
indicated above by asterisks, pursuant to powers of attorney duly executed by
such directors and officers and filed as exhibits to this report on Form
10-K.
By: /S/ James R. Eller, Jr.
-----------------------------
James R. Eller, Jr.
Attorney-in-fact
Page 35
INDEPENDENT AUDITORS' REPORT
The Stockholder and Board of Directors
Golden State Holdings Inc.:
We have audited the accompanying consolidated balance sheets of Golden
State Holdings Inc. and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of income, comprehensive income, stockholder's
equity and cash flows for each of the years in the three-year period ended
December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Golden State
Holdings Inc. and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 2(p) to the consolidated financial statements, the
Company changed its method of accounting for derivative instruments and hedging
activities in 2001 with the adoption of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities."
KPMG LLP
San Francisco, California
January 15, 2002
F-1
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2001 and 2000
(dollars in thousands, except per share data)
Assets 2001 2000
----------- -----------
Cash and due from banks $ 709,139 $ 697,441
Interest-bearing deposits in other banks 103 123
Short-term investment securities 95,929 85,510
----------- -----------
Cash and cash equivalents 805,171 783,074
Securities available for sale, at fair value 116,054 637,070
Securities held to maturity (fair value of $30,602 and $590,571 at December 31,
2001 and 2000, respectively) 30,602 587,503
Mortgage-backed securities available for sale, at fair value (includes securities
pledged to creditors with the right to sell or repledge of $1,607,130 and
$2,620,399 at December 31, 2001 and 2000, respectively) 7,057,903 9,866,823
Mortgage-backed securities held to maturity (fair value $1,411,157 and
$2,959,677 at December 31, 2001 and 2000, respectively) (includes securities
pledged to creditors with the right to sell or repledge of $763,438 and
$2,053,070 at December 31, 2001 and 2000, respectively) 1,385,113 2,886,612
Loans held for sale, net 2,608,365 845,763
Loans receivable, net 39,335,623 39,592,814
Investment in FHLB System 1,446,607 1,361,066
Premises and equipment, net 276,411 290,899
Foreclosed real estate, net 18,564 19,080
Accrued interest receivable 288,308 364,414
Intangible assets (net of accumulated amortization of $306,011 and $246,150
at December 31, 2001 and 2000, respectively) 640,843 691,288
MSRs, net of valuation allowance 1,623,947 1,559,323
Derivative assets 349,026 --
Other assets 536,281 1,029,082
----------- -----------
Total assets $56,518,818 $60,514,811
=========== ===========
Liabilities, Minority Interest and Stockholder's Equity
Deposits $25,146,827 $23,462,372
Securities sold under agreements to repurchase 2,363,945 4,511,309
Borrowings 24,444,541 28,800,557
Derivative liabilities 250,711 --
Other liabilities 1,188,005 942,397
----------- -----------
Total liabilities 53,394,029 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 at December 31, 2001 and 2000, respectively) 1 1
Additional paid-in capital 1,569,894 1,564,821
Accumulated other comprehensive loss, net (63,327) (91,405)
Retained earnings (substantially restricted) 1,118,221 824,759
----------- -----------
Total stockholder's equity 2,624,789 2,298,176
----------- -----------
Total liabilities, minority interest and stockholder's equity $56,518,818 $60,514,811
=========== ===========
See accompanying notes to consolidated financial statements.
F-2
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31, 2001, 2000 and 1999
(in thousands)
2001 2000 1999
---------- ---------- ----------
Interest income:
Loans receivable $2,980,884 $2,852,971 $2,332,500
Mortgage-backed securities available for sale 603,142 800,444 872,823
Mortgage-backed securities held to maturity 124,117 206,469 177,644
Loans held for sale 137,430 62,591 109,486
Securities available for sale 18,718 55,917 76,621
Securities held to maturity 23,899 29,499 11,459
Interest-bearing deposits in other banks 973 5,034 12,049
Dividends on FHLB stock 79,485 92,872 59,639
---------- ---------- ----------
Total interest income 3,968,648 4,105,797 3,652,221
---------- ---------- ----------
Interest expense:
Deposits 831,538 928,407 888,286
Securities sold under agreements to repurchase 196,425 352,100 265,467
Borrowings 1,577,508 1,677,498 1,312,629
Other 1,565 -- --
---------- ---------- ----------
Total interest expense 2,607,036 2,958,005 2,466,382
---------- ---------- ----------
Net interest income 1,361,612 1,147,792 1,185,839
Provision for loan losses -- -- 10,000
---------- ---------- ----------
Net interest income after provision for loan losses 1,361,612 1,147,792 1,175,839
---------- ---------- ----------
Noninterest income:
Loan servicing fees, net (14,393) 176,159 127,834
Customer banking fees and service charges 221,796 196,969 187,022
Gain on sale, settlement and transfer of loans, net 78,440 49,730 32,885
Gain (loss) on sale of assets, net 21,942 (13,424) 24,042
Other income 49,618 34,161 31,096
---------- ---------- ----------
Total noninterest income 357,403 443,595 402,879
---------- ---------- ----------
Noninterest expense:
Compensation and employee benefits 452,721 425,327 389,904
Occupancy and equipment 161,931 153,223 141,696
Professional fees 36,821 40,852 52,493
Loan expense 16,828 17,018 17,200
Foreclosed real estate operations, net (905) (4,690) (6,411)
Amortization of intangible assets 59,861 62,717 69,724
Other expense 232,089 203,981 227,329
---------- ---------- ----------
Total noninterest expense 959,346 898,428 891,935
---------- ---------- ----------
Income before income taxes, minority interest, extraordinary items and
cumulative effect of change in accounting principle 759,669 692,959 686,783
Income tax expense 302,667 144,204 234,263
Minority interest: provision in lieu of income tax expense -- -- 79,005
Minority interest: other 26,988 26,987 34,936
---------- ---------- ----------
Income before extraordinary items and cumulative effect of change in
accounting principle 430,014 521,768 338,579
Extraordinary items - gains on early extinguishment of debt, net of
applicable taxes of $2,083 and $1,801 in 2000 and 1999,
respectively -- 3,014 2,472
Cumulative effect of change in accounting principle, net of applicable
taxes of $1,072 in 2001 (1,552) -- --
---------- ---------- ----------
Net income $ 428,462 $ 524,782 $ 341,051
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-3
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2001, 2000 and 1999
(in thousands)
2001 2000 1999
---------- ---------- ----------
Net income $428,462 $524,782 $ 341,051
Other comprehensive income (loss), net of tax:
Unrealized holding gain (loss) on securities available for sale:
Unrealized holding gain (loss) arising during the period 134,400 170,821 (282,241)
Less: reclassification adjustment for (gain) loss included
in net income (15,941) 9,976 (742)
-------- -------- ---------
118,459 180,797 (282,983)
Amortization of market adjustment for securities
transferred from available-for-sale to held-to-maturity 28,998 4,630 --
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 $51,611 (74,732) -- --
-------- -------- ---------
Other comprehensive income (loss) 28,078 185,427 (282,983)
-------- -------- ---------
Comprehensive income $456,540 $710,209 $ 58,068
======== ======== =========
See accompanying notes to consolidated financial statements.
F-4
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Stockholder's Equity
Years Ended December 31, 2001, 2000 and 1999
(in thousands)
Retained
Additional Other (Loss) Earnings Total
Common Paid-in Accumulated Comprehensive Income, Net (Substantially Stockholder's
Stock Capital Securities Derivatives Total Restricted) Equity
----- ------- ---------- ----------- ----- ----------- ------
Balance at December 31, 1998 $1 $1,512,061 $ 6,151 $ -- $ 6,151 $ 214,043 $1,732,256
Net income -- -- -- -- -- 341,051 341,051
Golden State Acquisition - see note 3 -- (12,380) -- -- -- -- (12,380)
Adjustment to initial dividend of tax
benefits to parent due to
deconsolidation -- -- -- -- -- 66,383 66,383
Impact of Golden State restricted
common stock -- 477 -- -- -- -- 477
Tax benefit on exercise of stock
options -- 2,013 -- -- -- -- 2,013
Dividends to parent -- -- -- -- -- (225,500) (225,500)
Contributions from parent -- 40,000 -- -- -- -- 40,000
Change in net unrealized holding gain
(loss) on securities available for
sale -- -- (282,983) -- (282,983) -- (282,983)
-- ---------- --------- --------- --------- ---------- ----------
Balance at December 31, 1999 1 1,542,171 (276,832) -- (276,832) 395,977 1,661,317
Net income -- -- -- -- -- 524,782 524,782
Change in unrealized holding loss
on securities available for sale -- -- 180,797 -- 180,797 -- 180,797
Amortization of unrealized holding
loss on securities held to maturity -- -- 4,630 -- 4,630 -- 4,630
Dividends to parent -- -- -- -- -- (96,000) (96,000)
Contributions from parent -- 19,000 -- -- -- -- 19,000
Impact of Golden State restricted
common stock -- 3,175 -- -- -- -- 3,175
Tax benefit on exercise of stock
options -- 475 -- -- -- -- 475
-- ---------- --------- --------- --------- ---------- ----------
Balance at December 31, 2000 1 1,564,821 (91,405) (91,405) 824,759 2,298,176
Net income -- -- -- -- -- 428,462 428,462
Change in net unrealized holding gain
(loss) on securities available for
sale -- -- 88,085 -- 88,085 -- 88,085
Change in net unrealized holding loss
on derivatives -- -- -- (74,732) (74,732) -- (74,732)
Unrealized loss on securities
reclassified from held-to-maturity,
net of tax -- -- 30,374 -- 30,374 -- 30,374
Amortization of unrealized holding loss
on reclassified securities, net of
tax -- -- 28,998 -- 28,998 -- 28,998
Transition adjustment upon adoption
of SFAS No. 133 -- -- -- (44,647) (44,647) -- (44,647)
Dividends to parent -- -- -- -- -- (135,000) (135,000)
Impact of Golden State restricted
common stock -- 3,458 -- -- -- -- 3,458
Tax benefits on exercise of stock -- 1,615 -- -- -- 1,615
-- ---------- --------- --------- --------- ---------- ----------
Balance at December 31, 2001 $1 $1,569,894 $ 56,052 $(119,379) $ (63,327) $1,118,221 $2,624,789
== ========== ========= ========= ========= ========== ==========
See accompanying notes to consolidated financial statements.
F-5
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 2001, 2000 and 1999
(in thousands)
2001 2000 1999
------------- ------------ ------------
Cash flows from operating activities:
Net income $ 428,462 $ 524,782 $ 341,051
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Amortization of intangible assets 59,861 62,717 69,724
Provision for deferred income taxes 117,117 23,367 146,373
Accretion of discount on borrowings 1,041 1,093 1,018
Amortization of purchase accounting
premiums and discounts, net 11,269 269 7,541
Amortization of MSRs 361,076 204,032 212,310
Provision for loan losses -- -- 10,000
(Gain) loss on sale of assets, net (21,942) 13,424 (21,699)
Gain on sale of branches, net -- -- (2,343)
Gain on sale of foreclosed real estate, net (3,203) (8,950) (13,069)
Loss on sale, settlement and transfer of loans, net 291,074 76,918 152,657
Capitalization of originated MSRs (369,514) (126,648) (185,541)
Extraordinary items - gains on early
extinguishment of debt, net -- (3,014) (2,472)
Depreciation and amortization of premises and
equipment 53,422 51,067 37,465
Amortization of deferred debt issuance costs 6,773 7,354 7,295
FHLB stock dividends (79,485) (92,872) (59,639)
Purchases and originations of loans held for sale (17,934,105) (5,344,219) (8,345,470)
Net proceeds from the sale of loans held for sale 15,996,488 5,059,241 9,711,385
Net gain on derivatives used to hedge MSRs (79,948) -- --
Provision for loss on MSRs 153,345 -- --
Decrease (increase) in other assets 166,400 (452,212) 69,397
Decrease (increase) in accrued interest receivable 76,106 (41,580) (4,141)
Increase (decrease) in other liabilities 448,293 272,812 (263,027)
Amortization of deferred compensation expense -
Golden State restricted common stock 1,768 1,897 477
Gain on non-monetary exchange of Star Systems
common stock (20,671) -- --
Reduction in net accrued tax liability (25,805) -- --
Minority interest: provision in lieu of income taxes -- -- 79,005
Minority interest: other 26,988 26,987 34,936
Dividends on Golden State restricted common stock 63 36 --
------------ ----------- -----------
Net cash (used in) provided by operating activities (335,127) 256,501 1,983,233
============ =========== ===========
(Continued)
See accompanying notes to consolidated financial statements.
F-6
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
Years Ended December 31, 2001, 2000 and 1999
(in thousands)
2001 2000 1999
------------- ------------ ------------
Cash flows from investing activities:
Acquisitions and divestitures:
Downey Acquisition $ -- $ (379,314) $ --
Nevada Purchase -- -- 458,943
Purchases of securities available for sale (90,967) (50,691) (807,690)
Proceeds from maturities of securities available for sale 700,563 58,022 431,934
Purchases of securities held to maturity (9,403) (4,199) (28,869)
Principal payments and proceeds from maturities of securities
held to maturity 530,345 51,289 94,820
Purchases of mortgage-backed securities available for sale (171,943) (115,256) (4,832,344)
Principal payments on mortgage-backed securities available for sale 3,477,044 1,878,401 3,623,918
Proceeds from sales of mortgage-backed securities available for sale 788,564 1,367,666 193,732
Principal payments on mortgage-backed securities held to maturity 433,575 428,067 621,179
Proceeds from sales of loans 83,829 98,894 18,528
Loan originations and principal collections, net 4,277,725 (3,804,590) (1,694,325)
Purchases of loans receivable (4,298,594) (1,648,599) (2,197,573)
Purchases of FHLB stock, net (23,193) (107,570) (110,477)
Purchases of premises and equipment (42,166) (48,718) (44,331)
Proceeds from disposal of premises and equipment 16,448 4,146 14,549
Proceeds from sales of foreclosed real estate 33,442 75,312 136,565
Proceeds from sale of Concord EFS common stock 29,948 -- --
Purchase of remaining 20% interest in Auto One (9,000) -- --
Purchases of MSRs (308,003) (344,262) (334,842)
Hedge (payments) receipts (7,298) 5,593 (10,191)
Purchases of derivatives (713,575) (127,199) (67,698)
Proceeds from sales and settlements of derivatives 622,765 101,114 46,860
Proceeds from sales of MSRs -- 774 30,802
------------- ------------ ------------
Net cash provided by (used in) investing activities 5,320,106 (2,561,120) (4,456,510)
------------- ------------ ------------
Cash flows from financing activities:
Branch sales -- -- (69,340)
Net increase (decrease) in deposits 1,685,252 423,216 (2,074,736)
Proceeds from additional borrowings 111,475,897 43,513,455 33,029,009
Principal payments on borrowings (115,466,294) (40,367,906) (29,717,967)
Net (decrease) increase in securities sold under agreements
to repurchase (2,147,364) (970,438) 1,243,352
Principal payment on GS Holdings Notes (350,000) -- --
Bank Preferred Stock Tender Offers -- -- (97,621)
Debt Tender Offers -- -- (253)
Dividends on common stock (135,000) (96,000) (225,500)
Dividends paid to minority stockholders, net of taxes (26,988) (26,987) (30,752)
Tax benefit on exercise of stock options 1,615 475 2,013
Capital contribution from parent -- 19,000 40,000
------------- ------------ ------------
Net cash (used in) provided by financing activities (4,962,882) 2,494,815 2,098,205
------------- ------------ ------------
Net change in cash and cash equivalents 22,097 190,196 (375,072)
Cash and cash equivalents at beginning of year 783,074 592,878 967,950
------------- ------------ ------------
Cash and cash equivalents at end of year $ 805,171 $ 783,074 $ 592,878
============= ============ ============
See accompanying notes to consolidated financial statements.
F-7
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) ORGANIZATION
The Company, 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. Activities for the consolidated entity are primarily carried out by
the Bank and its subsidiaries.
The Bank is a diversified financial services company that primarily serves
consumers in California and, to a lesser extent, in Nevada. The Bank's principal
business consists of operating retail branches that provide deposit products
(for example demand, transaction and savings accounts), and sell investment
products (for example mutual funds, annuities and insurance). In addition, it
engages in mortgage banking activities, including originating and purchasing 1-4
unit residential loans for sale or retention, and servicing loans for itself and
others. To a lesser extent, the Bank originates and/or purchases commercial real
estate, commercial banking and consumer loans for investment. Revenues are
derived primarily from interest earned on loans and 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 and
borrowings, and general and administrative expenses including compensation and
benefits, occupancy and equipment, professional fees and other general and
administrative expenses.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform to GAAP and
prevailing practices within the banking and thrift industries. The following
summarizes the more significant of these policies.
A glossary of defined terms appears on page 31.
(a) Basis of Presentation
The accompanying consolidated financial statements include the accounts of
GS Holdings, the Bank and the Bank's wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Certain amounts in the prior years have been reclassified to conform to the
current year's presentation. As GS Holdings' common stock is wholly owned by
Golden State, earnings per share data is not presented.
(b) Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash and due from banks, interest-bearing deposits in other
banks, and other short-term investment securities with original maturities of
three months or less. Savings and loan associations are required by the Federal
Reserve System to maintain non-interest bearing cash reserves equal to a
percentage of certain deposits. The reserve requirement for California Federal
at December 31, 2001 was $52.3 million, which was met with vault cash of $112.2
million and cash reserves of $28.6 million. In addition, the Company held
restricted cash related to escrows on loans held for sale of $63.5 million and
$43.4 million at December 31, 2001 and 2000, respectively.
(c) Securities and Mortgage-backed Securities
The Company's investment in securities consists primarily of U.S.
government and agency securities and mortgage-backed securities. The Company
classifies debt and equity securities, including mortgage-backed securities,
into one of three categories: held-to-maturity, available-for-sale or trading
securities. Securities held to maturity represent securities which management
has the positive intent and ability to hold to maturity; these are carried at
amortized cost. Securities bought and held principally for the purpose of
selling them in the near term are classified as trading securities and are
reported at fair value, with unrealized gains and losses included in income. All
other securities, including equity securities with readily determinable fair
values, are classified as available-for-sale and are carried at fair value, with
unrealized holding gains and losses, net of tax, reported as a separate
component of stockholder's equity. Declines in the value of held-to-maturity and
available-for-sale securities below their cost that are deemed to be other than
temporary are reflected in earnings as realized losses. Realized gains and
F-8
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
losses on securities available for sale are computed on a specific
identification basis and are accounted for on a trade-date basis.
Securities available for sale include IO strips, some of which are
accounted for as trading securities and reported at fair value and some of which
are accounted for in accordance with EITF No. 99-20 with impairment charges
recorded to income.
Amortization and accretion of premiums and discounts relating to
mortgage-backed securities is recognized using the interest method over the
estimated lives of the underlying mortgages.
(d) Loans Held for Sale, Net
One to four unit residential loans originated and intended for sale in the
secondary market which qualify for fair value hedging under SFAS No. 133 are
carried at fair market value, less the values associated with servicing. Net
unrealized gains and losses are recognized as a component of income.
One to four unit residential loans originated and intended for sale in the
secondary market which do not qualify for fair value hedging under SFAS No. 133
were carried at the lower of aggregate cost or fair market value based on quoted
market prices for mortgage-backed securities backed by similar loans. Net
unrealized losses were recognized in a valuation allowance by charges to income.
Loans held for sale are valued based upon quoted market prices for
mortgage-backed securities backed by similar loans.
(e) Loans Receivable, Net
Loans receivable, net, is stated at UPBs, less the allowance for loan
losses, and net of deferred loan origination fees or costs and purchase
discounts or premiums.
Interest is accrued monthly at the loan's stated rate for loans on accrual
status. Discounts or premiums on 1-4 unit residential loans are accreted or
amortized to income using the interest method, generally over the remaining
contractual loan period. Discounts or premiums on consumer and other loans are
recognized over the lives of the loans using the interest method.
Adjustable-rate mortgages comprise a significant portion of the Company's
real estate loan portfolio. The interest rate and payment terms of these
mortgages adjust on a periodic basis in accordance with various published
indices. The majority of these adjustable-rate mortgages have terms which limit
the amount of interest rate adjustment that can occur each year and over the
life of the mortgage. When such limits are applied, negative amortization occurs
on certain adjustable-rate mortgages. See note 34.
Charges to income increase the allowance for loan losses while charge-offs
(net of recoveries) decrease it. Management periodically evaluates the adequacy
of the allowance based on such factors as the Company's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
have occurred but are not yet known that may affect the borrower's ability to
repay, the estimated value of underlying collateral, and economic conditions.
Management uses assumptions consistent with those that would be used by
unrelated buyers and sellers. For example, in determining the estimated fair
value of a loan's collateral, management would consider occupancy, rental rates,
and property expenses from industry sources. Management's methodology for
assessing the adequacy of the allowance includes the evaluation of the following
three key elements: (a) the formula allowance, (b) specific allowances for
identified problem loans and (c) the unallocated allowance. As management
utilizes information currently available to make such evaluation, the allowance
for loan losses is subjective and may be adjusted in the future depending on
changes in economic and environmental conditions, management assumptions about
specific borrowers or other factors. Additionally, regulatory authorities, as an
integral part of their regular examination process, review the Bank's allowance
for estimated losses on a periodic basis. These authorities may require the Bank
to recognize adjustments to the allowance based on their judgment of information
available to them at the time of their examination.
F-9
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Loans that are contractually ninety days or more past due are placed on
nonaccrual status, and the related accrued interest is charged off, or an
allowance is established, based on management's periodic evaluation. The
allowance is established by a charge to interest income equal to all interest
previously accrued, and income is subsequently recognized only to the extent
that cash payments are received. When, in management's judgment, the borrower's
ability to make periodic interest and principal payments resumes, the loan is
returned to accrual status.
(f) Securitized Loan Sales
When the Company sells residential mortgage loans as part of a
securitization transaction, it generally retains the servicing rights and one or
more subordinated tranches, both of which are retained interests in the
securitized receivables. Gain or loss on sale of the receivables depends in part
on the previous carrying amount of the financial assets involved in the
transfer, allocated between the assets sold and the retained interests based on
their relative fair values at the date of transfer. To obtain fair values,
quoted market prices are used if available. However, quotes are generally not
available for retained interests, so the Company generally estimates fair value
based on the present value of future expected cash flows estimated using
management's best estimates of the key assumptions (credit losses, prepayment
speeds and discount rates commensurate with the risks involved) applied by an
independent company in its valuation analysis.
