-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ga8Q0X2nGHzr2QM7E4/VTd6BQxNYRHBF4Zh0iV4JkXiSwj7klnV+Z+ZwTzv/9uZy /yy0+9gQfTHiPV2YvGkzfw== 0000898430-98-003381.txt : 19980921 0000898430-98-003381.hdr.sgml : 19980921 ACCESSION NUMBER: 0000898430-98-003381 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980918 SROS: NYSE SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOLDEN STATE BANCORP INC CENTRAL INDEX KEY: 0001019508 STANDARD INDUSTRIAL CLASSIFICATION: COMMERCIAL BANKS, NEC [6029] IRS NUMBER: 954642135 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-29654 FILM NUMBER: 98711201 BUSINESS ADDRESS: STREET 1: 135 MAIN ST CITY: SAN FRANCISCO STATE: CA ZIP: 94105 BUSINESS PHONE: 8185002000 MAIL ADDRESS: STREET 1: 414 NORTH CENTRAL AVENUE CITY: GLENDALE STATE: CA ZIP: 91203 10-K405 1 FORM 10-K405 FOR PERIOD ENDED JUNE 30, 1998 ================================================================================ 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 (NO FEE REQUIRED) For the fiscal year ended June 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from: to Commission File Number 333-28037 ------------------------- GOLDEN STATE BANCORP INC. (Exact name of Registrant as specified in its charter) Delaware 95-4642135 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 414 North Central Avenue, 91203 GLENDALE, CALIFORNIA (Zip Code) (Address of principal executive office) Registrant's telephone number, including area code: (818) 500-2000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of class on which registered -------------------------- ------------------- Common Stock, $1 par value New York Stock Exchange Pacific Stock Exchange Noncumulative Convertible Preferred Stock, New York Stock Exchange Series A, $1 par value -------------------- Securities registered pursuant to Section 12(g) of the Act: Warrants to Purchase Common Stock Litigation Tracking Warrants(TM) 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. Yes X 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 the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of the voting stock held by nonaffiliates of the registrant as of July 6, 1998: $1,663,215,529. Number of shares of Common Stock outstanding as of July 6, 1998: 55,302,830 shares =============================================================================== GOLDEN STATE BANCORP 1998 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
Page ------- PART I Item 1. BUSINESS......................................................................................... 1 Cal Fed Merger................................................................................. 1 General........................................................................................ 2 Loans Receivable............................................................................... 9 Real Estate Acquired in Settlement of Loans.................................................... 21 Mortgage-Backed Securities..................................................................... 22 Liquidity and Investments...................................................................... 25 Mortgage Loan Servicing Activities............................................................. 26 Deposits....................................................................................... 29 Borrowings..................................................................................... 31 Asset and Liability Management and Market Risk................................................. 32 Interest Rate Margin........................................................................... 36 Subsidiaries................................................................................... 37 Competition.................................................................................... 37 Employees...................................................................................... 37 Regulation..................................................................................... 38 Taxation....................................................................................... 43 ITEM 2. PROPERTIES....................................................................................... 44 ITEM 3. LEGAL PROCEEDINGS................................................................................ 44 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................. 46 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................ 46 ITEM 6. SELECTED FINANCIAL DATA.......................................................................... 47 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 49 Overview....................................................................................... 49 Balance Sheet Analysis......................................................................... 51 Liquidity and Asset and Liability Management................................................... 59 Results of Operations.......................................................................... 62 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................................... 69 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............. 69 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................... 69 ITEM 11. EXECUTIVE COMPENSATION........................................................................... 74 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................... 81 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................... 82 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.................................. 83 Index to Financial Statements.................................................................. 86
PART I ITEM 1. BUSINESS CAL FED MERGER Golden State Bancorp Inc. ("Golden State" or the "Company") entered into an Agreement and Plan of Reorganization (the "Plan of Reorganization"), dated as of February 4, 1998, as amended as of July 13, 1998, by and among the Company; Golden State Financial Corporation, a Delaware corporation and a wholly owned subsidiary of the Company ("Golden State Financial"); First Nationwide (Parent) Holdings Inc., a Delaware corporation ("First Nationwide"); First Nationwide Holdings Inc., a Delaware corporation ("FNH"); and certain other parent entities of California Federal Bank, A Federal Savings Bank ("Cal Fed"); and a related Agreement and Plan of Merger, dated as of February 4, 1998, by and between Golden State and First Nationwide (together with the Plan of Reorganization, the "Cal Fed Merger Agreement"). The Cal Fed Merger Agreement is set forth as an appendix to the Proxy Statement on Schedule 14A filed by the Company with the Securities and Exchange Commission on July 16, 1998, in connection with the Cal Fed Merger (the "Cal Fed Merger Proxy Statement"). Golden State's stockholders approved the Cal Fed Merger on August 17, 1998, and the Cal Fed Merger received Office of Thrift Supervision ("OTS") approval on August 12, 1998. The transactions contemplated by the Cal Fed Merger Agreement are expected to be consummated on September 11, 1998. Pursuant to the Cal Fed Merger Agreement, the businesses of the Company and First Nationwide and their respective subsidiaries will be combined through, among other things, the merger of First Nationwide with and into the Company, the merger of FNH with and into Golden State Financial and the merger of Glendale Federal Bank, Federal Savings Bank ("Glendale Federal" or the "Bank") with and into Cal Fed (collectively, the "Cal Fed Merger"). FNH is controlled, through intermediate entities, by MacAndrews and Forbes Holdings Inc. ("MAF") and Gerald J. Ford ("Ford"), the Chairman of the Board and Chief Executive Officer of Cal Fed. After giving effect to the Cal Fed Merger, the combined parent company, Golden State, will continue to be a publicly traded company. Upon completion of the Cal Fed Merger, two thirds of the Company's board of directors will be designated by MAF and Ford and management of the merged entity will be assumed by Cal Fed management. The terms of the Cal Fed Merger provide that the Company's pre-merger stockholders are to own between 58% and 55% of the combined entity on a fully diluted basis, immediately after the Cal Fed Merger, according to a formula set forth in the Cal Fed Merger Agreement that is based on the Company's stock price. Based on prevailing prices, it is expected that such pre-merger stockholders' ownership immediately following the Cal Fed Merger will be 58%, before giving effect to any shares that may be issuable pursuant to the Litigation Tracking Warrants(TM) or to the possible issuance of contingent additional shares of Golden State common stock to affiliates of MAF and Ford under the Cal Fed Merger agreement that could substantially increase the percentage ownership of the MAF and Ford affiliates. Following the Cal Fed Merger, the Company will have between 130 and 140 million fully diluted shares of common stock outstanding. Because the Company will survive the Cal Fed Merger, the Litigation Tracking Warrants(TM) will remain exercisable for common stock of the Company after the Cal Fed Merger. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations -Overview - Goodwill Litigation Tracking Warrants(TM)" for additional information on Litigation Tracking Warrants(TM). 1 The Cal Fed Merger will be treated as a "purchase," as such term is used under generally accepted accounting principles ("GAAP"), for accounting and financial reporting purposes. The Company will be treated as the acquired corporation for such purposes. Accordingly, the Company's assets, liabilities and other items will be adjusted to their estimated fair value at the expected closing date of the Cal Fed Merger and combined with the historical book values of the assets and liabilities of First Nationwide. Consequently, the historical financial statements of the merged entity will be those of First Nationwide. Applicable income tax effects of such adjustments will be included as a component of the combined entity's deferred tax asset or liability. The difference between the estimated fair value of the assets, liabilities and other items of the Company (adjusted as described above) and the purchase price will be recorded as goodwill and amortized against earnings over a 15-year period following consummation of the Cal Fed Merger. The historical financial statements of the Company set forth in this report should be read in light of the foregoing. Pro forma financial and other information reflecting the Cal Fed Merger is set forth in the Cal Fed Merger Proxy Statement and is incorporated by reference herein. The management strategies and expectations described herein are those of the Company prior to completion of the Cal Fed Merger. While the Company has been informed by Cal Fed management that they intend to pursue strategies that are similar to those of the Company, upon completion of the Cal Fed Merger they may pursue different strategies in the future, depending on future economic, interest rate and other factors. At June 30, 1998, First Nationwide, through its subsidiary Cal Fed, operated 225 branches and had $34.1 billion in assets, including $20.4 billion in loans receivable, net and $16.0 billion in deposits. See Note 24 of the Notes to Consolidated Financial Statements for additional information on the Cal Fed Merger. GENERAL Golden State was formed to become the holding company for Glendale Federal in a reorganization that was approved by Glendale Federal's stockholders and completed on July 24, 1997. As part of the holding company formation, shares of Glendale Federal's common stock automatically became an equal number of shares of Golden State common stock and shares of Glendale Federal's Noncumulative Preferred Stock, Series E, automatically became an equal number of shares of Golden State's Noncumulative Convertible Preferred Stock, Series A. Glendale Federal's two classes of warrants became exercisable solely to purchase common stock of Golden State. The members of the board of directors of Glendale Federal also became the board of directors of Golden State. On November 26, 1997, Golden State Financial was formed as a wholly-owned subsidiary of Golden State for the purpose of becoming an intermediate tier holding company to effect the acquisition of CENFED Financial Corporation ("CENFED"), the parent company of CenFed Bank, A Federal Savings Bank ("CenFed Bank"). On April 21, 1998, Golden State acquired CENFED in a tax-free, stock-for-stock merger. Pursuant to the terms of the transaction, Golden State issued 7,390,557 shares of its common stock resulting in a total recorded purchase price of $211.1 million. On April 21, 1998, CENFED was merged with and into Golden State Financial, with Golden State Financial as the surviving entity in the merger. On May 8, 1998, Golden State Bancorp contributed its shares of Glendale Federal to Golden State Financial and CenFed Bank was merged into Glendale Federal, with Glendale Federal as the surviving entity. The goodwill of $90.5 million recorded in this transaction under the purchase method of accounting will be amortized over 15 years using the straight-line method. At April 21, 1998, CENFED operated 18 branches and had $1.9 billion in assets, including $1.4 billion of loans receivable, net, and $354 million of mortgage-backed securities, net. CENFED's liabilities at April 21, 1998 included $1.4 billion of deposits and $403 million of borrowings. See Note 4 of the Notes to Consolidated Financial Statements for additional information. On July 11, 1998, Golden State acquired RedFed Bancorp Inc. ("RedFed") and its federal savings bank subsidiary, Redlands Federal Bank, in a tax-free, stock-for-stock merger. Pursuant to the terms of the transaction, Golden State issued 5,221,995 shares of its common stock, resulting in a total recorded purchase price of $158.3 million. In connection with its acquisition of RedFed, Golden State undertook a stock repurchase program, pursuant to which Golden State purchased 5,222,200 shares of its common stock in the open market. At June 30, 1998, the Company had 4,688,400 shares of its common stock in treasury that had been repurchased under this program at an aggregate cost of $158.1 million. The goodwill of $62.8 million recorded in this transaction under the purchase method of accounting will be amortized over 15 years using the straight-line method. At July 11, 1998, RedFed operated 15 branches and had $1.0 billion in assets, including $893.7 million of loans receivable, net. RedFed's liabilities at July 11, 1998 included $864.1 million of deposits and $78.7 million of borrowings. See Notes 3 and 24 of the Notes to Consolidated Financial Statements for additional information. 2 Golden State has no significant assets or business other than its ownership of Golden State Financial, and Golden State Financial has no significant assets or business other than its ownership of Glendale Federal. The Bank's business consists primarily of attracting checking and savings deposits from the public, originating real estate, business and consumer loans, and purchasing loans secured by mortgages on residential real estate. The Bank, through its subsidiaries, also provides general insurance and securities brokerage services. Golden State is headquartered in Glendale, California and operates 209 banking offices and 25 loan offices throughout California. The Company derives its income primarily from the interest it receives on real estate, business and consumer loans and, to a lesser extent, from interest on investment securities and fees received in connection with loans, loan servicing, and deposit services. The Company's major expenses are the interest it pays on deposits and on borrowings and general operating expenses. The Company's operations, like those of other depository institutions, are significantly influenced by general economic conditions, by the strength of the real estate market, by the monetary, fiscal and regulatory policies of the federal government and by the policies of financial institution regulatory authorities. In the normal course of its business, the Company encounters two significant types of risk: economic risk and regulatory risk. There are four main components of economic risk: interest rate risk, credit risk, market risk and concentrations of credit risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on different bases, than its interest-earning assets. Credit risk is the risk of default on the Company's loan portfolio that results from borrowers' inability or unwillingness to make contractually required payments. Market risk refers to the risk of decline in the value of collateral underlying loans receivable and the value of real estate held by the Company, and in the valuation of loans held for sale, mortgage-backed securities available for sale and mortgage servicing assets. Concentration of credit risk refers to the risk that, if the Company extends a significant portion of its total outstanding credit to borrowers in a specific geographical area or industry or on the security of a specific form of collateral, the Company may experience disproportionately high levels of default and losses if those borrowers, or the value of the type of collateral, is adversely affected by factors that are particularly applicable to such borrowers or collateral. The Company's lending activities are principally in California, with the largest concentration of the Company's loan portfolio being secured by real estate located in Southern California. The ability of the Company's borrowers to repay amounts owed is dependent on several factors, including the economic conditions in the borrower's geographic region and the borrower's financial condition. The Company and the Bank are subject to the regulations of various government agencies. Regulatory risk refers, among other things, to the fact that these regulations can and do change significantly from period to period. In addition, the Bank undergoes periodic examinations by regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required loss allowances and operating restrictions resulting from the regulators' judgments based on information available to them at the time of their examination. The Company has had an ongoing program that was intended to ensure that its operational and financial systems would not be adversely affected by Year 2000 data processing hardware and software failures arising from processing errors involving calculations using the Year 2000 date. Enhancements to the Company's mainframe systems have been implemented with completion of all mission critical repairs having been scheduled for November 1998. The Company has initiated renovation of its non-mainframe systems, with completion of all but one mission critical system having been scheduled for December 1998 and the one remaining mission critical system was to be completed in February 1999. The Company halted further implementation of its own Year 2000 efforts as of August 20, 1998 after receiving both shareholder and OTS approvals for the Cal Fed Merger. Future Year 2000 compliance will depend upon the ongoing systems that will be maintained by Cal Fed. Expenses related to the Year 2000 enhancements amounted to $10.0 million in fiscal 1998, compared to $0.3 million in fiscal 1997. The Company expected to incur approximately $37 million on this project, including $2 million to $3 million on software and hardware expenditures, on its program to modify, redevelop or replace its computer applications to try to make them "Year 2000" compliant. Year 2000 compliance failures could result in additional expense to the Company and significant disruption of its business. 3 OPERATING STRATEGIES During fiscal 1998 the Company's principal business strategy was to continue its transformation from a traditional savings and loan institution into a broad- based community bank offering deposit, cash management and credit products and services to individuals and small- to medium-sized businesses. This intended transformation reflected management's assessment of the competitive financial services environment and the significant narrowing of the spread between the yield on single-family residential mortgage loans and the cost of term deposits. Competition from the federally-sponsored secondary mortgage market agencies, mortgage bankers and commercial banks has driven the returns available from the housing finance business to levels that require lower cost funding sources than the certificate of deposit accounts that have traditionally been the principal source of funds for savings institutions. The purpose of the Company's community bank strategy was to reduce the Company's reliance on mortgage lending and provide the Company with a broader, more interest rate-sensitive asset base and a lower costing, transaction account-focused deposit base. This broader mix of assets and liabilities was intended to increase the Company's net interest margin and to build a fee income stream that would enhance the Company's future earnings. Implementation of this business strategy has resulted in an increase in general and administrative expenses due to the increased cost of servicing transaction accounts, the growth of the Company's customer base, business lines and retail network, and the increased cost of marketing necessary to build Glendale Federal's name recognition among consumers. The targeted benefits of this transformation, namely increased net interest margin and higher fee income, have lagged the increase in expenditures attributable to the timing of the investment in new business lines, network expansion and marketing, and the increase in revenues that is intended to result from this investment. The Company's mix of products and services now include three principal lines of business: business banking, consumer banking and real estate lending. Golden State began offering business banking lending and deposit products in fiscal 1996 and has since continued to expand its business banking customer base and the variety of business banking products it offers. As part of its overall business banking strategy, in fiscal 1997 the Company acquired a portfolio of agricultural loans, established an agribusiness lending program in central California, and began a statewide Small Business Administration ("SBA") guaranteed lending program. The Company's focus in consumer banking has been principally on its "Infinity" account, a combined checking and savings account that allows customers greater flexibility in managing their finances. The Company also offers unsecured lines of credit and home equity lines of credit that are accessible through the customer's Infinity account. Real estate lending is principally focused on traditional single-family residential loans. Each of the Company's lines of business is discussed separately below. The Company's focus on its new business lines during fiscal 1998 resulted in significant growth in its business and consumer loan portfolios and in its transaction-based accounts. At June 30, 1998, the Company's commercial and consumer loan portfolios increased to $290.5 million and $150.1 million, respectively, from $160.1 million and $120.7 million, respectively, at June 30, 1997. Checking accounts increased by $614.9 million, or 51%, to $1.8 billion during fiscal 1998. Excluding the CENFED acquisition, checking account balances increased $504.0 million, or 42%. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information on loan and deposit activities in these portfolios. BUSINESS BANKING The Company's business banking program has four components: community business banking, commercial markets banking, agribusiness lending and SBA lending. The Company initially introduced a line of community business banking products and services in fiscal 1996. This program focuses on small businesses, primarily professionals, wholesalers, distributors and light manufacturers, with annual sales of up to $5 million, located in the markets served by the Company's retail banking offices. The Company's community business banking product line includes, but is not limited to, business checking accounts of various types, account analysis, payroll services, electronic banking and merchant draft servicing. To meet the credit needs of its business customers, the Company offers revolving lines of credit and term loans (primarily secured) with maturities of up to five years and with prime-based adjustable interest rates. The maximum loan offered by the community business banking group is $1 million. At June 30, 1998, line of credit commitments and deposit relationships under the community business banking product line totaled $190.3 million and $611.9 million, respectively. 4 In fiscal 1997, the Company, through its commercial markets group, introduced a line of middle-market banking products and services to build larger deposit relationships. This middle-market business banking program accommodates businesses with annual sales of up to $150 million, but focuses primarily on businesses with annual sales between $10 million and $75 million. The Company offers its commercial markets group customers business checking accounts, various cash management services, standby and commercial letters of credit, revolving lines of credit and term loans with a maximum limit of $15 million. Specific loan terms are determined based upon the financial strength of the borrower, the amount of credit granted, and the type and quality of collateral available. At June 30, 1998, line of credit commitments and deposit relationships under the commercial markets group totaled $69.1 million and $87.4 million, respectively. The Company's agribusiness lending program serves the southern half of the Central Valley region of California and specializes in crop production loans for crops such as cotton, grapes, nuts and stone fruits, and dairy operations, together with loans for other agricultural businesses, such as processors and packers. At June 30, 1998, line of credit commitments and deposit relationships under the agribusiness lending program totaled $159.8 million and $16.8 million, respectively. In the fourth quarter of fiscal 1997, the Company added SBA lending to its business banking line to complement the SBA program acquired in the TransWorld acquisition. The SBA is a federal government agency created to assist small businesses by providing guarantees of loans made to eligible small businesses. Golden State focuses on the long-term needs of small businesses and provides long-term, variable and fixed-rate financing to expanding small businesses. In August 1997, Golden State was granted statewide preferred lender status by the SBA. This designation allows the Company to approve SBA-guaranteed loan applications without prior review from the SBA, thereby speeding up the decision-making process for small business loan applications. Preferred lenders, the highest lender status awarded by the SBA, enjoy priority funding and service from the SBA. Loans approved through the preferred lender program carry a maximum SBA guarantee of 75 percent. At June 30, 1998, line of credit commitments and deposit relationships under the SBA lending program totaled $30.4 million and $5.5 million, respectively. The Company's business banking loan products primarily have adjustable interest rates that are indexed to the Prime Rate, as published in the Wall Street Journal. CONSUMER BANKING Golden State's consumer banking program focuses on increasing checking account relationships, especially the Infinity account, which is the Company's multi- relationship deposit account, rather than the higher-rate certificates of deposit that have been the traditional source of deposit funding for thrift institutions. The Infinity account allows customers to manage their finances, including checking, money market, savings, and certificate of deposit accounts, borrowings and investments, through the use of a series of linked asset and loan accounts with both automatic "sweep" and discretionary transfer features, all of which are reflected on a single statement. The customer has the ability to transfer funds to and from checking or money market accounts or to transfer funds to and from a GLENFED Brokerage account for investment in stocks, bonds or mutual funds. The Infinity account has increased the Company's demand deposit and money market accounts, which carry a lower interest cost to the Company than certificate of deposit accounts. In early fiscal 1998, the Company introduced a new component of the Infinity account--the Uninsured Money Market Fund Accounts (the "UMMFA"). The UMMFA is a liquid and convenient account that provides the Infinity customer easy access to uninsured money market mutual funds managed by an unrelated third party. When a customer's Infinity checking account balance exceeds a customer-determined "ceiling", which has a minimum setting of $2,000, the surplus is automatically transferred on the same day to the UMMFA. If the Infinity checking balance drops below a customer-determined "floor", which has a minimum setting of $1,000, funds are automatically transferred on the same day from the UMMFA to return the checking account balance to the "floor". This two- way sweep feature not only provides the customer overdraft protection but also promotes regular savings and a steady investing schedule. 