(g) Auto One Loans
The Company, through its subsidiary, Auto One, originates loans and also
purchases loans individually and in groups. For loans purchased prior to July 1,
2001, the loans are grouped and accounted for in homogeneous pools based upon
certain risk characteristics, including interest coupon rate, credit quality,
and period of origination. At acquisition, the Company estimated the amount and
timing of undiscounted Expected Cash Flows for each pool. For certain purchased
pools of loans, the amount paid reflects the Company's determination that it is
probable the Company will be unable to collect all amounts due according to the
contractual terms of the underlying loans in the pool. Accordingly, at
acquisition, the Company recognized the excess of the Scheduled Contractual Cash
Flows over the Expected Cash Flows as Nonaccretable Contractual Cash Flows. The
excess of the Expected Cash Flows over the price paid - representing the
Accretable Yield - is accreted into interest income over the remaining life of
each pool.
Over the life of each pool of loans purchased prior to July 1, 2001, the
Company continues to estimate Expected Cash Flows. In the event a pool's actual
cash flows plus the expected cash payments are less than the Expected Cash Flows
estimated at the time of the purchase, the amount by which the current carrying
value of the pool exceeds the present value of the expected cash flows
discounted at the originally estimated internal rate of return is an impairment
and requires an allocation of the allowance for loan losses established by
provisions for loan losses. If the present value of a pool's expected remaining
cash flows discounted at the originally estimated internal rate of return
exceeds the current carrying value of the pool, the amount of the Accretable
Yield is increased and the amount of the Nonaccretable Contractual Cash Flows is
decreased by the amount the sum of a pool's expected remaining cash flows
exceeds the sum of the remaining payments less the Nonaccretable Contractual
Cash Flows. The adjusted Accretable Yield is accreted into interest income over
the pool's remaining life using the interest method.
All Auto One originated loans, and Auto One loans purchased after July 1,
2001 are recorded on a gross-coupon basis, rather than on a credit-adjusted
yield basis. Accordingly, an allowance for loan losses is established for those
loans when an adverse situation has occurred that will affect the borrower's
ability to repay principal and interest.
(h) Impaired Loans
The Company considers a loan impaired when, based on current information
and events, it is "probable" that it will be unable to collect all amounts due
(i.e., both principal and interest) according to the contractual terms of the
loan agreement. Any insignificant delay or insignificant shortfall in amount of
payments will not cause a loan to be considered impaired. In determining
impairment, the Company considers large non-homogeneous loans including
F-10
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
nonaccrual loans, troubled debt restructurings and performing loans that
exhibit, among other characteristics, high loan-to-value ratios, low
debt-coverage ratios, or other indications that the borrowers are experiencing
increased levels of financial difficulty. Loans collectively reviewed for
impairment by the Company include all single-family loans, consumer loans,
commercial banking loans under $100,000 and performing multi-family and
commercial real estate loans under $500,000, excluding loans which have entered
the workout process.
Impairment is measured based on (a) the present value of the expected
future cash flows of the impaired loan discounted at the loan's original
effective interest rate, (b) the observable market price of the impaired loan,
or (c) the fair value of the collateral of a collateral-dependent loan. The
Company measures collateral-dependent impaired loans based on the fair value of
the loan's collateral, less disposal costs. The amount, if any, by which the
recorded investment of the loan exceeds the measure of the impaired loan's value
is recognized by recording a valuation allowance. Large groups of smaller
balance homogeneous loans are collectively evaluated for impairment.
Cash receipts on impaired loans not performing according to contractual
terms are generally applied to reduce the carrying value of the loan, unless the
Company believes it will recover the remaining principal balance. Impairment
losses are included in the allowance for loan losses. Upon disposition of an
impaired loan, loss of principal, if any, is recorded through a charge-off to
the allowance for loan losses.
(i) Loan Origination and Commitment Fees and Related Costs
Loan origination fees, net of loan origination costs, are deferred and
amortized to interest income using the interest method, generally over the
contractual term of the loan, adjusted for actual loan prepayment experience.
Unamortized fees, net of loan origination costs on loans sold or paid in full,
are recognized as income or expense, as appropriate. Adjustable-rate loans with
lower initial interest rates during the introductory period result in the
amortization of a substantial portion of the net deferred fees during the
introductory period.
Fees received in connection with loan commitments are deferred and
recognized as fee revenue on a straight-line basis over the term of the
commitment. If the commitment is subsequently exercised during the commitment
period, the remaining unamortized commitment fee at the time of exercise is
recognized over the term of the loan using the interest method.
Forward loan sale commitments and related commitment fees, which are paid
to investors for the right to deliver residential loans in the future at
specified yield, are marked to market through earnings and included in
derivative assets and liabilities. Prior to the adoption of SFAS No. 133 on
January 1, 2001, these fees were deferred. Amounts were included in the
recognition of gain (loss) on sale of loans as loans were delivered to the
investor in proportion to the percentage relationship of loans delivered to the
total commitment amount. Any unused fees were recognized as an expense at the
expiration of the commitment date, or earlier, if it was determined the
commitment would not be filled.
Other loan fees and charges, which represent income from the prepayment of
loans, delinquent payment charges, and miscellaneous loan services, are
recognized as income when collected.
(j) Premises and Equipment, Net
Land is carried at cost. Premises, equipment and leasehold improvements are
stated at cost, less accumulated depreciation. Premises, equipment and leasehold
improvements are depreciated to their residual value on a straight-line basis
over the lesser of the lease term or the estimated useful lives of the various
classes of assets. Maintenance and repairs on premises and equipment are charged
to expense in the period incurred.
Closed facilities of the Company and its subsidiaries are carried at fair
value. In the case of leased premises that are vacated by the Company, a
liability is recorded representing the difference between the net present value
of future lease payments plus holding costs and the net present value of
anticipated sublease income, if any, for the remaining term of the lease.
F-11
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(k) Foreclosed Real Estate, Net
Real estate acquired through, or in lieu of, loan foreclosure is initially
recorded at fair value less estimated disposal costs at the time of foreclosure.
Subsequent to foreclosure, the Company charges current earnings with a provision
for estimated losses if the carrying value of the collateral property exceeds
its fair value. Gains or losses on the sale of real estate are recognized upon
disposition of the property. Carrying costs such as maintenance and property
taxes are expensed as incurred.
(l) Intangible Assets
Intangible assets, which primarily consist of the excess of cost over fair
value of net assets acquired in business combinations accounted for as a
purchase, are amortized on a straight-line basis over the expected period to be
benefited of 15 years. The Company periodically reviews the operations of the
businesses acquired to determine that income from operations continues to
support the recoverability of its intangible assets and the amortization periods
used. See note 2(u), "Recent Accounting Pronouncements - Goodwill and Other
Intangible Assets."
(m) Mortgage Servicing Rights
The Company purchases MSRs separately and acquires MSRs through the sale of
loans it purchases or originates. Generally, purchased MSRs are capitalized at
the cost to acquire the rights and are carried at the lower of cost, net of
accumulated amortization, or fair value, in accordance with SFAS No. 140 and
SFAS No. 65. Originated MSRs are capitalized based on the relative fair value of
the servicing right to the fair value of the loan and the servicing right and
are carried at the lower of the capitalized amount, net of accumulated
amortization, or fair value. In addition, the MSR carrying value is further
adjusted for changes in fair value resulting from the application of hedge
accounting, in accordance with SFAS No. 133. Changes in fair value are recorded
in loan servicing fees.
A portion of the cost of originating a mortgage loan is allocated to the
mortgage servicing right based on its relative fair value. To determine the fair
value of MSRs the Company uses market prices for comparable mortgage servicing
contracts, when available, or alternatively, uses a valuation model that
calculates the present value of estimated future net servicing income. In using
this valuation method, the Company incorporates assumptions that market
participants would use in estimating future net servicing income, which includes
estimates of the cost to service, the discount rate, custodial earnings rate, an
inflation rate, ancillary income, prepayment speeds and default rates and
losses. See note 37 for more information on the valuation of MSRs.
MSRs are amortized in proportion to, and over the period of, estimated net
servicing income. The amortization of the MSRs is analyzed periodically and is
adjusted to reflect changes in prepayment rates and other estimates.
The Company evaluates the possible impairment of servicing rights based on
the difference between the carrying amount and current fair value of the
servicing rights. In determining impairment, the Company aggregates all MSRs and
stratifies them into tranches based on the predominant risk characteristics of
interest rate, loan type and investor type. If impairment exists, a valuation
allowance is established for any excess of amortized cost over the current fair
value, by risk stratification tranche, by a charge to income. If the Company
later determines that all or a portion of the impairment no longer exists for a
particular tranche, a reduction of the allowance may be recorded as an increase
to income.
The Company employs hedging techniques through the use of interest rate
floors, interest rate swaptions, interest rate swaps and principal-only swaps to
reduce the sensitivity of its earnings and value of its servicing rights to
changing interest rates and borrower prepayments as further discussed in note
36. At the inception of the hedge and throughout the hedge period, high
effectiveness of the hedge instruments is anticipated. Therefore, changes in the
market value of the hedge instruments due to changes in the benchmark interest
rate being hedged will substantially offset changes in the market value of MSRs
due to these interest rate changes. Both the changes in the market value of the
MSR and the offsetting related hedge instruments are marked to market through
current income.
F-12
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
If high effectiveness did not exist, the hedge instruments would be
considered speculative and would be marked to market with changes in market
value reflected in current income, and the MSR carrying value would not be
adjusted, except for any LOCOM adjustments required in accordance with SFAS No.
140.
Since the adoption of SFAS No. 133, the Company's derivative contracts are
carried at fair market value with changes in value reflected in income. Amounts
paid and received under the terms of these contracts are recognized as income
and expense when paid and received.
Prior to the adoption of SFAS No. 133 on January 1, 2001, the premium paid
by the Company on the interest rate floors and swaptions was amortized over the
life of the contract. Amounts received or paid under the interest rate swaps,
principal only swaps, interest rate floors, interest rate swaptions or
terminated hedges were included in the carrying value of MSRs and were amortized
as part of the basis in MSRs.
(n) Gains/Losses on Sales, Settlement and Transfer of Loans, Net
Mortgage loans are generally sold with the MSRs retained by the Company.
The carrying value of mortgage loans sold is reduced by the cost allocated to
the associated MSRs. Gains or losses on sales of mortgage loans are recognized
based on the difference between the selling price and the carrying value of the
related mortgage loans sold. Deferred origination fees and expenses, net of
commitment fees paid in connection with the sale of the loans, are recognized at
the time of sale in the gain or loss determination.
Unrealized mark to market gains and losses on those loans held for sale,
forward loan sale commitments and interest rate lock commitments which qualify
as fair value hedges are recognized in income.
In the normal course of business, the Company purchases loans held for
investment at a discount. Proceeds received in settlement of loans in excess of
the carrying value are included in gain on sale and settlement of loans, net.
(o) Servicing Fee Income
Servicing fee income is recorded for fees earned for servicing mortgage
loans under servicing agreements with FNMA, FHLMC, GNMA and certain private
investors. The fees are based on a contractual percentage of the outstanding
principal balance or a fixed amount per loan and are recorded as income when
received. The amortization of and valuation provisions for MSRs and Pass-through
Interest Expense are netted against servicing fee income.
(p) Derivatives
The Company adopted SFAS No. 133 on January 1, 2001. 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 effect
on pre-tax net income from the adoption was an increase of $1.0 million. In
accordance with the transition provisions of SFAS No. 133, the Company recorded
a transition adjustment of $44.6 million (net of $30.8 million in taxes), (as a
decrease in equity) in OCI in a manner similar to a cumulative effect of a
change in accounting principle. The transition adjustment was the initial amount
necessary to adjust the carrying values of certain derivative instruments (that
qualified as cash flow hedges) to fair value to the extent that the related
hedge transactions had not yet been recognized. In accordance with SFAS No. 133,
derivative assets represent contracts with a positive fair value (where the
counterparty would owe the Company money) and derivative liabilities represent
contracts with a negative fair value (where the Company would owe the
counterparty money).
F-13
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company uses interest rate derivative financial instruments (interest
rate swaps, interest rate floors, interest rate swaptions and principal only
swaps) primarily to hedge against the change in value of the mortgage servicing
portfolio due to expected prepayment risk assumption changes caused by declining
interest rates and to hedge against the interest rate risk inherent in
floating-rate FHLB advances and reverse repos. These instruments serve to reduce
the Company's exposure to movements in interest rates, both at inception and
throughout the hedge period. At the inception of the hedge, the Company
identifies an individual asset or liability, or an identifiable group of
essentially similar assets or liabilities, that expose the Company to interest
rate risk at the consolidated level.
Interest rate derivative financial instruments receive hedge accounting
treatment only if they are designated as a hedge and are expected to be, and
are, effective in substantially reducing interest rate risk arising from the
assets and liabilities identified as exposing the Company to risk. Those
derivative financial instruments that do not meet the hedging criteria discussed
below would be classified as trading activities and would be recorded at fair
value with changes in fair value recorded in income. Derivative hedge contracts
must meet specific effectiveness tests (i.e., over time the change in their fair
values due to the designated hedge risk must be within 80 to 125 percent of the
opposite change in the fair values of the hedged assets or liabilities). Changes
in fair value of the derivative financial instruments must be effective at
offsetting changes in the fair value of the hedged items due to the designated
hedge risk during the term of the hedge. Further, if the underlying financial
instrument differs from the hedged asset or liability, there must be a clear
economic relationship between the prices of the two financial instruments.
If periodic assessment indicates derivatives no longer provide an effective
hedge, the derivatives contracts would be closed out and settled or classified
as a trading activity. For hedges of borrowings, the net settlement (upon close
out or termination) that offsets changes in the value of the hedged borrowing is
deferred and amortized into net interest income over the life of the hedged
asset or liability. For hedges of MSRs, the net settlement (upon close out or
termination) that offsets changes in the value of the MSRs adjusts the basis of
the MSRs and is deferred and amortized to loan servicing income over the life of
the MSRs. The portion, if any, of the net settlement amount that did not offset
changes in the value of the hedge asset or liability is recognized immediately
in noninterest income.
Beginning January 1, 2001, in accordance with SFAS No. 133, hedges of FHLB
advances and reverse repos are generally accounted for as cash flow hedges, with
changes in fair value recorded in derivative assets or liabilities and OCI. MSR
hedges are accounted for as fair value hedges, with changes in fair value
recorded in derivative assets or liabilities and loan servicing fees. Rate lock
commitments and hedges of forward loan sales are recorded at fair value, with
changes in fair value recorded in derivative assets or liabilities and gain
(loss) on sale of loans, net. MSR hedging instruments are marked to market
through earnings and included in derivative assets and liabilities. The fair
market value is recorded based on the estimated amounts that the Company would
receive or pay to terminate the contracts at the reporting date. Prior to
January 1, 2001, hedge-related premiums were classified on the balance sheet
with the hedged asset or liability at the time the premium was paid. These
premiums were amortized to net loan servicing fee income over the life of the
contract.
Prior to January 1, 2001, interest rate swaps that hedged borrowings were
accounted for under the "accrual method." Interest rate floors, swaptions,
principal only swaps and interest rate swaps that hedged MSRs were accounted for
under the "deferral method." Under the accrual method, the net interest payment
due or owed under the instrument was recognized over the life of the contract in
net interest income. Under the deferral method, realized gains or losses, or
payments made or received on the derivative financial instrument, were reported
as adjustments to the carrying value of the hedged asset or liability. There was
no recognition under either method on the balance sheet for changes in the fair
value of the derivatives.
Cash flows resulting from the derivative financial instruments that are
accounted for as hedges of assets and liabilities are classified in the cash
flow statement in the same category as the cash flows of the items being hedged.
F-14
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(q) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
A valuation allowance is maintained against the deferred tax asset in an
amount representing the amount of such asset which is more likely than not that
the Company will be unable to utilize. The deferred tax asset is continually
evaluated for realizability. To the extent that management's judgment regarding
the realization of the deferred tax asset changes, an adjustment to the
allowance is recorded, with an offsetting increase or decrease, as appropriate,
in income tax expense. Such adjustments are recorded in the period in which
management's estimate as to the realizability of the asset changed.
Prior to the Golden State Merger, for federal income tax purposes, the
Company was a member of the Mafco Group, and accordingly, its federal taxable
income or loss prior to the Golden State Acquisition was included in the
consolidated federal income tax return filed by Mafco. The Company was also
included in certain state and local income tax returns of Mafco or its
subsidiaries. The Company's tax sharing agreement with Mafco provided that
income taxes be based on the separate results of the Company. The agreement
generally provided that the Company would pay Mafco amounts equal to the taxes
that the Company would be required to pay if it were to file a return separately
from the affiliated group. Furthermore, the agreement provided that the Company
would be entitled to take into account any net operating loss carryovers in
determining its tax liability. The agreement also provided that Mafco pay the
Company amounts equal to tax refunds the Company would be entitled to if it had
always filed a separate company tax return.
In connection with the Golden State Acquisition, the tax sharing agreement
with FN Holdings was assumed by GS Holdings and the Company and its subsidiaries
became part of the Golden State affiliated group. Accordingly, the Company and
its subsidiaries file consolidated federal income tax returns and certain state
and local income tax returns for periods subsequent to September 11, 1998.
(r) Stock Compensation Plan
SFAS No. 123 encourages all entities to adopt a fair value based method of
accounting for employee stock compensation plans, whereby compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. However, it also
allows an entity to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting prescribed by APB Opinion No. 25,
whereby compensation cost is the excess, if any, of the quoted market price of
the stock at the grant date (or other measurement date) over the amount an
employee must pay to acquire the stock. Stock options issued under Golden
State's stock option plan established for the benefit of the Bank's employees
have no intrinsic value at the grant date, and under APB Opinion No. 25, no
compensation cost was recognized for them. Compensation expense related to
restricted stock issued under Golden State's stock plan is recognized on a
straight line basis over the vesting period for each tranche of the award, with
a corresponding increase to additional paid-in capital. Dividends on unvested
restricted stock are recorded as compensation expense with a corresponding
increase to additional paid-in capital. The Company uses the accounting
methodology prescribed in APB Opinion No. 25 and complies with the disclosure
requirements of SFAS No. 123.
F-15
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(s) Off-balance Sheet Activities
The Company is a party to credit related financial instruments with
off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit, standby letters of credit and commercial letters of credit. Such
commitments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the consolidated balance sheets.
The Company's exposure to credit loss is represented by the contractual
amount of these commitments. The Company uses the same credit policies in making
commitments as it does for on-balance sheet instruments.
(t) Management's Use of Estimates
The preparation of the consolidated financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect (a) the
reported amounts of assets and liabilities, (b) disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and (c) the
reported amounts of revenues and expenses during the reported period. On an
ongoing basis, the Company evaluates its estimates, including those related to
investments, allowances for loan losses, loans held for sale, MSRs, intangible
assets, income taxes, post-retirement benefits, contingencies and litigation.
Actual results could differ from those estimates. Material estimates subject to
change include the allowance for loan losses and MSRs. For more information on
the assumptions used in making these estimates, refer to notes 2(e), 2(m), 16
and 36.
(u) 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 acquiror versus the acquiree in an acquisition. 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 became effective for business combinations initiated after June 30, 2001,
and has not materially impacted the Company's current financial condition or
operating results.
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
F-16
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
144.
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 has reviewed the records from the Company's various
acquisitions. At December 31, 2001, the Company's $640.8 million intangible
asset includes $1.0 million representing a core deposit intangible and $49.4
million representing goodwill generated pursuant to SFAS No. 72. The remaining
$590.4 million of this asset balance represents goodwill that will cease to be
amortized as of January 1, 2002 pursuant to SFAS No. 142. As a result of the
implementation of SFAS No. 142, management expects GAAP earnings to increase by
$13.9 million per quarter in 2002.
ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS
In June 2001, the FASB issued SFAS No. 143, which addresses the recognition
and measurement of obligations associated with the retirement of tangible
long-lived assets. SFAS No. 143 applies to legal obligations associated with the
retirement of long-lived assets resulting from the acquisition, construction,
development or the normal operation of a long-lived asset. SFAS No. 143 requires
that the fair value of an asset retirement obligation be recognized as a
liability in the period in which it is incurred. The asset retirement obligation
is to be capitalized as part of the carrying amount of the long-lived asset and
the expense is to be recognized over the useful life of the long-lived asset.
SFAS No. 143 is effective January 1, 2003, with early adoption permitted. The
Company plans to adopt SFAS No. 143 effective January 1, 2003 and does not
expect the adoption of the statement to have a material impact on the Company's
financial condition or operating results.
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
On October 3, 2001, the FASB issued SFAS No. 144. SFAS No. 144 establishes
a single accounting model for the financial accounting and reporting for
impairment or disposal of long-lived assets. The reason for issuing the
Statement stemmed from the failure of SFAS No. 121 to address the accounting for
the disposal of a segment of a business accounted for as a discontinued
operation under APB Opinion No. 30. Thus, two accounting models
F-17
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
existed for the disposal of long-lived assets. SFAS No. 144 is based on the
framework established in SFAS No. 121.
The accounting, disclosure and financial statement provisions of SFAS No.
144 are effective for financial statements issued for the Company beginning
January 1, 2002. The provisions of the Statement generally are to be applied
prospectively.
The implementation of SFAS No. 144 is not expected to materially impact the
Company's financial condition or operating results.
(3) ACQUISITIONS AND DIVESTITURES
GOLDEN STATE ACQUISITION
On September 11, 1998, pursuant to the Golden State Merger agreement,
Parent Holdings and Hunter's Glen completed the Golden State Merger, accounted
for under the purchase method of accounting.
Pursuant to the Golden State Merger agreement, First Gibraltar, the parent
company of Parent Holdings, and Hunter's Glen, a 20% minority shareholder of FN
Holdings, received at the closing of the Golden State Acquisition, in
consideration of their interests as stockholders of Parent Holdings and FN
Holdings, 56,722,988 shares of Golden State Common Stock, that constituted, in
the aggregate, 47.9% of the common stock outstanding, immediately after giving
effect to the Golden State Acquisition. In connection with the Golden State
Merger, the Hunter's Glen minority interest in FN Holdings was extinguished.
Subsequent to the Golden State Merger, GSB Investments, an indirect subsidiary
of Mafco Holdings Inc., became the successor to First Gibraltar under the Golden
State Merger agreement and the owner of the shares of common stock previously
held by First Gibraltar.
At September 11, 1998, Glendale Federal had total assets of approximately
$18.9 billion and deposits of $11.3 billion and operated 181 branches and 26
loan offices in California. Excess cost over fair value of net assets acquired
in the Golden State Acquisition totalled $354.8 million. Since the date of
purchase, the results of operations related to such assets and liabilities have
been included in the Company's consolidated statements of income.