5 On the lending side, the Infinity account encourages the use of secured and unsecured lines of credit that carry higher yields to the Company than single- family loans. These line of credit products include a home equity line of credit, a line of credit secured by a savings deposit, and an unsecured line of credit and are primarily adjustable-rate products indexed to the Prime Rate, as published in the Wall Street Journal. REAL ESTATE LENDING The Company's real estate lending activity is focused on the origination and purchase of loans secured by single-family residential real estate. Income property lending (loans secured by multi-family residential and non-residential properties) and construction lending activities were discontinued in 1991, except for the resumption of residential construction lending for a short period during fiscal 1996. Income property lending is currently restricted to refinancing existing loans, financing the disposition of real estate acquired in settlement of loans ("REO") and a program initiated in fiscal 1998 of lending on multi-family residences located in low- and moderate-income and minority communities. Construction lending has been restricted to fulfilling commitments under outstanding loans. The largest portion of the Company's real estate loans are made to homeowners on the security of single-family residences for the purpose of enabling them to purchase or refinance such property. Most of the Company's single-family residential permanent loan contracts provide for amortization of principal over 30 years. These loans, however, have remained outstanding for much shorter periods because the original loans have been refinanced or the borrowers have repaid the loans in full upon sale of the properties securing the loans, or the underlying collateral has been acquired in settlement of the loan. The Company originates and purchases for its own portfolio, depending upon certain yield and other guidelines, adjustable-rate mortgage loans ("ARMs") (loans bearing interest rates that change periodically based on changes in a reference index), loans with rates that are fixed for up to five years and then convert to adjustable rates for the remainder of the loan term, and fixed-rate loans. The ARM programs offered by the Company provide for interest rates that adjust either monthly, semi-annually or annually, beginning three, six or twelve months from the inception of the loan, based primarily on changes in the average weekly yield on specified maturities of U.S. Treasury securities or on changes in the monthly weighted average cost of funds for savings institutions in the Eleventh District of the Federal Home Loan Bank System. Adjustments to the required monthly payment of principal and interest on such loans occur either monthly, semi-annually or annually, depending on the loan program selected by the borrower. The Company has placed greater emphasis on the origination of loans whose rates are tied to U.S. Treasury securities since this index is more sensitive to changes in market rates. The Company also offers several programs that provide for interest rates that are fixed for up to five years and then convert to adjustable rates tied to the same Treasury rate indices as certain of the Company's other ARM products. See "Loans Receivable" below for a summary of the Company's loan originations by note type. While ARMs have the advantage of reducing an institution's sensitivity to interest rate fluctuations, they present certain risks not associated with traditional fixed-rate mortgage loans. These include: (i) the risk that the borrower, having qualified for the loan based upon interest rates prevailing at the time of origination, may be unable to make the higher payments required under the ARM when increases in the applicable index rates increase the interest rate payable on the loan; and (ii) the risk that "negative amortization" of principal (that is, the addition of a portion of monthly interest accruals to the principal amount of the loan) may occur in those ARMs which provide for limits in the monthly payment increase and do not correspondingly limit the rate increase. The Company attempts to mitigate these risks by the use of underwriting standards that include analyzing the financial impact to the borrower resulting from payment adjustments, and which require borrowers to qualify for their loans at the greater of the initial interest rate plus the first annual adjustment or at a predetermined interest rate based on loan-to- value ("LTV"). 6 Loans with an LTV in excess of 80% are required by Company policy to have private mortgage insurance, except that loans meeting certain criteria may be made, at the option of the loan applicant, without mortgage insurance, but at higher fees, interest rates and margins to reflect the increased credit risk assumed by the Company. This option is available only on loans with a maximum loan amount of $300,000 and an LTV ratio of no more than 90%, where the purpose of the loan is to purchase, or to refinance an existing Glendale Federal loan secured by a one-unit, single-family residence. This alternative is only available on loans that do not have negative amortization features. The Company discontinued significant originations of loans with negative amortization features in fiscal 1991 and does not separately monitor the historical loss experience on such loans. Negative amortization is not considered by the Company to be a sufficiently significant credit risk characteristic to require specific identification for historical loss monitoring purposes. Most of the loans with negative amortization features remaining in the Company's portfolio are income property loans that are individually monitored to assess loss potential. Because negatively amortizing income property loans of this type are no longer being originated by the Company, the balances on such loans are declining on both an absolute and relative basis. As of June 30, 1998 and 1997, loans owned by the Company that were subject to negative amortization totaled approximately $3.1 billion and $3.2 billion, respectively, including cumulative negative amortization at such dates of approximately $1.0 million and $0.9 million, respectively. Approximately 74% of such loans are secured by multi-family or non-residential real estate. The Company offers a loan program called California Partners to low- and moderate-income and minority borrowers. This program provides more favorable pricing and flexible underwriting standards, including reduced down payment and reduced income documentation requirements. These criteria are designed to enable eligible borrowers who might not be able to satisfy conventional underwriting standards to qualify for a home loan. The Company originated $181.6 million and $90.6 million of such loans in fiscal 1998 and 1997, respectively. Loan Purchase Activity The Company purchases single-family residential real estate loans in the secondary mortgage market to supplement its retail single-family loan originations. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Balance Sheet Analysis--Loans Receivable" for a three-year summary of secondary market loan purchases by note type. The servicing rights for these loans are typically retained by the seller. The servicer collects the mortgage payments, passes through the interest and principal due the Company under the Company's loan purchase agreement, and retains a servicing fee typically ranging between 0.25% and 0.50% on the unpaid principal balances of the loans. The Company determines the timing and amount of its whole loan purchases based on available liquidity, current asset yields and the Company's interest rate risk management policy. The Company's investment and underwriting policies governing purchased loans are the same as its policies for originating single-family residential loans. Loans purchased by the Company are accepted or settled only after the Company's loan underwriting and appraisal staff perform a review of a representative sample of loans in the pool to be purchased. To reduce the Company's loss exposure, Golden State has implemented procedures designed to monitor and analyze the Company's portfolio of mortgage loans serviced by other institutions (the "LSBO Portfolio") and to ensure the servicer's compliance with its servicing agreement with the Company. The majority of the loans in this portfolio were originated during the last five years. At June 30, 1998, 97.6% of the LSBO Portfolio was secured by single- family residential real estate. 7 The following tables set forth the composition of the Company's LSBO Portfolio by note type and by state as of the dates indicated (dollars in thousands):
June 30 ----------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------ ------------ ----------- ------------ ---------- Adjustable-rate................................... $1,724,491 $2,245,683 $2,075,212 $ 392,078 $151,555 Fixed-rate........................................ 3,397,111 2,082,616 1,068,635 1,358,107 486,685 ---------- ---------- ---------- ---------- -------- $5,121,602 $4,328,299 $3,143,847 $1,750,185 $638,240 ========== ========== ========== ========== ======== Weighted average rate on portfolio at end of period........................................ 7.46% 7.61% 7.37% 7.74% 7.07% ========== ========== ========== ========== ======== June 30 ---------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------ ------------ ------------ ----------- ---------- California........................................ $2,342,130 $1,932,794 $1,442,451 $ 581,305 $243,417 New York.......................................... 229,237 244,111 233,659 116,303 35,138 Virginia.......................................... 225,533 201,829 97,393 81,814 24,222 Florida........................................... 212,160 190,412 123,122 112,798 83,062 Maryland.......................................... 178,361 156,964 93,677 76,294 24,343 New Jersey........................................ 174,162 169,456 137,311 98,215 34,493 Other(1).......................................... 1,760,019 1,432,733 1,016,234 683,456 193,565 ---------- ---------- ---------- ---------- -------- $5,121,602 $4,328,299 $3,143,847 $1,750,185 $638,240 ========== ========== ========== ========== ========
__________ (1) The states with the largest balance in the "Other" category were Illinois with $167,319 at June 30, 1998; Texas with $152,078 at June 30, 1997; Illinois with $101,094 at June 30, 1996; Texas with $71,028 at June 30, 1995; and Massachusetts with $29,510 at June 30, 1994. 8 LOANS RECEIVABLE LOAN PORTFOLIO COMPOSITION The following table summarizes the composition of Golden State's loan portfolio, including loans held for sale, by property type as of the dates indicated (dollars in thousands):
June 30 ------------------------------------------------------------------------ 1998 1997 1996 1995 1994 -------------- -------------- -------------- -------------- ------------ Real estate loans: Existing structures: 1-4 units............................... $10,299,303 $ 8,785,539 $ 7,535,048 $ 6,292,589 $ 5,481,781 5-36 units.............................. 1,504,288 1,472,654 1,559,097 1,666,032 1,895,203 37 or more units........................ 313,575 345,052 400,415 478,803 556,440 Non-residential......................... 1,336,126 1,196,703 1,338,975 1,593,839 1,749,988 Construction: 1-4 units............................... -- 7,726 16,794 2,113 35,602 5-36 units.............................. 570 4,895 5,445 7,624 25,574 37 or more units........................ -- -- -- -- 7,748 Non-residential......................... -- 531 -- 500 8,870 Land..................................... 22,754 9,779 18,250 36,251 40,888 Home equity and improvement.............. 56,335 28,563 28,470 30,468 74,966 ----------- ----------- ----------- ----------- ----------- Total real estate loans.............. 13,532,951 11,851,442 10,902,494 10,108,219 9,877,060 ----------- ----------- ----------- ----------- ----------- Non-real estate loans: Equity................................... 69,594 45,709 10,079 12,750 17,858 Unsecured................................ 50,502 39,712 21,788 17,600 27,360 Deposit account.......................... 16,737 15,702 17,113 17,571 20,383 Auto and recreational vehicle............ 8,699 13,838 17,588 24,739 37,855 Mobile home.............................. 4,518 5,724 6,590 7,943 3,593 ----------- ----------- ----------- ----------- ----------- Total consumer loans.............. 150,050 120,685 73,158 80,603 107,049 Commercial loans......................... 290,515 160,061 10,391 22,844 47,212 ----------- ----------- ----------- ----------- ----------- Total non-real estate loans.......... 440,565 280,746 83,549 103,447 154,261 ----------- ----------- ----------- ----------- ----------- Total gross loans receivable.............. 13,973,516 12,132,188 10,986,043 10,211,666 10,031,321 Unearned discounts (net of premiums)................................ (21,861) (38,824) (34,772) (70,038) (50,407) Undisbursed loan funds.................... (216) (1,807) (12,160) (4,653) (22,215) Deferred loan origination fees............ (20,377) (22,705) (24,446) (28,536) (42,205) Allowance for loan losses................. (156,482) (163,759) (186,756) (209,142) (320,714) ----------- ----------- ----------- ----------- ----------- Loans receivable, net..................... $13,774,580 $11,905,093 $10,727,909 $ 9,899,297 $ 9,595,780 =========== =========== =========== =========== =========== Weighted average yield on loan portfolio at end of period............ 7.75% 7.73% 7.74% 7.91% 6.87% =========== =========== =========== =========== ===========
9 The following table sets forth the activity in the Company's loan portfolio for the periods indicated (dollars in thousands):
Years Ended June 30 ---------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------------- ------------ ------------- ------------- -------------- Loans, beginning balance.................. $11,905,093 $10,727,909 $ 9,899,297 $9,595,780 $10,850,039 Originations(1)........................... 1,182,590 731,307 713,857 805,897 1,747,519 Purchases................................. 2,720,739 2,430,461 2,107,509 1,549,955 521,357 Acquisition of CENFED loans(2)............ 1,415,858 -- -- -- -- Acquisition of TransWorld loans(2)........ -- 135,766 -- -- -- Acquisition of OneCentral loans(2)........ -- 37,992 -- -- -- Acquisition of Union Federal loans(2)..... -- -- -- 398,635 -- Principal repayments...................... (2,859,855) (1,894,953) (1,430,312) (892,977) (1,252,503) Sales..................................... (344,348) (78,809) (275,428) (156,494) (348,838) Sale of University Savings loans(3)....... -- -- -- (815,406) -- Principal reductions due to foreclosures.. (96,448) (156,820) (186,157) (294,822) (328,022) Loans exchanged for mortgage- backed securities...................... (171,737) (42,222) (145,826) (268,436) (1,470,844) Decrease in allowance for loan losses..... 7,277 22,997 22,386 111,572 14,068 Accretion of net unearned discounts(4).... 3,458 (575) 12,618 8,394 6,464 (Increase) decrease in undisbursed loan funds.................................. 1,591 10,353 (7,507) 11,073 5,509 Other changes, net........................ 10,362 (18,313) 17,472 (153,874) (148,969) ----------- ----------- ----------- ---------- ----------- Net increase (decrease)................... 1,869,487 1,177,184 828,612 303,517 (1,254,259) ----------- ----------- ----------- ---------- ----------- Loans, ending balance..................... $13,774,580 $11,905,093 $10,727,909 $9,899,297 $ 9,595,780 =========== =========== =========== ========== =========== Weighted average yield on originations during the period...................... 7.44% 7.94% 7.90% 8.08% 6.17% =========== =========== =========== ========== =========== Weighted average yield on purchases during the period....................... 7.29% 7.83% 6.78% 8.68% 8.69% =========== =========== =========== ========== ===========
__________ (1) Net of refinanced portion of the Company's loans, which amounted to, in the years ended June 30: 1998--$421,685; 1997--$86,566; 1996--$153,449; 1995-- $61,553; and 1994--$390,370. (2) For information regarding the CENFED, TransWorld, OneCentral and Union Federal transactions, see Note 4 of the Notes to Consolidated Financial Statements. The weighted average yields of these loans at acquisition were 8.48%, 10.26%, 9.60% and 7.94%, respectively. (3) These loans were owned by University Savings Bank, a Washington state chartered savings bank subsidiary of Glendale Federal that was sold in fiscal 1995. (4) Includes accretion of discount and amortization of premium on acquired loans. 10 The following tables present the Company's gross loan portfolio, including loans owned and serviced by the Company and loans owned and serviced by others, by note type and the distribution of adjustable-rate loans among the major underlying indices at the dates indicated (dollars in millions):
June 30, 1998 ---------------------------------------------------- Loans Loans Owned by Owned and Company and Serviced Serviced Percent by Company by Others Total of Total ------------ --------------- ----------- ----------- Adjustable-rate: 6-month Treasury Bills.................................... $ 261 $ 22 $ 283 2% 1-Year Treasury Bills (1)................................. 2,270 1,634 3,904 28 11th District Cost of Funds............................... 3,648 63 3,711 27 Prime..................................................... 561 -- 561 4 Other..................................................... 315 6 321 2 ------ ------ ------- --- 7,055 1,725 8,780 63 Fixed-rate.................................................. 1,797 3,397 5,194 37 ------ ------ ------- --- $8,852 $5,122 $13,974 100% ====== ====== ======= ===
June 30, 1997 ---------------------------------------------------- Loans Loans Owned by Owned and Company and Serviced Serviced Percent by Company by Others Total of Total ------------ --------------- ----------- ----------- Adjustable-rate: 6-month Treasury Bills.................................... $ 328 $ 32 $ 360 3% 1-Year Treasury Bills (1)................................. 2,452 2,135 4,587 38 11th District Cost of Funds............................... 3,551 71 3,622 30 Prime..................................................... 288 -- 288 2 Other..................................................... 115 7 122 1 ------ ------ ------- --- 6,734 2,245 8,979 74 Fixed-rate.................................................. 1,070 2,083 3,153 26 ------ ------ ------- --- $7,804 $4,328 $12,132 100% ====== ====== ======= ===
- ------------------ (1) Includes $1.2 billion and $1.1 billion at June 30, 1998 and 1997, respectively, of loans with interest rates that are fixed for three to five years and then convert to adjustable rates for the remainder of the loan term. The following table summarizes Golden State's term loan originations, including the refinanced portion of the Company's loans, for the periods indicated (in thousands):
Years Ended June 30 -------------------------------------------------------- 1998 1997 1996 1995 1994 -------------------------------------------------------- Fixed-rate............................................ $1,200,000 $323,824 $371,611 $152,921 $ 655,341 Convertible/fixed..................................... 220,853 188,324 243,436 270,693 690,759 Adjustable-rate....................................... 99,001 224,978 164,817 296,380 636,912 Call-date............................................. 17,405 27,763 43,595 109,322 69,778 Construction/tract.................................... -- 6,780 21,957 19,337 66,279 ---------- -------- -------- -------- ---------- Total real estate................................... 1,537,259 771,669 845,416 848,653 2,119,069 Consumer.............................................. 12,767 16,100 20,504 18,797 18,820 Commercial............................................ 54,249 30,104 1,386 -- -- ---------- -------- -------- -------- ---------- $1,604,275 $817,873 $867,306 $867,450 $2,137,889 ========== ======== ======== ======== ==========
11 As of June 30, 1998, approximately $5.1 billion of fixed-rate loans and $8.5 billion of adjustable-rate loans were contractually due after one year. The following table summarizes the remaining contractual maturities of the Company's gross loan portfolio as of June 30, 1998 (in thousands):
Real Estate Consumer Commercial Loans Loans Loans Total ------------ ------------ ------------- --------------- Due in year 1.................................................... $ 120,845 $ 66,384 $182,177 $ 369,406 Due in year 2.................................................... 108,215 4,354 9,706 122,275 Due in year 3.................................................... 83,841 5,597 14,584 104,022 Due after year 3 through year 5.................................. 331,157 62,256 39,747 433,160 Due after year 5 through year 10................................. 670,231 9,282 30,169 709,682 Due after year 10 through year 15................................ 309,458 1,831 3,634 314,923 Due after year 15................................................ 11,909,204 346 10,498 11,920,048 ----------- -------- -------- ----------- $13,532,951 $150,050 $290,515 $13,973,516 =========== ======== ======== ===========
Actual repayments may differ from contractual maturities as borrowers generally have the right to prepay loans. DELINQUENCIES When a borrower fails to make a required payment on a loan and does not promptly cure the delinquency, the loan is classified as delinquent. The Company's normal procedure for delinquent loans is to contact the borrower at regular intervals in an effort to bring the loan to a current status. If a delinquency is not cured, foreclosure proceedings are typically instituted by the Company by the ninetieth day of delinquency. During fiscal 1998, the Company's delinquencies, expressed in dollars, declined in total by $31.0 million, or 14%, to $184.3 million, as well as in all categories of loans except for increases of $2.5 million and $141,000 in the multi-family (37 or more units) residential and consumer loan portfolios, respectively. The overall improvement in payment performance of the Company's portfolio reflects continuing economic recovery in California, which is the Company's primary lending area. The increase in the multi-family (37 or more units) residential delinquencies is primarily the result of one loan for $2.7 million in the 31-60 days delinquent category which was repaid in July 1998. Consumer loan delinquencies, however, increased by 4%, to $3.9 million, at June 30, 1998. Delinquencies as a percent of consumer loans receivable declined by 51 basis points during fiscal 1998 due to portfolio growth. Management believes the increases in multi-family and consumer loan delinquencies are not reflective of adverse portfolio quality trends. However, if economic growth slows in the Company's primary lending markets or is negatively impacted by other economic events, the declining delinquency trends experienced over the past six years may be adversely impacted and could reverse. 12 The following table presents the principal amount and percentage of the Company's loan delinquencies, in each case by property type, as of the dates indicated (dollars in thousands):
Percent of Percent of June 30, Type of June 30, Type of June 30, 1998 Gross Loans 1997 Gross Loans 1996 -------- ---------------- ------------ ---------------- ------------- Single-family 1-4 units: 31-60 Days............................ $ 43,043 0.41% $ 46,172 0.52% $ 57,047 61-90 Days............................ 23,579 0.23 17,030 0.19 18,416 Over 90 Days.......................... 70,136 0.68 82,989 0.95 119,978 -------- ---- -------- ---- -------- 136,758 1.32 146,191 1.66 195,441 -------- ---- -------- ---- -------- Multi-family 5-36 units: 31-60 Days............................ 9,248 0.62 8,944 0.61 9,528 61-90 Days............................ 1,463 0.10 3,021 0.20 7,601 Over 90 Days.......................... 6,755 0.45 17,713 1.20 25,595 -------- ---- -------- ---- -------- 17,466 1.17 29,678 2.01 42,724 -------- ---- -------- ---- -------- Multi-family 37 or more units: 31-60 Days............................ 3,419 1.10 1,312 0.38 2,126 61-90 Days............................ -- -- -- -- -- Over 90 Days.......................... 417 0.13 -- -- 14,461 -------- ---- -------- ---- -------- 3,836 1.23 1,312 0.38 16,587 -------- ---- -------- ---- -------- Non-residential: 31-60 Days............................ 5,632 0.42 11,240 0.93 3,169 61-90 Days............................ 1,715 0.12 3,079 0.26 2,762 Over 90 Days.......................... 11,774 0.87 14,149 1.17 17,907 -------- ---- -------- ---- -------- 19,121 1.41 28,468 2.36 23,838 -------- ---- -------- ---- -------- Commercial: 31-60 Days............................ 804 0.28 3,235 2.02 38 61-90 Days............................ 1,262 0.43 1,935 1.21 -- Over 90 Days.......................... 1,191 0.41 726 0.45 -- -------- ---- -------- ---- -------- 3,257 1.12 5,896 3.68 38 -------- ---- -------- ---- -------- Consumer: 31-60 Days............................ 1,618 1.08 1,560 1.29 1,081 61-90 Days............................ 939 0.62 624 0.52 612 Over 90 Days.......................... 1,330 0.89 1,562 1.29 1,001 -------- ---- -------- ---- -------- 3,887 2.59 3,746 3.10 2,694 -------- ---- -------- ---- -------- Total: 31-60 Days............................ 63,764 0.46 72,463 0.60 72,989 61-90 Days............................ 28,958 0.21 25,689 0.21 29,391 Over 90 Days.......................... 91,603 0.65 117,139 0.96 178,942 -------- ---- -------- ---- -------- $184,325 1.32% $215,291 1.77% $281,322 ======== ==== ======== ==== ========
Percent of Percent of Percent of Type of June 30, Type of June 30, Type of Gross Loans 1995 Gross Loans 1994 Gross Loans ------------------ ------------ -------------------- ---------- ------------------- Single-family 1-4 units: 31-60 Days............................ 0.75% $ 57,979 0.92% $ 44,181 0.79% 61-90 Days............................ 0.24 26,460 0.42 21,919 0.39 Over 90 Days.......................... 1.59 110,761 1.75 127,556 2.28 ---- -------- ---- -------- ----- 2.58 195,200 3.09 193,656 3.46 ---- -------- ---- -------- ----- Multi-family 5-36 units: 31-60 Days............................ 0.61 19,249 1.15 59,663 3.11 61-90 Days............................ 0.49 11,433 0.68 26,841 1.40 Over 90 Days.......................... 1.63 32,804 1.96 96,920 5.04 ---- -------- ---- -------- ----- 2.73 63,486 3.79 183,424 9.55 ---- -------- ---- -------- ----- Multi-family 37 or more units: 31-60 Days............................ 0.53 4,079 0.85 14,434 2.56 61-90 Days............................ -- 3,202 0.67 8,682 1.54 Over 90 Days.......................... 3.61 13,371 2.79 66,254 11.74 ---- -------- ---- -------- ----- 4.14 20,652 4.31 89,370 15.84 ---- -------- ---- -------- ----- Non-residential: 31-60 Days............................ 0.23 19,789 1.21 31,637 1.76 61-90 Days............................ 0.20 6,409 0.39 25,767 1.43 Over 90 Days.......................... 1.33 39,588 2.43 152,415 8.47 ---- -------- ---- -------- ----- 1.76 65,786 4.03 209,819 11.66 ---- -------- ---- -------- ----- Commercial: 31-60 Days............................ 0.37 -- -- 952 2.02 61-90 Days............................ -- 90 0.39 -- -- Over 90 Days.......................... -- -- -- 5,025 10.64 ---- -------- ---- -------- ----- 0.37 90 0.39 5,977 12.66 ---- -------- ---- -------- ----- Consumer: 31-60 Days............................ 1.48 2,206 2.74 3,504 3.27 61-90 Days............................ 0.84 941 1.17 1,040 0.97 Over 90 Days.......................... 1.36 906 1.12 1,711 1.60 ---- -------- ---- -------- ----- 3.68 4,053 5.03 6,255 5.84 ---- -------- ---- -------- ----- Total: 31-60 Days............................ 0.66 103,302 1.01 154,371 1.54 61-90 Days............................ 0.27 48,535 0.48 84,249 0.84 Over 90 Days.......................... 1.63 197,430 1.93 449,881 4.48 ---- -------- ---- -------- ----- 2.56% $349,267 3.42% $688,501 6.86% ==== ======== ==== ======== =====
13 NON-ACCRUAL LOANS All loans delinquent for more than 90 days are placed on non-accrual status. Loans delinquent 90 days or less are placed on non-accrual status if the borrower is considered by management to be unable to continue performance. As of June 30, 1998 and 1997, loans 90 days or less delinquent totaling $4.4 million and $23.2 million, respectively, had been placed on non-accrual status. Placement of loans on non-accrual status does not necessarily mean that the outstanding loan principal will not be collected but rather that timely collection of principal and interest is in question. When a loan is placed on non-accrual status, interest accrued but not received is reversed. A non-accrual loan may be restored to accrual status when principal and interest payments are brought current or when brought to 90 days or less delinquent and continuing payment of principal and interest is expected. The amount of interest income which would have been recorded in fiscal 1998, 1997 and 1996 had the Company's non-accrual loans been current in accordance with their original terms was $9.1 million, $12.4 million and $16.3 million, respectively. The amount of interest income on these loans that was included in net earnings in fiscal 1998, 1997 and 1996 was $3.0 million, $5.3 million and $5.8 million, respectively. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Balance Sheet Analysis--Non- Performing Assets and Restructured Loans" for fiscal 1998 non-accrual loans activity. See Note 8 of the Notes to Consolidated Financial Statements for information on the geographical location of non-accrual loans at June 30, 1998 and 1997. The following table shows the Company's non-accrual loans by property type as of the dates indicated (in thousands):
June 30 ---------------------------------------------------- 1998 1997 1996 1995 1994 --------- --------- ---------- -------- -------- Single-family 1-4 units..................................... $70,188 $ 82,989 $119,978 $111,881 $130,554 Multi-family: 5-36 units................................................ 7,615 21,087 33,123 50,487 112,400 37 or more units.......................................... 417 3,121 14,461 21,255 84,937 Non-residential............................................. 14,504 30,672 23,860 59,430 172,897 ------- -------- -------- -------- -------- Total real estate......................................... 92,724 137,869 191,422 243,053 500,788 Commercial.................................................. 1,828 859 22 283 6,044 Consumer.................................................... 1,442 1,567 1,001 906 1,711 ------- -------- -------- -------- -------- $95,994 $140,295 $192,445 $244,242 $508,543 ======= ======== ======== ======== ========