Merger and integration costs associated with the Golden State Acquisition
was $7.7 million for the year ended December 31, 1999, including severance for
terminated California Federal employees, expenses for California Federal branch
closures, and conversion and consolidation costs, as well as transition expenses
for duplicate personnel, facilities and computer systems during the integration
period. No such expenses were incurred during 2001 or 2000.
During the year ended December 31, 1999, the Company recorded fair value
and other adjustments to increase intangible assets in the Golden State
Acquisition by $0.3 million, increasing a previously recorded vacant facility
accrual. In addition, intangible assets were reduced by $16.6 million, $18.1
million and $12.4 million related to (a) previously accrued severance and
termination costs (which had not been utilized upon completion of the
integration plan), (b) a "true-up" adjustment of the deferred tax asset and (c)
the purchase price, respectively.
During the year ended December 31, 2000, the Company recorded adjustments
to reduce intangible assets by $2.3 million related to a tax refund for periods
prior to the Golden State Acquisition and to increase intangible assets by $2.1
million to "true-up" the deferred tax asset. No adjustments were made in 2001
for the Golden State Acquisition.
AUTO ONE ACQUISITION
On November 16, 2001, the Bank purchased the remaining 20% interest in its
subsidiary, Auto One, for $9 million, which was recorded as goodwill.
F-18
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
DOWNEY ACQUISITION
On February 29, 2000, Auto One closed the Downey Acquisition with prime
auto loans of approximately $370 million. Intangible assets of $7.7 million were
recorded in connection with this acquisition.
NEVADA BRANCH PURCHASE
On April 16, 1999, the Bank consummated the Nevada Purchase with deposits
of approximately $543 million. An unidentifiable intangible asset of $50.7
million was recorded in connection with this acquisition.
CAL FED ACQUISITION
On January 3, 1997, pursuant to the Merger Agreement among FN Holdings, Cal
Fed and Old California Federal, FN Holdings completed the Cal Fed Acquisition.
At December 31, 1996, Old California Federal had total assets of approximately
$14.1 billion and deposits of $8.9 billion, and operated 119 branches in
California and Nevada. Excess cost over fair value of net assets acquired in the
Cal Fed Acquisition totalled $397.6 million. Since the date of purchase, the
results of operations related to such assets and liabilities have been included
in the Company's consolidated statements of income.
During 1999, the Company recorded an adjustment to reduce other liabilities
and excess cost over fair value of net assets acquired by $38.2 million, related
to a tax refund for periods prior to January 3, 1997. During 2000, the Company
recorded adjustments to reduce other liabilities and excess cost over fair value
of net assets acquired by $52.1 million as a result of a "true-up" the deferred
tax asset, $21.0 million related to the reversal of state deferred taxes and
$180 thousand related to receipt of a tax refund for periods prior to the Cal
Fed Acquisition. During 2001, the Company recorded adjustments to increase other
liabilities and excess cost over fair value of net assets acquired by $416
thousand for tax deficiencies for periods prior to the Cal Fed Acquisition.
SERVICING SALE
During April 1999, the Bank's wholly-owned mortgage banking subsidiary,
FNMC, sold servicing rights on approximately 49,000 loans with a UPB of $2.0
billion, recognizing a pre-tax gain of $16.3 million.
PURCHASE ACCOUNTING ADJUSTMENTS
Premiums and discounts related to interest-earning assets acquired and
interest-bearing liabilities assumed are amortized (accreted) to operations
using the interest method over the estimated remaining lives of the respective
assets and liabilities.
F-19
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Year Ended December 31,
-------------------------------------------
2001 2000 1999
---------- ---------- ----------
(in thousands)
Cash paid (received) for:
Interest $2,827,012 $2,881,679 $2,255,685
Income taxes, net 227,632 (9,012) 64,318
Non-cash activities:
Reclassification of mortgage-backed securities
from the available-for-sale portfolio to the
held-to-maturity portfolio -- 1,055,611 --
Reclassification of securities from the available-for-sale
portfolio to the held-to-maturity portfolio -- 445,000 --
Principal reductions to loans due to foreclosure 30,990 47,175 101,692
Loans made to facilitate the sale of real estate 1,631 5,433 10,039
Loans exchanged for mortgage-backed securities -- 116,517 227,099
Reclassification of loans from loans held for sale
to loans receivable 6,542 77,913 110,313
Reclassification of loans receivable to loans held for sale 160,999 -- --
Reclassification of mortgage-backed securities to
loans held for sale -- 1,052 --
Reduction of previously accrued severance
and contract termination costs -- -- 18,908
Reduction of valuation allowance of deferred tax asset -- 211,738 --
True-up of deferred tax asset -- -- 18,146
Adjustment to initial dividend of tax benefits to
former parent due to deconsolidation -- -- 66,383
Impact of Golden State restricted common stock 3,458 3,175 477
Adjustment to Golden State Acquisition
purchase price -- -- (12,380)
Reclassification of mortgage-backed securities from the
held-to-maturity portfolio to the available-for-sale
portfolio upon the adoption of SFAS No. 133 1,067,933 -- --
Reclassification of securities from the held-to-maturity
portfolio to the available-for-sale portfolio upon the
adoption of SFAS No. 133 84,984 -- --
Reclassification of derivative assets ($173.6 million) and
derivative liabilities ($8.8 million) related to MSRs
at fair value upon the adoption of SFAS No. 133 164,767 -- --
F-20
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) 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 comprise securities which
are required as part of the Bank's regulatory liquidity portfolio. The net
unrealized loss related to these securities of $64.0 million, which is included
as a component of equity (accumulated other comprehensive loss), is amortized to
interest income over the remaining life of the securities using the interest
method. The effect of this amortization on interest income is fully offset by
the effect of amortization of the related discount recorded against the
respective assets at the time of transfer.
(6) SECURITIES AVAILABLE FOR SALE
Securities available for sale and the related unrealized gain or loss
consisted of the following (in thousands):
December 31, 2001
-------------------------------------------------------------------
Net
Amortized Unrealized Unrealized Unrealized Carrying
Cost Gains Losses Gain Value
---- ----- ------ ---- -----
Marketable equity securities $ 640 $ 248 $ -- $ 248 $ 888
U.S. government and agency obligations 29,190 180 -- 180 29,370
Municipal securities 85,377 678 (259) 419 85,796
-------- ------ ----- ----- --------
Total $115,207 $1,106 $(259) 847 $116,054
======== ====== ===== ========
Estimated tax effect (346)
-----
Net unrealized holding gain in
stockholder's equity $ 501
=====
December 31, 2000
-------------------------------------------------------------------
Net
Amortized Unrealized Unrealized Unrealized Carrying
Cost Gains Losses Gain Value
---- ----- ------ ---- -----
Marketable equity securities $ 640 $325 $ -- $ 325 $ 965
U.S. government and agency obligations 638,488 36 (2,419) (2,383) 636,105
-------- ---- ------- ------- --------
Total $639,128 $361 $(2,419) (2,058) $637,070
======== ==== ======= ========
Estimated tax effect 841
-------
Net unrealized holding loss in
stockholder's equity $(1,217)
=======
F-21
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
-------------------------------------------------------------------
Net
Amortized Unrealized Unrealized Unrealized Carrying
Cost Gains Losses Gain (Loss) Value
---- ----- ------ ----------- -----
Marketable equity securities $ 336 $811 $ -- $ 811 $ 1,147
U.S. government and agency obligations 1,143,665 47 (69,125) (69,078) 1,074,587
---------- ---- -------- -------- ----------
Total $1,144,001 $858 $(69,125) (68,267) $1,075,734
---------- ---- -------- ----------
Estimated tax effect 28,774
--------
Net unrealized holding loss in
stockholder's equity $(39,493)
========
The weighted average stated interest rates on securities available for sale
were 3.55%, 6.21% and 6.24% at December 31, 2001, 2000 and 1999, respectively.
The following represents a summary of the amortized cost, estimated fair
value (carrying value) and weighted average yield of securities available for
sale with related maturities (dollars in thousands):
December 31, 2001
---------------------------------------------
Estimated Weighted
Amortized Fair Average
Cost Value Yield
---- ----- -----
Marketable equity securities $ 640 $ 888 5.13%
U.S. government and agency obligations:
Maturing within 1 year 23,095 23,098 1.81
Maturing after 1 year but within 5 years 6,095 6,272 4.76
Municipal securities:
Maturing after 5 years but within 10 years 19,828 19,869 4.79
Maturing after 10 years 65,549 65,927 5.12
-------- --------
Total $115,207 $116,054 4.38%
======== ========
At December 31, 2001, U.S. government and agency obligations available for
sale of $26.9 million were pledged as collateral for various obligations, none
of which were pledged to creditors with the right to sell or repledge. See note
34.
(7) SECURITIES HELD TO MATURITY
Securities held to maturity consisted of the following (in thousands):
December 31, 2001
----------------------------------------------------------------------
Net
Amortized Unrealized Unrealized Unrealized Estimated
Cost Gains Losses Gain (Loss) Fair Value
---- ----- ------ ----------- ----------
Commercial paper $30,602 $-- $-- $-- $30,602
======= === === === =======
F-22
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000
------------------------------------------------------------------
Net Estimated
Amortized Unrealized Unrealized Unrealized Fair
Cost Gains Losses Gain (Loss) Value
---- ----- ------ ----------- -----
Municipal securities $511,532 $6,153 $ (3,085) $ 3,068 $514,600
Commercial paper 75,971 -- -- -- 75,971
-------- ------ -------- -------- --------
Total $587,503 $6,153 $ (3,085) $ 3,068 $590,571
======== ====== ======== ======== ========
Securities included above transferred
from available-for-sale $497,894 $ -- $(52,894) $(52,894) $445,000
======== ====== ======== ========
Estimated tax effect 21,607
Amortization of unrealized holding loss 2,289
--------
Net unrealized holding loss in
stockholder's equity $(28,998)
========
December 31, 1999
------------------------------------------------------------------
Net Estimated
Amortized Unrealized Unrealized Unrealized Fair
Cost Gains Losses Gain (Loss) Value
---- ----- ------ ----------- -----
Municipal securities $ 84,727 $415 $(5,323) $ (4,908) $ 79,819
Commercial paper 100,630 -- -- -- 100,630
-------- ---- ------- -------- --------
Total $185,357 $415 $(5,323) $ (4,908) $180,449
======== ==== ======= ======== ========
The weighted average stated interest rates on securities held to maturity
were 2.37%, 5.95% and 4.89% at December 2001, 2000 and 1999, respectively. The
entire balance of securities held to maturity at December 31, 2001, which had a
weighted average yield of 2.37%, matures within one year.
At December 31, 2001, commercial paper investments of $30.3 million were
held in reserve with third-party trustees to guarantee credit enhancements on
loans transferred as part of securitization transactions by the Bank. See note
34.
(8) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
The following table provides details on MBS sales (in thousands):
Year Ended December 31,
-----------------------------------------------
2001 2000 1999
-------- ---------- -------
Proceeds from sales $788,564 $1,367,666 $193,732
Carrying value 771,230 1,385,802 193,732
-------- ---------- --------
Net gain (loss) on sales (a) $ 17,334 $ (18,136) $ --
======== ========== ========
___________
(a) Net gain (loss) on sales represents gross gains in 2001 and gross gains
of $19.6 million and gross losses of $1.5 million in 2000.
F-23
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Mortgage-backed securities available for sale and the related unrealized
gain or loss consisted of the following (in thousands):
December 31, 2001
--------------------------------------------------------------------
Net
Amortized Unrealized Unrealized Unrealized Carrying
Cost Gains Losses Gain (Loss) Value
---- ----- ------ ----------- -----
GNMA $ 388,888 $ 3,991 $ (249) $ 3,742 $ 392,630
FNMA 1,052,686 10,905 (2,254) 8,651 1,061,337
FHLMC 418,820 4,730 (518) 4,212 423,032
Other mortgage-backed securities 200,130 205 (2,110) (1,905) 198,225
Collateralized mortgage obligations 4,884,717 85,833 (4,062) 81,771 4,966,488
Other - trading securities (IO strips) 16,191 -- -- -- 16,191
---------- -------- ------- -------- ----------
Total $6,961,432 $105,664 $(9,193) 96,471 $7,057,903
========== ======== ======= ==========
Estimated tax effect (39,409)
--------
Net unrealized holding gain in
stockholders' equity $ 57,062
========
December 31, 2000
--------------------------------------------------------------------
Net
Amortized Unrealized Unrealized Unrealized Carrying
Cost Gains Losses Gain (Loss) Value
---- ----- ------ ----------- -----
GNMA $ 385,906 $ 152 $ (4,050) $ (3,898) $ 382,008
FNMA 1,327,352 3,429 (7,648) (4,219) 1,323,133
FHLMC 534,498 2,395 (467) 1,928 536,426
Other mortgage-backed securities 338,405 1,156 (2,053) (897) 337,508
Collateralized mortgage obligations 7,330,167 11,679 (54,098) (42,419) 7,287,748
---------- ------- -------- -------- ----------
Total $9,916,328 $18,811 $(68,316) (49,505) $9,866,823
========== ======= ======== ==========
Estimated tax effect 20,223
--------
Net unrealized holding loss in
stockholders' equity $(29,282)
========
December 31, 1999
--------------------------------------------------------------------
Net
Amortized Unrealized Unrealized Unrealized Carrying
Cost Gains Losses Gain (Loss) Value
---- ----- ------ ----------- -----
GNMA $ 645,299 $ 402 $ (12,897) $ (12,495) $ 632,804
FNMA 2,554,242 5,087 (56,767) (51,680) 2,502,562
FHLMC 910,543 4,958 (8,553) (3,595) 906,948
Other mortgage-backed securities 499,117 6,845 (10,018) (3,173) 495,944
Collateralized mortgage obligations 9,562,817 1,778 (338,288) (336,510) 9,226,307
----------- ------- --------- --------- -----------
Total $14,172,018 $19,070 $(426,523) (407,453) $13,764,565
=========== ======= ========= ===========
Estimated tax effect 171,741
---------
Net unrealized holding loss in
stockholder's equity $(235,712)
=========
F-24
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following represents a summary of the amortized cost, estimated fair
value (carrying value), weighted average yield and weighted average life of
mortgage-backed securities available for sale (dollars in thousands):
December 31, 2001
-----------------------------------------------------------------
Estimated Weighted Weighted
Amortized Fair Average Average
Cost Value Yield Life
---- ----- ----- ----
(in years)
GNMA $ 388,888 $ 392,630 6.81% 22.8
FNMA 1,052,686 1,061,337 6.26 21.7
FHLMC 418,820 423,032 6.75 20.5
Other mortgage-backed securities 200,130 198,225 6.64 20.0
Collateralized mortgage obligations 4,884,717 4,966,488 6.36 23.8
Other - trading securities (IO strips) 16,191 16,191 13.62 28.8
---------- ----------
Total $6,961,432 $7,057,903 6.42% 23.2
========== ==========
The weighted average stated interest rates on mortgage-backed securities
available for sale were 6.46%, 6.89% and 6.62% at December 31, 2001, 2000 and
1999, respectively. At December 31, 2001, 2000 and 1999, mortgage-backed
securities available for sale included securities totalling $0.4 billion, $0.7
billion and $0.9 billion, respectively, which resulted from the securitization
of certain qualifying mortgage loans from the Bank's, Old California Federal's,
Glendale Federal's and San Francisco Federal's loan portfolios.
At December 31, 2001, 2000 and 1999, mortgage-backed securities available
for sale included $1.8 billion, $3.0 billion and $4.3 billion, respectively, of
variable-rate securities.
At December 31, 2001, mortgage-backed securities available for sale of $3.9
billion were pledged as collateral for FHLB advances and securities sold under
agreements to repurchase, $1.6 billion of which were pledged to creditors who
have the right to sell or repledge the collateral. See notes 18, 19 and 34.
Further, at December 31, 2001, mortgage-backed securities available for sale
with a carrying value of $776.8 million were pledged for various other
obligations and include $127.0 million in securities pledged to FNMA associated
with the sales of certain securitized multi-family loans as further discussed in
note 34.
F-25
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage-backed securities held to maturity consisted of the following (in
thousands):
December 31, 2001
--------------------------------------------------------------------
Net
Amortized Unrealized Unrealized Unrealized Estimated
Cost Gains Losses Gain(Loss) Fair Value
---- ----- ------ ---------- ----------
FHLMC $ 86,504 $ 3,188 $-- $ 3,188 $ 89,692
FNMA 1,297,948 22,862 -- 22,862 1,320,810
Other mortgage-backed securities 661 -- (6) (6) 655
---------- ------- --- ------- ----------
Total $1,385,113 $26,050 $(6) $26,044 $1,411,157
========== ======= === ======= ==========
December 31, 2000
--------------------------------------------------------------------
Net
Amortized Unrealized Unrealized Unrealized Estimated
Cost Gains Losses Gain(Loss) Fair Value
---- ----- ------ ---------- ----------
GNMA $ 237,437 $ 6,309 $ (1,204) $ 5,105 $ 242,542
FHLMC 234,969 7,785 (2) 7,783 242,752
FNMA 2,413,331 60,771 (589) 60,182 2,473,513
Other mortgage-backed securities 875 -- (5) (5) 870
---------- ------- -------- -------- ----------
Total $2,886,612 $74,865 $ (1,800) $ 73,065 $2,959,677
========== ======= ======== ======== ==========
Securities included above transferred
from available-for-sale $1,110,920 $ 628 $(55,937) $(55,309) $1,055,611
========== ======= ======== ==========
Estimated tax effect 22,594
Amortization of unrealized holding loss 2,341
--------
Net unrealized holding loss in
stockholder's equity $(30,374)
========
December 31, 1999
--------------------------------------------------------------------
Net
Amortized Unrealized Unrealized Unrealized Estimated
Cost Gains Losses Gain(Loss) Fair Value
---- ----- ------ ---------- ----------
FHLMC $ 161,129 $ 3,801 $ -- $ 3,801 $ 164,930
FNMA 1,987,428 16,687 (20,170) (3,483) 1,983,945
Other mortgage-backed securities 1,139 -- -- -- 1,139
---------- ------- -------- -------- ----------
Total $2,149,696 $20,488 $(20,170) $ 318 $2,150,014
========== ======= ======== ======== ==========
F-26
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following represents a summary of the amortized cost (carrying value),
estimated fair value, weighted average yield and weighted average life of
mortgage-backed securities held to maturity (dollars in thousands):
December 31, 2001
------------------------------------------------------------------
Estimated Weighted Weighted
Amortized Fair Average Average
Cost Value Yield Life
---- ----- ----- ----
(in years)
FHLMC $ 86,504 $ 89,692 7.24% 19.7
FNMA 1,297,948 1,320,810 6.46 15.3
Other mortgage-backed securities 661 655 12.61 13.8
---------- ----------
Total $1,385,113 $1,411,157 6.51% 15.5
========== ==========
The weighted average stated interest rates on mortgage-backed securities
held to maturity were 6.46%, 7.45% and 6.92% at December 31, 2001, 2000 and
1999, respectively. At December 31, 2001, 2000 and 1999, mortgage-backed
securities held to maturity included securities with carrying values totalling
$1.4 billion, $1.8 billion and $2.1 billion, respectively, which resulted from
the securitization with FNMA and FHLMC of certain qualifying mortgage loans from
the Bank's, Old California Federal's, Glendale Federal's and San Francisco
Federal's loan portfolio with full recourse to the Bank.
At December 31, 2001, 2000 and 1999, mortgage-backed securities held to
maturity included $1.3 billion, $1.8 billion and $2.1 billion, respectively, of
variable-rate securities.
At December 31, 2001, mortgage-backed securities held to maturity of $0.9
billion were pledged as collateral for various obligations, $0.8 billion of
which were pledged to creditors who have the right to sell or repledge the
collateral. See notes 18, 19 and 34. Further, at December 31, 2001,
mortgage-backed securities held to maturity with a carrying value of $146.8
million were pledged for various other obligations. See note 34.
(10) LOANS RECEIVABLE, NET
Loans receivable, net, included the following (in thousands):
December 31,
---------------------------------
2001 2000
----------- -----------
Real estate loans:
1-4 unit residential $29,546,035 $30,828,368
Multi-family residential 4,130,287 3,569,228
Commercial real estate 2,354,919 2,487,093
Land 14,055 22,384
Construction 2,495 7,416
----------- -----------
Total real estate loans 36,047,791 36,914,489
----------- -----------
Equity-line 639,297 538,524
Other consumer loans 283,434 302,559
Auto loans, net (a) 1,917,591 1,567,257
Commercial loans 693,114 557,796
----------- -----------
Total consumer and other loans 3,533,436 2,966,136
----------- -----------
Total loans receivable 39,581,227 39,880,625
Deferred loan fees, costs, discounts and premiums, net 243,120 229,962
Allowance for loan losses (497,298) (526,308)
Purchase accounting adjustments, net 8,574 8,535
----------- -----------
Total loans receivable, net $39,335,623 $39,592,814
=========== ===========
______________
(a) $766.0 million and $632.4 million of this portfolio represents
prime product as of December 31, 2001 and 2000, respectively.
The prime product is 40% of the total portfolio balance at each date.
F-27
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 31, 2001, $27.1 billion in residential loans, $3.6 billion in
multi-family loans and $1.6 billion in commercial real estate loans were pledged
as collateral for FHLB advances as discussed in notes 19 and 34.
As a result of the Golden State and Cal Fed Acquisitions, the Bank assumed
obligations for certain loans sold with recourse. The outstanding balances of
loans sold with recourse at December 31, 2001 totalled $2.0 billion. No loans
were sold with recourse during the years ended December 31, 2001, 2000 and 1999.
The Bank evaluates the credit risk of loans sold with recourse and, if
necessary, records a liability (included in other liabilities) for estimated
losses related to these potential obligations. At December 31, 2001, such
liability totalled $23.7 million.
Auto loans purchased at a discount related to credit quality are included
in the balance sheet amount of loans receivable as follows (in thousands):
December 31,
------------------------------
2001 2000
----------- -----------
Auto loans: contractual payments receivable $1,885,168 $2,124,182
Accretable Yield (136,515) (232,635)
Nonaccretable Contractual Cash Flows (336,073) (334,878)
---------- ----------
Loans purchased at a discount relating to credit quality, net $1,412,580 $1,556,669
========== ==========
Nonaccretable Contractual Cash Flows represents contractual principal and
interest cash flows that the Company determined, at acquisition, it was probable
the Company would be unable to collect. The decrease in Accretable Yield in 2001
is primarily due to fewer loan additions using the accretable yield methodology,
offset in part by higher payments and payoffs.
Nonaccretable
Accretable Contractual
Yield Cash Flows
----- ----------
(in thousands)
Balance at December 31, 1998 $ (88,145) $(121,334)
Addition - purchases (114,640) (163,816)
Accretion 80,432 --
Allocation from allowance for loan losses -- (7,339)
Eliminations (1,591) 89,488
--------- ---------
Balance at December 31, 1999 (123,944) (203,001)
Addition - purchases (266,800) (267,155)
Accretion 145,942 --
Reclassification 18,565 (18,565)
Charge-offs (6,398) --
Eliminations -- 153,843
--------- ---------
Balance at December 31, 2000 (232,635) (334,878)
Addition - purchases (125,394) (154,346)
Accretion 202,861 --
Reclassification 30,472 (30,472)
Charge-offs (11,819) --
Eliminations -- 183,623
--------- ---------
Balance at December 31, 2001 $(136,515) $(336,073)
========= =========
During the year ended December 31, 2001 and 2000, the Company incurred
losses totalling $11.8 million and $6.4 million, respectively, on loans
purchased at a discount as a result of pool impairment. These losses are
reflected as charge-offs. During the fourth quarter of 1999, the Company
incurred losses of $7.3 million on loans purchased at a discount by increasing
the allocated allowance for loan losses relative to such loans. No loss
allowance was acquired from predecessor institutions in connection with the
Downey Acquisition. No loss accruals were reversed in 2001, 2000 or 1999.
F-28
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents loans which have been placed on nonaccrual
status as of the dates indicated (in thousands):
December 31,
----------------------------
Nonaccrual loans: 2001 2000
---- ----
Real estate loans:
1-4 unit residential $ 75,078 $ 88,650
Multi-family residential 491 3,253
Commercial and other 3,786 1,509
Land -- 84
Construction -- 68
-------- --------
Total real estate 79,355 93,564
Non-real estate:
Auto One 10,878 5,721
Commercial banking 9,759 14,986
Consumer 600 768
-------- --------
Total non-real estate 21,237 21,475
-------- --------
Total nonaccrual loans $100,592 $115,039
======== ========
For loans on nonaccrual status, the following table summarizes the interest
income recognized ("Recognized") and total interest income that would have been
recognized had the borrowers performed under the original terms of the loans
("Contractual") (in thousands):
Year Ended December 31,
------------------------------------------------------------------------------------------
2001 2000 1999
------------------------- -------------------------- ---------------------------
Recognized Contractual Recognized Contractual Recognized Contractual
---------- ----------- ---------- ----------- ---------- -----------
Nonaccrual loans $6,177 $9,968 $4,743 $7,385 $6,410 $10,864
Activity in the allowance for loan losses is summarized as follows (in
thousands):
December 31,
---------------------------------------------
2001 2000 1999
---- ---- ----
Balance - beginning of year $526,308 $554,893 $588,533
Provision for loan losses -- -- 10,000
Charge-offs (32,002) (33,477) (40,312)
Recoveries 3,122 4,892 4,681
Reclassifications (a) (130) -- (670)
Allocation to Nonaccretable Contractual
Cash Flows of purchased auto loan portfolio -- -- (7,339)
-------- -------- --------
Balance - end of year $497,298 $526,308 $554,893
======== ======== ========
___________
(a) The reclassification of $130 thousand for the year ended December 31,
2001 relates to loans transferred to the held-for-sale portfolio. The
reclassification of $670 thousand for the year ended December 31, 1999
represents an adjustment resulting from the acquisition of loans from
GSAC.
At December 31, 2001, $29.0 billion, or 80.3%, of the Company's real estate
loan portfolio was collateralized by properties located in California. The
financial condition of the Company is affected by interest rates and real estate
market conditions, both of which are volatile. Any downturn in the economy could
reduce real estate values. An increase in the general level of interest rates
may adversely affect the ability of certain borrowers to pay their obligations.
Accordingly, if interest rates rise or real estate market values decline,
particularly in California, the Company may find it difficult to maintain its
asset quality and may require additional allowances for loss above the amounts
currently estimated by management.
F-29
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11) SECURITIZED LOAN SALES
In years prior to 2000, the Company entered into certain securitization
transactions, which resulted in the recording of residual interests on the
Company's books. The Company has securitized interests in residential real
estate loans. When the Company securitized assets, it retained interest-only
strips, subordinated tranches and, in some cases, a cash reserve account, all of
which are considered retained interests in the securitized assets. Gains upon
sale of the assets depend, in part, on the Company's allocation of the previous
carrying amount of the assets to the retained interests. Previous carrying
amounts are allocated in proportion to the relative fair values of the assets
sold and interests retained.
At December 31, 2001, key economic assumptions and sensitivity of the
current fair value of residual cash flows to immediate 10 percent and 20 percent
adverse changes in those assumptions are as follows (dollars in thousands):
Residential Adjustable-Rate
Mortgage Loans
---------------------------
Fair value of retained interests (a) $146,782
Weighted average life (in years) 4.01
Prepayment speed assumption (annual rate) 17.63%
Impact on fair value of 10% adverse change $ (46)
Impact on fair value of 20% adverse change $ (91)
Expected credit losses (annual rate) (0.25)%
Impact on fair value of 10% adverse change $ (37)
Impact on fair value of 20% adverse change $ (74)
Bond equivalent effective yield discount rate (semi-annual compounding) 4.75%
Impact on fair value of 10% adverse change $ (734)
Impact on fair value of 20% adverse change $ (1,469)
___________
(a) Excludes cash reserve accounts of $11.2 million.
The following table presents quantitative information about delinquencies
and net credit losses for securitized financial assets managed by the Company
(in thousands):
Principal Amount of
Total Principal Loans 60 Days or Net Credit
Amount of Loans More Past Due (a) Losses (b)
----------------- ------------------ -----------------------------------
December 31, During the Year Ended December 31,
----------------------------------------- -----------------------------------
2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ----
Carrying value of residential
adjustable-rate mortgage loans
managed or securitized (c):
Loans held by the Company $148,236 $223,632 $ 953 $ 7,643 -- --
in portfolio
Loans held by others but
serviced by the Company 13,179 80,734 84 2,759
-------- -------- ------ -------
Total $161,415 $304,366 $1,037 $10,402 -- --
======== ======== ====== =======
(Continued)
F-30
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
____________
(a) Loans 60 days or more past due are based on end-of-period total loans.
(b) Net credit losses are charge-offs and are based on total loans outstanding.
(c) Owned and securitized loans are mortgage loans in which the transferor
retains a subordinate interest or retains any risk of loss.
(12) IMPAIRED LOANS
At December 31, 2001 and 2000, loans that are considered to be impaired
totalled $59.1 million and $97.2 million, respectively (of which $14.1 million
and $19.5 million, respectively, were on nonaccrual status). The average
recorded investment in impaired loans during the years ended December 31, 2001,
2000 and 1999 was approximately $60.5 million, $91.3 million and $139.3 million,
respectively. For the years ended December 31, 2001, 2000 and 1999, the Company
recognized interest income on those impaired loans of $4.6 million, $8.3 million
and $9.5 million, respectively, which included $0.5 million, $1.6 million and
$2.7 million of interest income recognized using the cash basis method of income
recognition.
Generally, allowances for loan losses relative to impaired loans have not
been allocated from the general allowance because the carrying value of such
loans, net of purchase accounting adjustments, exceeds the loans' related
collateral values less estimated selling costs.
(13) INVESTMENT IN FHLB
The Company carries FHLB stock at cost. The FHLB provides a central credit
facility for member institutions. As a member of the FHLB system, the Bank is
required to own FHLB capital stock in an amount equal to the greater of (a) 1%
of the Bank's residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each calendar year, (b) .3% of total assets, or
(c) 5% of its advances (borrowings) from the FHLB. The Bank was in compliance
with this requirement at December 31, 2001, 2000 and 1999. At December 31, 2001,
the Bank pledged FHLB stock as collateral for FHLB advances as further discussed
in note 19.
(14) PREMISES AND EQUIPMENT, NET
The following table summarizes premises and equipment, net (dollars in
thousands):
Estimated
December 31, Depreciable Lives at
----------------------------
2001 2000 December 31, 2001
---------- ---------- --------------------
Land $ 45,689 $ 46,155 --
Buildings and leasehold improvements 163,709 157,482 1-39
Furniture and equipment 237,002 205,986 1-7
Construction in progress 10,261 12,169 --
--------- ---------
456,661 421,792
Accumulated depreciation and amortization (180,250) (130,893)
--------- ---------
Total premises and equipment, net $ 276,411 $ 290,899
========= =========
Depreciation and amortization expense related to premises and equipment for
the years ended December 31, 2001, 2000 and 1999 totalled $53.4 million, $51.1
million and $37.5 million, respectively.
F-31
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company rents certain premises and equipment under long-term,
noncancellable operating leases expiring at various dates through the year 2034.
Such rental expenses are included in occupancy and equipment expense and
totalled $39.8 million, $38.6 million and $41.1 million, for the years ended
December 31, 2001, 2000 and 1999, respectively. Rental income from sublease
agreements for the years ended December 31, 2001, 2000 and 1999 totalled $4.9
million, $5.1 million and $5.6 million, respectively. At December 31, 2001, the
projected minimum rental commitments, net of sublease agreements, under terms of
the leases were as follows (in thousands):
Cash Effect on
Commitment Net Income
---------- ----------
Year Ending
-----------
2002 $ 48,036 $ 28,413
2003 45,665 27,011
2004 41,282 24,418
2005 36,096 21,351
2006 25,058 14,822
Thereafter 54,299 32,118
-------- --------
Total $250,436 $148,133
======== ========
On October 4, 2001, the Bank sold a property complex consisting of a retail
branch and a lending facility totalling approximately 17,088 square feet,
resulting in a gain of $2.0 million. As part of the sale agreement, the Bank
agreed to lease back 6,363 square feet, under two separate lease agreements.
Approximately $0.9 million of the gain was deferred and is being recognized over
the life of the respective leases. The lease covering the lending facility is a
month-to-month lease. The lease covering the branch office is non-cancelable
with a termination date of October, 2008. It is the Bank's intent to occupy
these facilities until lease termination.
At December 31, 2001, the projected minimum rental commitments under the
terms of the leases were as follows (in thousands):
Lending Facility Branch Total
--------------- ------ -----
Year Ending
-----------
2002 $17 $ 150 $ 167
2003 -- 150 150
2004 -- 150 150
2005 -- 150 150
2006 -- 150 150
Thereafter -- 264 264
--- ------ ------
Total $17 $1,014 $1,031
=== ====== ======
On November 15, 1999, the Bank sold a complex consisting of a retail
branch, a parking lot and administrative offices totalling approximately 139,608
square feet, resulting in a gain of $5.3 million. As part of the sale agreement,
the Bank agreed to lease back 16,253 square feet under two separate lease
agreements. Approximately $1.8 million of the gain was deferred and will be
recognized over the life of the respective leases. The lease covering the branch
and parking lot is cancelable with six months' notice with a final termination
date of November, 2009. The lease covering the administrative offices is
non-cancelable with a termination date of November, 2004. It is the Bank's
intent to occupy these facilities until lease termination.
F-32
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 31, 2001, the projected minimum rental commitments under the
terms of the leases were as follows (in thousands):
Branch and Administrative
Parking Lot Offices Total
----------- ------- -----
Year Ending
-----------
2002 $116 $205 $ 321
2003 116 205 321
2004 116 188 304
2005 116 -- 116
2006 116 -- 116
Thereafter 337 -- 337
---- ---- ------
Total $917 $598 $1,515
==== ==== ======
(15) ACCRUED INTEREST RECEIVABLE
The following table summarizes accrued interest receivable (in thousands):
December 31,
--------------------------
2001 2000
-------- ---------
Cash and cash equivalents and securities $ 26,990 $ 54,637
Mortgage-backed securities 21,185 38,858
Loans receivable and loans held for sale 240,133 270,919
-------- --------
Total accrued interest receivable $288,308 $364,414
-------- --------
F-33
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(16) MORTGAGE SERVICING RIGHTs
The following table summarizes activity for MSRs and the MSR hedges for the
years ended December 31, 2001, 2000 and 1999 (in thousands). Prior to the
adoption of SFAS No. 133 on January 1, 2001, the MSR hedges were included in
MSRs on the balance sheet. Since the adoption of SFAS No. 133, MSR hedges are a
component of derivative assets and derivative liabilities on the balance sheet.
MSR
MSR Hedge Total
---------- --------- ----------
Balance at December 31, 1998 $ 855,727 $ 87,854 $ 943,581
Additions - purchases 334,842 -- 334,842
Originated servicing 193,855 -- 193,855
Sales (18,604) -- (18,604)
Swaption sales 28,727 (58,553) (29,826)
Interest rate floor sales 21,208 (38,242) (17,034)
Premiums paid -- 67,698 67,698
Payments made to counterparties, net 10,191 -- 10,191
Amortization (193,710) (18,600) (212,310)
---------- -------- ----------
Balance at December 31, 1999 1,232,236 40,157 1,272,393
Additions - purchases 344,262 -- 344,262
Originated servicing 126,648 -- 126,648
Sales (440) -- (440)
Swaption sales (20,088) (30,417) (50,505)
Interest rate floor sales (25,675) (24,934) (50,609)
Interest rate floor receipts (224) -- (224)
Premiums paid -- 127,199 127,199
Payments received from counterparties, net (5,369) -- (5,369)
Amortization (187,040) (16,992) (204,032)
---------- -------- ----------
Balance at December 31, 2000 1,464,310 95,013 1,559,323
SFAS No. 133 transition adjustment (69,754) -- (69,754)
Additions - purchases 308,003 -- 308,003
Originated servicing 369,514 -- 369,514
Swaption sales -- (488,143) (488,143)
Interest rate floor sales -- (151,715) (151,715)
Interest rate floor receipts (121) (5,074) (5,195)
Interest rate swap sales -- 17,228 17,228
Interest rate swap payments -- 18,688 18,688
Premiums paid -- 713,576 713,576
PO swap sale/matured -- (135) (135)
Payments received from counterparties, net -- (6,195) (6,195)
SFAS No. 133 current year fair value adjustments 66,416 83,287 149,703
Provision for loss in fair value (153,345) -- (153,345)
Amortization (361,076) -- (361,076)
---------- -------- ----------
Balance at December 31, 2001 $1,623,947 $276,530 $1,900,477
========== ======== ==========
Aggregate 1-4 unit residential loan participations, whole loans and
mortgage pass-through securities serviced for other investors (not including the
Bank) by FNMC totalled $85.2 billion, $84.1 billion and $72.9 billion, at
December 31, 2001, 2000 and 1999, respectively. In addition, FNMC had $13.8
billion, $11.1 billion and $10.4 billion of master servicing at December 31,
2001, 2000 and 1999, respectively.
The Company's loans serviced for others, secured by properties located in
California, Texas, and Florida was 45%, 7% and 6%, respectively, at December 31,
2001 and 46%, 7% and 6%, respectively, at December 31, 2000.
F-34
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
MSR fair value totalled $1.6 billion and $1.5 billion at December 31, 2001
and 2000, respectively. See discussion of valuation assumptions at note 37.
A recent decline in long-term interest rates has resulted in the
acceleration of mortgage loan prepayments. Higher levels of prepayments
accelerate amortization of MSRs and result in a reduction in the market value of
MSRs and servicing fee income. To reduce the sensitivity of its earnings to
interest rate and market value fluctuations, the Company hedges the change in
value of its MSRs based on changes in the benchmark interest rate. The Company
does not hedge certain components of its portfolio, notably ARMs and loans with
prepayment penalties. In addition, the Company hedges only certain components of
risk, which have not generally included the mortgage rate spread to other market
interest rates.
MSRs are amortized over the period of estimated net servicing income. SFAS
No. 140 requires enterprises to measure the impairment of MSRs based on the
difference between the carrying amount of the MSRs and their current estimated
fair value. At December 31, 2000, no allowance for impairment of the MSRs was
necessary. During the year ended December 31, 2001, the Company recorded pre-tax
valuation provisions on its MSRs of $153.3 million. The provision for 2001 is
due in large part to the significant decline in interest rates during 2001. On
an aggregate basis, at December 31, 2001, the estimated fair value of the MSRs
was $15.3 million higher than book value (net of a valuation allowance of $153.3
million). To the extent there is recovery of fair values of the impaired
tranches in future quarters, the valuation allowance will be reduced.
The Company owned several derivative instruments at December 31, 2001,
which were used to hedge against the change in value of the mortgage servicing
portfolio due to expected prepayment risk assumption changes. These derivative
instruments included interest rate swap agreements, Constant Maturity Swap
interest rate floor contracts, swaptions and principal only swaps. MSR
derivatives at December 31, 2001 are comprised of the following (dollars in
thousands):
Notional Fair Value at
Derivative Amount Contract Provisions Maturity December 31, 2001
---------- ------ ------------------- -------- --------------------
Assets Liabilities
------ -----------
Interest rate swap agreements $ 2,462,000 Weighted average pay rate of 1.9% 2010 - 2011 $ 42,102 $(34,541)
Receive rates between 4.8% and 6.2%
Interest rate floor contracts 3,054,000 Strike rates between 6.0% and 6.7% 2006 78,917 --
(a)
Swaption contracts (b) 4,111,000 Strike rates between 5.5% and 6.9% 2002 - 2004 183,641 --
Principal only swap agreements 378,928 Index tied to LIBOR from a PO strip 2002 - 2029 7,487 (1,076)
----------- -------- --------
$10,005,928 $312,147 $(35,617)
=========== ======== ========
____________
(a) Premiums paid to counterparties in exchange for the right to receive cash
payments when the 10-year Constant Maturity Swap rate falls below the
strike rate are recorded as part of the MSR derivative asset on the balance
sheet.
(b) Premiums paid to counterparties in exchange for the right to enter into an
interest rate swap are recorded as part of the MSR derivative asset on the
balance sheet.
The estimated market value of interest rate floor contracts, interest rate
swaps, principal only swaps and swaptions designated as hedges against MSRs at
December 31, 2000 were $52.8 million, $5.1 million, $1.2 million and $105.6
million, respectively. Beginning January 1, 2001, the derivative instruments are
carried at fair value in accordance with SFAS No. 133. See note 36 for further
discussion.
F-35
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following summarizes servicing advances and other receivables (included
in other assets) related to 1-4 unit residential loan servicing, net of
valuation allowances of $16.3 million and $16.1 million in 2001 and 2000,
respectively, (in thousands):
December 31,
---------------------------
2001 2000
---- ----
Servicing advances $108,682 $106,120
Checks in process of collection 1,215 745
Other 5,501 6,287
-------- --------
$115,398 $113,152
======== ========
(17) DEPOSITS
A summary of the carrying value of deposits follows (dollars in thousands):
December 31,
---------------------------------
2001 2000
---- ----
Transaction Accounts:
Non-interest checking $ 2,013,163 $ 1,749,359
Interest-bearing checking 2,139,674 2,063,185
----------- -----------
Subtotal checking 4,152,837 3,812,544
Money market 4,614,223 2,948,853
Passbook savings 3,055,766 3,086,852
----------- -----------
Total transaction accounts 11,822,826 9,848,249
Certificates of deposit 10,618,260 12,241,809
----------- -----------
Subtotal retail deposits 22,441,086 22,090,058
Custodial accounts 2,512,684 825,438
Accrued interest payable 46,184 80,225
Purchase accounting 328 1,009
----------- -----------
Total retail deposits 25,000,282 22,996,730
Brokered Deposits:
Certificates of deposit 60,692 369,581
Money market 84,993 84,155
Accrued interest payable 723 11,653
Purchase accounting 137 253
----------- -----------
Total brokered deposits 146,545 465,642
----------- -----------
Total deposits $25,146,827 $23,462,372
=========== ===========
Checking deposits as a % of retail deposits
(including custodials) 26.7% 20.2%
Transaction accounts as a % of retail deposits
(including custodials) 57.5% 46.6%
Checking deposits as a % of retail deposits
(excluding custodials) 18.5% 17.3%
Transaction accounts as a % of retail deposits
(excluding custodials) 52.7% 44.6%
The aggregate amount of jumbo certificates of deposit (term deposits) with
a minimum denomination of $100,000 was approximately $2.8 billion and $3.3
billion at December 31, 2001 and 2000, respectively.
F-36
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Total deposits include Golden State deposits of $12.7 million and $32.6
million at December 31, 2001 and 2000, respectively.
The following summarizes interest expense by deposit category (in
thousands):
December 31,
--------------------------------------------
2001 2000 1999
-------- -------- --------
Passbook savings $ 76,702 $116,321 $124,618
Interest-bearing demand deposits 9,903 13,914 17,772
Money market deposit accounts 129,796 120,683 124,368
Term accounts 615,137 677,489 621,528
-------- -------- --------
Total $831,538 $928,407 $888,286
======== ======== ========
At December 31, 2001, term accounts were scheduled to mature as follows (in
thousands):
Year Ending
-----------
2002 $ 9,141,546
2003 1,029,717
2004 139,747
2005 191,974
2006 174,959
Thereafter 1,009
-----------
Total $10,678,952
===========
(18) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The following summarizes securities sold under agreements to repurchase
(dollars in thousands):
December 31, 2001
------------------------------------------------------------------
Underlying Collateral Repurchase Liability
----------------------------- --------------------
Recorded Market Interest
Value (a) Value Amount Rate
--------- ----- ------ ----
Maturing in 30 to 90 days $ 251,830 $ 250,619 $ 200,000 4.16%
Maturing after 90 days to 1 year 221,859 220,736 200,000 3.10
Maturing over 1 year 1,925,644 1,914,635 1,950,000 3.11
---------- ---------- ----------
Total (b) 2,399,333 2,385,990 2,350,000 3.20%
Accrued interest payable -- -- 13,945
---------- ---------- ----------
$2,399,333 $2,385,990 $2,363,945
========== ========== ==========
December 31, 2000
------------------------------------------------------------------
Underlying Collateral Repurchase Liability
----------------------------- --------------------
Recorded Market Interest
Value (a) Value Amount Rate
--------- ----- ------ ----
Maturing within 30 days $ 980,736 $ 981,379 $ 888,748 6.61%
Maturing in 30 to 90 days 477,528 481,113 423,597 6.63
Maturing after 90 days to 1 year 1,315,377 1,317,242 1,284,115 6.74
Maturing over 1 year 1,931,155 1,943,241 1,850,000 7.28
---------- ---------- ----------
Total (b) 4,704,796 4,722,975 4,446,460 6.93%
Accrued interest payable -- -- 64,849
---------- ---------- ----------
$4,704,796 $4,722,975 $4,511,309
========== ========== ==========
(Continued)
F-37
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
____________
(a) Recorded value includes accrued interest at December 31, 2001 and 2000. In
addition, the recorded values at December 31, 2001 and 2000 include
adjustments for the unrealized gain or loss on mortgage-backed securities
available for sale.