RESTRUCTURED LOANS The Company has agreed to loan modifications on certain existing single- family, multi-family residential and non-residential loans in the form of interest rate and other concessions that are not generally available for similar loans in order to maximize the recovery of its loans that are not performing under their original terms. Such loans that are performing in accordance with their modified terms are presented as "restructured loans." Restructured loans are placed on non-accrual status (and presented as "non- accrual loans") if they become more than 90 days delinquent or the borrower otherwise fails, or is not expected, to perform in accordance with the restructure agreement. See Note 1 of the Notes to Consolidated Financial Statements for additional discussion of the Company's accounting policy with respect to restructured loans. Interest income with respect to restructured loans would have been $2.2 million, $2.9 million and $0.9 million in fiscal 1998, 1997 and 1996, respectively, under their original terms. Actual interest income recognized by the Company with respect to restructured loans was $1.8 million, $2.4 million and $0.7 million in fiscal 1998, 1997 and 1996, respectively. As of June 30, 1998, the Company's largest restructured loan was secured by a 59 unit apartment complex located in Southern California and had a balance outstanding of $3.0 million, which represented 14% of all restructured loans. As of June 30, 1998, except for $222,000 of single-family restructured loans in Florida, all of the Company's loans were in the state of California. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Balance Sheet Analysis--Non-Performing Assets and Restructured Loans" for fiscal 1998 restructured loans activity. 14 The following table shows the Company's restructured loans by property type as of the dates indicated (in thousands):
June 30 ----------------------------------------------- 1998 1997 1996 1995 1994 --------- -------- -------- --------- -------- Single-family 1-4 units........................................... $ 2,138 $ 2,168 $3,222 $ 4,601 $ -- Multi-family: 5-36 units...................................................... 5,074 3,676 2,197 10,717 5,338 37 or more units................................................ 6,782 18,331 2,251 7,462 14,456 Non-residential................................................... 7,471 6,889 1,524 15,762 14,424 ------- ------- ------ ------- ------- $21,465 $31,064 $9,194 $38,542 $34,218 ======= ======= ====== ======= =======
POTENTIAL PROBLEM ASSETS Impaired Loans Impaired secured loans are carried in the Company's accounting records at the fair value of the collateral securing the loan less estimated selling costs. Impaired unsecured loans are recorded at the present value of the expected future cash flows from the loans, discounted at the loan's effective interest rate, or at the loan's observable market price. Impaired loans exclude large groups of smaller balance homogeneous loans that are collectively evaluated for impairment. For the Company, loans collectively reviewed for impairment include single-family loans with unpaid balances of less than $500,000, substantially all consumer loans, business banking loans with principal balances less than $100,000, and performing multi-family and non-residential real estate loans ("income property loans") with principal balances of less than $1 million, excluding loans which have entered the workout process. The Company considers a loan to be impaired when, based upon current information and events, it believes it is probable that the Company will be unable to timely collect all amounts due according to the contractual terms of the loan agreement. Non-accrual income property loans, non-accrual single-family loans or borrowing relationships with unpaid balances greater than $500,000, non-accrual business banking loans with unpaid balances of greater than $100,000, troubled debt restructurings, and certain performing loans are measured individually for impairment. Loans not included in the preceding categories are collectively measured for impairment. Specific valuation allowances are established for impaired collateralized loans at the difference between the loan amount and the fair value of the related collateral, reduced by estimated selling costs, and for unsecured loans at either the present value of the expected future cash flows from the loan, discounted at the loan's effective interest rate, or at the loan's observable market price. Impairment losses are recognized through an increase in the allowance for loan losses and a corresponding charge to the provision for loan losses. Adjustments to impairment losses due to changes in the fair value of the collateral properties for impaired loans are included in the provision for loan losses. While a loan is on non-accrual status, interest is recognized only as cash is received and only if no portion of the loan's balance is classified "Doubtful." Impaired loans may be left on accrual status during the period the Company is pursuing repayment of the loan. When an impaired loan is either sold, transferred to real estate acquired in settlement of loans ("REO") or written down, any related valuation allowance is charged off against the allowance for loan losses. Impaired loans are placed on non-accrual status at the point that either: (1) they become 90 days delinquent; or (2) the Company determines that the borrower is incapable of, or has ceased efforts toward, continuing performance under the terms of the loan. At June 30, 1998 and 1997, the recorded investments in loans identified by the Company as impaired totaled $109.9 million and $142.8 million, respectively, and the total specific allowance for loan losses related to such loans were $13.4 million and $14.0 million, respectively. See Note 8 of the Notes to Consolidated Financial Statements for additional information regarding impaired loans. 15 Classification of Assets Savings institutions are required under applicable law and regulations to review their assets on a regular basis and to classify them as "satisfactory", "special mention", "substandard", "doubtful" or "loss". An asset which possesses no apparent weakness or deficiency is designated "satisfactory". An asset which possesses weaknesses or deficiencies deserving close attention is designated as "special mention". An asset, or a portion thereof, is generally classified as "substandard" if it possesses a well-defined weakness which could jeopardize the timely liquidation of the asset or realization of the collateral at the asset's book value. These assets are characterized by the possibility that the institution will sustain some loss if the deficiencies are not corrected. An asset, or portion thereof, is classified as "doubtful" if a probable loss of principal and/or interest exists but the amount of the loss, if any, is subject to the outcome of future events which are undeterminable at the time of classification. If an asset, or portion thereof, is classified as "loss", the Company either establishes a specific valuation allowance equal to the amount classified as loss or charges off such amount. The Regional Director of the OTS has the authority to approve, disapprove or modify any asset classification or any amount established as an allowance pursuant to such classification. The Company monitors the level of assets within each of the asset classification categories and utilizes this information along with its review of the underlying collateral and other factors in determining the appropriate level of loss allowances it maintains from period to period. See "Credit Loss Experience" below for further information. SIGNIFICANT LOAN RELATIONSHIPS Most of the Company's gross loan portfolio consists of loans with individual balances of less than $1 million. At June 30, 1998 the Company's largest borrower had eight performing loans secured by multi-family residential and non- residential properties with outstanding balances totaling $16.0 million. The second largest borrower at that date had six loans outstanding totaling $14.8 million, all of which were performing and secured by multi-family residential properties. The third largest borrower at that date was an investor in multi- family housing projects in Southern California with 14 performing loans outstanding totaling $14.1 million, of which four loans totaling $3.3 million were restructured. The fourth largest borrower at that date had five performing loans totaling $13.3 million which were secured by non-residential properties. The fifth largest borrower at that date had one performing loan with an outstanding balance of $13.0 million secured by a multi-family residential property. The Company had no other borrowing relationships exceeding $10 million at June 30, 1998. The Company's single-family residential and consumer loans are relatively homogeneous and typically no single loan is individually significant in terms of size or risk of loss. The Company reviews most of its single-family residential and consumer portfolios by analyzing the performance and the composition of these portfolios as a whole. The Company's monitoring process for non- homogeneous multi-family residential and non-residential loans encompasses a periodic review of the individual loans. The Company reviews--annually if rated "satisfactory" or quarterly if rated "special mention", "substandard", "doubtful", or "loss"--any loan with an unpaid principal balance of more than $1 million, and any relationship with a single borrower whose aggregate loan balances exceed $3 million. The reviews are based on information available and generally include analysis of operating statements, occupancy levels, debt coverage, the condition and the appraised value of the collateral, the borrower's financial strength and other factors. The Company periodically reviews all individual commercial loans with a balance of $100,000 or more. Loans that are rated "satisfactory" are reviewed at least annually, and those that are rated "special mention", "substandard", "doubtful" or "loss" are reviewed quarterly. The Company maintains special departments with responsibility for resolving problem loans and liquidating collateral or selling foreclosed real estate. 16 CREDIT LOSS EXPERIENCE Credit losses are inherent in the business of lending. The allowance for loan losses is established to provide for such losses and is based on management's assessment of trends in the homogeneous portfolio as well as the results of management's periodic review of the individual loans in the non-homogeneous portfolio. Specific valuation allowances are established for impaired loans at the difference between the loan amount and the fair value of the collateral less estimated selling costs. The general allowance for loan losses is based upon a number of factors, including asset classification, historical loss experience, loan portfolio composition, industry experience, prevailing and forecasted economic and market conditions and management's judgment. Since the factors on which the general allowance is based are subject to change from time to time as a result of changes in relevant conditions and management's knowledge thereof, no assurance can be given that additional provisions for loss will not be required in future periods as a result of changes in economic and market conditions, management's assessments thereof or other factors. OTS examiners review the Company's allowances for estimated losses and may require the Company to make additions to such allowances based on their judgments of the information available to them at the time of their examination. 17 The following table summarizes activity in the allowance for loan losses during the periods indicated (in thousands):
Years Ended June 30 ----------------------------------------------------------- 1998 1997 1996 1995 1994 --------- ----------- ----------- ------------ ------------ Allowance for loan losses, beginning balance.......... $163,759 $186,756 $209,142 $ 320,714 $ 334,782 Provision for loan losses............................. (1,727) 25,204 40,350 66,150 139,726 -------- -------- -------- --------- --------- 162,032 211,960 249,492 386,864 474,508 -------- -------- -------- --------- --------- Charge-offs: Single-family 1-4 units............................. (11,243) (25,773) (33,617) (37,194) (43,248) Multi-family: 5-36 units....................................... (6,239) (10,756) (13,175) (54,314) (39,743) 37 or more units................................. (551) (5,860) (7,923) (33,932) (28,149) Non-residential..................................... (5,619) (12,996) (14,490) (73,602) (43,675) -------- -------- -------- --------- --------- Total real estate............................. (23,652) (55,385) (69,205) (199,042) (154,815) Commercial.......................................... (1,992) (68) (974) (2,340) (6,353) Consumer............................................ (3,408) (3,043) (2,842) (4,595) (6,904) -------- -------- -------- --------- --------- Total charge-offs............................. (29,052) (58,496) (73,021) (205,977) (168,072) -------- -------- -------- --------- --------- Recoveries: Single-family 1-4 units............................. 272 167 149 334 1,013 Multi-family: 5-36 units....................................... -- 8 288 -- 440 37 or more units................................. 286 248 231 800 878 Non-residential..................................... 799 1,159 2,929 9,572 2,339 -------- -------- -------- --------- --------- Total real estate............................. 1,357 1,582 3,597 10,706 4,670 Commercial.......................................... 4,341 3,575 5,590 4,748 6,873 Consumer............................................ 901 1,062 1,098 1,840 2,735 -------- -------- -------- --------- --------- Total recoveries.............................. 6,599 6,219 10,285 17,294 14,278 -------- -------- -------- --------- --------- Net charge-offs............................... (22,453) (52,277) (62,736) (188,683) (153,794) -------- -------- -------- --------- --------- Additions due to acquisitions(1): Single-family 1-4 units............................. 5,968 -- -- 2,535 -- Non-residential..................................... 10,921 219 -- 14,815 -- Commercial.......................................... -- 3,857 -- -- -- Consumer............................................ 14 -- -- -- -- -------- -------- -------- --------- --------- Total additions............................... 16,903 4,076 -- 17,350 -- -------- -------- -------- --------- --------- Deletions due to sale of subsidiary(2): Single-family 1-4 units............................. -- -- -- (2,389) -- Multi-family: 5-36 units....................................... -- -- -- (1,282) -- 37 or more units................................. -- -- -- (401) -- Non-residential..................................... -- -- -- (2,127) -- Consumer............................................ -- -- -- (190) -- -------- -------- -------- --------- --------- Total deletions............................... -- -- -- (6,389) -- -------- -------- -------- --------- --------- Allowance for loan losses, ending balance............. $156,482 $163,759 $186,756 $ 209,142 $ 320,714 ======== ======== ======== ========= =========
________ (1) Represents the allowance for loan losses recorded in connection with the acquisitions of CENFED in fiscal 1998 and TransWorld and OneCentral in fiscal 1997, and with the acceptance of loans receivable as part of the consideration for assuming the deposit liabilities of Union Federal in fiscal 1995. For additional information, see Note 4 of the Notes to Consolidated Financial Statements. (2) Represents the reduction of the allowance for loan losses due to the sale of University Savings. 18 The following table indicates the ratio of the Company's charge-offs (net of recoveries) to average gross loans by category for the periods indicated (dollars in thousands):
YEARS ENDED JUNE 30 ------------------------------------------------------------------------------ 1998 1997 1996 1995 1994 ------------------------------------------------------------------------------ Single-family 1-4 units: Average gross loans................ $ 9,588,733 $ 8,201,070 $ 6,952,741 $ 5,958,760 $ 5,823,737 Net charge-offs.................... 10,971 25,606 33,468 36,860 42,235 Net charge-offs/average gross loans...................... 0.11% 0.31% 0.48% 0.62% 0.73% Multi-family 5-36 units: Average gross loans................ 1,491,203 1,521,046 1,619,099 1,797,216 2,054,056 Net charge-offs.................... 6,239 10,748 12,887 54,314 39,303 Net charge-offs/average gross loans...................... 0.42% 0.71% 0.80% 3.02% 1.91% Multi-family 37 or more units: Average gross loans................ 329,314 372,734 439,609 521,496 633,694 Net charge-offs.................... 265 5,612 7,692 33,132 27,271 Net charge-offs/average gross loans...................... 0.08% 1.51% 1.75% 6.35% 4.30% Non-residential: Average gross loans................ 1,282,947 1,282,119 1,493,908 1,715,168 1,940,320 Net charge-offs.................... 4,820 11,837 11,561 64,030 41,336 Net charge-offs/average gross loans...................... 0.38% 0.92% 0.77% 3.73% 2.13% Commercial: Average gross loans................ 225,288 85,226 16,618 35,028 66,061 Net charge-offs (recoveries)..................... (2,349) (3,507) (4,616) (2,408) (520) Net charge-offs (recoveries)/ average gross loans.............. (1.04)%(1) (4.11)%(1) (27.78)% (6.87)% (0.79)% Consumer: Average gross loans................ 135,367 96,922 76,880 93,826 135,704 Net charge-offs.................... 2,507 1,981 1,744 2,755 4,169 Net charge-offs/average gross loans...................... 1.85% 2.04% 2.27% 2.94% 3.07% Total: Average gross loans................ $13,052,852 $11,559,117 $10,598,855 $10,121,494 $10,653,572 Net charge-offs.................... 22,453 52,277 62,736 188,683 153,794 Net charge-offs/average gross loans...................... 0.17% 0.45% 0.59% 1.86% 1.44%
__________ (1) Excluding business banking loans from the average gross loan balances, this ratio would have been (201.3)% and (68.4)% in fiscal 1998 and 1997, respectively. 19 The following tables set forth the allocation of Golden State's allowance for loan losses by property type as of the dates indicated (dollars in thousands):
JUNE 30, 1998 ------------------------------------------------------ PERCENT OF PERCENT OF LOANS TO ALLOWANCE TOTAL GROSS TO GROSS LOANS LOANS ALLOWANCE LOANS ------------------------------------------------------ Single-family 1-4 units................ 74.11% $10,355,638 $ 48,568 0.47% Multi-family: 5-36 units............................ 10.77 1,504,858 31,087 2.07 37 or more units...................... 2.24 313,575 11,724 3.74 Non-residential........................ 9.73 1,358,880 30,988 2.28 Commercial............................. 2.08 290,515 11,749 4.04 Consumer............................... 1.07 150,050 22,366 14.91 ------ ----------- -------- 100.00% $13,973,516 $156,482 1.12% ====== =========== ======== JUNE 30, 1997 --------------------------------------------------------- PERCENT OF PERCENT OF LOANS TO ALLOWANCE TOTAL GROSS TO GROSS LOANS LOANS ALLOWANCE LOANS --------------------------------------------------------- Single-family 1-4 units................ 72.71% $ 8,821,828 $ 52,579 0.60% Multi-family: 5-36 units............................ 12.18 1,477,549 43,852 2.97 37 or more units...................... 2.84 345,052 16,496 4.78 Non-residential........................ 9.95 1,207,013 35,280 2.92 Commercial............................. 1.32 160,061 7,552 4.72 Consumer............................... 1.00 120,685 8,000 6.63 ----- ----------- -------- 100.00% $12,132,188 $163,759 1.35% ====== =========== ======== JUNE 30, 1996 --------------------------------------------------------- PERCENT OF PERCENT OF LOANS TO ALLOWANCE TOTAL GROSS TO GROSS LOANS LOANS ALLOWANCE LOANS --------------------------------------------------------- Single-family 1-4 units.............. 69.00% $ 7,580,312 $ 56,833 0.75% Multi-family: 5-36 units.......................... 14.24 1,564,542 48,628 3.11 37 or more units.................... 3.65 400,415 26,062 6.51 Non-residential...................... 12.35 1,357,225 47,260 3.48 Commercial........................... 0.09 10,391 4,699 45.22 Consumer............................. 0.67 73,158 3,274 4.48 ------ ----------- -------- 100.00% $10,986,043 $186,756 1.70% ====== =========== ======== JUNE 30, 1995 --------------------------------------------------------- PERCENT OF PERCENT OF LOANS TO ALLOWANCE TOTAL GROSS TO GROSS LOANS LOANS ALLOWANCE LOANS --------------------------------------------------------- Single-family 1-4 units.............. 61.94% $ 6,325,170 $ 44,483 0.70% Multi-family: 5-36 units.......................... 16.39 1,673,656 41,736 2.49 37 or more units.................... 4.69 478,803 31,569 6.59 Non-residential...................... 15.97 1,630,590 83,086 5.10 Commercial........................... 0.22 22,844 4,176 18.28 Consumer............................. 0.79 80,603 4,092 5.08 ------ ----------- -------- 100.00% $10,211,666 $209,142 2.05% ====== =========== ========
June 30, 1994 ------------------------------------------------------ PERCENT OF PERCENT OF LOANS TO ALLOWANCE TOTAL GROSS TO GROSS LOANS LOANS ALLOWANCE LOANS ------------------------------------------------------ Single-family 1-4 units................................. 55.75% $ 5,592,349 $ 44,667 0.80% Multi-family: 5-36 units............................................. 19.15 1,920,777 65,878 3.43 37 or more units....................................... 5.62 564,188 61,867 10.97 Non-residential......................................... 17.94 1,799,746 137,775 7.66 Commercial.............................................. 0.47 47,212 6,052 12.82 Consumer................................................ 1.07 107,049 4,475 4.18 ------ ----------- -------- 100.00% $10,031,321 $320,714 3.20% ====== =========== ========
The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any other category. The Company's allowance for loan losses, expressed both in dollars and as a percent of loans receivable, decreased during fiscal 1998, reflecting reduced levels of delinquencies and charge-offs, continued improvements in classified asset levels, and a 15% increase in the size of the gross loan portfolio from $12.1 billion at June 30, 1997 to $14.0 billion at June 30, 1998. The increases in allowance allocations to consumer and commercial lending reflect growth in the respective loan portfolios and the Company's limited experience to date in managing the credit performance of these new lines of business. 20 The following tables compare the Company's gross loans, allowance for loan losses, non-accrual loans and non-performing assets ("NPAs") by property type as of the dates indicated (dollars in thousands):
PERCENT OF NON- ALLOWANCE TO PERCENT OF PERCENT OF GROSS ACCRUAL NON-ACCRUAL NPAS TO ALLOWANCE JUNE 30, 1998 LOAN ALLOWANCE LOANS LOANS NPAs(1) GROSS LOANS TO NPAs - ------------- ----------- --------- --------- ------------ ----------- ----------- ----------- Single-family 1-4 units........... $10,355,638 $ 48,568 $70,188 69.20% $ 93,194 0.90% 52.11% Multi-family: 5-36 units...................... 1,504,858 31,087 7,615 408.23 10,702 0.71 290.48 37 or more units................ 313,575 11,724 417 2,811.51 417 0.13 2,811.51 Non-residential................... 1,358,880 30,988 14,504 213.65 26,686 1.96 116.12 Commercial........................ 290,515 11,749 1,828 642.72 1,828 0.63 642.72 Consumer.......................... 150,050 22,366 1,442 1,551.04 1,442 0.96 1,551.04 ----------- -------- ------- -------- $13,973,516 $156,482 $95,994 163.01% $134,269 0.96% 116.54% =========== ======== ======= ========
PERCENT OF NON- ALLOWANCE TO PERCENT OF PERCENT OF GROSS ACCRUAL NON-ACCRUAL NPAs TO ALLOWANCE JUNE 30, 1998 LOANS ALLOWANCE LOANS LOANS NPAs(1) GROSS LOANS TO NPAs - ------------- ----------- --------- --------- ------------ ----------- ----------- ---------- Single-family 1-4 units............. $ 8,821,828 $ 52,579 $ 82,989 63.36% $117,105 1.33% 44.90% Multi-family: 5-36 units........................ 1,477,549 43,852 21,087 207.96 29,501 2.00 148.65 37 or more units.................. 345,052 16,496 3,121 528.55 5,054 1.46 326.39 Non-residential..................... 1,207,013 35,280 30,672 115.02 50,841 4.21 69.39 Commercial.......................... 160,061 7,552 859 879.16 859 0.54 879.16 Consumer............................ 120,685 8,000 1,567 510.53 1,598 1.32 500.63 ----------- -------- -------- -------- $12,132,188 $163,759 $140,295 116.72% $204,958 1.69% 79.90% =========== ======== ======== ========
__________ (1) Comprised of non-accrual loans and REO and other repossessed assets. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Allowance for Loan Losses" for discussion of the allowance for loan losses at June 30, 1998. REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS The procedures for foreclosure of the Company's real estate loans are governed by the laws of the states in which the loan collateral is located. In California, the Company normally utilizes the non-judicial foreclosure sale procedures available under applicable state law. In Florida, where the Company formerly had offices and where properties secured $799 million of its mortgage loans at June 30, 1998, judicial foreclosure is normally required. The borrowers' rights of redemption under the laws of the respective states are also different. In California, the right to cure the default and reinstate the loan terminates five days before the scheduled trustee sale under a deed of trust. In Florida, the borrower generally may cure the default under a mortgage at any time during foreclosure proceedings and until the certificate of title is issued, usually 10 days after the sale, by making all delinquent payments and paying all charges, including legal fees. Florida law permits a mortgage lender to seek a deficiency judgment against a borrower in default when the proceeds of the foreclosure sale are not sufficient to satisfy the loan balance. Such judgments are ordinarily not permitted or are impractical in California. In most foreclosure sales, the Company acquires title to the property. REO is recorded and carried at the lower of the recorded investment in the loan or the fair value of the asset received less selling costs. The fair value of the asset received is based on the current appraised value less estimated selling costs. See Note 9 of the Notes to Consolidated Financial Statements for information on the geographical location of REO as of June 30, 1998 and 1997. 21 The following table shows the Company's REO and other repossessed assets, net of specific valuation allowances, and gross of the general valuation allowance, by property type as of the dates indicated (in thousands):
JUNE 30 -------------------------------------------------- 1998 1997 1996 1995 1994 -------------------------------------------------- Single-family 1-4 units........................................ $23,006 $34,116 $39,693 $ 37,316 $ 43,231 Multi-family: 5-36 units................................................... 3,087 8,414 11,668 18,131 27,180 37 or more units............................................. -- 1,933 4,827 5,716 2,792 Non-residential................................................ 12,182 20,169 25,893 50,024 79,089 ------- ------- ------- -------- -------- Total real estate......................................... 38,275 64,632 82,081 111,187 152,292 Other repossessed assets....................................... -- 31 123 93 127 ------- ------- ------- -------- -------- $38,275 $64,663 $82,204 $111,280 $152,419 ======= ======= ======= ======== ========
See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Balance Sheet Analysis--Non-Performing Assets and Restructured Loans" for discussion regarding REO activity for fiscal 1998. MORTGAGE-BACKED SECURITIES The Company purchases mortgage-backed securities from time to time to meet its balance sheet size objectives, to augment loan originations and whole loan purchases, and to replace loan portfolio and mortgage-backed securities run-off. The Company's primary choice for such purposes for the last three fiscal years has been mortgage pass-through securities that are issued or guaranteed by certain agencies including the Government National Mortgage Association ("GNMA"), Fannie Mae ("FNMA") and Freddie Mac ("FHLMC"). These securities are backed by pools of fixed-rate and adjustable-rate single-family mortgage loans and are obtained either through cash purchase or through securitization of the Company's single-family mortgage loans. The Company uses these securities to collateralize borrowings, to secure public agency deposits, to reduce the Company's credit risk exposure through the agency guarantees of the securities and to reduce its regulatory capital requirements. During fiscal 1998, $584.1 million and $171.7 million of these securities were obtained through cash purchase and securitizations, respectively. The gross amount of these agency related securities totaled $1.6 billion at June 30, 1998. 22 The following tables summarize the composition of Golden State's held to maturity and available for sale mortgage-backed securities portfolios by security type as of the dates indicated (dollars in thousands):