(b) Total mortgage-backed securities collateral at December 31, 2001 and 2000
includes $0.8 billion and $1.7 billion, respectively, in outstanding
balances of loans securitized with full recourse to the Bank. The market
value of such collateral was $0.8 billion and $1.7 billion at December 31,
2001 and 2000, respectively.
At December 31, 2001 and 2000, these agreements had weighted average stated
interest rates of 3.20% and 6.93%, respectively. Third party securities dealers
hold the underlying securities. These dealers may have loaned the securities to
other parties in the normal course of their operations, but all agreements
require the dealers to resell to California Federal the identical securities at
the maturities of the agreements. The average daily balance of securities sold
under agreements to repurchase was $3.6 billion, $5.4 billion and $5.1 billion
during 2001, 2000 and 1999, respectively; the weighted average rate was 5.41%,
6.45% and 5.18% during 2001, 2000 and 1999, respectively; and the maximum amount
outstanding at any month-end during these periods was $4.7 billion, $8.5 billion
and $6.2 billion, respectively.
At December 31, 2001, securities sold under agreements to repurchase were
collateralized with $1.6 billion of mortgage-backed securities available for
sale and $0.8 billion of mortgage-backed securities held to maturity.
(19) BORROWINGS
Borrowings are summarized as follows (dollars in thousands):
December 31,
---------------------------------------------------------
2001 2000
------------------------ ------------------------
Carrying Average Carrying Average
Value Rate Value Rate
----- ---- ----- ----
Fixed-rate borrowings from FHLB $17,487,045 5.13% $21,337,878 6.08%
Variable-rate borrowings from FHLB 4,836,000 2.23 5,090,000 6.71
10% Subordinated Debentures due 2006 92,100 10.00 92,100 10.00
FN Holdings 10 5/8% Senior Subordinated
Notes due 2003 250 10.63 250 10.63
6 1/2% Convertible Subordinated
Debentures due 2001 -- -- 160 6.50
10% Subordinated Debentures due 2003 -- -- 4,299 10.00
Floating Rate Notes due 2003 250,000 3.23 250,000 7.76
6 3/4% Senior Notes due 2001 -- -- 350,000 6.75
7% Senior Notes due 2003 600,000 7.00 600,000 7.00
7 1/8% Senior Notes due 2005 800,000 7.13 800,000 7.13
Federal funds purchased 225,000 1.63 -- --
Other borrowings 55 9.22 406 7.57
----------- -----------
Total borrowings 24,290,450 4.63 28,525,093 6.28
Discount on borrowings (5,580) (8,564)
Purchase accounting adjustments, net 2,524 7,420
----------- -----------
Subtotal 24,287,394 4.63% 28,523,949 6.28%
Accrued interest payable 157,147 276,608
----------- -----------
$24,444,541 $28,800,557
=========== ===========
F-38
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following summarizes maturities and weighted average stated interest
rates on borrowings at December 31, 2001, not including discounts, accrued
interest payable or purchase accounting adjustments (dollars in thousands):
Weighted
Balances Maturing Average Rates
Maturities during the Years --------------------------- ------------------------
Ending December 31, FHLB Other FHLB Other
------------------- ---- ----- ---- -----
2002 $10,231,000 $225,018 4.20% 1.63%
2003 7,990,000 850,000 4.73 5.89
2004 3,450,000 -- 5.24 --
2005 651,625 800,250 2.58 7.13
2006 -- 92,100 -- 10.00
Thereafter 420 37 7.74 9.54
----------- ----------
Total $22,323,045 $1,967,405 4.50% 6.10%
=========== ==========
The following summarizes interest expense on borrowings for the years ended
December 31, 2001, 2000 and 1999 (in thousands):
Year Ended December 31,
---------------------------------------------
2001 2000 1999
---- ---- ----
FHLB advances $1,366,607 $1,521,806 $1,165,010
Interest rate swap agreements 67,279 7,188 5,940
10% Subordinated Debentures due 2006 9,210 9,210 9,210
11.20% Senior Notes due 2004 -- -- 651
FN Holdings 10 5/8% Senior Subordinated Notes
due 2003 27 27 26
6 1/2% Convertible Subordinated Debentures due 2001 1 32 172
10% Subordinated Debentures due 2003 333 430 430
Floating Rate Notes due 2003 13,455 18,942 15,931
6 3/4% Senior Notes due 2001 13,781 23,625 23,625
7% Senior Notes due 2003 42,000 42,000 42,000
7 1/8% Senior Notes due 2005 57,000 57,000 57,000
Federal funds purchased 11,661 4,747 2,750
Other borrowings 8 28 25
Discount accretion 1,042 1,092 1,031
Purchase accounting adjustments (4,896) (8,629) (11,172)
---------- ---------- ----------
Total $1,577,508 $1,677,498 $1,312,629
========== ========== ==========
The following summarizes the carrying value of assets pledged as collateral
for FHLB advances (in thousands):
December 31, 2001
-----------------
Loans receivable $32,332,761
Mortgage-backed securities available for sale 2,338,317
FHLB stock 1,446,607
-----------
Total $36,117,685
===========
F-39
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
FHLB ADVANCES
During 2000, the FHLB called and the Bank prepaid $400 million in FHLB
advances, resulting in extraordinary gains of $3.0 million, net of income taxes
of $2.1 million, on the early extinguishment of such borrowings.
10% SUBORDINATED DEBENTURES DUE 2006
As part of the FN Acquisition, California Federal assumed $92.1 million
principal amount of the 10% Subordinated Debentures Due 2006.
Events of default under the Old FNB Indenture include, among other things:
(a) a 30-day default in the payment of interest, (b) a default in principal
payment when due, (c) the failure to comply with covenants in the Old FNB
Indenture, provided that the Bank does not cure the default within 60 days of
receipt of notice by the trustee or holders of at least 25% in principal amount
of the outstanding 10% Subordinated Debentures Due 2006, (d) certain events of
bankruptcy, insolvency or reorganization of the Bank, (e) the FSLIC (or a
comparable entity) is appointed to act as conservator, liquidator, receiver or
other legal custodian for the Bank and (f) a default under other indebtedness of
the Bank in excess of $10 million resulting in such indebtedness becoming due
and payable, and such default or acceleration has not been rescinded or annulled
within 60 days of receipt of notice of such failure by the trustee to the Bank
or by holders of at least 25% in principal amount of the outstanding 10%
Subordinated Debentures Due 2006 to the Bank and the trustee.
11.20% SENIOR NOTES DUE 2004
As part of the SFFed Acquisition, California Federal assumed $50 million
principal amount of the 11.20% Senior Notes. On December 20, 1999, the Bank
repurchased all of the remaining $6.0 million outstanding principal amount of
the 11.20% Senior Notes at a price of 113.9% of the principal amount, plus the
accrued interest thereon. The Bank recorded an extraordinary loss, net of tax,
of $0.2 million in connection with this repurchase.
FN HOLDINGS 10 5/8% SENIOR SUBORDINATED NOTES DUE 2003
In connection with the Cal Fed Acquisition, GS Holdings acquired the net
proceeds from the issuance of $575 million principal amount of the FN Holdings
10 5/8% Notes and assumed FN Escrow's obligations under the FN Holdings 10 5/8%
Notes and indenture. At December 31, 2001, $0.3 million of the FN Holdings 10
5/8% Notes remained outstanding.
GS Holdings had the right to redeem the FN Holdings 10 5/8% Notes at its
option, in whole or in part, during the twelve-month period beginning January 1,
2002 at a price of 102.656% plus accrued and unpaid interest to the date of
redemption, and thereafter at 100% plus accrued and unpaid interest to the date
of redemption. The $0.3 million of remaining FN Holdings 10 5/8% Notes were
redeemed in January, 2002.
As a result of the Cal Fed Acquisition, the Bank was obligated with respect
to the following two outstanding securities of Old California Federal.
6 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2001
In 1986, Cal Fed Inc., Old California Federal's former parent company,
issued $125 million of the 6 1/2% Convertible Subordinated Debentures. As a
result of a corporate restructuring in December 1992, Cal Fed Inc. was merged
with and into XCF, a subsidiary of Old California Federal. The 6 1/2%
Convertible Subordinated Debentures were redeemable at the option of the holders
on February 20, 2000, at 123% of their principal amount. Due to the purchase of
all of the Cal Fed Stock by FN Holdings in the Cal Fed Acquisition on January 3,
1997, the common stock conversion feature has been eliminated. During the first
quarter of 2000, the Bank repurchased $2.5 million outstanding principal amount
of the 6 1/2% Convertible Subordinated Debentures, resulting in an extraordinary
gain of $41 thousand, net of income taxes of $30 thousand on the early
extinguishment debt. The remaining balance of $160 thousand was paid in full
during the first quarter of 2001.
F-40
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
10% SUBORDINATED DEBENTURES DUE 2003
On December 16, 1992, Old California Federal issued $13.6 million of the
10% Subordinated Debentures. The remaining balance of $4.3 million was paid in
full during the fourth quarter of 2001.
FLOATING RATE NOTES DUE 2003
On August 6, 1998, GS Escrow, an affiliate of GS Holdings, issued $250
million principal amount of the Floating Rate Notes Due 2003. The notes will
mature on August 1, 2003 with interest payable quarterly on February 1, May 1,
August 1 and November 1. Interest on the Floating Rate Notes is equal to
three-month LIBOR plus 100 basis points per annum, except that the initial rate
was 6 3/4%, based on six-month LIBOR until the first interest payment date on
February 1, 1999. At December 31, 2001, the interest rate on the Floating Rate
Notes Due 2003 was 3.23%. Deferred costs associated with the issuance of the
Floating Rate Notes totalling $3.1 million were recorded in other assets and are
being amortized over the term of the Floating Rate Notes.
The Floating Rate Notes are redeemable at the option of GS Holdings, in
whole or in part, after August 1, 2000 at a price of 101.5% of the outstanding
principal amount during the twelve-month period beginning August 1, 2000; at a
price of 101% of the outstanding principal amount during the twelve-month period
beginning August 1, 2001; and at a price of 100.5% of the outstanding principal
amount during the twelve-month period beginning August 1, 2002; including
accrued and unpaid interest, if any, to the date of redemption. In the event of
a change in control, the Floating Rate Notes are redeemable in whole at the
option of GS Holdings. The redemption price includes principal plus accrued and
unpaid interest, if any, to the date of redemption, plus the excess, if any, of
(a) the sum of the present value of the redemption price for the Floating Rate
Notes and the remaining scheduled interest payments over (b) the outstanding
principal amount of the Floating Rate Notes to be redeemed.
FIXED RATE NOTES
On August 6, 1998, GS Escrow, an affiliate of GS Holdings, issued $350
million principal amount of the 2001 Notes, $600 million principal amount of the
2003 Notes and $800 million principal amount of the 2005 Notes. The Fixed Rate
Notes will mature on August 1 of the respective year with interest payable
semiannually on February 1 and August 1. The 2001 Notes matured and were paid in
full on August 1, 2001. Deferred costs associated with the issuance of the Fixed
Rate Notes totalling $3.5 million, $12.5 million and $19.5 million for the 2001
Notes, the 2003 Notes and the 2005 Notes, respectively, were recorded in other
assets and are being amortized over the terms of the notes using the interest
method.
The Fixed Rate Notes are redeemable at the option of GS Holdings, in whole
or in part, at a redemption price equal to principal plus accrued and unpaid
interest, if any, to the date of redemption, plus the excess, if any, of (a) the
sum of the present value of the redemption price for the notes and the remaining
scheduled interest payments over (b) the outstanding principal amount of the
notes to be redeemed.
F-41
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(20) ACCRUED TERMINATION AND FACILITIES COSTS
In connection with the Golden State Acquisition, the Company recorded
liabilities resulting from (a) branch consolidations due to duplicate
facilities; (b) employee severance and termination benefits due to a planned
reduction in force; and (c) expenses incurred under contractual obligations to
terminate services provided by outside service providers (principally relating
to DP systems expenses). The merger and integration plan relative to the Golden
State Acquisition was in place on September 11, 1998. Certain of these costs
were included in the allocation of purchase price and others were recognized in
net income. The table below summarizes the activity in the liability for the
costs related to such plan (in thousands):
Severance and
Branch Termination Contract
Consolidations Benefits Terminations Total
-------------- -------------- ---------------- --------
Balance at December 31, 1998 $ 29,870 $ 33,480 $ 11,815 $ 75,165
Additional liabilities recorded 9,401 71 -- 9,472
Charges to liability account (15,220) (4,140) (9,523) (28,883)
Reversal of accrual -- (16,641) (2,267) (18,908)
-------- -------- -------- --------
Balance at December 31, 1999 24,051 12,770 25 36,846
Additional liabilities recorded 2,504 -- -- 2,504
Charges to liability account (10,511) (241) (25) (10,777)
-------- -------- -------- --------
Balance at December 31, 2000 16,044 12,529 -- 28,573
Charges to liability account (1,836) -- -- (1,836)
Reversal of accrual -- (29) -- (29)
-------- -------- -------- --------
Balance at December 31, 2001 $ 14,208 $ 12,500 $ -- $ 26,708
======== ======== ======== ========
The Bank had identified certain of its retail banking facilities to be
closed and marketed for sale, with the related operations consolidated into
other retail banking facilities acquired in the Golden State Acquisition.
Accordingly, the liabilities established represent the estimated present value
of occupancy expenses, offset by estimates of sub-lease income over the
applicable remaining lease terms. The first group of branches was closed in
November 1998. The final closure was in June 2000. The balance relating to
accrued costs for branch consolidations remaining at December 31, 2001
represents remaining lease obligations, net of sub-lease income.
In connection with the Golden State Acquisition, management identified
approximately 1,100 full-time equivalent positions to be eliminated. During
1999, this estimate was increased to 1,141. These positions spanned all areas
and business units of the Bank. As of December 31, 2000, all positions had been
eliminated. The balance relating to accrued severance and termination benefits
remaining at December 31, 2001 primarily represents a liability for annuity
benefits contractually payable to former senior officers of Golden State.
The Bank had also established additional liabilities for contract
termination costs with outside service providers. As of December 31, 2000, all
such contracts have been terminated.
F-42
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The table below provides detail of the initial liability recorded in 1998,
additional liabilities recorded and subsequent reversals of the excess liability
(see note 3) (in thousands):
Merger Costs Expenses
Included in Recognized in
Allocation of Net Income
Purchase Price (Pre-tax) Total
-------------- ------------- --------
Branch Consolidation $ 22,304 $ 7,566 $ 29,870
Severance and termination benefits 42,211 6,092 48,303
Contract termination 14,455 -- 14,455
-------- ------- --------
Total liability initially established in 1998 78,970 13,658 92,628
Additional liability recorded in 1999 500 8,972 9,472
Excess liability reversed in 1999 (16,641) (2,267) (18,908)
-------- ------- --------
Balance at December 31, 1999 62,829 20,363 83,192
Additional liability recorded in 2000 -- 2,504 2,504
-------- ------- --------
Balance at December 31, 2000 62,829 22,867 85,696
Excess liability reversed in 2001 (29) -- (29)
-------- ------- --------
Net liability recorded from
Golden State Acquisition $ 62,800 $22,867 $ 85,667
======== ======= ========
(21) SEGMENT REPORTING
The Company has two reportable segments, the community bank and the
mortgage bank. The community bank operates retail deposit branches in California
and Nevada. The community bank provides retail consumer and small businesses
with: (a) deposit products (including demand, transaction and savings accounts),
(b) investment products (including mutual funds, annuities and insurance) and
(c) lending products (such as consumer and commercial loans). Further, the
community bank segment invests in residential real estate loans purchased from
FNMC and from others, and also invests in mortgage-backed and other securities.
The mortgage banking segment, conducted by FNMC, operates loan production
facilities throughout the United States and originates or purchases fixed-rate
1-4 unit residential loans for sale and services loans for itself and others.
The mortgage banking segment also originates adjustable-rate loans for the
community bank segment.
The accounting policies of the segments are the same as those described in
note 2. The Company evaluates performance based on net interest income after
provision for loan losses, noninterest income, and noninterest expense. The
total of these three items is the reportable segment's net (pre-tax)
contribution.
The Company's reportable segments are strategic business units that offer
different services in different geographic areas. They are managed separately
because each segment appeals to different markets and, accordingly, requires
different technology and marketing strategies.
F-43
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Since the Company derives a significant portion of its revenues from
interest income, and interest expense is the most significant expense, the
segments are reported below using net interest income. Because the Company also
evaluates performance based on noninterest income and noninterest expense goals,
these measures of segment profit and loss are also presented. The Company does
not allocate income taxes to the segments.
Community Mortgage
Banking Banking Total
------- ------- -----
(in thousands)
Net interest income after provision for loan losses: (a)
2001 $1,378,192 $112,788 $ 1,490,980
2000 1,250,631 7,585 1,258,216
1999 1,237,624 47,814 1,285,438
Noninterest income: (b)
2001 347,621 51,160 398,781
2000 247,957 242,034 489,991
1999 229,001 220,509 449,510
Noninterest expense: (c)
2001 805,860 158,126 963,986
2000 752,696 150,372 903,068
1999 718,668 177,907 896,575
Pre-tax contribution:
2001 919,953 5,822 925,775
2000 745,892 99,247 845,139
1999 747,957 90,416 838,373
Segment assets: (d)
2001 56,317,391 5,876,410 (e) 62,193,801
2000 60,149,476 3,498,106 (e) 63,647,582
1999 56,806,653 3,459,880 (e) 60,266,533
------------------
(a) Includes $129.4 million, $110.4 million and $109.6 million for 2001,
2000 and 1999, respectively, in earnings credit provided to FNMC by the
Bank, primarily for custodial bank account balances generated by FNMC.
Also includes $237.0 million, $253.2 million and $235.6 million for 2001,
2000 and 1999, respectively, in interest income and expense on
intercompany loans.
(b) Includes $41.4 million, $46.4 million and $46.6 million for 2001, 2000
and 1999, respectively, in intercompany servicing fees.
(c) Includes $4.6 million for 2001, 2000 and 1999, respectively, in
intercompany noninterest expense.
(d) Includes $5.6 billion, $3.1 billion and $3.2 billion for 2001, 2000 and
1999, respectively, in intercompany borrowings and $57.7 million, $43.6
million and $30.2 million for 2001, 2000 and 1999, respectively, in
intercompany deposits maintained with the Bank.
(e) Includes $1.9 billion, $1.6 billion and $1.3 billion for 2001, 2000 and
1999, respectively, in MSRs and the related hedge.
F-44
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following reconciles the above table to the amounts shown on the
consolidated financial statements as of and for the years ended December 31, (in
thousands):
2001 2000 1999
----------- ----------- -----------
Net interest income after provision for loan losses:
Total net interest income for reportable segments $ 1,490,980 $ 1,258,216 $ 1,285,438
Elimination of intersegment net interest income (129,368) (110,424) (109,599)
----------- ----------- -----------
Total $ 1,361,612 $ 1,147,792 $ 1,175,839
=========== =========== ===========
Noninterest income:
Total noninterest income for reportable segments $ 398,781 $ 489,991 $ 449,510
Elimination of intersegment servicing fees (41,378) (46,396) (46,631)
----------- ----------- -----------
Total $ 357,403 $ 443,595 $ 402,879
=========== =========== ===========
Noninterest expense:
Total noninterest expense for reportable segments $ 963,986 $ 903,068 $ 896,575
Elimination of intersegment expense (4,640) (4,640) (4,640)
----------- ----------- -----------
Total $ 959,346 $ 898,428 $ 891,935
=========== =========== ===========
Pre-tax contribution:
Total contributions for reportable segments $ 925,775 $ 845,139 $ 838,373
Elimination of intersegment contributions (166,106) (152,180) (151,590)
----------- ----------- -----------
Total $ 759,669 $ 692,959 $ 686,783
=========== =========== ===========
Total assets:
Total assets for reportable segments $62,193,801 $63,647,582 $60,266,533
Elimination of intersegment borrowings (5,617,314) (3,089,139) (3,195,180)
Elimination of intersegment deposits (57,669) (43,632) (30,222)
----------- ----------- -----------
Total $56,518,818 $60,514,811 $57,041,131
=========== =========== ===========
F-45
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(22) COMPREHENSIVE INCOME
Comprehensive income includes certain revenue, expenses, gains, and losses,
such as unrealized gains and losses on available-for-sale securities, which are
required to be reported as a separate component of the equity section of the
balance sheet rather than in net income.
The tax effect associated with unrealized gain (loss) on securities for the
years ended December 31, 2001, 2000 and 1999 is summarized as follows (in
thousands):
Before-tax Tax benefit Net-of-tax
amount (expense) amount
------ --------- ------
2001
----
Unrealized gain on securities:
Unrealized holding gain arising during the period $ 227,219 $ (92,819) $ 134,400
Less: reclassification adjustment for gain in net income (26,950) 11,009 (15,941)
Amortization of market adjustment for securities transferred
from available-for-sale to held-to-maturity 49,025 (20,027) 28,998
Transition adjustment upon adoption of SFAS No. 133 (75,481) 30,834 (44,647)
Change in fair value of derivatives used for cash flow hedges (126,343) 51,611 (74,732)
--------- --------- ---------
OCI $ 47,470 $ (19,392) $ 28,078
========= ========= =========
2000
----
Unrealized gain on securities:
Unrealized holding gain arising during the period $ 299,311 $(128,490) $ 170,821
Less: reclassification adjustments for losses in net income 16,866 (6,890) 9,976
Amortization of market adjustment for securities transferred
from available-for-sale to held-to-maturity 7,826 (3,196) 4,630
--------- --------- ---------
OCI $ 324,003 $(138,576) $ 185,427
========= ========= =========
1999
----
Unrealized loss on securities:
Unrealized holding loss arising during the period $(487,673) $ 205,432 $(282,241)
Less: reclassification adjustments for gains in net income (1,283) 541 (742)
--------- --------- ---------
Other comprehensive loss $(488,956) $ 205,973 $(282,983)
========= ========= =========
(23) MINORITY INTEREST
REIT PREFERRED STOCK
In November 1996, the Bank formed Preferred Capital Corp. for the purpose
of acquiring, holding and managing real estate mortgage assets. Preferred
Capital Corp. is a Maryland corporation and qualifies as a REIT for federal
income tax purposes. All of Preferred Capital Corp.'s common stock is owned by
the Bank. FNMC services Preferred Capital Corp.'s mortgage assets pursuant to a
subservicing agreement.