JUNE 30 ------------------------------------------------------------------ 1998 1997 1996 1995 1994 ------------------------------------------------------------------ Held to maturity: FNMA.................................. $ 336,318 $ 422,701 $ 489,919 $ 579,486 $ 665,634 FHLMC................................. 221,364 266,272 298,090 329,081 100,879 GNMA.................................. 176,949 230,410 273,690 325,025 356,898 ---------- ---------- ---------- ---------- ---------- Total agency securities............ 734,631 919,383 1,061,699 1,233,592 1,123,411 Pass-through securities............... 156,263 212,595 256,781 1,499,337 1,867,312 Subordinated securities............... 17,422 21,926 25,855 31,909 36,720 Collateralized mortgage obligations... -- -- -- 1,878,117 2,037,867 Residual collateralized mortgage obligations........................ -- -- 277 4,760 7,043 ---------- ---------- ---------- ---------- ---------- Total gross........................ 908,316 1,153,904 1,344,612 4,647,715 5,072,353 Unamortized premiums.................. 8,417 11,557 14,664 77,369 98,154 Deferred loan origination fees........ (2,140) (2,636) (3,041) (3,677) (3,321) ---------- ---------- ---------- ---------- ---------- Total, at amortized cost........... 914,593 1,162,825 1,356,235 4,721,407 5,167,186 ---------- ---------- ---------- ---------- ---------- Available for sale: GNMA.................................. 485,221 514,321 113,181 1,840 60,115 FHLMC................................. 242,722 44,859 142 161 109,135 FNMA.................................. 163,745 14,133 28 32 36 ---------- ---------- ---------- ---------- ---------- Total agency securities............ 891,688 573,313 113,351 2,033 169,286 Pass-through securities............... 512,961 496,784 704,586 -- 33,301 Collateralized mortgage obligations... 50,104 24,831 58,357 -- -- Residual collateralized mortgage obligations........................ -- 100 -- -- -- ---------- ---------- ---------- ---------- ---------- Total gross........................ 1,454,753 1,095,028 876,294 2,033 202,587 Unrealized (loss) gain................ (4,914) (2,320) (16,076) 53 (4,765) Unamortized premiums (discounts)......................... 10,931 24,001 24,337 (36) (1,176) Deferred loan origination fees........ -- -- -- -- (53) ---------- ---------- ---------- ---------- ---------- Total, at fair value............... 1,460,770 1,116,709 884,555 2,050 196,593 ---------- ---------- ---------- ---------- ---------- Total mortgage-backed securities, net... $2,375,363 $2,279,534 $2,240,790 $4,723,457 $5,363,779 ========== ========== ========== ========== ========== Weighted average yield on mortgage- backed securities portfolio at end of period................................. 6.37% 6.78% 6.26% 6.30% 5.28% ========== ========== ========== ========== ==========
23 The following table presents the Company's gross mortgage-backed securities portfolio (before adjustment for unamortized premiums and discounts, deferred loan origination fees, and any unrealized loss on mortgage-backed securities available for sale) by note type and the distribution of adjustable-rate mortgage-backed securities among the major underlying indices at the dates indicated (dollars in millions):
JUNE 30, 1998 JUNE 30, 1997 -------------------------------------------------------------- PERCENT PERCENT AMOUNT OF TOTAL AMOUNT OF TOTAL -------------------------------------------------------------- Adjustable-rate: 6-month Treasury Bills....................................... $ 322 14% $ 411 18% 1-Year Treasury Bills (1).................................... 1,237 52 1,285 57 11th District Cost of Funds.................................. 334 14 131 6 Prime........................................................ 6 -- 8 -- Other........................................................ 129 6 117 6 ------ --- ------ --- 2,028 86 1,952 87 Fixed-rate..................................................... 335 14 297 13 ------ --- ------ --- $2,363 100% $2,249 100% ====== === ====== === - ----------------------
(1) Includes $204 million and $239 million at June 30, 1998 and 1997, respectively, of mortgage-backed securities with interest rates that are fixed for three to five years and then convert to adjustable rates for the remainder of the loan term. The following table sets forth the activity in the Company's mortgage-backed securities portfolio for the periods indicated (in thousands):
YEARS ENDED JUNE 30 -------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------------------------------------------------------------------- Mortgage-backed securities, beginning balance.......................................... $2,279,534 $2,240,790 $ 4,723,457 $5,363,779 $ 4,044,744 Purchases........................................... 584,101 498,066 115,595 958 3,524,460 Loans exchanged for mortgage-backed securities....................................... 171,737 42,222 145,826 268,436 1,470,844 Acquisitions(1)..................................... 355,972 5,909 -- 23,963 -- Sales(2)............................................ (294,767) (42,222) (1,838,289) (12,099) (1,223,167) Principal repayments................................ (702,906) (475,949) (851,974) (711,881) (2,474,146) Amortization of unearned premium.................... (13,393) (10,486) (20,810) (19,786) (58,316) Other changes....................................... (4,915) 21,204 (33,015) (3,214) 79,360 University Savings mortgage-backed securities sold(1).......................................... -- -- -- (186,699) -- ---------- ---------- ----------- ---------- ----------- Net increase (decrease)............................. 95,829 38,744 (2,482,667) (640,322) 1,319,035 ---------- ---------- ----------- ---------- ----------- Mortgage-backed securities, ending balance.......... $2,375,363 $2,279,534 $ 2,240,790 $4,723,457 $ 5,363,779 ========== ========== =========== ========== ===========
__________ (1) Represents mortgage-backed securities acquired from CENFED in fiscal 1998, TransWorld and OneCentral in fiscal 1997, and from Union Federal in fiscal 1995. For information regarding the CENFED, TransWorld and OneCentral transactions, see Note 4 of the Notes to Consolidated Financial Statements. (2) Includes loans originated by the Company and converted to mortgage-backed securities. 24 The following table summarizes the contractual maturities of the Company's gross mortgage-backed securities portfolio as of June 30, 1998 (dollars in thousands):
------------------------------------------------------------------------------------ DUE AFTER YEAR 1 DUE AFTER YEAR 5 DUE IN YEAR 1 THROUGH YEAR 5 THROUGH YEAR 10 DUE AFTER YEAR 10 TOTAL ------------------------------------------------------------------------------------ Held to maturity: FNMA................................. $ -- $5,594 $ -- $ 330,724 $ 336,318 FHLMC................................ -- -- -- 221,364 221,364 GNMA................................. -- -- -- 176,949 176,949 ------ ------ ------ ---------- ---------- Total agency securities........... -- 5,594 -- 729,037 734,631 Pass-through securities.............. -- -- -- 156,263 156,263 Subordinated securities.............. -- -- -- 17,422 17,422 ------ ------ ------ ---------- ---------- $ -- $5,594 $ -- $ 902,722 $ 908,316 ====== ====== ====== ========== ========== Weighted average coupon -- 6.50% -- 7.01% 7.01% rate............................... ====== ====== ====== ========== ========== Available for sale: GNMA................................. $ -- $ -- $ 109 $ 485,112 $ 485,221 FHLMC................................ 1,310 496 10 240,906 242,722 FNMA................................. 273 2,917 -- 160,555 163,745 ------ ------ ------ ---------- ---------- Total agency securities........... 1,583 3,413 119 886,573 891,688 Pass-through securities.............. -- -- -- 512,961 512,961 Collateralized mortgage obligations.. -- -- 6,828 43,276 50,104 ------ ------ ------ ---------- ---------- $1,583 $3,413 $6,947 $1,442,810 $1,454,753 ====== ====== ====== ========== ========== Weighted average coupon rate............................... 7.55% 6.09% 7.06% 6.92% 6.92% ====== ====== ====== ========== ========== Total gross mortgage-backed securities............................ $1,583 $9,007 $6,947 $2,345,532 $2,363,069 ====== ====== ====== ========== ========== Weighted average coupon rate on total gross mortgage-backed securities portfolio at end of 7.55% 6.35% 7.06% 6.96% 6.96% period............................. ====== ====== ====== ========== ==========
LIQUIDITY AND INVESTMENTS The Company is required by federal regulations to maintain a specified minimum amount of liquid assets which may be invested in specified types of securities and is also permitted to make certain other securities investments. The balance of securities investments maintained by the Company in excess of regulatory requirements reflects management's objective of maintaining liquidity at a level necessary to meet operating requirements, taking into account anticipated cash flows and available sources of credit, to afford future flexibility to meet withdrawal requests and loan commitments or to make other investments. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations", for discussion of the Company's current investing strategies. The OTS currently requires savings institutions to maintain eligible liquid assets as defined by federal regulations in an amount equal to or greater than 4% of average deposits and borrowings. This liquidity requirement may be changed from time to time by the OTS Director to any amount within the range of 4% to 10% and the OTS Director has the authority to prescribe different liquidity requirements for different classes of savings institutions, which classes may be determined in accordance with criteria selected by the OTS Director. See "Regulation" below. The Company's qualified regulatory liquidity percentage of 4.38% for the month of June 1998 exceeded the regulatory requirement. 25 The following table summarizes Golden State's cash and short-term, highly liquid securities by type at the dates indicated (in thousands):
JUNE 30 ----------------------------------------------------- 1998 1997 1996 1995 1994 ----------------------------------------------------- Federal funds sold......................................... $ 27,000 $ -- $ 33,000 $ 16,000 $ 45,961 Securities purchased under resale agreements............... 145,000 482,000 375,000 280,000 270,000 Whole loans purchased under resale agreements.............. -- 150,000 25,000 -- -- -------- -------- -------- -------- -------- 172,000 632,000 433,000 296,000 315,961 Cash and amounts due from banks............................ 311,278 221,557 153,608 139,697 164,576 -------- -------- -------- -------- -------- $483,278 $853,557 $586,608 $435,697 $480,537 ======== ======== ======== ======== ========
The following table summarizes the carrying amount of Golden State's other investments (excluding Federal Home Loan Bank ("FHLB") stock) at the dates indicated (in thousands):
JUNE 30 ----------------------------------------------------- 1998 1997 1996 1995 1994 ----------------------------------------------------- Certificates of deposit.................................... $ 2,200 $ 4,005 $ 10,786 $10,059 $ 13,716 U.S. Government and Federal agency obligations............. 39,471 25,690 8,086 17,354 148,056 Obligations of municipalities(1)........................... 83,763 -- -- -- -- Equity securities.......................................... 2,915 2,104 5 5 52 Commercial paper........................................... -- -- -- 14,908 1,564 FHLB deposits.............................................. -- -- -- -- 1,668 Mortgage-backed collateralized notes....................... -- -- -- -- 605 Other...................................................... -- -- -- -- 379 -------- ------- -------- ------- -------- $128,349 $31,799 $ 18,877 $42,326 $166,040 ======== ======= ======== ======= ========
- ------------------------ (1) Acquired in the April 1998 CENFED merger. Shown below are the carrying amounts and weighted average rates of other investments (excluding FHLB stock) at June 30, 1998, with related remaining terms to maturity (dollars in thousands):
WEIGHTED CARRYING AVERAGE AMOUNT RATE -------------------------- Certificates of deposit maturing within 1 year............................................... $ 2,200 5.55% U.S. Government and Federal agency obligations: Maturing within 1 year..................................................................... 12,404 5.06 Maturing in 1-5 years...................................................................... 25,040 5.59 Maturing in 5-10 years..................................................................... 2,027 5.75 Obligations of municipalities: Maturing after 10 years.................................................................... 83,763 3.81 Equity securities............................................................................ 2,915 -- -------- $128,349 4.23% ========
MORTGAGE LOAN SERVICING ACTIVITIES The Company services mortgage loans for other loan investors in exchange for servicing fees. Mortgage loan servicing activities include: collecting payments from borrowers; forwarding the payments to the loans' investors along with an accounting of the allocation of the payments, the loans' payment status, and custodial funds held by the Company; holding impounded borrower funds for the payment of taxes and insurance; if necessary, foreclosing on delinquent borrowers; and advancing corporate funds when impounded funds on hand are inadequate to pay property taxes and insurance, or as otherwise needed to protect the investors' interest in the loans. 26 The Company enters into agreements to service mortgage loans for others primarily through the purchase of servicing rights from other servicers, and, to a lesser extent, through the sale of mortgage loans it has originated while retaining the right to service the loans. Of the Company's $25.3 billion in unpaid principal balance of mortgage loans serviced for others at June 30, 1998, approximately $22.9 billion was obtained through the purchase of servicing agreements and $2.4 billion was obtained through the sale of Company-originated mortgage loans with servicing rights retained. The Company receives fees from loan investors, generally expressed as a percent of the unpaid balance of the mortgage loans serviced, and retains any late charges or other fees collected from the borrowers. Servicing fees are collected from the borrowers' payments, or in the event of default by the borrower, from the investor's proceeds from foreclosure of the real estate collateral. During the period the borrower is not making payments, the Company receives no fees and may be required to advance corporate funds to meet contractual principal and interest pass-through requirements for certain investors, maintain current property taxes and insurance, move the loan through the foreclosure process, and to obtain title to, prepare and market foreclosed real estate collateral. The Company generally recovers advanced funds from borrowers of reinstated and performing loans, and from investors of foreclosed loans. At June 30, 1998 and 1997, 0.98% and 1.11%, respectively, of the Company's mortgage loans serviced for others were delinquent 30 days or more. The following table summarizes the activity in the Company's portfolio of mortgage loans serviced for others for the periods indicated (in millions):
YEARS ENDED JUNE 30 ----------------------------------------- 1998 1997 1996 1995 ----------------------------------------- Portfolio of mortgage loans serviced for others, beginning balance.... $29,598 $14,168 $11,678 $10,085 Add: Servicing purchased............................................. -- 17,184 3,696 2,803 Servicing acquired in the CENFED merger......................... 447 -- -- -- Servicing retained on loans sold................................ 386 92 -- -- Less: Amortization, prepayments and foreclosures...................... (5,162) (1,846) (1,206) (1,210) ------- ------- ------- ------- Portfolio of mortgage loans serviced for others, ending balance...... $25,269 $29,598 $14,168 $11,678 ======= ======= ======= =======
The Company's Consolidated Statements of Financial Condition include "Mortgage Servicing Assets" ("MSA") recorded at the lower of the amortized cost or the estimated fair value of servicing rights acquired by the Company through purchase, merger or retention of the servicing rights relating to mortgage loans sold. As more fully discussed in Note 1 of the Notes to Consolidated Financial Statements, effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS 125"). SFAS 125 requires the recognition of a servicing asset or liability for mortgage loans sold where the Company retains the servicing rights. The amount recognized is an allocation of the carrying value of the mortgage loan sold based on the relative fair value of the mortgage loan to the servicing rights retained. SFAS 125 also requires recognition of a valuation allowance for impairment, if any, in the fair value of the MSA. 27 The following table summarizes activity in the Company's MSA and the related valuation allowance for the periods indicated (in thousands):
YEARS ENDED JUNE 30 ------------------------------------------------ 1998 1997 1996 1995 ------------------------------------------------ MORTGAGE SERVICING ASSETS ACTIVITY: MSA, beginning balance............................................. $288,519 $127,399 $ 99,122 $ 68,719 Purchases.......................................................... 1,021(1) 187,343 50,836 51,537 Addition due to CENFED acquisition................................. 8,318 -- -- -- Servicing rights on loans sold with servicing rights retained...... 4,890 1,119 -- -- Amortization....................................................... (49,245) (27,342) (22,559) (19,131) Decrease due to sale of University Savings......................... -- -- -- (2,003) -------- -------- -------- -------- MSA, ending balance................................................ $253,503 $288,519 $127,399 $ 99,122 ======== ======== ======== ======== VALUATION ALLOWANCE ACTIVITY: MSA valuation allowance, beginning balance......................... $ (4,047) $ -- Additions charged to loan servicing income......................... (6,142) (4,047) -------- -------- MSA valuation allowance, ending balance............................ $(10,189) $ (4,047) ======== ========
- -------------- (1) Consists of capitalized costs and adjustments related to prior years' purchases. The fair values of the Company's MSA at June 30, 1998 and 1997 were $297.6 million and $353.5 million, respectively. The fair value of the Company's servicing portfolio is estimated by applying market assumptions for the serviced loans to estimate servicing-related income and expenses over the underlying loans' estimated lives, and discounting the estimated future net servicing income at the current market discount rate. The assets are summarized by risk attribute strata and a valuation allowance is recorded as the sum of the impairment amounts for all strata with impairment. For purposes of defining impairment strata, the Company groups loans by interest rate, by whether the loan is government-insured, and by whether the loan has a fixed or adjustable interest rate. Fair value is significantly influenced by market prepayment expectations. Prepayment expectations are influenced by the difference between the mortgage loans' interest rates and current market interest rates. During periods of decreasing interest rates, the market anticipates that homeowners will be more likely to refinance their existing mortgage loans; during periods of increasing interest rates, the market anticipates that homeowners will be less inclined to refinance their existing mortgage loans. The slower prepayments anticipated in times of rising interest rates result in a longer estimated period of net servicing income for the existing servicing portfolio, and therefore increases its value. Conversely, the faster prepayments anticipated in times of declining interest rates result in a shorter estimated period of net servicing income and therefore decreases the value of the Company's servicing portfolio. The following table summarizes the Company's portfolio of mortgage loans serviced for others by interest rate at June 30, 1998 (dollars in thousands):
WEIGHTED AVERAGE WEIGHTED AVERAGE INTEREST NUMBER OF PRINCIPAL SERVICE FEE REMAINING CONTRACTUAL RATE LOANS BALANCE (IN BASIS POINTS) TERM (IN MONTHS) ---- ------------------------------------------------------------------------- Less than 6.5%...................................... 4,315 $ 468,537 33.7 177 6.50-6.99........................................... 18,301 2,466,816 26.3 194 7.00-7.49........................................... 49,619 7,358,008 29.2 262 7.50-7.99........................................... 58,560 8,582,464 26.7 280 8.00-8.49........................................... 36,690 3,837,659 41.6 283 8.50-8.99........................................... 26,079 1,621,156 48.5 261 9.00-9.49........................................... 6,472 276,897 49.6 212 9.50-9.99........................................... 6,180 245,699 56.1 191 10.00 and over...................................... 6,754 411,649 36.3 188 ------- ----------- 212,970 $25,268,885 31.9 261 ======= ===========
28 The following table sets forth the geographic distribution of the Company's portfolio of mortgage loans serviced for others at June 30, 1998 (dollars in thousands):
PERCENT OF NUMBER OF PRINCIPAL TOTAL PRINCIPAL STATE LOANS BALANCE BALANCE ----- ------------------------------------------------- California................................................................. 124,228 $17,284,546 68% Florida.................................................................... 40,259 2,174,765 9 New York................................................................... 3,510 668,176 3 New Jersey................................................................. 3,379 557,339 2 Texas...................................................................... 6,473 547,006 2 Maryland................................................................... 2,497 431,016 2 Virginia................................................................... 2,033 360,284 1 Colorado................................................................... 3,134 328,764 1 Washington................................................................. 1,979 238,088 1 Others(1).................................................................. 25,478 2,678,901 11 ------- ----------- --- 212,970 $25,268,885 100% ======= =========== ===
- ------------- (1) No other state represents more than 1% of the Company's mortgage servicing portfolio measured by unpaid principal balance. DEPOSITS The Company's deposits are obtained primarily in California, where its branch offices are located. The Company attracts checking and other daily access type accounts as well as short-term and long-term certificate accounts from the general public by providing a wide assortment of accounts and interest rates. The Company's customer deposit accounts include savings, checking and money market accounts, certificates of deposit with fixed terms ranging from three months to five years, and negotiated rate $95,000 and over "jumbo" certificates with maturities ranging from 14 days to five years. Included among these savings programs are individual retirement accounts and Keogh retirement accounts. Jumbo certificates are obtained from a diverse customer base which includes state and local governments, private individuals, corporations and non-profit organizations. The following table sets forth information regarding the amounts of deposits in the various types of deposit programs offered by the Company as of the dates indicated (dollars in thousands):
JUNE 30 ----------------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------------------------------------------------------------------- Daily access: Checking............................. $ 1,812,869 $1,198,011 $ 778,980 $ 661,853 $ 850,112 Savings.............................. 477,199 452,225 492,777 551,905 1,236,446 Money-market......................... 2,379,249 2,119,553 1,719,319 1,272,012 1,038,944 ----------- ---------- ---------- ---------- ----------- Total daily access................ 4,669,317 3,769,789 2,991,076 2,485,770 3,125,502 ----------- ---------- ---------- ---------- ----------- Certificates with original maturities of: 6 months and under................... 706,779 803,849 955,203 870,733 1,426,838 Over 6 months to 18 months........... 3,328,793 2,951,465 2,797,297 2,758,070 3,428,317 Over 18 months to 30 months.......... 929,305 1,096,788 961,912 1,345,524 1,288,984 Over 30 months....................... 728,697 552,342 770,786 737,891 1,088,872 Jumbo certificates................... 335,374 182,676 247,702 536,892 561,293 ----------- ---------- ---------- ---------- ----------- Total certificates................ 6,028,948 5,587,120 5,732,900 6,249,110 7,794,304 ----------- ---------- ---------- ---------- ----------- $10,698,265 $9,356,909 $8,723,976 $8,734,880 $10,919,806 =========== ========== ========== ========== =========== Weighted average interest rate on deposits at end of period.......... 4.06% 4.37% 4.62% 5.13% 3.94% =========== ========== ========== ========== ===========
For information regarding the changes in the Company's deposit composition and the strategies that led to those decisions, see "Operating Strategies" above and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Balance Sheet Analysis--Deposits". 29 The following table sets forth information relating to the Company's deposit flows during the periods indicated (in thousands):
YEARS ENDED JUNE 30 --------------------------------------------------------------------- 1998 1997 1996 1995 1994 --------------------------------------------------------------------- Deposits, beginning balance.................... $ 9,356,909 $8,723,976 $8,734,880 $10,919,806 $11,615,529 Interest credited.............................. 412,559 402,863 432,992 398,861 423,132 Net deposits (decrease) increase............... (472,256) (175,087) (443,896) 608,417 (1,118,855) Acquisition of CENFED deposits................. 1,401,053 -- -- -- -- Acquisition of OneCentral Bank deposits........ -- 68,809 -- -- -- Acquisition of TransWorld Bank deposits........ -- 336,348 -- -- -- Sale of Florida franchise...................... -- -- -- (3,281,049) -- Sale of University Savings..................... -- -- -- (918,126) -- Acquisition of Independence One deposits....... -- -- -- 194,146 -- Acquisition of Union Federal deposits.......... -- -- -- 812,825 -- ----------- ---------- ---------- ----------- ----------- Net increase (decrease)........................ 1,341,356 632,933 (10,904) (2,184,926) (695,723) ----------- ---------- ---------- ----------- ----------- Deposits, ending balance....................... $10,698,265 $9,356,909 $8,723,976 $ 8,734,880 $10,919,806 =========== ========== ========== =========== ===========
For additional information with respect to the Company's deposit acquisitions in fiscal 1998 and 1997, see Note 4 of the Notes to Consolidated Financial Statements. The following table sets forth information regarding the remaining contractual maturities of deposits as of June 30, 1998 (dollars in thousands):
WEIGHTED AVERAGE TOTAL 3 MONTHS 4-6 7-12 13-24 25-36 OVER 36 RATE BALANCE OR LESS(1) MONTHS MONTHS MONTHS MONTHS MONTHS --------------------------------------------------------------------------------------------------------- Checking................ 0.31% $ 1,812,869 $1,812,869 $ -- $ -- $ -- $ -- $ -- Savings................. 2.00 477,199 477,199 -- -- -- -- -- Money-market............ 3.93 2,379,249 2,379,249 -- -- -- -- -- Certificates: 5.00% and lower....... 4.77 1,503,191 491,230 359,064 545,199 92,680 12,233 2,785 5.01%-6.00%............ 5.52 4,095,310 1,489,394 1,004,674 646,705 792,108 71,792 90,637 6.01%-7.00%............ 6.28 340,288 90,203 28,702 70,975 119,006 5,702 25,700 7.01%-8.00%............ 7.28 84,266 2,555 4,643 5,410 66,844 1,358 3,456 8.01%-9.00%............ 8.59 5,222 360 716 454 3,449 145 98 9.01%-10.00%........... 9.43 671 3 -- 668 -- -- -- ----------- ---------- ---------- ---------- ---------- ------- -------- Total certificates... 5.41 6,028,948 2,073,745 1,397,799 1,269,411 1,074,087 91,230 122,676 ----------- ---------- ---------- ---------- ---------- ------- -------- 4.06% $10,698,265 $6,743,062 $1,397,799 $1,269,411 $1,074,087 $91,230 $122,676 =========== ========== ========== ========== ========== ======= ========
__________ (1) Includes deposits with no stated maturity. For additional information with respect to deposits, see Note 13 of the Notes to Consolidated Financial Statements. 30 BORROWINGS The following table summarizes Golden State's consolidated borrowings by type at the dates indicated (dollars in thousands):
JUNE 30 ------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------------------------------------------------------------- Securities sold under agreements to repurchase............................ $ 175,551 $ 768,682 $ 758,050 $2,695,176 $2,306,274 Borrowings from FHLB...................... 5,613,458 4,788,000 3,838,000 3,495,000 2,443,428 Short-term borrowing...................... 45,000 -- -- -- -- Senior debentures......................... 18,866 -- -- -- -- Notes payable............................. 70 276 93 1,177 1,440 Subordinated debentures................... -- 10,506 10,506 14,227 14,280 Collateralized notes...................... -- -- -- 13,479 81,170 ---------- ---------- ---------- ---------- ---------- $5,852,945 $5,567,464 $4,606,649 $6,219,059 $4,846,592 ========== ========== ========== ========== ========== Weighted average interest rate on 5.61% 5.72% 5.87% 6.18% 4.65% borrowings at end of period.............. ========== ========== ========== ========== ==========