On January 31, 1997, Preferred Capital Corp. publicly issued $500 million
of its REIT Preferred Stock, which is reflected in the Company's consolidated
balance sheet as minority interest. Preferred Capital Corp. used the proceeds
from such offering to acquire mortgage assets from the Bank. The REIT Preferred
Stock has a stated liquidation value of $25 per share, plus declared and unpaid
dividends, if any. The annual cash dividends on the 20,000,000 shares of REIT
Preferred Stock, assuming such dividends are declared by the Board of Directors
of Preferred Capital Corp., are expected to approximate $45.6 million per year.
As long as Preferred Capital Corp. qualifies as a REIT, a distribution on the
REIT Preferred Stock will be a dividends-paid deduction by Preferred Capital
Corp. for tax purposes. Dividends paid on the REIT Preferred Stock during 2001,
2000 and 1999 were $27.0 million, $27.0 million and $26.4 million, respectively,
net of the income tax benefit.
F-46
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The REIT Preferred Stock ranks prior to the common stock of Preferred
Capital Corp. and to all other classes and series of equity securities
subsequently issued, other than any class or series expressly designated as
being on a parity with or senior to the REIT Preferred Stock as to dividends and
liquidating distributions.
Holders of the REIT Preferred Stock have no voting rights, except as
required by law or certain limited circumstances.
Except in the event of a change of control or upon certain tax events, the
REIT Preferred Stock is not redeemable prior to January 31, 2002. The REIT
Preferred Stock is redeemable solely at the option of Preferred Capital Corp. or
its successor or any acquiring or resulting entity with respect to Preferred
Capital Corp. (including by any parent or subsidiary of Preferred Capital Corp.,
any such successor or any such acquiring or resulting entity), as applicable, at
any time on and after January 31, 2002 in whole or in part, at $26.14 per share
on or after January 31, 2002 and prior to January 31, 2003, and at prices
decreasing pro-rata annually thereafter to the stated liquidation value of $25
per share on or after January 31, 2007, plus declared and unpaid dividends, if
any, without interest. Upon change of control, the REIT Preferred Stock is
redeemable on or prior to January 31, 2002 at the option of Preferred Capital
Corp. or its successor or any acquiring or resulting entity with respect to the
Bank (including by any parent or subsidiary of Preferred Capital Corp., any such
successor or any such acquiring or resulting entity), as applicable, in whole,
but not in part, at a price per share equal to: (a) $25, plus (b) an amount
equal to declared and unpaid dividends, if any, to the date fixed for
redemption; without interest and without duplication, an additional amount equal
to the amount of dividends that would be payable on the REIT Preferred Stock in
respect of the period from the first day of the dividend period in which the
date fixed for redemption occurs to the date fixed for redemption (assuming all
such dividends were to be declared), plus (c) a specified make whole premium.
Each share of REIT Preferred Stock will be exchanged automatically for one
newly issued share of the 9 1/8% Preferred Stock if the appropriate federal
regulatory agency directs in writing such exchange because (a) the Bank becomes
"undercapitalized" under prompt corrective action regulations, (b) the Bank is
placed into conservatorship or receivership or (c) the appropriate federal
regulatory agency, in its sole discretion, anticipates the Bank becoming
"undercapitalized" in the near term. If issued, the 9 1/8% Preferred Stock will
rank on a parity with the Bank Preferred Stock.
AUTO ONE COMMON STOCK
In connection with the GSAC Acquisition, Auto One issued 250 shares of its
common stock, par value $1.00 per share, representing a 20% interest in Auto
One. During 2001, the Bank purchased the remaining 20% interest in Auto One for
$9 million, which was recorded as goodwill.
11 1/2% BANK PREFERRED STOCK
During the year ended December 31, 1999, all of the remaining 318,341
outstanding shares of 11 1/2% Bank Preferred Stock were redeemed by the Company
at $105.75 per share, for a total redemption price of $33.7 million. This
transaction reduced minority interest by $31.8 million on the Company's
consolidated balance sheet and resulted in a charge of $1.8 million to minority
interest expense.
Dividends are payable quarterly at an annual rate of 11.50% per share when
declared by the Bank's Board of Directors. Dividends paid on the 11 1/2% Bank
Preferred Stock for each year ended December 31, 2001, 2000 and 1999 totalled
$34.6 million, of which $1.8 million was included in minority interest expense
in 1999.
10 5/8% Bank Preferred Stock
During the year ended December 31, 1999, all of the remaining 607,299
outstanding shares of 10 5/8% Bank Preferred Stock were redeemed by the Company
at $105.313 per share, for a total redemption price of $63.9 million. This
transaction reduced minority interest by $60.7 million on the Company's
consolidated balance sheet and resulted in a charge of $3.2 million to minority
interest expense.
F-47
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Cash dividends on the 10 5/8% Bank Preferred Stock are noncumulative and
are payable at an annual rate of 10 5/8% per share if, when, and as declared by
the Board of Directors of the Bank. Dividends paid on the 10 5/8% Bank Preferred
Stock for each year ended December 31, 2001, 2000 and 1999 totalled $18.3
million.
PRE-MERGER TAX BENEFITS
During 1999, minority interest expense of $79.0 million was recorded based
upon changes to estimated pre-merger tax benefits retained by GSB Investments
and Hunter's Glen. This amount was fully offset by income tax benefits to GS
Holdings in the same periods. See note 27.
(24) STOCKHOLERR'S EQUITY
COMMON STOCK
The Company issued 1,000 shares of its common stock with par value of $1.00
per share. The common stock of the Company is owned 100% by its parent, Golden
State.
Dividends and distributions on the Company's common stock in 2001, 2000 and
1999 totalled $135.0 million, $96.0 million and $225.5 million, respectively.
During 1999, the Company recorded a $66.4 million adjustment to the initial
dividend of tax benefits to parent related to the Company's deconsolidation from
its tax reporting group. See "Retained Earnings."
ADDITIONAL PAID-IN CAPITAL
During 2001, the Company did not receive any capital contributions from its
parent. During 2000 and 1999, the Company received capital contributions from
its parent of $19.0 million and $40.0 million, respectively. In addition, the
Company recorded an adjustment during 1999 to the purchase price in the Golden
State Acquisition of $12.4 million. See note 3.
RETAINED EARNINGS
During 2001, 2000 and 1999, the Company paid dividends to its parent of
$135.0 million, $96.0 million and $225.5 million, respectively.
During 1999, the Company recorded a $66.4 million increase in retained
earnings representing an adjustment to reduce the initial dividend of tax
benefits to its parent upon the Company's deconsolidation from its tax reporting
group on September 11, 1998. See note 27.
PAYMENT OF IVIDENDSs
The terms of the GS Escrow Notes indenture generally will permit the
Company to make distributions of up to 75% of the Consolidated Net Income of GS
Holdings since July 1, 1998 if after giving effect to such distribution, (a) the
Bank is "well capitalized" under applicable OTS regulations and (b) the
Consolidated Common Stockholder's Equity of the Bank is at least equal to the
Minimum Common Equity Amount. The Federal thrift laws and regulations of the OTS
limit the Bank's ability to pay dividends on its preferred or common stock. The
Bank generally may not pay dividends without the consent of the OTS if, after
the payment of the dividends, it would not be deemed "adequately capitalized"
under the prompt corrective action standards of the Federal Deposit Insurance
Corporation Improvement Act of 1991.
As of December 31, 2001, the Bank could pay dividends of $501.2 million
without the consent of the OTS and it could pay dividends of $896.6 million and
still be "well-capitalized." As of December 31, 2001, the Company could pay
dividends, in addition to those already paid, of $666.3 million without
violating the most restrictive terms of the GS Escrow Notes indenture.
F-48
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(25) REGULATORY CAPITAL OF THE BANK
The Bank is subject to various regulatory capital requirements administered
by the Federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory - and possibly additional discretionary - actions
by regulators that could have a direct material effect on the Company's and the
Bank's consolidated financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classifications
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to insure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of tangible and leverage capital to adjusted total assets, and of Tier 1
and total risk-based capital to risk-weighted assets. Management believes, as of
December 31, 2001, that the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 2001 and 2000, the most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum leverage, Tier 1 risk-based and total risk-based ratios as set
forth in the table below. There are no conditions or events since the most
recent notification that management believes have changed the institution's
category.
F-49
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Bank's actual capital amounts and ratios as of December 31, 2001 and
2000 are presented in the following table (dollars in thousands):
To be Adequately
Actual Capitalized To be Well Capitalized
------------------------- ---------------------- --------------------------
As a % of As a % of As a % of
2001 Amount Assets Amount Assets Amount Assets
- -------------------------------- ------ ------ ------ ------ ------ ------
Stockholder's equity of the Bank
per financial statements $4,124,022
Minority interest 500,000
Net unrealized holding gain
on securities (57,564)
Net unrealized holding loss
on derivative instruments 119,379
-----------
4,685,837
Adjustments for tangible and
leverage capital:
Goodwill litigation assets (158,834)
Non-qualifying MSRs (148,617)
Intangible assets (640,843)
Non-includable subsidiaries (68,108)
----------
Total tangible capital $3,669,435 6.62% $ 831,857 1.50% N/A N/A
========== ==========
Total leverage capital $3,669,435 6.62% $2,218,285 4.00% $2,772,857 5.00%
========== ========== ==========
Tier 1 risk-based capital $3,669,435 11.54% N/A N/A $1,902,470 6.00%
========== ==========
Adjustments for risk-based
capital:
Qualifying subordinated
debt 73,091
General loan loss allowance 397,409
Qualifying portion of
unrealized holding gains 111
Low level recourse (9,301)
Assets required to be
deducted (16,130)
----------
Total risk-based capital $4,114,615 12.98% $2,536,627 8.00% $3,170,784 10.00%
========== ========== ==========
F-50
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
To be Adequately
Actual Capitalized To be Well Capitalized
------------------------- ---------------------- --------------------------
As a % of As a % of As a % of
2000 Amount Assets Amount Assets Amount Assets
- -------------------------------- ------ ------ ------ ------ ------ ------
Stockholder's equity of the Bank
per financial statements $4,165,973
Minority interest 500,000
Net unrealized holding loss
on securities 89,874
----------
4,755,847
Adjustments for tangible and
leverage capital:
Goodwill litigation assets (158,809)
Non-qualifying MSRs (83,941)
Intangible assets (691,288)
Non-includable subsidiaries (62,592)
----------
Total tangible capital $3,759,217 6.30% $ 894,475 1.50% N/A N/A
========== ==========
Total leverage capital $3,759,217 6.30% $2,385,268 4.00% $2,981,585 5.00%
========== ========== ==========
Tier 1 risk-based capital $3,759,217 11.58% N/A N/A $1,942,330 6.00%
========== ==========
Adjustments for risk-based
capital:
Qualifying subordinated
debt 91,985
General loan loss allowance 405,857
Qualifying portion of
unrealized holding gains 145
Low level recourse (9,994)
Assets required to be
deducted (11,770)
----------
Total risk-based capital $4,235,440 13.08% $2,589,773 8.00% $3,237,216 10.00%
========== ========== ==========
(26) OTHER NONINTEREST EXPENSE
Other noninterest expense amounts are summarized as follows (in thousands):
Year ended December 31,
----------------------------------
2001 2000 1999
-------- -------- --------
Other noninterest expense:
Telephone $ 27,586 $ 24,530 $ 26,088
Marketing 37,422 35,314 31,814
DP systems expense 25,598 24,836 23,440
Savings Association Insurance Fund deposit insurance premium 4,521 4,792 14,230
Insurance and surety bonds 7,217 6,400 7,412
Postage 14,479 13,001 13,021
Printing, copying and office supplies 14,925 13,418 12,968
Employee travel 13,191 14,170 13,855
Other losses 14,592 8,672 18,703
Merger and integration costs -- -- 7,747
Other expense 72,558 58,848 58,051
-------- -------- --------
$232,089 $203,981 $227,329
======== ======== ========
F-51
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(27) Income Taxes
Total income tax expense was allocated as follows (in thousands):
Year ended December 31,
-----------------------------------------
2001 2000 1999
-------- -------- ---------
Income before income taxes, minority interest, extraordinary items
and cumulative effect of change in accounting principle $302,667 $144,204 $ 234,263
Extraordinary items and cumulative effect of change in accounting
principle (1,072) 2,083 1,801
Net unrealized holding gain (loss) on securities
available for sale 19,392 138,576 (205,973)
Stockholder's equity, for compensation expense for tax purposes
in excess of amounts recognized for financial reporting purposes 1,310 526 2,246
Provision in lieu of income taxes - minority interest -- -- 79,005
-------- -------- ---------
$322,297 $285,389 $ 111,342
======== ======== =========
Income tax expense attributable to income before income taxes, minority
interest, extraordinary items and cumulative effect of change in accounting
principle consisted of (in thousands):
Year ended December 31,
----------------------------------------
2001 2000 1999
-------- -------- --------
Federal
Current $152,958 $ 72,889 $ 33,843
Deferred 116,260 3,880 117,796
-------- -------- --------
269,218 76,769 151,639
State and local
Current 32,592 47,948 54,047
Deferred 857 19,487 28,577
-------- -------- --------
33,449 67,435 82,624
-------- -------- --------
Income tax expense before provision in lieu of income taxes 302,667 144,204 234,263
Provision in lieu of income taxes - minority interest -- -- 79,005
-------- -------- --------
Total income tax expense $302,667 $144,204 $313,268
======== ======== ========
The consolidated income tax expense differs from the amounts computed by
applying the statutory federal corporate tax rate of 35% for 2001, 2000 and 1999
to income before income taxes, minority interest, extraordinary items and
cumulative effect of change in accounting principle as follows (in thousands):
Year ended December 31,
----------------------------------------
2001 2000 1999
-------- -------- --------
Computed "expected" income tax expense $265,883 $ 242,535 $240,374
Increase in taxes resulting from:
State income taxes, net of federal income
tax benefit 21,743 43,833 53,705
Tax exempt income (1,014) (966) (1,010)
Amortization of excess cost over fair
value of net assets acquired 18,395 19,460 22,355
Adjustment to prior year's tax expense -- -- (2,693)
Other (2,340) 1,030 537
Change in the beginning-of-the-year balance of
the valuation allowance for deferred tax assets
allocated to income tax expense -- (161,688) --
-------- -------- --------
$302,667 $144,204 $313,268
======== ======== ========
F-52
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below (in thousands):
December 31,
-------------------------------
2001 2000
---------- ----------
Deferred tax assets:
Net operating loss carryforwards $ 972 $ 116,201
Foreclosed real estate 9 445
Loans receivable 154,753 151,555
Miscellaneous accruals 36,040 48,466
Accrued liabilities 77,391 44,676
State taxes 59,720 77,325
Purchased MSRs 75,301 93,723
Alternative minimum tax credit and other tax
credit carryforwards 124,363 126,708
Unrealized losses on securities available for sale 43,733 63,125
Purchase accounting adjustments 670 --
Other 7,510 10,537
--------- ----------
Total gross deferred tax assets 580,462 732,761
Less valuation allowance (44,031) (39,496)
--------- ----------
Net deferred tax assets 536,431 693,265
--------- ----------
Deferred tax liabilities:
MSRs 137,311 177,600
Purchase accounting adjustments -- 6,242
FHLB stock 208,311 173,338
Deferred interest 1,461 322
Goodwill litigation 116,651 116,651
Contractual obligations 19,250 19,250
Deferred loan fees 192,298 198,934
Other 5,687 8,957
--------- ----------
Net deferred tax liabilities 680,969 701,294
--------- ----------
Total deferred tax liabilities $(144,538) $ (8,029)
========= ==========
Subsequently recognized tax benefits relating to the valuation allowance
for deferred tax assets as of December 31, 2001 will be allocated as follows (in
thousands):
Income tax benefit that would be reported in the consolidated statement of earnings $28,226
Goodwill and other noncurrent intangible assets 15,805
-------
$44,031
=======
The net change in the total valuation allowance for the year ended December
31, 2001 was an increase of $4.5 million. The increase in the valuation
allowance is attributable to additional net operating losses not likely to be
realized.
Based on favorable resolutions of federal income tax audits of Old
California Federal and Glendale Federal, and the status of Mafco's, including
the Company's, audits for the years 1991 through 1995, management changed its
judgment about the realizability of the Company's deferred tax asset and reduced
its valuation allowance by $211.7 million during 2000. As a result of reducing
the valuation allowance, income tax expense was reduced by $161.7 million and
goodwill was reduced by $50.0 million.
Management believes that the realization of the resulting deferred tax
asset is more likely than not, based upon the expectation that the Company will
generate the necessary amount of taxable income in future periods.
F-53
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 31, 2001, the Company had regular NOL carryforwards for federal
income tax purposes of approximately $2.8 million which are available to offset
future federal taxable income, if any, through 2007. In addition, the Company
had alternative minimum tax credit carryforwards of approximately $115.6 million
which are available to offset future federal regular income taxes, if any, over
an indefinite period. The IRS is examining the 1991 through 1995 federal income
tax returns of the Company and any NOL carryforwards are subject to review and
disallowance, in whole or in part, by the IRS.
A deferred tax liability has not been recognized for the base year reserves
of the Bank. The base year reserves are generally the balance of the tax bad
debt reserve as of December 31, 1987 reduced proportionately for reductions in
the Bank's loan portfolio since that date. At December 31, 2001, the amount of
those reserves was $305 million. The amount of the unrecognized deferred tax
liability at December 31, 2001 was $107 million. Pursuant to the Act,
circumstances that may require an accrual of this unrecorded tax liability are a
failure to meet the definition of a "bank" for federal income tax purposes,
dividend payments in excess of the greater of current or accumulated earnings
and profits, and other distributions, dissolution, liquidation or redemption of
stock, excluding preferred stock meeting certain conditions.
(28) Employee Benefit Plans
Postretirement Health Care and Defined Benefit Plans
The Bank provides certain postretirement medical benefits to certain
eligible employees and their dependents through age 64. In general, early
retirement is age 55 with 10 years of service. Retirees participating in the
plans generally pay Consolidated Omnibus Budget Reduction Act premiums for the
period of time they participate. The estimated cost for postretirement health
care benefits has been accrued on an actuarial net present value basis.
The following table sets forth the changes in the plan's benefit
obligations and fair value of plan assets, as well as the funded status at
December 31, 2001 and 2000 (in thousands):
Non-Qualified Plans Qualified Plan
Postretirement Benefits Pension Benefits Pension Benefits
----------------------- ------------------- -------------------
2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ----
Change in Benefit Obligation
- ----------------------------
Benefit obligation at beginning of year $ 10,370 $ 8,248 $ 15,732 $ 15,355 $103,591 $111,923
Service cost 365 601 -- -- -- --
Interest cost 788 624 1,155 1,041 7,956 7,933
Actuarial (gain) loss (105) 1,279 1,065 1,229 14,452 (7,769)
Benefits paid (407) (382) (1,646) (1,893) (7,600) (8,496)
-------- -------- -------- -------- -------- --------
Benefit obligation at end of year $ 11,011 $ 10,370 $ 16,306 $ 15,732 $118,399 $103,591
======== ======== ======== ======== ======== ========
Change in Plan Assets
- ---------------------
Fair value at beginning of year $ -- $ -- $ -- $ -- $133,312 $145,777
Actual return on plan assets -- -- -- -- (5,590) (3,969)
Employer contribution 407 382 1,647 1,893 -- --
Benefits paid (407) (382) (1,647) (1,893) (7,600) (8,496)
-------- -------- -------- -------- -------- --------
Fair value at end of year $ -- $ -- $ -- $ -- $120,122 $133,312
======== ======== ======== ======== ======== ========
Funded status $(11,011) $(10,370) $(16,306) $(15,732) $ 1,723 $ 29,721
Unrecognized actuarial loss -- -- -- -- 30,138 (1,565)
-------- -------- -------- -------- -------- --------
Prepaid (accrued) benefit cost
recognized in the consolidated
balance sheet $(11,011) $(10,370) $(16,306) $(15,732) $ 31,861 $ 28,156
======== ======== ======== ======== ======== ========
F-54
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Assumptions used in computing the funded status were:
Non-Qualified Plans Qualified Plan
Postretirement Benefits Pension Benefits Pension Benefits
Weighted Average Assumptions as of ----------------------- ------------------- ----------------
December 31, 2001 2000 2001 2000 2001 2000
- ---------------------------------- ---- ---- ---- ---- ---- ----
Discount rate 7.00% 7.75% 7.00% 7.75% 7.00% 7.50%
Expected return on plan assets N/A N/A 9.00 9.00 9.00 9.00
Rate of compensation increase 0.00 0.00 0.00 0.00 0.00 0.00
The initial health care cost trend rate for medical benefits in 2002 is
assumed to be 9%, the average trend rate is assumed to be 7% and the ultimate
trend rate is assumed to be 5%, which will be reached in 9 years.
At December 31, 2001, an increase of 1% in the health care cost trend rate
would cause the accumulated postretirement benefit obligation to increase by
$1.2 million, and the service and interest cost to increase by less than $0.2
million. At December 31, 2001, a decrease of 1% in the health care cost trend
rate would cause the accumulated postretirement benefit obligation to decrease
by $1.0 million and the service and interest costs to decrease by $0.1 million.
The net periodic benefit cost for the years ended December 31, 2001, 2000
and 1999 included the following components (in thousands):
Qualified and
Non-Qualified
Postretirement Benefits Pension Benefits
--------------------------- --------------------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
Service cost $ 365 $ 601 $612 $ -- $ -- $ --
Interest cost 788 624 539 9,111 8,974 9,059
Expected return on plan assets -- -- -- (11,661) (12,895) (12,320)
Recognized net actuarial (gain) loss (105) 1,279 (717) 1,065 1,228 1,164
------ ------ ---- -------- -------- --------
Net periodic cost (income) $1,048 $2,504 $434 $ (1,485) $ (2,693) $ (2,097)
====== ====== ==== ======== ======== ========
DEFINED CONTRIBUTION PLAN
The Bank offers a defined contribution plan, available to substantially all
employees with at least six months of employment. Employee contributions are
voluntary. The plan provides for the deferral of up to 12% of eligible
compensation of plan participants not to exceed the maximum allowed by the IRS.
The Bank's matching contribution provides for 100% of the first 3% of employee
deferrals and beginning in January 2000, 50% of the next 2% of employee
deferrals. The annual discretionary employer profit sharing contribution is a
maximum of 2.5% of eligible compensation. It can be declared at any level in the
range from 0% to 2.5%. Prior to January 2000, the maximum was 3% of employee
deferrals. Employees vest immediately in their own deferrals, employer matching
contributions and employer profit sharing contributions. Prior to January 2000,
employer matching contributions vested based on completed years of service. The
Bank's contributions to such plan totalled $19.3 million, $16.7 million and
$14.6 million for the years ended December 31, 2001, 2000 and 1999,
respectively.