The Company sells securities under "reverse repurchase agreements" with securities dealers and the FHLB. Reverse repurchase agreements consist of sales of securities with a commitment by the Company to repurchase such securities for a predetermined price at a future date, typically ranging from one to 120 days after the date of initial sale. The proceeds are used to provide investment funds. Reverse repurchase transactions are treated as borrowings, with the repurchase obligations being reflected as a liability under the caption "Securities sold under agreements to repurchase" in the Consolidated Statements of Financial Condition, and the related interest expense being included in "Interest expense: Short-term borrowings" in the Consolidated Statements of Operations. The securities collateralizing the reverse repurchase agreements are included in the respective line items in the Consolidated Statements of Financial Condition. The FHLB System functions in a reserve credit capacity for savings institutions and certain other home financing institutions. As a member, the Company is required to own capital stock in the Federal Home Loan Bank of San Francisco and is authorized to apply for advances from the FHLB on the security of such stock and certain of its home mortgage loans and other assets. Such borrowings may be made pursuant to several different credit programs offered from time to time by the FHLB. Each credit program has its own interest rate and range of maturities, and the FHLB prescribes the acceptable uses to which the advances pursuant to each program may be put as well as limitations on the size of the advances. Depending upon the credit program used, FHLB advances bear interest at fixed rates or at adjustable rates tied to various indices. When the Company utilizes adjustable-rate programs, it generally obtains advances tied to LIBOR. The FHLB offers a full range of maturities up to 30 years at generally competitive rates. A prepayment penalty is normally imposed for early repayment of FHLB advances. The Company has a line of credit with the FHLB enabling the Company to borrow up to 35% of the total consolidated assets of Glendale Federal. Based on the amount of these assets at June 30, 1998, the Company's credit limit with the FHLB was $6.3 billion. The Company had borrowings outstanding from the FHLB at June 30, 1998 of $5.6 billion. All advances from the FHLB are collateralized with mortgage loans, mortgage-backed securities and FHLB stock. The Company is also a member of the Federal Reserve System and may borrow from the Federal Reserve Bank of San Francisco. Savings institutions are required to exhaust their FHLB borrowing capacity before borrowing from the Federal Reserve Bank. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Asset and Liability Management" for further information on the Company's liquidity. The short-term borrowing was obtained in June 1998 from a commercial bank to purchase shares of the Company's common stock in connection with its acquisition of RedFed in July 1998. See Note 24 of the Notes to Consolidated Financial Statements for more information on the RedFed acquisition. The Company made a $10 million principal payment on this borrowing in July 1998. The remaining $35 million is due on the earlier of November 16, 1998, or 15 days after the completion of the Cal Fed Merger, which is expected to take place on September 11, 1998. 31 The senior debentures were assumed in the CENFED acquisition in April 1998. The balance at June 30, 1998, in the above borrowings table includes $17,750,000 of principal and $1,116,000 of purchase accounting premium. The debentures bore interest at 11.17% and had a stated maturity of December 2001. The debentures were repaid in full prior to maturity in July 1998 in an amount that included principal, accrued interest and a $2.8 million premium over the Company's book value of such debentures. All of the subordinated debentures outstanding at June 30, 1997 were redeemed on September 16, 1997 at a redemption price equal to 100% of the principal amount together with accrued and unpaid interest from March 15, 1997 to the redemption date. In the past, the Company has utilized other sources of funds to supplement retail deposits. These sources included the issuance by the Company of subordinated debentures, collateralized notes, subordinated capital notes, commercial paper, medium-term notes and other short-term debt and the use by the Company's subsidiaries of commercial paper, lines of credit with banks and other notes payable. ASSET AND LIABILITY MANAGEMENT AND MARKET RISK Golden State's earnings depend primarily on its net interest income, which is the difference between the amounts it receives from interest earned on its loans and securities investments (its "interest-earning assets") and the amounts it pays in interest on its deposit accounts and borrowings (its "interest-bearing liabilities"). Net interest income is affected by (i) the difference (the "interest rate spread" as applied to a specified date and the "yield-cost spread" as applied to a specified period) between rates of interest earned on its interest-earning assets and rates paid on its interest-bearing liabilities and (ii) the relative amounts of its interest-earning assets and interest- bearing liabilities. See "Interest Rate Margin" below for information concerning the interest rate spread at the end of each of the past three fiscal years. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--Net Interest Income" for information concerning the yield-cost spread and a discussion of net interest income for the past three fiscal years. Market risk reflects changes in the value of collateral underlying loans receivable, the valuation of real estate held by the Company, and the valuation of loans held for sale, mortgage-backed securities available for sale and mortgage servicing assets. Changes in the value of collateral and real estate are primarily affected by economic and market conditions in the local communities in which the real estate is located. Changes in the value of loans, mortgage-backed securities and mortgage servicing assets are primarily affected by prevailing interest rates in the national credit markets. The Company's primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Company's net interest income and capital, while adjusting the Company's asset-liability structure to obtain the maximum yield-cost spread on that structure. The Company relies primarily on its asset-liability structure to control interest rate risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on different bases, than its interest-earning assets. If interest rates decline significantly from the June 30, 1998 levels, the Company's interest-earning assets could shrink due to timing differences between the runoff attributable to higher levels of prepayments on loans and mortgage- backed securities and the Company's ability to locate suitable investments to replace the runoff. A reduction in interest-earning assets or the yields thereon could adversely impact the Company's earnings. The Company actively monitors the impact of changes in interest rates on its net interest income. For this purpose, the Company utilizes various dynamic computer simulation models to measure the sensitivity of its net interest income and earnings forecasts to changes in market rates and possible offsetting changes in the Company's business strategies. Based on such analyses, the Company develops and implements short- and long-term strategies to mitigate the effects of adverse operating environments. 32 The OTS measures interest rate risk through a somewhat similar computer simulation model described in its Thrift Bulletin No. 13, "Interest Rate Risk Exposure: Guidelines on Director and Officer Responsibilities" ("TB 13"). Under TB 13, institutions are required to establish limits on the sensitivity of their net interest income and net portfolio value to changes in interest rates. Unlike the Company's analyses, under TB 13 changes in interest rates are defined to consist solely of instantaneous and sustained movements in interest rates in 100 basis point increments and no possible adjustments to a company's business strategies to reflect the assumed changes in interest rates are permitted to be taken into account. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Asset and Liability Management--Asset and Liability Management" for further information relating to the Bank's interest rate risk sensitivity at June 30, 1998 and 1997, as calculated in accordance with the requirements of TB 13. Another measure of the Company's exposure to differential changes in interest rates between assets and liabilities used by some companies and analysts, although not one used by the Bank in its interest rate risk management and planning activities, is shown in the following table, which sets forth the maturity and rate sensitivity of Golden State's interest-earning assets and interest-bearing liabilities as of June 30, 1998. "GAP", as reflected in the table, represents the estimated difference between the amount of interest- earning assets and interest-bearing liabilities repricing during future periods, based on certain assumptions, including those stated in the notes to the table. The interest rate sensitivity of the Company's assets and liabilities illustrated in the following table would vary substantially if different assumptions were used or if actual experience differs from the assumptions used. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Asset and Liability Management--Asset and Liability Management" for further discussion. 33
MATURITY/RATE SENSITIVITY ------------------------------------------- TOTAL PERCENT OF WITHIN OVER 6 TO 12 1-5 OVER 5 BALANCE TOTAL 6 MONTHS MONTHS YEARS YEARS ---------------------------------------------------------------------- (DOLLARS IN MILLIONS) Interest-earning Assets: Loans receivable(1): Single-family 1-4 units(2)(3)......................... $10,356 60.0% $3,727 $1,717 $ 3,506 $1,406 Multi-family and non-residential(2)(3)................ 3,177 18.4 2,797 162 114 104 Consumer and commercial(3)............................ 441 2.7 433 1 6 1 Mortgage-backed securities(2)(3)........................ 2,363 13.7 971 608 553 231 Investment securities(4)................................ 300 1.7 203 -- -- 97 Other assets(5)......................................... 611 3.5 300 -- -- 311 ------- ----- ------ ------ ------- ------ Total interest-earning assets....................... 17,248 100.0% $8,431 $2,488 $ 4,179 $2,150 ===== ------ ------ ------- ------ Non-interest-earning assets............................... 869 ------- Total assets.............................................. $18,117 ======= Interest-bearing Liabilities: Deposits: Checking(6)........................................... $ 1,813 11.0% $ 161 $ 147 $ 791 $ 714 Savings(6)............................................ 477 2.9 35 32 186 224 Money market(6)....................................... 2,379 14.4 417 344 1,272 346 Certificates(4)....................................... 6,029 36.4 3,472 1,269 1,276 12 Borrowings: FHLB(4)(7)............................................ 5,613 33.9 2,879 1,049 1,685 -- Other(4)(8)........................................... 240 1.4 240 -- -- -- ------- ----- ------ ------ ------- ------ Total interest-bearing liabilities... 16,551 100.0% $7,204 $2,841 $ 5,210 $1,296 ===== ------ ------ ------- ------ Non-interest-bearing liabilities.......................... 327 ------- Total liabilities......................................... 16,878 Stockholders' equity...................................... 1,239 ------- Total liabilities and stockholders' equity................ $18,117 ======= Maturity GAP.............................................. $1,227 $ (353) $(1,031) $ 854 Cumulative GAP............................................ $1,227 $ 874 $ (157) $ 697 As % of total assets...................................... 6.8% 4.8% (0.9)% 3.8% June 30, 1997 Cumulative GAP.............................. $1,924 $2,358 $ 631 $ 600 As % of total assets...................................... 11.9% 14.5% 3.9% 3.7%
__________ (1) Loan balances are net of loans in process. (2) ARM loans are predominantly included in the "within 6 months" and "over 6 to 12 months" categories, as they are subject to an interest adjustment every month, six months or twelve months, depending upon the terms of the applicable note. (3) Maturity/rate sensitivity is based upon contractual maturity, projected repayments and prepayments of principal. The prepayment experience reflected herein is based on the Company's historical experience. The Company's average Constant Prepayment Rate ("CPR") is 21.2% and 19.6% on its fixed- rate and adjustable-rate portfolios, respectively. The actual maturity and rate sensitivity of these assets could vary substantially if future prepayments differ from the Company's historical experience. (4) Based on the contractual maturity of the instrument. (5) Includes cash and demand deposits and FHLB stock, the latter earning a rate of return that varies quarterly. (6) In accordance with standard industry and regulatory practice, a decay factor, used to estimate deposit runoff, of 38.09% (CPR) per year has been applied to these deposits. (7) Includes $400 million and $300 million funded in March and April 1998, respectively, with a five-year term, but which the FHLB has the option to call after one year and which accordingly has been allocated to the "over 6 to 12 months" category. (8) Includes $18.9 million ($17.8 million principal plus $1.1 million premium) of fixed-rate senior debentures due 2001, but which were repaid in full in July 1998 and accordingly have been allocated to the "within 6 months" category. 34 The following table presents the gross balances, categorized by expected maturity, and fair values, of the Company's financial instruments that are sensitive to changes in interest rates at June 30, 1998. Interest rate sensitive instruments are generally defined as on and off balance sheet derivatives and other financial instruments. See Note 16 of the Notes to Consolidated Financial Statements for additional information regarding the fair values of the Company's financial instruments.
Expected Maturity Date (1) ----------------------------------------------------------------------------------- There- 1999 2000 2001 2002 2003 after ----------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Interest-sensitive assets: Loans receivable (2): Single-family 1-4 units.......... $ 2,001,762 $1,845,061 $1,483,930 $1,142,031 $ 878,506 $3,004,348 Average interest rate........... 7.67% 7.70% 7.66% 7.65% 7.63% 7.53% Multi-family and non-residential............. 297,444 277,885 260,444 235,347 223,144 1,882,833 Average interest rate........... 7.87% 7.75% 7.77% 7.69% 7.75% 7.62% Consumer and commercial.......... 100,431 60,471 245,672 3,400 3,060 27,531 Average interest rate........... 11.81% 10.56% 9.98% 8.89% 8.89% 8.89% Mortgage-backed securities (3).... 425,116 357,314 294,496 235,760 240,470 809,913 Average interest rate........... 7.16% 7.07% 7.03% 6.98% 6.97% 6.78% Investment securities............. 203,459 -- -- -- -- 96,890 Average interest rate........... 5.63% -- -- -- -- 3.73% Mortgage servicing assets (4)..... 48,101 39,166 31,254 25,247 20,622 89,113 ----------- ---------- ---------- ---------- ---------- ---------- Total interest-sensitive assets... $ 3,076,313 $2,579,897 $2,315,796 $1,641,785 $1,365,802 $5,910,628 =========== ========== ========== ========== ========== ========== Interest-sensitive liabilities: Deposits: Checking......................... $ 308,188 $ 255,796 $ 212,311 $ 176,218 $ 146,261 $ 714,095 Average interest rate........... 0.32% 0.32% 0.32% 0.32% 0.32% 0.32% Savings.......................... 66,808 57,455 49,411 42,494 36,544 224,487 Average interest rate........... 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% Money-market..................... 1,400,660 313,148 212,941 144,800 98,464 209,236 Average interest rate........... 3.96% 3.96% 3.96% 3.96% 3.96% 3.96% Certificates..................... 4,740,900 1,072,659 91,231 79,945 31,565 12,648 Average interest rate........... 5.36% 5.62% 5.62% 5.79% 5.79% 5.79% Borrowings: FHLB............................. 3,928,458 245,000 1,000,000 -- 440,000 -- Average interest rate........... 5.53% 5.53% 5.74% -- 5.97% -- Other............................ 239,417 -- -- 70 -- -- Average interest rate........... 6.23% -- -- 8.75% -- -- ----------- ---------- ---------- ---------- ---------- ---------- Total interest-sensitive $10,684,431 $1,944,058 $1,565,894 $ 443,527 $ 752,834 $1,160,466 liabilities.................... =========== ========== ========== ========== ========== ========== Total Gross Fair Balance Value ---------- ------------ Interest-sensitive assets: Loans receivable (2): Single-family 1-4 units.......... 10,355,638 $10,333,005 Average interest rate........... 7.63% Multi-family and non-residential............. 3,177,097 3,042,740 Average interest rate........... 7.68% Consumer and commercial.......... 440,565 405,642 Average interest rate........... 10.39% Mortgage-backed securities (3).... 2,363,069 2,382,325 Average interest rate........... 6.96% Investment securities............. 300,349 300,349 Average interest rate........... 5.02% Mortgage servicing assets (4)..... 253,503 297,557 ---------- ----------- Total interest-sensitive assets... 16,890,221 $16,761,618 ========== =========== Interest-sensitive liabilities: Deposits: Checking......................... 1,812,869 $ 1,812,869 Average interest rate........... 0.32% Savings.......................... 477,199 477,199 Average interest rate........... 2.00% Money-market..................... 2,379,249 2,379,249 Average interest rate........... 3.96% Certificates..................... 6,028,948 6,031,536 Average interest rate........... 5.42% Borrowings: FHLB............................. 5,613,458 5,614,652 Average interest rate........... 5.60% Other............................ 239,487 240,480 Average interest rate........... 6.23% ---------- ----------- Total interest-sensitive 16,551,210 $16,555,985 liabilities.................... ========== ===========
__________ (1) Expected maturities are contractual maturities adjusted for prepayments of principal. The Company uses certain assumptions to estimate expected maturities. For assets, expected maturities are based upon contractual maturity, projected repayments and prepayments of principal. The prepayment experience reflected herein is based on the Company's historical experience. The Company's CPR is 21.2% and 19.6% on its fixed-rate and adjustable-rate portfolios, respectively, for interest-earning assets (excluding investment securities, which do not have prepayment features). For deposit liabilities, in accordance with standard regulatory and industry practice, "decay factors", used to estimate deposit runoff, of 38.09% CPR per year have been applied. The actual maturities of these instruments could vary substantially if future prepayments differ from the Company's or the industry's historical experience. (2) Loans receivable balances are presented gross of unearned discounts/premiums, deferred loan fees and allowance for loan losses. (3) Mortgage-backed securities balances are presented gross of unearned discounts/premiums, deferred loan fees and unrealized loss. (4) Mortgage servicing assets balances are presented gross of the valuation allowance. 35 The Company continually evaluates interest rate risk management opportunities, including the use of derivative financial instruments. Management believes that derivative instruments currently available are not cost-effective, and therefore, has focused its efforts on increasing the Company's yield-cost spread by attracting lower-costing retail deposits, principally checking accounts from businesses and individuals. In the past, the Company has used derivatives, primarily interest rate exchange agreements, as a component of its interest rate risk management strategy. The purpose of the interest rate exchange agreements was to reduce the effect of rising interest rates on short-term deposits and FHLB advances, and the effect thereof on interest expense. The Company currently has no interest rate exchange agreements or other off-balance sheet derivatives. The Company carried $356,000 of interest-only strips in its Consolidated Statements of Financial Condition at June 30, 1998. INTEREST RATE MARGIN The following table provides information concerning the weighted average yield/cost of interest-earning assets and interest-bearing liabilities at the end of each of the past three fiscal years:
JUNE 30 ----------------------------------- 1998 1997 1996 ----------------------------------- Interest-earning assets: Loans receivable, net................................................................... 7.75% 7.73% 7.74% Mortgage-backed securities, net......................................................... 6.37 6.78 6.26 Total loans and mortgage-backed securities........................................... 7.55 7.58 7.49 Federal funds sold and assets purchased under resale agreements......................... 6.36 6.49 5.69 Other investments(1).................................................................... 6.09 8.41 9.58 Total investments.................................................................... 6.17 7.10 6.99 Total interest-earning assets........................................................ 7.50 7.55 7.46 Interest-bearing liabilities: Deposits--daily access.................................................................. 2.33 2.76 3.02 Deposits--certificates.................................................................. 5.41 5.46 5.46 Total deposits....................................................................... 4.06 4.37 4.62 Securities sold under agreements to repurchase.......................................... 5.72 5.66 5.50 Borrowings from FHLB.................................................................... 5.59 5.72 5.94 Other borrowings........................................................................ 7.01 7.78 7.76 Total borrowings..................................................................... 5.61 5.72 5.87 Total interest-bearing liabilities................................................... 4.61 4.87 5.05 Interest rate spread...................................................................... 2.89% 2.68% 2.41% Adjusted interest rate spread(2).......................................................... 2.99% 2.79% 2.59%
__________ (1) Includes certificates of deposit, other debt and equity securities, and investment in capital stock of FHLB. (2) Net interest income annualized at the rates in effect as of the reported date divided by the balance of interest-earning assets as of such date. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--Net Interest Income" for an analysis of changes in interest income and interest expense and their effect on the results of the Company's operations. 36 SUBSIDIARIES Direct and indirect subsidiaries of the Company whose operations are on-going include Glendale Federal, Golden State Financial, GLENFED Brokerage Services ("GBS") and GLENFED Insurance Services, Inc. ("GIS"). Glendale Federal recorded total revenues (defined as interest income plus other income less income from subsidiaries) and pre-tax earnings (excluding income from subsidiaries) of $1.2 billion and $218.1 million, respectively, for fiscal 1998 and had total assets (excluding investments in and loans to subsidiaries) of $18.1 billion at June 30, 1998. These amounts are presented on an unconsolidated basis. Golden State Financial had no revenues and a $443 thousand pre-tax loss (primarily interest expense) for fiscal 1998 and had total assets of $22.9 million at June 30, 1998, consisting entirely of cash. GBS markets investments such as mutual funds and annuity products and provides discount securities brokerage services. GBS recorded total revenues and pre-tax earnings of $9.2 million and $4.3 million, respectively, for fiscal 1998 and had total assets of $13.9 million at June 30, 1998. GIS provides general insurance agency services. GIS recorded total revenues and pre-tax earnings of $4.6 million and $2.3 million, respectively, for fiscal 1998 and had total assets of $10.8 million at June 30, 1998. While GBS and GIS conduct their activities separately from those of the Bank, their principal sources of customers are referrals from the Bank's retail branch offices. GBS and GIS have contributed to the Company's non-interest income and, as such, continue to be a part of the Company's core operations. Glendale Federal conducts various business activities through its subsidiaries including GBS and GIS. Applicable regulations provide that federally chartered institutions such as the Bank may invest up to 2% of their assets in capital stock and secured and unsecured loans to subsidiary service corporations and an additional 1% of assets when the additional funds are used for community development and inner-city purposes. An institution that meets its regulatory capital requirements is also generally permitted to make conforming loans to service corporations (and certain joint ventures of service corporations) in which the institution owns or holds more than 10% of the capital stock in an aggregate amount of up to 50% of its regulatory capital. At June 30, 1998 the Bank's aggregate permissible investment limit was $950.8 million and the Bank's aggregate investment for regulatory purposes related to this limitation was $205.3 million. COMPETITION Savings institutions such as Glendale Federal face intense competition in attracting retail deposits and in making loans. The most direct competition for deposits comes from commercial banks, other savings institutions, credit unions, thrift and loan associations, short-term money market securities, including, in particular, money-market funds, and from other corporate and government securities. The principal basis of competition for funds is the interest rate paid. The principal methods used by the Bank to attract retail deposits include advertising, customer service, aggressive branch marketing, convenient office locations and automated teller machines ("ATM"). Competition for retail deposits in California is particularly strong from large commercial banks because they provide a broader range of consumer services and have more extensive branch and ATM networks. Competition in making loans comes principally from mortgage banking companies, other savings institutions and commercial banks. These institutions compete for loans primarily through the interest rates and loan fees charged and the efficiency, convenience and quality of services they provide to borrowers, home builders and real estate brokers. Many of the nation's largest mortgage banking companies, savings institutions and commercial banks operate in the same areas in which the Company competes and consequently the Company has had to market and price its own products aggressively. EMPLOYEES As of June 30, 1998, Golden State had a total of 2,961 full-time equivalent employees. None of its employees is represented by any collective bargaining group. The Company provides its full-time employees with a comprehensive program of benefits, most of which are on a contributory basis, including medical insurance, dental insurance, life insurance, accidental death and dismemberment insurance, long-term disability coverage, a pension plan and a 401(k) plan. Management considers the Company's employee relations to be satisfactory with a work force which maintains an overall commitment to the mission and strategic goals of the Company. 37 REGULATION GENERAL Golden State is subject to regulation and examination by the OTS under the savings and loan holding company provisions of federal law. As a federally chartered and insured savings bank (referred to generally in applicable statutes as a "savings association"), Glendale Federal is subject to examination and supervision by the OTS and, in a back-up regulatory capacity, the FDIC and to federal statutes and regulations governing such matters as capital standards, business combinations, establishment and closure of branch offices, lending, deposit taking and borrowing authority, permitted subsidiary investments and activities and general investment authority. Glendale Federal is also subject to various regulations of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") concerning non-interest-bearing reserves required to be maintained against customer deposits and certain consumer protection laws and other regulations. The descriptions of the statutes and regulations that are applicable to Golden State and Glendale Federal set forth herein do not purport to be complete descriptions of such statutes and regulations and their effects. They also do not identify every statute and regulation that may apply to Glendale Federal or Golden State. The enforcement authority of the OTS over savings institutions includes the ability to impose penalties for and to seek correction of violations of laws or regulations or unsafe or unsound practices by assessing civil money penalties, issuing cease and desist or removal and prohibition orders against an institution, its directors, officers or employees and other persons or initiating injunctive actions. In general, such enforcement actions may be initiated in response to violations of laws, regulations and cease and desist orders or to address unsafe or unsound conditions or practices. The FDIC may terminate the deposit insurance of any insured depository institution if it determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation or order, or any condition imposed in writing by the FDIC. It may also suspend deposit insurance temporarily during the hearing process if the institution has no tangible capital. RESTRICTIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS OTS regulations impose limitations on "capital distributions" by savings institutions, including cash dividends, payments to repurchase or otherwise acquire an institution's shares, payments to shareholders in a "cash-out" merger and other distributions charged against capital. An institution that exceeds its minimum capital requirements is permitted to make capital distributions in specified amounts based on its regulatory capital levels without prior OTS approval. The OTS retains the authority in all cases, however, to prohibit any capital distribution that would otherwise be authorized under its regulations if the OTS determines that the capital distribution would constitute an unsafe or unsound practice and in each case requires prior notification of any proposed dividend or other capital distribution. FEDERAL HOME LOAN BANK SYSTEM The FHLB System provides a central credit facility for member institutions. Glendale Federal is required to own capital stock in its regional FHLB, the FHLB of San Francisco, in an amount at least equal to the greater of 1% of the aggregate outstanding balance of its loans secured by home mortgages, home purchase contracts and similar obligations at the end of each calendar year, or 5% of its FHLB advances. As of June 30, 1998, Glendale Federal was in compliance with this requirement with an investment in FHLB stock of $300.3 million. Institutions not satisfying certain "qualified thrift lender" requirements are subject to limitations on their ability to borrow from their FHLB. 38 LIQUIDITY Current federal regulations require savings institutions to maintain an average daily balance each month of liquid assets (as defined in the applicable regulations) equal to not less than a specified percentage of the average daily balance during the previous month of net withdrawable customer accounts and borrowings payable on demand or in one year or less (the "liquidity ratio"). The required liquidity ratio may be changed by the OTS within the range of 4% to 10% of an institution's net withdrawable accounts and short-term borrowings, depending upon economic conditions and the deposit flows of member institutions. The OTS has set the current required liquidity ratio at the statutory minimum of 4%. Glendale Federal is in compliance with its regulatory liquidity requirements. INSURANCE OF DEPOSIT ACCOUNTS The FDIC administers two separate deposit insurance funds. The Savings Association Insurance Fund (the "SAIF") insures the customer deposits of institutions that were formerly insured by the Federal Savings and Loan Insurance Corporation. The Bank Insurance Fund (the "BIF") insures the customer deposits of commercial banks and certain other institutions. Glendale Federal is a member of the SAIF. FDIC insurance premiums are assessed pursuant to a risk-based system under which institutions are classified on the basis of capital ratios, supervisory evaluation by the institutions' primary federal regulatory agency and other information deemed relevant by the FDIC. The deposit insurance premium assessment rate for SAIF-insured institutions currently ranges from 0% to 0.27%. The FDIC is authorized to increase deposit insurance premiums if it determines such increases are appropriate to maintain the reserves of either the SAIF or the BIF or to fund the administration of the FDIC. In addition, the FDIC is authorized to levy emergency special assessments on BIF and SAIF members. During the third calendar quarter of 1996, federal legislation was enacted which, among other things, recapitalized the SAIF through a one-time special assessment for SAIF members, such as Glendale Federal. The special assessment was at an assessment rate of .657% on Glendale Federal's assessment base as of March 31, 1995. Glendale Federal recorded a one-time charge of $55.5 million for the special assessment. The federal legislation also provided that, beginning January 1, 1997, the same risk-based insurance premium assessment schedule would apply to both SAIF members and BIF members, SAIF members having previously been subject to higher rates of insurance premium assessments than those applicable to BIF member institutions. The recapitalization of the SAIF reduced Glendale Federal's deposit insurance premium expense for subsequent periods. Additionally, the federal legislation enacted in the third quarter of 1996 provides for full pro rata sharing by all federally-insured institutions by January 1, 2000, of the obligation, previously borne entirely by SAIF-insured institutions, to pay the interest on the bonds (commonly referred to as the "FICO Bonds") that were issued by a specially created federal corporation for the purpose of funding the resolution of failed thrift institutions. Beginning on January 1, 1997 through January 1, 2000 (or January 1, 1999 if federal legislation is enacted to merge the commercial bank and savings association charters for federal law purposes), FICO premiums for the BIF- and SAIF-insured deposits are $0.013 and $0.064 per $100 of deposits, respectively. The legislation provides for the merger of the BIF and the SAIF on January 1, 1999, into a newly created Deposit Insurance Fund, provided that the commercial bank and savings association charters are combined by that date. Various "financial services modernization" proposals relating to the regulation of commercial banks and savings associations have been introduced in Congress that would merge the commercial bank and savings association charters and would in connection therewith limit the permitted range of business activities of savings association holding companies, while expanding the lending powers of institutions that are currently categorized as savings associations by categorizing them as commercial banks. While the legislative proposals currently under most active consideration by Congress would not provide for merger of the commercial bank and savings association charters, no reliable prediction can be made as to whether or in what form any such legislation may be enacted. 39 CAPITAL REQUIREMENTS Federal law and the capital regulations promulgated thereunder establish a "leverage limit" (also commonly referred to as the "core capital ratio"), a "tangible capital requirement" and a "risk-based capital requirement" for savings institutions subject to OTS supervision. The OTS capital regulations establish minimum acceptable levels of regulatory capital, with most institutions being expected by the OTS to maintain regulatory capital well above the minimum levels. The leverage limit currently requires a savings institution to maintain "core capital" of not less than 3% of adjusted total assets. "Core capital" generally includes common stockholders' equity (including retained earnings), noncumulative perpetual preferred stock and any related surplus, and minority interests in the equity accounts of fully consolidated subsidiaries. Intangible assets must generally be deducted from core capital. Under current regulations, up to 100% of core capital may be comprised of purchased and originated mortgage servicing rights ("MSRs"), with MSRs being valued for this purpose at the lowest of 90% of fair market value, 90% of original cost, or amortized book value as determined under generally accepted accounting principles. Under the tangible capital requirement a savings institution must maintain "tangible capital" in an amount not less than 1.5% of adjusted total assets. "Tangible capital" is defined as core capital less any intangible assets, with certain exceptions, and investments in certain subsidiaries engaged in activities not permissible for national banks. Under the risk-based capital requirement, a savings institution must maintain "total capital" (defined below) in an amount at least equal to 8% of its risk- weighted assets. Each asset held by a savings institution is assigned to one of four risk-weighting categories, based upon the degree of credit risk associated with the type of asset involved and ranging from 0% for low-risk assets such as U.S. Treasury securities and GNMA securities to 100% for various types of loans and other assets deemed to be of higher risk. Single family mortgage loans having loan-to-value ratios not exceeding 80% and meeting certain additional criteria, as well as 5- to 36-unit multi-family residential property loans meeting certain criteria, qualify for the 50% risk-weighting. The book value of each asset is multiplied by the risk-weighting applicable to the asset category, and the sum of the products of this calculation equals total risk-weighted assets. Off-balance sheet items are also included in the calculation of total risk-weighted assets through a formula intended to reflect the relative likelihood that a credit obligation would result from the off-balance sheet item. For purposes of the risk-based capital requirement, "total capital" means core capital (as described above) plus "supplementary capital" (as defined below), provided that the amount of supplementary capital may not exceed the amount of core capital, less certain assets. Supplementary capital includes (i) certain types of cumulative perpetual preferred stock and other perpetual preferred stock, mandatory convertible subordinated debt and perpetual subordinated debt, (ii) "maturing capital instruments" such as mandatory redeemable preferred stock, intermediate-term preferred stock and subordinated debt meeting certain criteria, and (iii) general valuation loan and lease loss allowances, up to a maximum of 1.25% of risk-weighted assets. Under the risk-based capital requirements, assets excluded from total capital include equity investments (including certain direct investments in real estate) and that portion of land loans and non-residential construction loans in excess of an 80% loan-to-value ratio. The Federal banking laws require each federal banking agency to monitor and to revise its risk-based capital standards as appropriate to ensure that such standards take adequate account of interest rate risk, concentration of credit risk and the risks of nontraditional activities, and to ensure that such standards reflect the actual performance and expected risk of loss of multi- family mortgages. In addition to the above regulatory capital requirements, the Federal banking laws contain so-called "prompt corrective action" ("PCA") provisions pursuant to which banks and savings institutions are to be classified into one of five categories based primarily upon capital adequacy, ranging from "well capitalized" to "critically undercapitalized," and which require, subject to certain exceptions, the appropriate federal banking agency to take prompt corrective action with respect to an institution which becomes "undercapitalized" and to take additional actions if the institution becomes "significantly undercapitalized" or "critically undercapitalized." These provisions expand the powers and duties of the OTS and the FDIC and expressly authorize, or in many cases direct, regulatory intervention prior to the time at which regulatory capital becomes negative. 40 The OTS regulations implementing the PCA provisions define the five capital categories. An institution is "well capitalized" if it has a total risk-based capital ratio of 10% or greater, has a Tier 1 risk-based capital ratio (Tier 1 capital to total assets) of 6% or greater, has a core capital ratio of 5% or greater and is not subject to any written capital order or directive to meet a specific capital level or any capital measure. An institution is "adequately capitalized" if it has a total risk-based capital ratio of 8% or greater, has a Tier 1 risk-based capital ratio of 4% or greater and has a core capital ratio of 4% or greater (3% for certain highly rated institutions). Institutions with lower capital ratios are categorized as "undercapitalized", "significantly undercapitalized" or "critically undercapitalized", with increasingly severe mandatory regulatory consequences at the descending capital levels, including mandatory appointment of a receiver or conservator if an institution's tangible capital to total assets ratio is 2% or lower. The OTS also has authority, after an opportunity for a hearing, to downgrade an institution from "well capitalized" to "adequately capitalized", or to subject an "adequately capitalized" or "undercapitalized" institution to the supervisory actions applicable to the next lower category, for supervisory concerns. At June 30, 1998, Glendale Federal's regulatory capital ratios were significantly above the 5% core capital, 6% Tier 1 risk-based capital and 10% risk-based capital levels required by federal regulators for "well-capitalized" institutions. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview--Capital" and Note 18 of the Notes to Consolidated Financial Statements for further information regarding Glendale Federal's regulatory capital ratios. LOANS TO ONE BORROWER Savings institutions are generally subject to the loans-to-one borrower limitations that are applicable to national banks. With certain limited exceptions, the maximum amount that a savings institution may lend to one borrower (including certain related entities of such borrower) is an amount equal to 15% of the savings institution's unimpaired capital and unimpaired capital surplus, plus an additional 10% for loans fully secured by readily marketable collateral. Real estate is not included within the definition of "readily marketable collateral" for this purpose. The definition of the term "unimpaired capital and unimpaired surplus" refers generally to an institution's regulatory capital and includes in the basic 15% of capital lending limit, that portion of an institution's general valuation allowance that is not includable in regulatory capital as calculated for other regulatory purposes. At June 30, 1998, the maximum amount which Glendale Federal could have loaned to any one borrower (and related entities) was $183.3 million. At that date, the largest balance of loans which Glendale Federal had outstanding to any one borrower and related entities was $16.0 million. QUALIFIED THRIFT LENDER TEST Under the qualified thrift lender ("QTL") test provisions of applicable Federal law, a savings institution must maintain at least 65% of its portfolio assets in qualified thrift investments on a specified monthly average basis. In general, qualified thrift investments include loans, securities and other investments that are related to housing, small business and credit card lending, and, to a more limited extent, consumer lending and community service purposes. Portfolio assets are defined as an institution's total assets less goodwill and other intangible assets, the institution's business property and a limited amount of the institution's liquid assets. A savings institution's failure to remain a QTL may result in limitations on new investments and activities, imposition of branching restrictions, loss of FHLB borrowing privileges, and limitations on the payment of dividends. If a savings institution that is a subsidiary of a savings and loan holding company fails to regain QTL status within one year of its loss of such status, the holding company must register as and will be deemed to be a bank holding company subject to, among other things, the business activity restrictions of the Bank Holding Company Act ("BHCA"). Glendale Federal's qualified thrift investments comprised 87.6% of its portfolio assets as of June 30, 1998. 41 COMMUNITY REINVESTMENT ACT The Community Reinvestment Act ("CRA") requires each savings institution, as well as commercial banks and other lenders, to identify the communities served by the institution's offices and to identify the types of credit the institution is prepared to extend within such communities. The CRA also requires the OTS to assess, as part of its examination of a savings institution, the performance of the institution in meeting the credit needs of its community and to take such assessments into consideration in reviewing applications for mergers, acquisitions and other transactions. An unsatisfactory CRA rating may be the basis for denying such an application. In connection with the assessment of a savings institution's CRA performance, the OTS will assign a rating of "outstanding", "satisfactory", "needs to improve" or "substantial noncompliance". Based on the most recent OTS examination conducted in 1998, Glendale Federal's CRA performance was rated "satisfactory". REAL ESTATE LENDING STANDARDS FDICIA requires the federal banking agencies to adopt uniform real estate lending standards. In response to this requirement, the OTS and the other federal banking agencies have jointly adopted uniform rules on real estate lending and related Interagency Guidelines for Real Estate Lending Policies (the "Guidelines"). The uniform rules require that institutions adopt and maintain comprehensive written policies for real estate lending. The policies must reflect consideration of the Guidelines and must address relevant lending procedures, such as loan to value limitations, loan administration procedures, portfolio diversification standards and documentation, approval and reporting requirements. Although the final rule did not impose specific maximum loan to value ratios, the related Guidelines state that such ratio limits established by individual institutions' boards of directors should not exceed levels set forth in the Guidelines, which range from a maximum of 65% for loans secured by raw land to 85% for improved property. No limit is set for single family residence loans, but the Guidelines state that such loans exceeding a 90% loan to value ratio should have private mortgage insurance or some form of credit enhancement. The Guidelines further permit a limited amount of loans that do not conform to these criteria. Glendale Federal has adopted limits in accordance with the Guidelines. SAVINGS AND LOAN HOLDING COMPANY REGULATIONS As a savings and loan holding company, Golden State is subject to certain restrictions with respect to its activities and investments. Among other things, Golden State is generally prohibited, either directly or indirectly, from acquiring more than 5% of the voting shares of any savings association or savings and loan holding company which is not a subsidiary. Similarly, OTS approval must be obtained prior to any person acquiring control of Golden State or Glendale Federal. Control is conclusively presumed to exist if, among other things, a person acquires more than 25% of any class of voting stock of the institution or holding company or controls in any manner the election of a majority of the directors of the insured institution or the holding company. Control is also presumed to exist, but subject to rebuttal, if, among other things, a person acquires more than 10% of any class of voting stock (or 25% of any class of stock) and is subject to any of certain specified "control factors," which include the percentage of the debt and equity of the institution or holding company owned by the person, agreements giving the person influence over a material aspect of the operations of the institution or holding company and the number of seats on the board of directors of the institution or holding company held by the person or designees of the person. The Cal Fed Merger, which is expected to occur on September 11, 1998, will constitute a change in control of Golden State and Glendale Federal. The OTS has granted approval for such change of control. Golden State is considered an "affiliate" of Glendale Federal for regulatory purposes. Savings associations are subject to the rules relating to transactions with affiliates and loans to insiders generally applicable to commercial banks that are members of the Federal Reserve System and certain additional limitations. In addition, savings associations are generally prohibited from extending credit to an affiliate, other than the association's subsidiaries, unless the affiliate is engaged only in activities which the Federal Reserve Board has determined to be permissible for bank holding companies and which the OTS has not disapproved. 42 Savings and loan holding companies which control only one savings association are exempt, if the association meets its QTL test, from restrictions on the conduct of business activities not related to their savings association subsidiaries that are applicable to other savings and loan holding companies and that are similar to the restrictions on the conduct of non-banking business activities applicable to bank holding companies under the BHCA. TAXATION For taxable years beginning prior to January 1, 1996, a savings institution that met certain definitional tests relating to the composition of its assets and the sources of its income (a "qualifying savings institution") was permitted to establish reserves for bad debts and to claim annual tax deductions for additions to such reserves. A qualifying savings institution was permitted to make annual additions to such reserves under a method based on the institution's loss experience. Alternatively, a qualifying savings institution could elect, on an annual basis, to use the "percentage of taxable income" method to compute its allowable addition to its bad debt reserve on qualifying real property loans (generally, loans secured by an interest in improved real estate). The percentage of taxable income method permitted the institution to deduct a specified percentage of its taxable income before such deduction, regardless of the institution's actual bad debt experience, subject to certain limitations. Since 1988, Glendale Federal has claimed bad debt deductions under the experience method because that method produced a greater deduction than did the percentage of taxable income method. The reserve method of accounting for bad debts for savings institutions was repealed effective for taxable years beginning after 1995 and savings institutions are generally required to recapture a portion of the reserves existing at the close of the last taxable year beginning before January 1, 1996. See Note 15 of the Notes to Consolidated Financial Statements for a discussion of the effect of this legislation on the Company. For its tax years beginning on or after January 1, 1996, Glendale Federal is required to account for its bad debts under the specific charge-off method. Under this method, deductions may be claimed only as and to the extent that loans become wholly or partially worthless. In addition to the regular corporate income tax, corporations, including qualifying savings institutions, are subject to an alternative minimum tax. The 20% tax is computed on Alternative Minimum Taxable Income ("AMTI") and applies if it exceeds the regular tax liability. AMTI is the regular taxable income with certain adjustments. For taxable years beginning after 1989, AMTI includes an adjustment for 75% of the excess of "adjusted current earnings" over regular taxable income. Net operating loss carrybacks and carryforwards are permitted to offset only 90% of AMTI. The California franchise tax applicable to the Bank and other financial corporations is higher than the rate for general corporations. Prior to 1995 the additional tax rate was computed for each year under a formula and was "in lieu" of local personal property and business license taxes paid by general corporations but not generally paid by banks and financial corporations. For calendar 1994 the rate applicable to the Bank was 11.47%. After 1994 the "in lieu" portion of the tax was set at 2% and the Bank's rate for 1995 and 1996 was 11.3%. For 1997 and subsequent years the rate is 10.84%. Under California law and regulations, financial corporations are permitted to claim a bad debt deduction by using a reserve method, with the reserve level being determined by past experience or current facts and circumstances. California franchise taxes are deductible for federal income tax purposes. Tax returns have been audited by the Internal Revenue Service through December 31, 1988 and by the California Franchise Tax Board through December 31, 1990. Under the California statute of limitations, the tax years ended December 31, 1991 and 1992 have closed without audit. Under the federal statute of limitations, tax years through 1992 have closed without being audited. Returns filed for years ended December 31, 1993 and 1994 are currently being examined by the Internal Revenue Service. For additional information regarding taxation, see Note 15 of the Notes to Consolidated Financial Statements. 43 ITEM 2. PROPERTIES Golden State conducts its business through 195 banking offices and 23 loan offices in California. Most of the loan offices are located in branch office buildings, but five are located in separately leased office facilities. The executive offices of the Company are located at 414 North Central Avenue, Glendale, California. The Company owns its executive offices and 89 of its banking offices, as well as five other properties in which service centers and other facilities are located, and leases the premises for 106 of its banking offices, as well as 12 other properties in which service centers and other facilities are located. The net book value of all offices and other properties at June 30, 1998 was $102 million, which included $15 million of leasehold improvements. Expirations of leases for facilities range from August 1998 to April 2034. See Notes 4 and 11 of the Notes to Consolidated Financial Statements for further information. The Company evaluates the suitability and adequacy of all its facilities on a continuing basis, including branch offices, support buildings and service centers, and has an active program of relocating, remodeling or closing such facilities as necessary to maintain efficient and attractive facilities. The Company believes its present facilities are adequate for its operating purposes. ITEM 3. LEGAL PROCEEDINGS GOODWILL LITIGATION AGAINST THE GOVERNMENT Following the adoption of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), Glendale Federal sued the United States Government (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 (Glendale Federal Bank, Federal Savings Bank v. United States, No. 90-772C, in the United States Court of Federal Claims, filed August 15, 1990). In July 1992, the United States Court of Federal Claims (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. On May 25, 1993, a three-judge panel of the United States Court of Appeals for the Federal Circuit (the "Federal Circuit") reversed the Claims Court's July 1992 judgment in favor of Glendale Federal, ruling that the Government was not liable for breach of contract, and remanded the case for trial of Glendale Federal's constitutional and other claims. On August 18, 1993, the Federal Circuit granted Glendale Federal's request for rehearing en banc and vacated the panel decision reversing the Claims Court's July 1992 judgment. On August 30, 1995 the Federal Circuit, by a 9 to 2 decision, affirmed the judgment of the Claims Court in favor of the Bank. The Government subsequently appealed this decision to the United States Supreme Court and on July 1, 1996, the Supreme Court, by a vote of 7 to 2, ruled that the Government had breached its contract with the Bank and remanded the case to the Claims Court for a determination of damages. The trial to determine damages commenced in the Claims Court on February 24, 1997 and the taking of testimony in the trial was completed on April 9, 1998. The Bank has presented evidence on three alternative damages theories: (1) "Reliance Damages", pursuant to which the Bank presented evidence of damages in the amount of $863.8 million; (2) "Expectation Damages", pursuant to which the Bank presented evidence of damages in the amount of $1.603 billion; and (3) "Restitution", pursuant to which the Bank presented evidence of damages in excess of $2.015 billion. The Government has presented evidence seeking to establish that the Bank benefited from the breach, rather than being damaged, and is not entitled to recover any compensation from the Government. In addition, as an affirmative defense, the Government asserts that certain testimony by Glendale Federal witnesses at the trial is inconsistent with prior documents filed by the Bank and that these inconsistencies constitute a fraud against the Government that should result in forfeiture of Glendale Federal's right to compensation for the Government's breach of contract. 44 In lieu of traditional closing briefs, the Claims Court requested the parties to respond to a series of written questions posed by the Court regarding factual and legal issues raised in the damages trial. Responses to those questions, as well as each party's reply to the other's responses, have been filed with the Court and final oral arguments are scheduled for September 11, 1998. Glendale Federal continues to anticipate a decision by the end of calendar 1998. SHAREHOLDER CLASS ACTION LITIGATION A wholly-owned subsidiary of Glendale Federal, as the successor by merger to Glendale Federal's former parent corporation, GLENFED, Inc. ("GLENFED"), is a defendant in consolidated class actions pending in the United States District Court for the Central District of California (the "District Court"), entitled In Re GLENFED Inc. Securities Litigation, Civil No. 91-0818 WJR, originally filed on January 18, 1991. The original consolidated complaint was dismissed by the Court on July 15, 1991, with leave to amend, for failure to allege with specificity the securities law and common law fraud claims asserted in the complaint. The complaint alleged, among other things, that various misrepresentations were made concerning the financial condition and operations of GLENFED and Glendale Federal prior to GLENFED's announcement of a $140 million loss on or about January 16, 1991. After dismissal of the complaint, the plaintiffs filed an amended complaint which was dismissed by the District Court, which then entered judgment in favor of GLENFED and the individual officer and director defendants. Plaintiffs appealed this dismissal and on September 15, 1993, the United States Court of Appeals for the Ninth Circuit (the "Appeals Court") affirmed the judgment dismissing the complaint. On December 9, 1994, the Appeals Court, sitting en banc, reversed the decision of the three-judge panel which had found in favor of GLENFED on only one of the alternative grounds on which the District Court had based its opinion. Since the three-judge panel had not ruled on all the grounds which formed the basis of the District Court's opinion, the en banc court remanded the case to the three-judge appellate panel for a ruling on the remaining grounds. On July 13, 1995, the three-judge panel of the Appeals Court entered an order affirming the dismissal by the District Court of the outside directors and remanded the remainder of the case to the District Court for further proceedings. On November 12, 1996, the court heard GLENFED's and the remaining officers' and directors' motion for summary judgment and/or summary adjudication. On January 6, 1997, the court denied the motion for summary judgment but granted the motion for summary adjudication that: 1) the marketplace was informed of conditions in the real estate and savings and loan industries during the relevant time period; and 2) defendants monitored and disclosed the status of GLENFED's loan loss and non-performing assets and did not make false or misleading statements in regard to said reserves and assets. The issue remaining in the case is whether the defendants had a reasonable belief that certain subsidiaries could be sold without a loss. On April 15, 1997 the court issued a ruling denying class certification. If the case does not proceed as a class action, it would involve only the individual claims of the plaintiffs. Counsel for the purported class has filed a motion in intervention to substitute other class representatives. The hearing on the motion was heard on June 3, 1997 and was granted. The new plaintiffs have filed a complaint seeking class status. A motion for class certification is pending. The company plans to vigorously oppose the claims of the new plaintiffs. Certain of the former officers and directors of GLENFED were also named defendants in a California state court derivative action (entitled Donald P. Delliquanti, et al. v. Norman M. Coulson, et al. and GLENFED, Inc., as a nominal defendant, Case No. BC021028, filed February 8, 1991 in Los Angeles County, California Superior Court) which charges those persons who were directors of GLENFED during the period covered by the plaintiff's allegations with breach of fiduciary duty and mismanagement in connection with past write-downs and loss provisions for real estate loans and investments. Since the litigation is derivative in nature, the subsidiary of Glendale Federal which is the successor to GLENFED would be a recipient of any judgment and has no exposure to damages. On October 8, 1991, the Court sustained the defendant's demurrer to the second amended complaint in this action and entered judgment in favor of GLENFED and the individual officer defendants. The plaintiffs filed an appeal, and on September 1, 1993, the Court of Appeals reversed the decision of the lower Court. Golden State and its directors have been sued in seven cases (four in Delaware and three in California) involving the Cal Fed Merger. The complaints allege, among other things, that the directors of the Company breached their fiduciary duties to Golden State stockholders in connection with the Cal Fed Merger. The cases have all been consolidated in Delaware. At the present time, the cases are at a very early stage. The Company intends to vigorously defend the claims asserted by the plaintiffs in this matter. 45 OTHER LITIGATION In addition to the matters described above, Golden State or its subsidiaries are involved as plaintiff or defendant in various legal actions incidental to their business, none of which is believed by management to be material to the financial condition or results of operations of Golden State and its subsidiaries on a consolidated basis. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On April 23, 1998, a special meeting of stockholders of Golden State was held to vote on a proposal to amend the Company's Articles of Incorporation to increase the total number of authorized shares of common stock from 100 million shares to 250 million shares, and to amend the Certificate of Designation relating to its Series A Preferred Stock in preparation for the issuance of the Company's LTW(TM)s. Holders of the Company's common stock approved the proposal with 35,455,460 shares cast "For", 673,901 shares cast "Against" and 144,798 shares abstaining. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF THE REGISTRANT'S COMMON STOCK Prior to completion of the organization of Golden State as the parent holding company for Glendale Federal on July 24, 1997, Glendale Federal's common stock was listed on the New York Stock Exchange ("NYSE") under the symbol "GLN" and was also listed on the Pacific Stock Exchange ("PSE"). On July 25, 1997, shares of Golden State common stock, which were exchanged for Glendale Federal common stock on a share-for-share basis in connection with the holding company formation transaction, began trading under the new stock symbol "GSB". The following table sets forth, for the periods indicated, the range of high and low sale prices of the Company's common stock:
HIGH LOW ---------- --------- Year Ended June 30, 1998 First Quarter................................................................................ $ 31 7/8 $ 26 1/8 Second Quarter............................................................................... 37 3/4 30 1/16 Third Quarter................................................................................ 39 3/8 29 7/8 Fourth Quarter (1)........................................................................... 41 13/16 29 3/4 Year Ended June 30, 1997 First Quarter................................................................................ $ 20 $15 7/8 Second Quarter............................................................................... 23 7/8 17 3/8 Third Quarter................................................................................ 28 1/8 22 1/2 Fourth Quarter............................................................................... 27 22 1/4