Effective January 1, 1999, the California Federal Employees' Investment
Plan was amended to provide for automatic enrollment into the plan at a
contribution rate of 3% unless the employee opts, in writing, to participate at
a different deferral rate, or to opt out of the plan. Effective January 15,
1999, the plan was amended to allow the use of certain employer and employee
contributions to purchase Golden State Common Stock at market prices.
Contributions to the plan were used to purchase 221,315 shares for $6.2 million
in 2001, 343,026 shares for $6.3 million in 2000 and 341,024 shares for $6.9
million in 1999. Sales by the plan of Golden State common shares during 2001
were 153,179 shares for $4.4 million; 217,166 shares for $4.5 million in 2000
and 52,126 shares for $1.1 million were sold by the plan in 1999. Effective
March 1, 1999, the plan was also amended to reduce the
F-55
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
length of required service to six months before an employee can contribute to
the plan and to amend the enrollment date to the first of the applicable month.
In connection with the Glen Fed Merger, the Bank assumed sponsorship of the
Glendale Federal's defined contribution plan. This plan was frozen at the merger
date, therefore no contributions were made to the plan subsequent to the merger
date. In the second quarter of 2000, Glendale Federal's plan was merged with the
Bank's plan. The fair value of the assets transferred was $40 million.
STOCK PLANS
At December 31, 2001, 2000 and 1999, the Bank administered the following
stock-based compensation plans: pre-merger stock option plans and the Omnibus
Stock Plan.
In connection with the Glen Fed Merger, the Bank administered stock option
plans that provided for the granting of options of Golden State Common Stock to
employees and directors. All pre-merger stock option plans expired on August 18,
1998 as to the making of additional grants. Upon the consummation of the merger
on September 11, 1998, substantially all options outstanding became exercisable.
On May 17, 1999, the Omnibus Stock Plan was approved, providing for the
granting of Golden State stock options and restricted stock, as well as other
instruments, to employees of Golden State and its subsidiaries and affiliates,
non-employee directors and to consultants who provide significant services to
Golden State. The total number of shares available for grant through March 15,
2009 under the Stock Plan is 7,000,000 shares, which may be issued from treasury
or from authorized but unissued shares.
Non-qualified options granted under the stock plan generally vest over
three years in one-third increments on the anniversary of the grant date. The
options generally expire 10 years from the date of grant.
The following is a summary of the transactions under all stock option
plans:
Weighted
Number of Range of Option Average Exercise
Shares Prices Price
--------- --------------- ----------------
Outstanding at December 31, 1998 1,993,787 $9.00 - $35.00 $19.30
Granted 1,352,000 $23.50 - $23.50 $23.50
Cancelled or expired (276,000) $23.50 - $28.50 $28.10
Exercised (508,705) $9.00 - $17.75 $13.44
---------
Outstanding at December 31, 1999 2,561,082 $9.00 - $35.00 $21.74
Granted 1,350,850 $12.94 - $21.31 $14.04
Cancelled or expired (101,200) $14.00 - $28.50 $21.49
Exercised (139,334) $9.00 - $28.50 $17.84
---------
Outstanding at December 31, 2000 3,671,398 $9.00 - $35.00 $19.06
Granted 1,416,100 $24.15 - $30.80 $28.09
Cancelled or expired (51,755) $14.00 - $35.00 $22.59
Exercised (320,144) $9.00 - $28.50 $19.22
---------
Outstanding at December 31, 2001 4,715,599 $9.00 - $35.00 $21.59
=========
F-56
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Information about stock options outstanding at December 31, 2001 was as
follows:
Options Outstanding Options Exercisable
------------------------------------------------------- ------------------------------
Options Weighted Average Weighted Shares Weighted
Outstanding Remaining Contractual Average Exercisable Average
Exercise Price Range at End of Year Life (in years) Exercise Price at End of Year Exercise Price
- -------------------- -------------- --------------- -------------- -------------- --------------
$ 9.00 - $12.63 247,750 2.8 $11.27 247,750 $11.27
$12.94 - $17.75 1,553,334 7.3 $14.54 717,709 $15.16
$18.75 - $23.50 1,251,665 7.4 $23.48 834,167 $23.49
$24.15 - $35.00 1,662,850 8.6 $28.31 318,700 $28.89
At December 31, 2001, 2000 and 1999, 2,118,326, 1,504,098 and 1,231,082
options were exercisable, respectively, and the related weighted average
exercise prices were $20.05, $20.95 and $19.83, respectively.
No compensation cost was recognized by the Company for stock options
granted during 2001, 2000 and 1999, in accordance with the intrinsic value
accounting methodology prescribed in APB Opinion No. 25, whereby compensation
expense to employees is determined based upon the excess, if any, of the market
price of Golden State's common stock at the measurement date over the exercise
price of the award.
If compensation cost during 2001, 2000 and 1999 for the Omnibus Stock Plan
had been determined based on the fair value of the awards at the grant dates,
net income would have been $420.5 million, $520.6 million and $339.2 million,
respectively. The fair values of the options were estimated at the grant date
using the Black-Scholes option pricing model, which includes the following
assumptions used for the stock options awarded during 2001, 2000 and 1999:
risk-free interest rate of 5.05%, 6.60% and 5.60%, respectively; expected option
life of seven years in 2001, 2000 and 1999; expected volatility of 52.83%,
52.54% and 41.30%, respectively; and expected dividend yield of 1.43% in 2001,
.01% in 2000 and no dividends in 1999.
The weighted average grant date fair value of the options granted during
2001, 2000 and 1999 were $14.61, $8.68 and $12.45 per share, respectively. The
exercise price of each option equals the market price of Golden State's Common
Stock on the date of the grant.
On January 22, 2001, January 24, 2000 and July 19, 1999, Golden State
awarded 99,108, 220,327 and 56,908 shares of restricted common stock,
respectively, to certain of the Company;s employees. The market value on the
date of each award was $26.38, $14.00 and $22.38 per share, respectively. These
shares vest over two years in 50% increments on the anniversary of the grant
date, based upon the continued service of the employee. The compensation expense
based on the stock price on the date of 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. In addition, dividends on
restricted stock are recorded as compensation expense with a corresponding
increase to additional paid-in capital. During 2001, 2000 and 1999, $1.8
million, $1.9 million and $0.5 million, respectively, in compensation expense
was recognized related to such awards. At December 31, 2001, 2000 and 1999,
202,365, 246,756 and 56,908 restricted shares, respectively, were outstanding,
of which 143,499, 28,454 and zero shares, respectively, were vested. These
restricted shares have full voting and dividend rights.
(29) INCENTIVE PLANS
On May 17, 1999, the Golden State Bancorp Inc. ECP was approved, providing
for performance-based incentive awards to senior executives of the Company.
Awards may be paid in cash; however up to 50% may be payable in restricted
common stock granted under the Omnibus Stock Plan discussed in note 28.
Compensation expense totalling $10.0 million, $8.7 million and $9.1 million
relating to the ECP was recorded during the years ended December 31, 2001, 2000
and 1999, respectively.
F-57
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Pursuant to the ECP, the Golden State Bancorp Inc. LTIP was approved,
providing incentive awards to senior executives of the Company based solely on
the performance of Golden State's Common Stock over a three-year period. Awards
may be paid in cash; however up to 50% may be payable in restricted common stock
granted under the Omnibus Stock Plan discussed in note 28. Compensation expense
totalling $5.7 million, $4.1 million and $2.0 million relating to the LTIP was
recorded during the years ended December 31, 2001, 2000 and 1999, respectively.
During the year ended December 31, 2001, $6.0 million in expense relating to the
LTIP was also reversed due to specific stock performance triggers of the plan
not being met during the prescribed period.
The DECP of the Bank provided for certain payments to participants in the
DECP for annual incentives and in the event of a change of control of California
Federal. The annual incentive feature of the DECP was terminated in 1998 upon
the consummation of the merger of California Federal and Glendale Federal, and
all amounts were paid out. No payment was made under the change of control
provision because the Compensation Committee of California Federal determined
that the merger of California Federal and Glendale Federal was not a change of
control within the meaning of the DECP. California Federal subsequently entered
into a replacement change of control agreement in 1999 with certain former
participants in the DECP, so that amounts that would have been payable under the
change of control provisions of the DECP would be paid to the former
participants in the DECP who remain employed by California Federal upon the
earlier to occur of (1) a change of control of California Federal subsequent to
September 11, 1998 or (2) December 31, 2002. Compensation expense totalling $2.3
million relating to the DECP was recognized in each of the years ended December
31, 2001, 2000 and 1999.
(30) EXTRAORDINARY ITEMS
During 2000, the FHLB called and the Bank prepaid $400 million in FHLB
advances, resulting in extraordinary gains of $3.0 million, net of income taxes
of $2.1 million, on the early extinguishment of such borrowings. Also in 2000,
the Bank repurchased $2.5 million outstanding principal amount of the 6 1/2%
Convertible Subordinated Debentures, resulting in an extraordinary gain of $41
thousand, net of income taxes of $30 thousand, on the early extinguishment of
debt.
During the fourth quarter of 1999, the FHLB called and the Bank prepaid
$500 million in FHLB advances, resulting in an extraordinary gain of $2.7
million, net of income taxes of $1.9 million, on the early extinguishment of
such borrowings.
On December 20, 1999, the Bank repurchased all of the remaining $6.0
million outstanding principal amount of the 11.20% Senior Notes assumed in the
SFFed Acquisition, resulting in an extraordinary loss of $0.2 million, net of
income taxes of $0.1 million, on the early extinguishment of debt.
(31) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
On September 21, 2000, the EITF issued EITF No. 99-20, which was effective
on April 1, 2001. EITF No. 99-20 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 during 2001, the Company recorded
a loss of $1.6 million, net of income tax credits of $1.1 million, representing
the cumulative effect of change in accounting principle. Subsequent declines in
the fair value of these securities, totalling $7.5 million on a pre-tax basis,
were recorded in gain (loss) on sale of assets.
F-58
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(32) 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.
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,
F-59
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 September 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, Golden State 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.
(33) GOODWILL LITIGATION ASSETS
In connection with the Cal Fed Acquisition, the Bank recorded as an asset
part of the estimated after-tax cash recovery from the California Federal
Goodwill Litigation that will inure to the Bank, net of amounts payable to
holders of the Litigation Interests and the Secondary Litigation Interests in
the Goodwill Litigation Asset. In connection with the Glen Fed Merger, the Bank
recorded a second Goodwill Litigation Asset related to the estimated after-tax
cash recovery from the Glendale Goodwill Litigation that will inure to the Bank,
net of amounts payable to holders of the LTWTMs. The Goodwill Litigation Asset
related to the California Federal Goodwill Litigation was recorded at its
estimated fair value of $100 million, net of estimated tax liabilities, as of
January 3, 1997. The Goodwill Litigation Asset related to the Glendale Goodwill
Litigation was recorded at its estimated fair value of $56.9 million, net of
estimated tax liabilities, as of September 11, 1998.
(34) COMMITMENTS, CONTINGENCIES AND OTHER OFF-BALANCE-SHEET ACTIVITIES
CREDIT RELATED FINANCIAL INSTRUMENTS
The Company is a party to credit related financial instruments with
off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit, standby letters of credit and commercial letters of credit. Such
commitments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the consolidated balance sheets.
The Company's exposure to credit loss is represented by the contractual
amount of these commitments. The Company uses the same credit policies in making
commitments as it does for on-balance sheet instruments.
Listed below are unfunded financial instruments whose contract amounts
represent credit risk (in thousands):
Contract Amount at December 31,
-------------------------------
2001 2000
---- ----
Commitments to extend credit
----------------------------
Unutilized consumer lines $1,467,625 $1,225,572
Unutilized commercial lines of credit 263,682 219,219
Commercial and standby letters of credit 24,953 2,112
F-60
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The contracts for the Company's commitments to extend credit expire as
follows (in thousands):
2001
--------------------------------------------------------------------------------
Contract Amount Expiring in
--------------------------------------------------------------------------------
Commitments to extend credit Total Less Than 1 Year 1-3 Years 4-5 Years More Than 5 Years
- ---------------------------- ----- ---------------- --------- --------- -----------------
Unutilized consumer lines $1,467,625 $ 511,135 $ 39,181 $ 13,115 $ 904,194
Unutilized commercial
lines of credit 263,682 159,705 75,013 15,601 13,363
Commercial and standby
letters of credit 24,953 18,272 6,681 -- --
The fair value of commitments to extend credit were not significant at
either December 31, 2001 or 2000.
Unutilized consumer lines of credit are commitments to extend credit. These
lines are either secured or nonsecured and may be cancelled by the Company if
certain conditions of the contract are not met. Many consumer line of credit
customers are not expected to fully draw down their total lines of credit and,
therefore, the total contractual amount of these lines does not necessarily
represent future cash requirements.
Unutilized commitments under commercial lines of credit are commitments for
possible future extensions of credit to existing customers. These lines of
credit are uncollateralized, usually do not contain a specified maturity date
and may not be drawn upon to the total extent to which the Company is committed.
Commercial and standby letters of credit are conditional commitments issued
by the Company to guarantee the performance of a customer to a third party.
Those letters of credit are primarily issued to support public and private
borrowing arrangements. All letters of credit issued have expiration dates
within three years. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Company generally holds collateral supporting those commitments in an amount
deemed to be necessary.
OFF-BALANCE SHEET COMMITMENTS TO ORIGINATE, PURCHASE AND SELL LOANS
The following is a summary of the Company's pipeline of loans in process
and mandatory forward commitments to sell loans at December 31, 2001 and 2000
that have not been recorded in the Company's balance sheet as they do not meet
the definition of a derivative financial instrument. These amounts exclude
commitments to extend credit which are summarized above. For more information on
derivative instruments, see note 37.
Contract Amount at December 31,
-------------------------------
2001 2000
---------- ----------
(in thousands)
Commitments to originate loans $3,937,422 $1,186,393
Commitments to purchase loans 3,791,436 867,867
Mandatory commitments to sell loans 679,182 442,117
The Company's pipeline of loans in process includes loan applications for
both portfolio and non-portfolio loans in various stages of processing that do
not meet the definition of a derivative financial instrument. Until all required
documentation is provided and underwritten, there is no credit risk to the
Company. There is no interest rate risk until a rate commitment is extended by
the Company to a borrower. Some of these commitments will ultimately be denied
by the Company or declined by the borrower and therefore the commitment amounts
do not necessarily represent future cash requirements. On a daily basis, the
Company determines what percentage of the rate-locked pipeline of loans in
process to hedge. Both the anticipated percentage of the pipeline that is
expected to fund and the inherent risk position of the portfolio are considered
in making this determination.
F-61
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Mandatory and optional delivery forward commitments to sell loans are used
by the Company to hedge its interest rate exposure from the time a loan has a
committed rate to the time the loan is sold. These instruments involve varying
degrees of credit and interest rate risk. Credit risk on these instruments is
controlled through credit approvals, limits and monitoring procedures. To the
extent that counterparties are not able to fulfill forward commitments, the
Company is at risk for any fluctuations in the market value of the mortgage
loans and locked pipeline.
OFF-BALANCE SHEET EMBEDDED DERIVATIVE OPTIONS
The Company also has off-balance sheet embedded options in borrowings as
shown in the table below (in thousands):
2001 2000
-------------------------------------- --------------------------------------
Instruments Notional Amount Estimated Fair Value Notional Amount Estimated Fair Value
----------- --------------- -------------------- --------------- --------------------
Interest rate caps $2,000,000 $52,163 $1,800,000 $ 6,552
Interest rate swaptions 1,250,000 9,448 1,150,000 12,892
The off-balance sheet embedded options in borrowings at December 31, 2001
are scheduled to expire as shown in the table below (in thousands):
Contract Amount Expiring in:
--------------------------------------------------------------------
Instruments 2002 2003 2004 2005 Total
----------- ---- ---- ---- ---- -----
Interest rate caps $-- $400,000 $350,000 $1,250,000 $2,000,000
Interest rate swaptions -- 150,000 -- 1,100,000 1,250,000
F-62
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
COMMITMENTS AND CONTINGENCIES
At December 31, 2001, the Bank had pledged as collateral the securities as
detailed below (in thousands):
Mortgage-backed Mortgage-backed Commercial
Securities Securities Securities Paper
Available for Sale Available for Sale Held to Maturity Investments
------------------ ------------------ ---------------- -----------
Provide credit enhancements for certain
bond-financed real estate projects
originated by Old FNB $23,098 $ 12,479 $ 8,137 $ --
Pledged securities for principal and
interest on Bank loan securitization -- 172,117 7,802 --
Guarantee credit enhancements on
multi-family bond issues and loans
securitized by FNMA and FHLMC 1,044 132,368 23,816 --
Guarantee credit enhancements on
loans transferred as part of
securitization transactions by the Bank -- -- -- 30,320
Guarantee state and local agency
deposits, and certain deposits with the
Federal Reserve Bank 2,717 289,771 40,172 --
Cover the margin on interest rate swap
agreements -- 170,107 66,853 --
Secure various obligations as discussed
in notes 8, 9, 18 and 19 at
December 31, 2001 -- 3,945,448 763,438 --
At December 31, 2000, securities available for sale and mortgage-backed
securities available for sale and held to maturity of $20.0 million, $6.5
billion and $2.1 billion, respectively, were pledged as collateral for various
obligations.
At December 31, 2001, $27.1 billion in residential loans, $3.6 billion in
multifamily loans and $1.6 billion in commercial real estate loans were pledged
as collateral for FHLB advances.
At December 31, 2001 and 2000, loans receivable included approximately $5.5
billion and $7.9 billion, respectively, of loans that had the potential to
experience negative amortization.
F-63
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(35) ON-BALANCE SHEET DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
DERIVATIVE FINANCIAL INSTRUEMTNS
Stand alone derivative financial instruments include swaps, futures,
forwards, and option contracts, all of which derive their value from underlying
interest rates. Embedded derivative financial instruments include interest rate
caps and swaptions in borrowings, which are not reflected on the Company's
balance sheet, and are discussed in note 34. These transactions involve both
credit and market risk. The notional amounts are amounts on which calculations,
payments, and the value of the derivative are based. Notional amounts do not
represent direct credit exposures. Direct credit exposure is limited to the net
difference between the calculated amounts to be received and paid, if any. Such
difference, which represents the fair value of the derivative instruments, is
reflected on the Company's balance sheet as derivative assets and derivative
liabilities for stand alone derivative financial instruments.
The Company is exposed to credit-related losses in the event of
nonperformance by the counterparties to those agreements. The Company controls
the credit risk of its financial contracts through credit approvals, limits and
monitoring procedures, and does not expect any counterparties to fail their
obligations. The Company deals only with primary dealers and the FHLB.
Derivative instruments are generally either negotiated OTC contracts or
standardized contracts executed on a recognized exchange. Negotiated OTC
derivative contracts are generally entered into between two counterparties that
negotiate specific agreement terms, including the underlying instrument, amount,
exercise prices and maturity.
INTEREST RATE 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 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 MSR 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.
F-64
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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
The Company utilizes interest rate swaps primarily as an asset/liability
management strategy to hedge against the interest rate risk inherent in
variable-rate FHLB advances and securities sold under agreements to repurchase.
The following table details the terms of interest rate swap agreements (dollars
in thousands):
December 31,
-----------------------
2001 2000
---- ----
Notional amounts outstanding to hedge borrowings $4,089,670 $3,219,670
Weighted average maturities (in years) 2.8 4.1
These agreements provided for the Company to receive payments at a variable
rate determined by a specified index (three month LIBOR) in exchange for making
payments at a fixed rate (dollars in thousands):
December 31,
---------------------
2001 2000
---- ----
Weighted average pay rates 5.98% 6.76%
Weighted average receive rates 2.16% 6.73%
Unrealized loss relating to interest rate swaps $201,825 $75,482
No interest rate swap agreements were terminated prior to maturity in 2001
or 2000. At December 31, 2001, an unrealized loss relating to interest rate
swaps was recorded in derivative liabilities in accordance with SFAS No. 133.
These losses will be recognized over the life of the FHLB advances or securities
sold under agreements to repurchase, as appropriate.
Risk management results for the year ended December 31, 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 year ended December 31, 2001 was
$75.5 million.
As of December 31, 2001, approximately $72.0 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 December 31, 2002.
INTEREST RATE RISK MANAGEMENT - FAIR VALUE HEDGING INSTRUMENTS - MORTGAGE
SERVICING RIGHTS HEDGES
OBJECTIVES AND CONTEXT
The Company either purchases or originates MSRs 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 and other variables. Since the
adoption of SFAS No. 133 on January 1, 2001, the carrying value of MSRs have
been first adjusted upwards or downwards by the calculated change in the fair
value of the MSRs being hedged and are then
F-65
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
recorded at the lesser of their amortized cost or fair value. Prior to
January 1, 2001, MSRs were generally recorded in the financial statements at the
lesser of their amortized cost or their fair value.
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
change in fair value of the servicing rights asset associated with fixed rate,
non-prepayment penalty loans for which it has recorded MSRs, 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 the change in value of the mortgage servicing portfolio due to
expected prepayment risk assumption changes. Although the Company hedges the
change in value of its MSRs, its hedge coverage ratio does not equate to 100%.
The Company believes it is economically prudent to keep hedge coverage ratios at
acceptable risk levels, which may vary depending on current and expected
interest rate movement.
INTEREST RATE SWAPS
The Company utilizes interest rate swaps as an asset/liability management
strategy to hedge against the change in value of the mortgage servicing
portfolio due to expected prepayment risk assumption changes. These interest
rate swap agreements are contracts to make a series of floating rate payments in
exchange for receiving a series of fixed rate payments. Payments related to swap
contracts are made either quarterly or semi-annually by one of the parties
depending on the specific terms of the related contract. The notional amount of
the contracts, on which the payments are based, are not exchanged. The primary
risks associated with interest rate swaps are the ability of the counterparties
to meet the terms of the contract and the possibility that swap rates may not
move in an inverse manner or in an amount equal to mortgage rate movements.
The following table details the terms of interest rate swap agreements
(dollars in thousands):
December 31,
------------------------
2001 2000
---- ----
Notional amount outstanding $2,462,000 $1,345,000
Weighted average maturity outstanding (in years) 9.5 10
These agreements provided for the Company to make payments at a
variable-rate determined by a specified index (three-month LIBOR) in exchange
for receiving payments at a fixed-rate (dollars in thousands):
December 31,
----------------------
2001 2000
---- ----
Weighted average pay rate 1.88% 6.40%
Weighted average receive rate 5.68% 6.21%
Unrealized gain relating to use of interest rate swaps $7,561 $5,099
No interest rate swap agreements were terminated prior to maturity in 2001
and 2000. At December 31, 2001, the unrealized gain relating to use of interest
rate swaps was recorded in derivative assets in accordance with SFAS No. 133.