- ----------------- (1) The Company distributed its LTW(TM)s to its stockholders, on the basis of one LTW(TM) for each outstanding share, on May 29, 1998. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview--Goodwill Litigation Tracking Warrants(TM)" for additional information. At the close of business on September 4, 1998, the Company's common stock price was $17 3/4. The Company has not paid any cash dividends on its common stock in the last three fiscal years. Refer to Item 1. "Business--Regulation," and Note 19 of the Notes to Consolidated Financial Statements for information with respect to current restrictions on the Company's ability to pay dividends. NUMBER OF HOLDERS OF COMMON STOCK At July 6, 1998, 55,302,830 shares of Company common stock were outstanding and held by approximately 5,572 holders of record. All of the outstanding common stock of the Bank is now owned, directly or indirectly, by Golden State. 46 ITEM 6. SELECTED FINANCIAL DATA The following tables summarize the Company's financial condition and its operating results for the past five fiscal years. See Note 4 of the Notes to Consolidated Financial Statements for a discussion of acquisitions in fiscal 1998 and 1997. GOLDEN STATE BANCORP AND SUBSIDIARIES CONSOLIDATED FIVE YEAR SUMMARY OF OPERATIONS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Years Ended June 30 --------------------------------------------------------------------- 1998 (1) 1997 1996 1995 1994 --------------------------------------------------------------------- Interest income ........................................... $1,157,945 $1,072,956 $1,080,035 $1,086,658 $ 989,945 Interest expense .......................................... 717,785 693,972 746,970 768,939 678,664 ---------- ---------- ---------- ---------- --------- Net interest income .................................. 440,160 378,984 333,065 317,719 311,281 Provision for loan losses ................................. (1,727) 25,204 40,350 66,150 139,726 ---------- ---------- ---------- ---------- --------- Net interest income after provision for loan losses .. 441,887 353,780 292,715 251,569 171,555 Other income: Fee income .............................................. 98,076 90,696 69,977 69,311 60,513 Gain (loss) on sale of loans, net ....................... 605 (291) (690) 146 665 Gain (loss) on sale of mortgage-backed securities, net .. 4,562 (1,804) (34,222) (11,725) 1,099 Gain on sale of banking operations ...................... -- -- -- 73,713 -- Other income (loss), net ................................ 1,645 62 (707) 3,001 (1,936) ---------- ---------- ---------- ---------- --------- Total other income ................................... 104,888 88,663 34,358 134,446 60,341 Other expenses: Compensation and employee benefits ...................... 135,966 114,270 101,502 105,218 126,037 Occupancy expense, net .................................. 34,215 31,777 29,698 31,433 37,691 Advertising and promotion ............................... 21,816 24,416 24,798 18,855 16,285 Furniture, fixtures and equipment ....................... 15,078 12,585 11,605 14,559 24,793 Stationery, supplies and postage ........................ 14,228 11,628 10,158 9,065 11,174 Regulatory insurance .................................... 7,843 16,317 27,491 29,077 38,233 Other general and administrative expenses ............... 64,524 52,231 41,683 35,265 37,449 ---------- ---------- ---------- ---------- --------- Total general and administrative expenses ............ 293,670 263,224 246,935 243,472 291,662 SAIF special assessment................................... -- 55,519 -- -- -- Legal expense--goodwill lawsuit........................... 19,045 24,058 1,929 369 304 Acquisition and restructuring costs....................... 6,939 -- -- -- -- Operations of real estate held for sale or investment ... (664) 935 1,242 (31) 2,690 Operations of real estate acquired in settlement of loans. (3,111) 6,623 8,426 15,034 24,089 Amortization of goodwill and other intangible assets .... 9,151 5,530 5,147 1,724 9,764 Write-off of assets held for Florida disposition.......... -- -- -- -- 136,209 ---------- ---------- ---------- ---------- --------- Total other expenses ................................. 325,030 355,889 263,679 260,568 464,718 Earnings (loss) before income tax provision (benefit) and extraordinary items........................................ 221,745 86,554 63,394 125,447 (232,822) Income tax provision (benefit) ............................ 92,996 36,131 21,342 52,146 (10,171) ---------- ---------- ---------- ---------- --------- Earnings (loss) before extraordinary items..... ........... 128,749 50,423 42,052 73,301 (222,651) Extraordinary items, net .................................. -- -- -- 1,755 14,092 ---------- ---------- ---------- ---------- --------- Net earnings (loss) .................................. $ 128,749 $ 50,423 $ 42,052 $ 75,056 $(208,559) ========== ========== ========== ========== ========= Earnings (loss) applicable to common shareholders: Net earnings (loss)....................................... $ 128,749 $ 50,423 $ 42,052 $ 75,056 $(208,559) Dividends declared on preferred stock ................... (10,108) (10,841) (16,156) (17,668) (13,759) Premium on exchange of preferred stock for common stock... -- (4,173) (9,443) -- -- ---------- ---------- ---------- ---------- --------- $ 118,641 $ 35,409 $ 16,453 $ 57,388 $(222,318) ========== ========== ========== ========== ========= Earnings (loss) per common share: Basic: Earnings (loss) before extraordinary items ............ $ 2.27 $ 0.72 $ 0.39 $ 1.38 $ (6.48) Net earnings (loss) ................................... 2.27 0.72 0.39 1.43 (6.10) Diluted: Earnings (loss) before extraordinary items ............ $ 1.78 $ 0.64 $ 0.36 $ 1.22 $ (6.48) Net earnings (loss) ................................... 1.78 0.64 0.36 1.25 (6.10) Return on average assets .................................. 0.78% 0.33% 0.28% 0.46% (1.19)% Return on average equity .................................. 11.42 5.14 4.45 8.26 (22.18) Efficiency ratio(2) ....................................... 54.56 56.04 61.27 62.91 78.53
__________ (1) Includes the results of operations of CENFED since its acquisition on April 21, 1998. (2) Defined as total general and administrative expenses divided by the sum of net interest income before provision for loan losses plus fee income. 47 ITEM 6. SELECTED FINANCIAL DATA (CONTINUED) GOLDEN STATE BANCORP AND SUBSIDIARIES CONSOLIDATED FIVE YEAR SUMMARY OF FINANCIAL CONDITION (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
JUNE 30 ------------------------------------------------------------------------- 1998(1) 1997 1996 1995 1994 ------------------------------------------------------------------------- ASSETS Cash and amounts due from banks...................... $ 311,278 $ 221,557 $ 153,608 $ 139,697 $ 164,576 Federal funds sold and assets purchased under resale agreements................................... 172,000 632,000 433,000 296,000 315,961 Other investments.................................... 128,349 31,799 18,877 42,326 166,040 Loans receivable, net................................ 13,774,580 11,905,093 10,727,909 9,899,297 9,595,780 Mortgage-backed securities, net...................... 2,375,363 2,279,534 2,240,790 4,723,457 5,363,779 Real estate held for sale or investment.............. 6,327 8,689 12,072 13,303 16,995 Real estate acquired in settlement of loans.......... 37,393 61,500 78,249 105,730 146,835 Investment in capital stock of Federal Home Loan Bank, at cost....................................... 300,339 259,587 192,842 185,799 139,678 Mortgage servicing assets............................ 243,314 284,472 127,399 99,122 68,719 Goodwill and other intangible assets................. 180,463 99,533 59,216 63,538 47,781 Assets held for Florida disposition, net............. -- -- -- -- 257,363 Other assets......................................... 587,331 434,495 412,602 475,977 519,524 ----------- ----------- ----------- ----------- ----------- $18,116,737 $16,218,259 $14,456,564 $16,044,246 $16,803,031 =========== =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits............................................. $10,698,265 $ 9,356,909 $ 8,723,976 $ 8,734,880 $10,919,806 Securities sold under agreements to repurchase....... 175,551 768,682 758,050 2,695,176 2,306,274 Borrowings from the FHLB............................. 5,613,458 4,788,000 3,838,000 3,495,000 2,443,428 Other borrowings..................................... 63,936 10,782 10,599 28,883 96,890 Other liabilities.................................... 326,850 281,812 168,488 148,460 158,419 ----------- ----------- ----------- ----------- ----------- Total liabilities............................ 16,878,060 15,206,185 13,499,113 15,102,399 15,924,817 ----------- ----------- ----------- ----------- ----------- Preferred stock..................................... 4,617 4,622 5,824 8,050 10,978 Common stock........................................ 60,173 50,349 46,730 40,720 37,737 Additional paid-in capital.......................... 1,049,822 793,111 790,724 793,372 792,946 Net unrealized holding gain (loss) on debt and equity securities available for sale...................... (1,607) (1,154) (11,391) 37 (5,727) Retained earnings - substantially restricted........ 283,787 165,146 125,564 99,668 42,280 Common stock in treasury, at cost................... (158,115) -- -- -- -- ----------- ----------- ----------- ----------- ----------- Total stockholders' equity................... 1,238,677 1,012,074 957,451 941,847 878,214 ----------- ----------- ----------- ----------- ----------- $18,116,737 $16,218,259 $14,456,564 $16,044,246 $16,803,031 =========== =========== =========== =========== =========== Common shares outstanding............................ 55,485,151(2) 50,348,509 46,729,698 40,719,718 37,737,434 Book value per common share (3)...................... $ 20.24 $ 17.81 $ 17.37 $ 18.19 $ 17.24 Tangible book value per common share (4)............. $ 16.99 $ 15.83 $ 16.11 $ 16.63 $ 10.89 Preferred stock liquidation value.................... $ 115,437 $ 115,550 $ 145,597 $ 201,250 $ 227,599 Interest rate spread................................. 2.89% 2.68% 2.41% 1.83% 2.13% Ratio of non-performing assets to total assets....... 0.74% 1.26% 1.90% 2.22% 3.94% Average equity to average assets..................... 6.80% 6.45% 6.24% 5.52% 5.34% Regulatory capital ratios: Tangible capital.................................. 6.02% 5.67% 6.29% 5.44% 4.28% Core capital...................................... 6.02% 5.67% 6.29% 5.44% 4.65% Risk-based capital................................ 11.54% 11.17% 11.93% 11.15% 9.61% Number of full service customer facilities........... 195 166 150 148 217
(1) Includes the assets and liabilities of CENFED which was acquired on April 21, 1998. (2) Excludes 4,688,400 shares of common stock in treasury. (3) Calculated as total stockholders' equity (net of preferred stock at its liquidation value) divided by the number of common shares outstanding. (4) Calculated in the same manner as book value per common share except that total stockholders' equity was reduced by goodwill and other intangible assets. 48 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW EARNINGS PERFORMANCE The Company recorded net earnings of $128.7 million, or $1.78 per diluted share, in fiscal 1998, compared to net earnings of $50.4 million, or $0.64 per diluted share, in fiscal 1997 and $42.1 million, or $0.36 per diluted share, in fiscal 1996. Net earnings for fiscal 1998 included legal expenses for the Company's goodwill litigation of $19.0 million ($11.0 million after-tax), and acquisition and restructuring costs of $6.9 million ($4.0 million after-tax) related to the acquisitions of CENFED and RedFed, and the distribution of the Litigation Tracking Warrants(TM) described below. See "Results of Operations--Legal Expenses--Goodwill Lawsuit" below and Item 3. "Legal Proceedings--Goodwill Litigation Against the Government" for information on the Company's goodwill litigation. See Item 1. "Business--General" and Notes 4 and 24 of the Notes to Consolidated Financial Statements for information on the CENFED and RedFed acquisitions. Net earnings for fiscal 1997 included a special assessment by the FDIC of $55.5 million ($31.9 million after-tax) to recapitalize the SAIF and legal expenses for the Company's goodwill litigation of $24.1 million ($13.8 million after-tax). See "SAIF Special Assessment" below for additional information on this item. Net earnings for fiscal 1996 included a loss of $28.2 million ($19.7 million after-tax) on the sale of $1.7 billion of collateralized mortgage obligations ("CMOs"). See "Sale of CMO Investment Portfolio" below for additional information. Also included in results of operations for fiscal 1996 is an after- tax loss of $1.7 million on the sale of the Company's former headquarters facility and legal expenses for the goodwill litigation of $1.9 million ($1.3 million after-tax). During fiscal 1997 and 1996, the Company exchanged 1.2 million shares and 2.2 million shares, respectively, of its Series A preferred stock for 3.1 million shares and 5.9 million shares, respectively, of Company common stock. These exchanges were made at a premium above the stated conversion rate of 2.404 shares of the Company's common stock for each share of the Series A preferred stock. See Notes 3 and 19 of the Notes to Consolidated Financial Statements for additional information on these transactions. Excluding the after-tax impact of the non-operating items mentioned above and the effect of the preferred stock conversions during fiscal 1997 and 1996, adjusted net earnings for fiscal 1998 were $143.8 million, or $1.99 per diluted share, compared to adjusted net earnings for fiscal 1997 and 1996 of $96.2 million, or $1.43 per diluted share, and $64.8 million, or $1.01 per diluted share, respectively. The 50% improvement in adjusted net earnings in fiscal 1998 over fiscal 1997 reflects higher net interest income, lower credit-related costs, increases in other fees and service charges and reduced FDIC insurance premiums, partially offset by decreases in loan servicing income, increases in general and administrative expenses due to expansion of the Company's business lines, recent acquisitions and franchise expansion, and increases in the amortization of goodwill and other intangible assets due to acquisitions. The Company's interest rate spread was 2.89% at June 30, 1998, as compared with 2.68% and 2.41% at June 30, 1997 and 1996, respectively. The Company's interest rate spread continued to improve in fiscal 1998 primarily due to a decline in the Company's cost of funds. The decrease in the cost of funds from 4.87% at June 30, 1997 to 4.61% at June 30, 1998 reflects a decline in deposit costs due to a continuing shift in the mix of deposits from higher-cost certificates of deposit to lower-cost checking and other daily access accounts obtained through internally developed growth and the CENFED acquisition. Checking accounts comprised 17.0% of total deposits at June 30, 1998, compared with 12.8% at June 30, 1997. See "Results of Operations--Net Interest Income" for additional discussion of the Company's interest rate spread and the impact possible future interest rate changes could have on the Company's net interest income. 49 See Note 1 of the Notes to Consolidated Financial Statements for information on current accounting pronouncements and their impact on the Company's consolidated financial statements. See Item 1. "Business--Cal Fed Merger" and Note 24 of the Notes to Consolidated Financial Statements for information on the Cal Fed Merger, which is expected to be completed on September 11, 1998. GOODWILL LITIGATION TRACKING WARRANTS(TM) On October 28, 1997, Golden State announced plans to distribute Litigation Tracking Warrants(TM) ("LTW(TM)s") to its security holders representing the right to receive, upon exercise of the LTW(TM)s, Golden State common stock equal in value to 85 percent of the net after-tax proceeds, if any, from Glendale Federal's pending goodwill lawsuit against the U.S. Government (the "Goodwill Litigation"). The LTW(TM)s would be exercisable after notification by Golden State of its receipt of proceeds from a final judgment in or settlement of the litigation. The LTW(TM)s would expire 60 days after such notification is given. At a special meeting held on April 23, 1998, Golden State shareholders approved certain corporate changes necessary to issue the LTW(TM)s, including an increase in the total number of authorized shares of common stock from 100 million shares to 250 million shares and amendments to certain of the terms of the Company's Noncumulative Convertible Preferred Stock, Series A (the "Series A Preferred Stock"). Following the shareholder meeting on that date, the Company's Board of Directors declared a distribution of its LTW(TM)s as of May 29, 1998, to holders of Golden State common stock of record on May 7, 1998, on the basis of one LTW(TM) for each share held as of the close of business on that date. The Board of Directors also reserved additional LTW(TM)s for future issuance in connection with conversions or exercises of the Company's outstanding Series A Preferred Stock, its two outstanding classes of common stock purchase warrants and employee stock options. The total number of LTW(TM)s issued to holders of common stock and reserved for such future issuances is approximately 85.8 million. The distribution of the LTW(TM)s will not affect Golden State's diluted shares outstanding prior to the time they become exercisable because the amount of the proceeds from the Goodwill Litigation and the number of shares of common stock to be issued cannot be determined until the LTW(TM)s become exercisable. The LTW(TM)s have traded on the NASDAQ National Market System since June 1, 1998 under the ticker symbol "GSBNZ". SAIF SPECIAL ASSESSMENT On September 30, 1996, President Clinton signed legislation providing for a special assessment on thrift institutions whose customer deposits are insured by the Savings Association Insurance Fund (the "SAIF") of the Federal Deposit Insurance Corporation (the "FDIC"). Pursuant to the new law, a one-time fee was payable by all SAIF-insured institutions at the rate of $0.657 per $100 of deposits held by such institutions at March 31, 1995. In the quarter ended September 30, 1996, the Company recorded a pre-tax accrual of $58.7 million for this assessment. In the fourth quarter ended June 30, 1997, the Company reversed $3.2 million of this accrual to reflect the actual assessment for fiscal 1997 of $55.5 million. The recapitalization of the SAIF has resulted in lower deposit insurance premiums beginning with the third quarter of fiscal 1997. SALE OF CMO INVESTMENT PORTFOLIO During fiscal 1996, the Company sold $1.7 billion of its fixed-rate CMO investments (the "CMO Sale") and recorded a pre-tax loss of $28.2 million. The Company's decision to sell most of its CMO portfolio was part of a strategic realignment of the Company's mortgage-backed securities portfolio in which $2.8 billion of mortgage-backed securities were reclassified from "held to maturity" to "available for sale" during the quarter ended December 31, 1995, in compliance with applicable accounting guidance. The reclassification included the Company's $1.8 billion fixed-rate CMO portfolio and $1.0 billion of its adjustable-rate pass-through securities portfolio. The realignment of the Company's mortgage-backed securities portfolio provided the Company with additional flexibility to manage its interest rate exposure. 50 CAPITAL At June 30, 1998, the Company's tangible book value was $16.99 per common share and $15.49 per diluted share. Glendale Federal's core capital, Tier 1 risk-based capital and total risk-based capital ratios at June 30, 1998 were 6.02%, 10.57% and 11.54%, respectively, placing the Bank in the "well- capitalized" category as defined by federal regulations, which require 5% core, 6% Tier 1 risk-based and 10% total risk-based capital to assets ratios to qualify for that designation. BALANCE SHEET ANALYSIS The Company's asset size and composition have been determined principally by seeking to balance liquidity, yield, risk and regulatory capital requirements. Consolidated assets of the Company increased by $1.9 billion, to $18.1 billion, in the twelve months ended June 30, 1998, primarily due to the acquisition of CENFED in April 1998 and the purchase of single-family residential loans in the secondary market. If interest rates decline significantly from the June 30, 1998 levels, the Company's interest-earning assets could shrink due to timing differences between the runoff attributable to higher levels of prepayments on loans and mortgage-backed securities and the Company's ability to locate suitable investments to replace the runoff. A reduction in interest-earning assets or the yields thereon could adversely impact the Company's earnings. Consolidated liabilities of the Company increased by $1.7 billion, to $16.9 billion, in the twelve months ended June 30, 1998. This was mainly attributable to the purchase of $1.4 billion of deposits and $404.7 million of borrowings relating to the acquisition of CENFED. MORTGAGE-BACKED AND OTHER DEBT AND EQUITY SECURITIES Mortgage-backed securities held to maturity decreased by $248.2 million, to $914.6 million, in the twelve months ended June 30, 1998, primarily due to principal payments received of $245.6 million. Mortgage-backed securities available for sale increased by $344.1 million, to $1.5 billion, in the twelve months ended June 30, 1998, primarily due to purchases of $584.1 million of mortgage-backed securities issued by various federal agencies, and $356.0 million of mortgage-backed securities acquired in the CENFED merger, of which $231.8 million were pass-through securities. These increases were partially offset by principal payments received of $457.3 million and sales of $123.0 million. Other debt and equity securities available for sale increased by $98.4 million, to $126.1 million, in the twelve months ended June 30, 1998, primarily due to $96.9 million of municipal debt securities and $20.0 million of U.S. Government debt securities acquired in the CENFED merger, offset by maturities of $6.5 million and sales of $2.0 million. LOANS RECEIVABLE Loans receivable held for investment increased by $1.9 billion, to $13.7 billion, in the twelve months ended June 30, 1998. The increase was primarily due to $1.4 billion of loans acquired as part of the CENFED merger, loans purchased for investment totaling $2.7 billion and loans originated for investment, net of refinances, of $755.6 million, partially offset by principal repayments of $2.9 billion and loans transferred to REO of $96.4 million. The loan purchases consisted primarily of $663.5 million of single-family residential, adjustable-rate mortgage loans and $2.0 billion of single-family residential, fixed-rate mortgage loans that were purchased in the secondary market. Loans receivable held for sale increased by $12.9 million, to $31.9 million, in the twelve months ended June 30, 1998, primarily due to the effect of increased fixed-rate loan origination activity during fiscal 1998 compared to fiscal 1997. See Note 2 of the Notes to Consolidated Financial Statements for additional information on the transfer of loans from the Company's held for investment portfolio. 51 As of June 30, 1998, commitments of the Company to purchase loans in the secondary market totaled $75.0 million and were comprised entirely of commitments to purchase fixed-rate loans. At that date, commitments of the Company to originate loans and sell loans and mortgage-backed securities totaled $97.4 million and $122.8 million, respectively, and the Company's commitments on outstanding letters of credit totaled $4.8 million. New commitments under lines of credit that were purchased or generated through the Company's consumer and commercial lending programs are summarized as follows (in thousands):
YEARS ENDED JUNE 30 --------------------------------------- 1998 1997 1996 --------------------------------------- Consumer loans................................................................ $173,771 $168,335 $70,718 Commercial loans.............................................................. 285,630 251,749 7,560 -------- -------- ------- $459,401 $420,084 $78,278 ======== ======== =======
The new commitments under consumer lines of credit during fiscal 1998 and 1997 included $2.4 million and $17.6 million, related to the acquisitions of CENFED and TransWorld, respectively. The new commitments under commercial lines of credit during fiscal 1998 included $9.0 million related to the acquisition of CENFED. The new commitments under commercial lines of credit during fiscal 1997 included $92.9 million purchased in the TransWorld and OneCentral acquisitions, and $80 million of agricultural loan commitments, of which $50 million were purchased in December 1996. The following table summarizes the outstanding commitments and related outstanding principal balances on lines of credit under the Company's consumer and commercial lending programs (in thousands):
JUNE 30 ------------------------ 1998 1997 ------------------------ Consumer loans: Credit limit balance..................................................... $459,702 $309,013 Outstanding principal balance............................................ 114,880 71,847 Commercial loans: Credit limit balance..................................................... 436,034 213,332 Outstanding principal balance............................................ 203,620 88,927
52 The following table summarizes loan originations by property type (including the refinanced portion of the Company's loans) and loans purchased in the secondary market for the periods indicated (dollars in millions):