F-66
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
PRINCIPAL ONLY SWAPS
The Company utilizes PO swap agreements to hedge against the change in
value of the mortgage servicing portfolio due to expected prepayment risk
assumption changes. PO swap agreements simulate the ownership of a PO strip, the
value of which is affected directly by prepayment rates themselves in an inverse
manner to the servicing rights, which act in a manner similar to IO strips.
Under the terms of the PO swap agreements, the counterparty to the transaction
purchases a PO strip and places the PO strip in a trust. The contracts executed
prior to December 31, 1998 call for the Company to pay floating interest to the
counterparty based on: (a) an index tied to one month LIBOR and (b) the
amortized notional balance of the swap. The contracts call for the Company to
receive cash from the counterparty based on the cash flows received from the PO
strip. For PO swap agreements executed after December 31, 1998, the agreement
also requires the PO swap to be marked to market value. A decrease in the market
value of the PO swap requires the Company to increase the amount paid to the
counterparty and an increase in the market value requires the counterparty to
increase their payment to the Company. The amounts to be paid and to be received
are then netted together each month. The nature of this instrument results in
increased cash flows and positive changes in the value of the PO swap during a
declining interest rate environment. This positive change in the value of the PO
swap is highly correlated to prepayment activity. PO swap agreements present
yield curve risk to the extent that short term interest rates (which impact the
cash amount that the Company pays on the PO swap to the counterparty) rise while
long term rates (which drive prepayment rates) stay the same. A third type of
risk associated with PO swaps is the ability of the counterparties to meet the
terms of the contract.
The following table details the terms of PO swap agreements (in thousands):
December 31,
--------------------------
2001 2000
---- ----
Notional amounts outstanding - PO swap assets $288,941 $ 89,323
Fair market value - PO swap assets 7,487 6,384
Notional amounts outstanding - PO swap liabilities 89,987 103,776
Fair market value - PO swap liabilities (1,076) (5,182)
No PO swap agreements were terminated prior to maturity in 2001 or 2000.
INTEREST RATE FLOORS
The Company currently uses interest rate floors to hedge against the change
in value of the mortgage servicing portfolio due to expected prepayment risk
assumption changes. Interest rate floors are interest rate protection
instruments that involve payment from the seller to the buyer of an interest
differential. This differential is the difference between a long-term rate
(e.g., 10-year Constant Maturity Swaps in 2001 and 2000) 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 on a monthly basis by a
counterparty, when the current long-term rate falls below the strike level of
the agreement. The fair value of interest rate floor agreements is included in
derivative assets or liabilities. Interest rate floors are subject to basis risk
because of differences in movements of mortgage and LIBOR rates, market
volatility and the impact of changes in the yield curve. In addition, a credit
risk associated with purchased interest rate floor agreements is the ability of
the counterparties to meet the terms of the contract.
F-67
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company was party to interest rate floor contracts as detailed below
(dollars in thousands):
December 31,
-----------------------------
2001 2000
---- ----
Weighted average maturity (in years) 4.9 4.9
Notional amount of remaining interest rate floor contracts $3,054,000 $2,338,000
Weighted average strike rate 6.36% 6.25%
Monthly floating rate 5.82% 6.15%
Strike rate exceeded floating rate 0.54% 0.10%
Cash received from interest rate floor contracts $ 5,194 $ 224
Proceeds from sales of interest rate floor contracts $ 151,715 $ 50,608
Fair value amount $ 78,917 $ 52,839
INTEREST RATE SWAPTIONS
The Company also uses swaptions to hedge against the change in value of the
mortgage servicing portfolio due to expected prepayment risk assumption changes.
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. Swaptions are subject to basis risk because
of differences in movements of mortgage and LIBOR rates, market volatility and
the impact of changes in the yield curve. In addition, credit risk associated
with swaptions is the ability of the counterparties to meet the terms of the
contract.
At December 31, 2001 and 2000, the Company was a party to swaption
contracts with a weighted average maturity of 2.4 years and 2.8 years,
respectively, in which the Company paid the counterparties premiums in exchange
for the right but not the obligation to purchase an interest rate swap
agreement. Under the terms of the underlying interest rate swap agreement, the
Company would pay the variable rate tied to three month LIBOR and would receive
the fixed rate.
The Company was a party to swaption contracts with details below (dollars
in thousands):
December 31,
----------------------------
2001 2000
---- ----
Notional amount of underlying interest rate swap contracts $4,111,000 $2,178,000
Weighted average strike rate 6.39% 6.44%
Three-month LIBOR rate 1.88% 6.40%
Strike rate exceeded floating rate 4.51% 0.04%
Proceeds received from sales of swaption contracts $ 488,143 $ 50,505
Fair market value $ 183,641 $ 105,626
RESULTS
Risk management results related to the hedging of MSRs are summarized below
and are included in the caption entitled "Loan servicing fees, net" in the
accompanying consolidated statements of income for 2001 (in thousands):
Gain on designated derivative contracts $83,286
Decrease in value of designated MSRs (3,338)
-------
Net gain on derivatives used to hedge MSRs $79,948
=======
F-68
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
MSR HEDGES
At December 31, 2001 and 2000, the Bank held cash collateral in the amount
of $95.2 million and $20 million, respectively, related to interest rate
derivatives used to hedge MSRs.
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 carried at fair market value, less the values associated with servicing (for
those loans which qualify for fair value hedging under SFAS No. 133) or at the
lower of aggregate amortized cost or market value (for those loans which do not
qualify for fair value hedging under SFAS No. 133). 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 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 for 2001 (in thousands):
Unrealized gain on designated forward loan sale commitments recognized $ 25,406
Decrease in value of warehouse loans (29,728)
--------
Net hedge ineffectiveness $ (4,322)
========
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 for the origination and/or purchase of loans. Some
of these rate lock commitments will ultimately expire without being completed.
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.
F-69
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 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
for 2001 (in thousands):
Unrealized gain on undesignated forward loan sale commitments recognized to income $ 11,473
Loss on undesignated interest rate loan commitments recognized to income (a) (13,269)
--------
Net loss on derivatives $ (1,796)
========
_________
(a) The fair value of interest rate loan commitments excludes the net
servicing value of $9.2 million.
NOTIONAL AMOUNTS OF DERIVATIVES
Information pertaining to the notional amounts of the Company's derivative
financial instruments utilized in both MSR and balance sheet hedging is as
follows (in thousands). In 2001, the fair values of these derivative financial
instruments were recorded in the Company's balance sheet in accordance with SFAS
No. 133.
December 31, 2001 December 31, 2000
-------------------------------- -----------------------------
Notional Notional
Amount Credit Risk (1) Amount Credit Risk (1)
------ --------------- ------ ---------------
Interest rate swaps - borrowings $ 4,089,670 $ -- $ 3,219,670 $ --
Interest rate swaps hedging MSRs 2,462,000 7,561 1,345,000 5,099
Principal only swaps 378,928 6,411 193,099 1,202
Interest rate floors 3,054,000 78,917 2,338,000 52,839
Interest rate swaptions 4,111,000 183,641 2,178,000 105,626
Forward loan sale commitments 3,980,863 36,879 679,487 --
Interest rate lock commitments 1,870,852 -- 270,442 --
----------- -------- ----------- --------
Total $19,947,313 $313,409 $10,223,698 $164,766
=========== ======== =========== ========
________________
(1) Credit risk represents the amount of unrealized gain included in
derivative assets which is subject to counterparty credit risk. It
reflects the effect of master netting agreements and excludes $95.2
million and $20 million cash collateral held by the Bank at December 31,
2001 and 2000, respectively.
F-70
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Derivative financial instruments used for other-than-trading purposes at
December 31, 2001 are scheduled to mature as follows (in thousands):
Notional Amounts
-----------------------------------------------------------------------------------------
2002 2003 2004 2005 2006 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Interest rate swaps -
borrowings $ 400,000 $ 715,000 $1,685,000 $519,670 $ 750,000 $ 20,000 $ 4,089,670
Interest rate swaps
hedging MSRs -- -- -- -- -- 2,462,000 2,462,000
Principal only swaps 204,286 -- 44,896 -- -- 129,746 378,928
Interest rate floors -- -- -- -- 3,054,000 -- 3,054,000
Interest rate swaptions 110,000 2,049,000 1,952,000 -- -- -- 4,111,000
Forward loan sale
commitments 3,980,863 -- -- -- -- -- 3,980,863
Interest rate lock
commitments 1,870,852 -- -- -- -- -- 1,870,852
---------- ---------- ---------- -------- ---------- ---------- -----------
Total $6,566,001 $2,764,000 $3,681,896 $519,670 $3,804,000 $2,611,746 $19,947,313
========== ========== ========== ======== ========== ========== ===========
For year-end fair values of derivative financial instruments used for
other-than-trading purposes at December 31, 2001 and 2000, see note 36.
F-71
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(36) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the
Company's financial instruments (in thousands):
December 31,
---------------------------------------------------------------
2001 2000
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Financial Assets:
Cash and cash equivalents $ 805,171 $ 805,171 $ 783,074 $ 783,074
Securities available for sale 116,054 116,054 637,070 637,070
Securities held to maturity 30,602 30,602 587,503 590,571
Mortgage-backed securities
available for sale 7,057,903 7,057,903 9,866,823 9,866,823
Mortgage-backed securities
held to maturity 1,385,113 1,411,157 2,886,612 2,959,677
Loans held for sale 2,608,365 2,617,435 845,763 851,856
Loans receivable, net 39,335,623 39,743,756 39,592,814 39,262,610
Investment in FHLB 1,446,607 1,446,607 1,361,066 1,361,066
Accrued interest receivable 288,308 288,308 364,414 364,414
MSRs (a) 1,623,947 1,639,255 1,559,323 1,474,096
Financial Liabilities:
Deposits 25,146,827 25,239,616 23,462,372 23,454,791
Securities sold under agreements
to repurchase 2,363,945 2,365,311 4,511,309 4,555,425
Borrowings 24,444,541 24,886,860 28,800,557 28,802,601
On-balance Sheet Derivatives:
Interest rate swaps hedging borrowings (201,825) (201,825) -- --
Interest rate swaps hedging MSRs 7,561 7,561 -- --
Principal only swaps 6,411 6,411 -- --
Interest rate floors 78,917 78,917 -- --
Interest rate swaptions 183,641 183,641 -- --
Interest rate lock commitments (b) (13,269) (4,028) -- --
Forward loan sale commitments 36,879 36,879 -- --
----------- -----------
Total derivative assets and liabilities 98,315 107,556
Off-balance Sheet Financial Instruments:
Interest rate swaps hedging borrowings -- -- -- (75,482)
Interest rate swaps hedging MSRs -- -- -- 5,099
Principal only swaps -- -- -- 1,202
Interest rate floors -- -- -- 52,839
Interest rate swaptions -- -- -- 105,626
Interest rate lock commitments -- -- -- 3,635
Forward loan sale commitments -- -- -- (5,340)
Embedded derivative options in borrowings:
Embedded derivative options in borrowi
Interest rate caps -- 52,163 -- 6,552
Interest rate swaptions -- 9,448 -- 12,892
(Continued)
F-72
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
_________________
(a) Fair value amounts presented for MSRs do not include the fair values of
interest rate floor contracts, interest rate swaps, principal only swaps
and interest rate swaptions. Prior to January 1, 2001, the MSR carrying
value included unamortized premiums associated with interest rate floors
and interest rate swaptions. The combined fair value of MSRs and the
related derivatives is $1.9 billion and $1.6 billion at December 31, 2001
and 2000, respectively.
(b) The carrying value of interest rate lock commitments does not include the
net servicing value, which when the loans are funded should result in a
greater fair value than the carrying value.
The following summary presents a description of the methodologies and
assumptions used to estimate the fair value of the Company's financial
instruments. Much of the information used to determine fair value is highly
subjective. When applicable, readily available market information has been
utilized. However, considerable judgment is required in estimating fair value
for certain items. The subjective factors include, among other things, the
estimated timing and amount of cash flows, risk characteristics, and interest
rates, all of which are subject to change.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents are valued at their
carrying amounts included in the consolidated statement of financial condition,
which are reasonable estimates of fair value due to the relatively short period
to maturity of the instruments.
SECURITIES AND MORTGAGE-BACKED SECURITIES: Securities and mortgage-backed
securities are valued at quoted market prices where available. If quoted market
prices are not available, fair values are based on quoted market prices of
comparable instruments.
LOANS HELD FOR SALE: Loans held for sale are valued based on quoted market
prices for mortgage-backed securities backed by similar loans.
LOANS RECEIVABLE, NET: Fair values are estimated for loans in groups with
similar financial and risk characteristics. Loans are segregated by type
including residential, multi-family and commercial. Each loan type is further
segmented into fixed and variable interest rate terms and by performing and
non-performing categories in order to estimate fair values.
For performing residential mortgage loans, fair value is estimated by
forecasting principal and interest payments, both scheduled and prepayments, and
discounting these amounts using factors provided by secondary market sources.
The fair value of performing commercial and multi-family loans is calculated by
discounting scheduled principal and interest cash flows through the estimated
maturity using estimated market discount rates that reflect the credit and
interest rate risk inherent in the respective loan type.
Fair value for non-performing loans is estimated by discounting the
forecasted cash flows using a rate commensurate with the risk associated with
the estimated cash flows, or underlying collateral values, where appropriate.
INVESTMENT IN FHLB: Since no secondary market exists for FHLB stock and the
FHLB buys and sells the stock at par, fair value of these financial instruments
approximates the carrying value.
ACCRUED INTEREST: The carrying amounts of accrued interest approximate
their fair values.
F-73
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
MORTGAGE SERVICING RIGHTS: The fair value of MSRs is based on market prices
for comparable mortgage servicing contracts, when available, or alternatively a
valuation model that calculates the present value of future net servicing
income. In using the valuation model, the Company incorporates assumptions that
market participants would use in estimating future net servicing income, which
include estimates of the cost to service, the discount rate, custodial earnings
rate, an inflation rate, ancillary income, prepayment speeds and default rates
and losses. The following assumptions were used in estimating the fair value of
residential MSRs; the fair value of commercial real estate and commercial
banking MSRs is considered to be immaterial.
December 31,
------------------------
2001 2000
------- -------
Weighted average default rate 1.03% 0.99%
Weighted average prepayment rate (CPR) 11.58% 12.78%
Weighted average discount rate 9.60% 10.20%
DEPOSITS: The fair values of demand deposits, passbook accounts, money
market accounts, and other deposits immediately withdrawable, by definition,
approximate carrying values for the respective financial instruments. For fixed
maturity deposits, the fair value was estimated by discounting expected cash
flows by the current offering rates of deposits with similar terms and
maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE: The fair value of
securities sold under agreements to repurchase is estimated using a discounted
cash flow analysis based on interest rates currently offered on such repurchase
agreements with similar maturities.
BORROWINGS: The fair value of borrowings, other than FHLB advances, is
estimated using discounted cash flow analyses based on current incremental rates
for similar borrowing arrangements. The fair values of FHLB advances are
estimated using a discounted cash flow analysis based on interest rates
currently offered on advances with similar maturities.
ON-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS AND EMBEDDED DERIVATIVE
OPTIONS: Derivative financial instruments are recorded at fair value based on
the estimated amounts that the Company would receive or pay to terminate the
contracts at the reporting date (i.e., mark-to-market value). Dealer quotes are
available for those derivative financial instruments hedging the Company's
liabilities. The Company uses an independent consultant to model the value of
the derivative financial instruments hedging MSRs.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS - LOAN COMMITMENTS:
The Company has two types of off-balance sheet loan commitments: (1)
commitments for commercial loans originated for portfolio and (2) commitments
for residential loans originated for portfolio.
These loan commitments are off-balance sheet because they do not meet the
definition of a derivative as described in SFAS No. 133. The fair value of
commitments for commercial loans originated for portfolio is estimated using the
fees currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate commitments, fair value also considers the
difference between current levels of interest rates and the committed rates. The
fair value of commitments for residential loans originated for portfolio is
estimated using as a basis the fair value of similar commitments for residential
loans that meet the definition of a derivative and which are readily convertible
to cash.
F-74
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(37) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected unaudited quarterly financial data
for the years ended December 31, 2001 and 2000 (in thousands):
Quarter Ended
----------------------------------------------------------------------------
December 31, September 30, June 30, March 31,
2001 2001 2001 2001 Total 2001
---- ---- ---- ---- ----------
Total interest income $ 893,503 $ 988,557 $1,027,531 $1,059,057 $ 3,968,648
Total interest expense (535,235) (632,073) (691,143) (748,585) (2,607,036)
--------- --------- ---------- ---------- -----------
Net interest income 358,268 356,484 336,388 310,472 1,361,612
Total noninterest income 97,064 86,879 114,229 59,231 357,403
Total noninterest expense (244,716) (242,222) (241,270) (231,138) (959,346)
--------- --------- ---------- ---------- -----------
Income before income taxes,
minority interest and
cumulative effect of change
in accounting principle 210,616 201,141 209,347 138,565 759,669
Income tax expense (91,414) (87,544) (87,526) (36,183) (302,667)
Minority interest (6,747) (6,747) (6,747) (6,747) (26,988)
--------- --------- ---------- ---------- -----------
Income before cumulative effect
of change in accounting principle 112,455 106,850 115,074 95,635 430,014
Cumulative effect of change in
accounting principle, net of tax -- -- (1,552) -- (1,552)
--------- --------- ---------- ---------- -----------
Net income $ 112,455 $ 106,850 $ 113,522 $ 95,635 $ 428,462
========= ========= ========== ========== ===========
Quarter Ended
----------------------------------------------------------------------------
December 31, September 30, June 30, March 31,
2000 2000 2000 2000 Total 2000
---- ---- ---- ---- ----------
Total interest income $1,060,382 $1,055,890 $1,022,871 $ 966,654 $ 4,105,797
Total interest expense (775,963) (769,937) (732,554) (679,551) (2,958,005)
---------- ---------- ---------- ---------- -----------
Net interest income 284,419 285,953 290,317 287,103 1,147,792
Total noninterest income 117,599 112,619 105,279 108,098 443,595
Total noninterest expense (225,985) (225,606) (223,588) (223,249) (898,428)
---------- ---------- ---------- ---------- -----------
Income before income taxes,
minority interest and
extraordinary items 176,033 172,966 172,008 171,952 692,959
Income tax (expense) benefit (76,673) (75,421) (75,057) 82,947 (144,204)
Minority interest (6,796) (6,797) (6,795) (6,599) (26,987)
---------- ---------- ---------- ---------- -----------
Income before extraordinary items 92,564 90,748 90,156 248,300 521,768
Extraordinary items - gains on
early extinguishment of debt,
net of tax -- -- 1,808 1,206 3,014
---------- ---------- ---------- ---------- -----------
Net income $ 92,564 $ 90,748 $ 91,964 $ 249,506 $ 524,782
========== ========== ========== ========== ===========
F-75
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(38) CONDENSED PARENT COMPANY FINANCIAL INFORMATION
The following represents condensed balance sheets of the Company (parent
company only) (in thousands):
December 31,
------------------------------
2001 2000
---------- ----------
Assets
Cash and cash equivalents $ 75,371 $ 80,125
Investment in the Bank 4,124,022 4,165,973
Other assets 115,050 103,159
---------- ----------
Total assets $4,314,443 $4,349,257
========== ==========
Liabilities, Minority Interest and Stockholder's Equity
GS Holdings Notes $1,650,000 $2,000,000
FN Holdings 105/8% Notes 250 250
Discount on borrowings (2,524) (3,566)
Accrued interest payable 42,624 54,387
Other liabilities (696) 10
---------- ----------
Total liabilities 1,689,654 2,051,081
Total stockholder's equity 2,624,789 2,298,176
---------- ----------
Total liabilities, minority interest and stockholder's equity $4,314,443 $4,349,257
========== ==========
The following represents parent company only condensed statements of income
(in thousands):
Year Ended December 31,
------------------------------------------
2001 2000 1999
-------- -------- ---------
Interest income $ -- $ -- $ 1,444
Dividends received from the Bank 582,912 192,912 324,582
-------- -------- ---------
Total income 582,912 192,912 326,026
Interest expense 127,305 142,686 139,613
Noninterest expense 6,836 7,367 7,625
-------- -------- ---------
Total expense 134,141 150,053 147,238
Income before equity in undistributed
net income of subsidiaries 448,771 42,859 178,788
Equity in undistributed net income of subsidiaries (75,107) 420,626 104,613
-------- -------- ---------
Income before income taxes and minority interest 373,664 463,485 283,401
Income tax benefit (54,798) (61,297) (143,545)
-------- -------- ---------
Income before minority interest 428,462 524,782 426,946
Minority interest -- -- 85,895
-------- -------- ---------
Net income $428,462 $524,782 $ 341,051
======== ======== =========
F-76
GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following represents parent company only statements of cash flows (in
thousands):
Year Ended December 31,
------------------------------------------
2001 2000 1999
--------- --------- ---------
Cash flows from operating activities:
Net income $ 428,462 $ 524,782 $ 341,051
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred issuance costs 6,773 7,354 7,295
Accretion of discount on borrowings 1,041 1,093 1,018
Increase in other assets (18,668) (21,471) (5,331)
(Decrease) increase in accrued interest payable (11,763) 285 (2,245)
Decrease in other liabilities (706) (873) (3,376)
Equity in undistributed net income of subsidiaries 75,107 (420,626) (104,613)
Minority interest -- -- 6,887
--------- --------- ---------
Net cash provided by operating activities 480,246 90,544 240,686
--------- --------- ---------
Principal payment on GS Holdings Notes (350,000) -- --
Bank Preferred Stock Tender Offers -- -- (97,621)
Debt Tender Offers -- -- (253)
Capital contribution -- 19,000 40,000
Dividends on common stock (135,000) (96,000) (225,500)
--------- --------- ---------
Net cash used in financing activities (485,000) (77,000) (283,374)
--------- --------- ---------
Net change in cash and cash equivalents (4,754) 13,544 (42,688)
Cash and cash equivalents at beginning of year 80,125 66,581 109,269
--------- --------- ---------
Cash and cash equivalents at end of year $ 75,371 $ 80,125 $ 66,581
========= ========= =========
Supplemental Disclosure of Cash Flow Information:
Year Ended December 31,
----------------------------------------
2001 2000 1999
-------- -------- --------
(in thousands)
Cash paid (received) for:
Interest $138,026 $142,401 $141,930
Income taxes, net (35,425) (39,833) (60,209)
Non-cash financing activities:
Adjustment to initial dividend of tax benefits
to former parent due to deconsolidation -- -- 66,383
Impact of Golden State restricted common stock 3,458 3,175 477
F-77