YEARS ENDED JUNE 30 -------------------------------------------------------------------- 1998 1997 1996 -------------------------------------------------------------------- PERCENT OF PERCENT OF PERCENT OF AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL ------ ---------- ------ ---------- ------ --------- Originations: Permanent Loans: Single-family 1-4 units....................... $1,493 35.1% $ 726 23.0% $ 778 26.9% Multi-family 5-36 units....................... 15 0.4 22 0.7 26 0.9 Multi-family 37 or more units................. -- -- 9 0.3 6 0.2 Non-residential............................... 23 0.5 8 0.3 13 0.4 Land.......................................... 6 0.1 -- -- 1 -- Construction Loans: Single-family 1-4 units....................... -- -- 4 0.1 16 0.7 Multi-family 5-36 units....................... -- -- 3 0.1 5 0.2 Commercial loans.................................... 54 1.3 30 1.0 1 -- Consumer loans...................................... 13 0.3 16 0.5 21 0.7 ------ ----- ------ ----- ------ ----- 1,604 37.7 818 26.0 867 30.0 ------ ----- ------ ----- ------ ----- Secondary Market Purchases (1-4 units): Adjustable-rate................................. 663 15.6 1,136 36.0 2,024 70.0 Fixed-rate...................................... 1,985 46.7 1,198 38.0 -- -- ------ ----- ------ ----- ------ ----- 2,648 62.3 2,334 74.0 2,024 70.0 ------ ----- ------ ----- ------ ----- Total Originations and Secondary Market Purchases....................................... $4,252 100.0% $3,152 100.0% $2,891 100.0% ====== ===== ====== ===== ====== =====
Term loan originations for fiscal 1998 increased by $786 million or 96%, to $1.6 billion, compared to fiscal 1997. This increase was primarily due to an increase of $786 million, to $1.2 billion, in fixed-rate mortgage lending resulting from a decline in long term interest rates and an improvement in the California housing market. Fixed-rate originations were 75% of total originations in fiscal 1998, compared to 40% in fiscal 1997. Loans refinanced totaled $421.7 million, or 26% of total originations, for the year ended June 30, 1998, compared to $86.6 million, or 11% of total originations, for the year ended June 30, 1997. Term loan originations for fiscal 1997 declined 6% from fiscal 1996 primarily due to a decline in refinancing activity. See Item 1. "Business - Loans Receivable - Loan Portfolio Composition" for information on the Company's loan originations by note type for the past five fiscal years. Multi-family residential and non-residential real estate loans have primarily been made to finance the disposition of REO and real estate held for sale or investment ("REI") properties or to refinance maturing loans. The single-family residential and multi-family residential construction loans originated in the prior fiscal years represent outstanding commitments made before the Company's construction lending program was terminated during fiscal 1997. 53 NON-PERFORMING ASSETS AND RESTRUCTURED LOANS The following table summarizes the Company's NPAs and restructured loans at the dates indicated (dollars in thousands):
JUNE 30 ------------------------------------------------ 1998 1997 ------------------------------------------------ PERCENT PERCENT OF TOTAL OF TOTAL AMOUNT ASSETS AMOUNT ASSETS ------ -------- ------ --------- Non-accrual loans........................................................... $ 95,994 0.53% $140,295 0.86% REO and other assets........................................................ 38,275 0.21 64,663 0.40 -------- ---- -------- ---- Total NPAs.................................................................. $134,269 0.74% $204,958 1.26% ======== ==== ======== ==== Restructured loans.......................................................... $ 21,465 0.12% $ 31,064 0.19% ======== ==== ======== ====
The following table summarizes NPA and restructured loan activity in fiscal 1998 (in thousands):
JUNE 30, PAYOFFS/ 1997 WRITE- REIN- SALES/ BALANCE ADDITIONS FORECLOSURES DOWNS STATEMENTS OTHER --------- --------- ------------ -------- ----------- ---------- Non-Accrual Loans: Single-family 1-4 units.................... $ 82,989 $131,987 $(64,853) $ -- $(50,286) $ (29,649) Multi-family 5-36 units.................... 21,087 20,130 (18,015) (900) (5,056) (9,631) Multi-family 37 or more units.............. 3,121 93 -- -- -- (2,797) Non-residential............................ 30,672 27,490 (14,254) (2,899) (5,070) (21,435) Commercial................................. 859 9,350 -- (134) (4,578) (3,669) Consumer................................... 1,567 836 -- (35) (5) (921) -------- -------- -------- ------- -------- --------- $140,295 $189,886 $(97,122) $(3,968) $(64,995) $ (68,102) ======== ======== ======== ======= ======== ========= REO and Other Repossessed Assets: Single-family 1-4 units.................... $ 34,116 $ 7,553 $ 52,653 $(1,019) $ -- $ (70,297) Multi-family 5-36 units.................... 8,414 1,449 13,882 (917) -- (19,741) Multi-family 37 or more units.............. 1,933 -- -- -- -- (1,933) Non-residential............................ 20,169 2,324 13,063 (1,289) -- (22,085) Consumer................................... 31 -- -- -- -- (31) -------- -------- -------- ------- -------- --------- $ 64,663 $ 11,326 $ 79,598 $(3,225) $ -- $(114,087) ======== ======== ======== ======= ======== ========= Total NPAs: Single-family 1-4 units.................... $117,105 $139,540 $(12,200) $(1,019) $(50,286) $ (99,946) Multi-family 5-36 units.................... 29,501 21,579 (4,133) (1,817) (5,056) (29,372) Multi-family 37 or more units.............. 5,054 93 -- -- -- (4,730) Non-residential............................ 50,841 29,814 (1,191) (4,188) (5,070) (43,520) Commercial................................. 859 9,350 -- (134) (4,578) (3,669) Consumer................................... 1,598 836 -- (35) (5) (952) -------- -------- -------- ------- -------- --------- $204,958 $201,212 $(17,524) $(7,193) $(64,995) $(182,189) ======== ======== ======== ======= ======== ========= Restructured Loans: Single-family 1-4 units.................... $ 2,168 $ 1,219 $ -- $ -- $ -- $ (1,249) Multi-family 5-36 units.................... 3,676 3,353 -- -- -- (1,955) Multi-family 37 or more units.............. 18,331 4,696 -- -- -- (16,245) Non-residential............................ 6,889 751 -- -- -- (169) -------- -------- -------- ------- -------- --------- $ 31,064 $ 10,019 $ -- $ -- $ -- $ (19,618) ======== ======== ======== ======= ======== =========
JUNE 30, 1998 BALANCE --------- Non-Accrual Loans: Single-family 1-4 units.................... $ 70,188 Multi-family 5-36 units.................... 7,615 Multi-family 37 or more units.............. 417 Non-residential............................ 14,504 Commercial................................. 1,828 Consumer................................... 1,442 -------- $ 95,994 ======== REO and Other Repossessed Assets: Single-family 1-4 units.................... $ 23,006 Multi-family 5-36 units.................... 3,087 Multi-family 37 or more units.............. -- Non-residential............................ 12,182 Consumer................................... -- -------- $ 38,275 ======== Total NPAs: Single-family 1-4 units.................... $ 93,194 Multi-family 5-36 units.................... 10,702 Multi-family 37 or more units.............. 417 Non-residential............................ 26,686 Commercial................................. 1,828 Consumer................................... 1,442 -------- $134,269 ======== Restructured Loans: Single-family 1-4 units.................... $ 2,138 Multi-family 5-36 units.................... 5,074 Multi-family 37 or more units.............. 6,782 Non-residential............................ 7,471 -------- $ 21,465 ========
NPAs decreased $70.7 million, or 34%, in the twelve months ended June 30, 1998, reflecting $114.1 million in sales of REO through the Company's regular liquidation process, the sale or payoff of $59.6 million in non-accrual loans, the reinstatement to accrual status of $65.0 million in non-accrual loans, and $24.7 million in write-downs (including those related to foreclosures), partially offset by NPA additions of $201.2 million, of which $18.3 million resulted from the CENFED acquisition. For the twelve months ended June 30, 1998, 69% of NPA additions were loans secured by, and REO consisting of, single-family residences. During October 1997, the Company's largest non-accrual loan in the amount of $11.3 million and secured by a shopping center, was repaid in full, and the Company's largest REO in the amount of $13.4 million and consisting of land acquired for development, was sold, for a combined reduction in NPAs of $24.7 million. 54 The $9.6 million decrease in restructured loans for the twelve months ended June 30, 1998 was primarily due to the payoff in November 1997 of the Company's largest restructured loan in the amount of $16.1 million, partially offset by $10.0 million of new restructured loans transferred from non-accrual status. Total delinquent loans decreased by $31.0 million, to $184.3 million, in the twelve months ended June 30, 1998. This decrease was attributable primarily to the single-family residential, multi-family (5-36 units) residential and non- residential portfolios, in which delinquent loans declined by $9.4 million, $12.2 million and $9.3 million, to $136.8 million, $17.5 million and $19.1 million, respectively. At June 30, 1998, single-family residential, multi-family (5-36 units) residential and non-residential loans comprised 74%, 9% and 10%, respectively, of total delinquent loans. If California and the other states in which the Company has significant loan concentrations experience an economic downturn, resulting in a significant decline in property values or a significant increase in unemployment, the level of NPAs and delinquent loans could increase. At June 30, 1998, the three states in which the Company had its largest loan concentrations were California ($10.5 billion), Florida ($799.3 million) and Virginia ($231.9 million). ALLOWANCE FOR LOAN LOSSES The Company's determination of the level and the allocation of the allowance for loan losses and, correspondingly, the provisions for such losses, is based on various judgments, assumptions and projections regarding a number of factors, including, but not limited to, current and forecasted economic and market conditions, loan portfolio composition, historical loan loss experience, industry experience and asset classifications. The Company's asset classification process, in accordance with applicable regulations, provides for the classification of assets into the categories of satisfactory, special mention, substandard, doubtful or loss. The allowance for loan losses is adjusted quarterly to reflect management's current assessment of the effect of these considerations on estimated inherent loan losses. While management uses all information available to it to estimate inherent losses on loans, future changes to the allowance may become necessary based on changes in loan performance, economic and market conditions. The OTS, as part of its examination process, periodically reviews the Company's allowance for loan losses. The OTS may require the Company to make changes to the allowance based on its examiners' judgments and the information available to them at the time of their examination. The following table sets forth the allocation of Golden State's allowance for loan losses at June 30, 1998 and 1997 by property type (dollars in thousands):
JUNE 30, 1998 JUNE 30, 1997 -------------------------------------- ------------------------------------------ PERCENT OF PERCENT OF ALLOWANCE ALLOWANCE GROSS TO GROSS GROSS TO GROSS ALLOWANCE LOANS LOANS ALLOWANCE LOANS LOANS ---------- ----------- ---------- ---------- ----------- ------------ Single-family 1-4 units.................. $ 48,568 $10,355,638 0.47% $ 52,579 $ 8,821,828 0.60% Multi-family: 5-36 units............................. 31,087 1,504,858 2.07 43,852 1,477,549 2.97 37 or more units....................... 11,724 313,575 3.74 16,496 345,052 4.78 Non-residential.......................... 30,988 1,358,880 2.28 35,280 1,207,013 2.92 Commercial............................... 11,749 290,515 4.04 7,552 160,061 4.72 Consumer................................. 22,366 150,050 14.91 8,000 120,685 6.63 -------- ----------- -------- ----------- $156,482 $13,973,516 1.12% $163,759 $12,132,188 1.35% ======== =========== ======== ===========
The allocation of the allowance to the above categories is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any other category. The reallocation of the allowance among the different portfolios (see tables below) reflects management's current assessment of the shifting of the relative risks of loss inherent in the different portfolios. 55 Specific valuation allowances for impaired loans totaled $13.4 million and $14.0 million at June 30, 1998 and 1997, respectively, and are included in the allowance for loan losses. Specific valuation allowances are provided when management determines that, for a specific loan, default appears probable and the amount of the expected loss is measurable. The balances of impaired loans with related specific valuation allowances at June 30, 1998 and 1997 totaled $54.3 million and $78.7 million, respectively. Impaired loans not having related specific valuation allowances at June 30, 1998 and 1997 totaled $55.6 million and $64.1 million, respectively. The allowance for loan losses declined by $7.3 million, to $156.5 million, in fiscal 1998. The decrease in the allowance during this period reflects improving NPA and delinquency trends, reduced levels of charge-offs, a reduced number of high-risk, large, and multiple loan borrower relationships and an overall improvement in the performance of the total loan portfolio, partially offset by growth in the loan portfolio through whole loan purchases and the addition of $16.9 million of allowance obtained in the acquisition of CENFED. The improvement in credit quality was significant, reflecting the lowest level of NPAs since fiscal 1988, and the lowest level of charge-offs since March 1989. The increase in the allowance allocation to consumer loans reflects growth in that portfolio and in the outstanding commitments on consumer lines of credit, and the Company's limited experience to date in managing the credit performance of this new line of business. The ratios of allowance to non-accrual loans and total gross loans at June 30, 1998 were 163.0% and 1.1%, respectively, compared to 116.7% and 1.4%, respectively, at June 30, 1997. A summary of activity in the allowance for loan losses by property type during fiscal 1998 is as follows (in thousands):
BALANCE ADDITIONS BALANCE JUNE 30, PROVISION DUE TO JUNE 30, 1997 (REALLOCATION) CHARGE-OFFS RECOVERIES ACQUISITION 1998 ------- ------------- ----------- ---------- ------------ -------- Single-family 1-4 units........................ $ 52,579 $ 992 $(11,243) $ 272 $ 5,968 $ 48,568 Multi-family: 5-36 units................................... 43,852 (6,526) (6,239) -- -- 31,087 37 or more units............................. 16,496 (4,507) (551) 286 -- 11,724 Non-residential................................ 35,280 (10,393) (5,619) 799 10,921 30,988 Commercial..................................... 7,552 1,848 (1,992) 4,341 -- 11,749 Consumer....................................... 8,000 16,859 (3,408) 901 14 22,366 -------- -------- -------- ------ ------- -------- $163,759 $ (1,727) $(29,052) $6,599 $16,903 $156,482 ======== ======== ======== ====== ======= ========
A summary of activity in the allowance for loan losses by property type during fiscal 1997 is as follows (in thousands):
BALANCE ADDITIONS BALANCE JUNE 30, PROVISION DUE TO JUNE 30, 1997 (REALLOCATION) CHARGE-OFFS RECOVERIES ACQUISITIONS 1998 ------- ------------- ----------- ---------- ------------ -------- Single-family 1-4 units........................ $ 56,833 $21,352 $(25,773) $ 167 $ -- $ 52,579 Multi-family: 5-36 units................................... 48,628 5,972 (10,756) 8 -- 43,852 37 or more units............................. 26,062 (3,954) (5,860) 248 -- 16,496 Non-residential................................ 47,260 (362) (12,996) 1,159 219 35,280 Commercial..................................... 4,699 (4,511) (68) 3,575 3,857 7,552 Consumer....................................... 3,274 6,707 (3,043) 1,062 -- 8,000 -------- ------- -------- ------ ------ -------- $186,756 $25,204 $(58,496) $6,219 $4,076 $163,759 ======== ======= ======== ====== ====== ========
The provision for loan losses declined by $26.9 million, to a credit of $1.7 million, in fiscal 1998, compared to fiscal 1997, reflecting management's assessment that there is a decreased risk of loss inherent in the loan portfolio, as evidenced by decreases in NPAs and delinquent loans. The negative balances shown in the "Provision/(Reallocation)" column in the above tables represent the reallocation of the allowance among the different portfolios and reflects management's assessment of the shifting of the relative risks of loss inherent in the different portfolios. If the recent economic improvements in the Company's principal market areas do not continue or if economic conditions in these areas deteriorate, the Company's loans could be adversely impacted, resulting in increases in NPAs and higher charge-offs. Such increased NPAs and charge-offs could require an increase in the provision for loan losses and a corresponding increase in the allowance for loan losses, which could reduce net earnings. 56 MORTGAGE LOAN SERVICING ACTIVITIES Golden State services mortgage loans for other loan investors in exchange for servicing fees. The Company enters into agreements to service loans for others primarily through the purchase of servicing rights from other servicers, and to a lesser extent, through the sale of loans it has originated while retaining the right to service the loans. Mortgage servicing assets decreased by $41.2 million, to $243.3 million, during fiscal 1998, primarily due to the amortization of MSA of $49.2 million and an increase to the valuation allowance of $6.1 million. These factors were partially offset by MSA additions of $8.3 million and $4.9 million, related to the CENFED acquisition and the sale of loans with servicing rights retained, respectively. The valuation of MSA is significantly affected by market prepayment expectations of the loans underlying the MSA. If prepayment expectations increase from the levels as of June 30, 1998, recognition of valuation allowances relating to the value of the Company's MSA and acceleration of the rate of amortization of that asset may be necessary, depending upon the frequency, magnitude and duration of such increases. A decrease in long-term interest rates in the range of 50 to 100 basis points from the June 30, 1998 levels could result in impairment to the Company's MSA (before the recorded valuation allowance of $10.2 million at June 30, 1998) in the range of $35.0 million to $73.7 million. If interest rates continue to decline or remain at current levels for a protracted period of time, the resulting higher actual and expected prepayments could have an adverse impact on the Company's operating results. The following table summarizes the Company's portfolio of mortgage loans serviced for others:
JUNE 30 ------------------------------------ 1998 1997 ------------ ------------ Principal balance (in billions)............................. $ 25.3 $ 29.6 Number of loans............................................. 212,970 240,629 Weighted average interest rate.............................. 7.64% 7.66% Weighted average service fee (in basis points).............. 31.9 32.1 Weighted average remaining term (in months)................. 261 310 Percent delinquent 30 days or more.......................... 0.98% 1.11%
LIABILITY COMPOSITION The Company's ratios of deposits and borrowings to total interest-bearing liabilities were 65% and 35%, respectively, at June 30, 1998, compared to ratios of 63% and 37%, respectively, at June 30, 1997. The Company continues to emphasize the attraction of retail deposits, especially low-cost demand deposits. The ratio of deposits to borrowings is, from time to time, impacted by the difficulty in attaining growth with concurrent growth in retail deposits. However, the Company expects to replace borrowings with retail deposits over time through a combination of retail sales efforts and acquisitions of deposits. See the deposit composition table following for additional information. DEPOSITS The Company uses retail deposits as its core source of funds for lending and asset purchase purposes and as a customer base for providing additional fee generating financial services. The Company's total deposits increased by $1.3 billion, to $10.7 billion, in fiscal 1998. Included in fiscal 1998's net deposit inflows in daily access and certificates were $373.4 million and $1.1 billion, respectively, of deposits purchased in the CENFED acquisition. 57 Golden State's deposit composition at June 30, 1998 and 1997 was as follows (dollars in thousands):
JUNE 30 --------------------------------------------------- 1998 1997 ------------------------ ----------------------- PERCENT OF PERCENT OF AMOUNT TOTAL AMOUNT TOTAL ------ ---------- ------ ---------- Checking.............................................................. $ 1,812,869 17.0% $1,198,011 12.8% Savings............................................................... 477,199 4.5 452,225 4.8 Money market.......................................................... 2,379,249 22.2 2,119,553 22.7 ----------- ----- ---------- ----- Total daily access.................................................. 4,669,317 43.7 3,769,789 40.3 ----------- ----- ---------- ----- Short-term certificates (1 year or less).............................. 2,494,525 23.3 2,703,538 28.9 Long-term certificates (over 1 year).................................. 3,199,049 29.9 2,700,906 28.9 Jumbo and brokered certificates....................................... 335,374 3.1 182,676 1.9 ----------- ----- ---------- ----- Total certificates.................................................. 6,028,948 56.3 5,587,120 59.7 ----------- ----- ---------- ----- $10,698,265 100.0% $9,356,909 100.0% =========== ===== ========== =====
Checking accounts increased by $614.9 million, or 51%, to $1.8 billion during fiscal 1998. The increase was comprised of a $355.6 million increase in retail and business checking accounts and a $259.3 million increase in custodial checking accounts in which borrower payments on loans serviced by the Company are deposited prior to disbursement to investors, taxing authorities or insurance companies. Jumbo and brokered certificates of deposit increased by $152.7 million, or 84%, to $335.4 million during fiscal 1998, primarily due to the addition of $100 million from the State of California. BORROWINGS Total borrowings increased by $285.5 million, to $5.9 billion, during the year ended June 30, 1998, primarily due to $189.0 million of mainly fixed-rate FHLB borrowings and $17.8 million of senior debentures assumed as part of the April 1998 acquisition of CENFED Financial Corporation, and to a $45.0 million commercial bank borrowing obtained by the Company in June 1998 to finance the purchase of its common stock in connection with the RedFed acquisition. Securities sold under agreements to repurchase, which have typically had a one-month maturity, decreased by $593.1 million, to $175.6 million, during fiscal 1998 and were replaced with a combination of retail deposits and longer- term, fixed-rate FHLB borrowings. FHLB borrowings increased by $825.5 million, to $5.6 billion, during fiscal 1998. Adjustable-rate FHLB borrowings decreased by $264.0 million, to $2.6 billion, while fixed-rate FHLB borrowings increased by $1.1 billion, to $3.0 billion. Included in the fixed-rate category are $1.0 billion of advances, with a weighted average rate of 5.19%, that have a stated maturity of five years, but which the FHLB has the option to call $700.0 million after one year, $200.0 million after two years and $100.0 million after three years ("callable advances"). The Company took down these callable advances to take advantage of the substantial rate discount at which these advances were offered as compared with prevailing straight fixed-rate advance rates and rates on other alternative borrowings. As of June 30, 1998, all of the adjustable-rate FHLB borrowings of $2.6 billion and $604.0 million of the fixed-rate FHLB borrowings (excluding the aforementioned $700.0 million of advances that are callable in fiscal 1999) were due within one year. Other borrowings increased by $53.2 million, to $63.9 million, during fiscal 1998, primarily due to the aforementioned additions of $17.8 million from CENFED and $45.0 million for treasury stock purchases, partially offset by the redemption in September 1997 of all of Golden State's $10.5 million of outstanding subordinated debentures. In July 1998, all of the $17.8 million senior debentures were redeemed, and $10.0 million of the $45.0 million borrowing was paid down. The remaining $35.0 million is due on the earlier of November 16, 1998, or 15 days after completion of the Cal Fed Merger, which is expected to take place on September 11, 1998. See "Liquidity and Asset and Liability Management--Asset and Liability Management" below for additional discussion of the Company's borrowings. 58 STOCKHOLDERS' EQUITY Stockholders' equity increased by $226.6 million, to $1.2 billion, during fiscal 1998, primarily due to the issuance of 7.4 million shares of common stock, with a value of $211.1 million, in connection with the Company's acquisition of CENFED, net earnings of $128.7 million, income tax benefits of $28.7 million relating to the exercise of stock options and proceeds of $26.3 million received from the issuance of common stock related to the exercise of stock options. These factors were partially offset by the repurchase of 4.7 million shares of common stock for $158.1 million in connection with the Company's acquisition of RedFed and dividends declared of $10.1 million on the Company's preferred stock. The Company intends to redeem all of its Series A Preferred Stock on October 1, 1998, at a redemption price of $26.09375 per share. As of June 30, 1998, 4,617,484 shares of Series A Preferred Stock were issued and outstanding. See Note 19 of the Notes to Consolidated Financial Statements for additional information on the Company's stockholders' equity. LIQUIDITY AND ASSET AND LIABILITY MANAGEMENT LIQUIDITY The Company's primary sources of funds are retail deposits, borrowings from the FHLB, principal repayments on loans and mortgage-backed securities, and sales of assets under agreements to repurchase. The Company also obtains funds from its operations. Each of the Company's sources of liquidity is subject to various uncertainties beyond the control of the Company. Scheduled loan payments are a relatively stable source of funds, while loan and mortgage-backed security prepayments and deposit flows may vary widely in reaction to changes in prevailing interest rates and other market conditions. As a measure of protection against these uncertainties, the Company generally has back-up sources of funds available to it. At June 30, 1998, funds estimated to be available from these sources totaled approximately $4.4 billion and consisted primarily of funds available from the repurchase agreement markets. During the twelve months ended June 30, 1998, the Company's cash and cash equivalents decreased by $370.3 million, to $483.3 million. The Company experienced a net cash outflow from financing activities of $319.6 million, primarily due to the repayments of FHLB advances of $3.5 billion, the maturities of short-term borrowings of $717.2 million and the repurchase of common shares for $158.1 million in connection with the RedFed merger, partially offset by the proceeds from FHLB advances of $4.0 billion and other borrowings of $45.0 million. The Company's investing activities during the period resulted in a net cash outflow of $280.3 million, principally due to the purchases of loans and mortgage-backed securities totaling $3.3 billion, and term loan originations of $720.1 million, partially offset by principal payments on loans and mortgage- backed securities of $3.6 billion and the proceeds from the sale of mortgage- backed securities of $124.8 million. The Company experienced positive cash flows from operating activities during the period of $229.6 million. During the month of June 1998, the Company's average liquidity ratio was 4.38%. The current minimum regulatory requirement for this ratio is 4.00%. ASSET AND LIABILITY MANAGEMENT Savings institutions are subject to interest rate risk to the degree that their interest-bearing liabilities, consisting principally of deposits, FHLB advances and other borrowings, mature or reprice at different frequencies, or on different bases, than their interest-earning assets, which consist predominantly of intermediate or long-term real estate loans and mortgage-backed securities. Interest rate risk is also affected by the difference in aggregate amounts of interest-earning assets and interest-bearing liabilities. Institutions that invest in mortgage-backed assets are subject to prepayment risk as the duration and value of such assets are impacted by changes in actual prepayments from projections of expected prepayment rates made at the time of origination or purchase. Generally, a significant or prolonged reduction in interest rates would be expected to result in an acceleration of loan prepayments beyond the levels currently projected by the Company. 59 The Company's Asset/Liability Management Committee ("ALCO") is responsible for implementing the interest rate risk management policy adopted by the Company. Among other things, the Company's policy statement sets forth the limits established by the Board of Directors on acceptable changes in net interest income and net portfolio value resulting from specified changes in interest rates. ALCO reviews, among other things, economic conditions, the interest rate outlook, the demand for loans, the availability of deposits and Golden State's current operating results, liquidity, capital and interest rate risk exposure. Based on such reviews, ALCO formulates a strategy that is intended to implement the objectives set forth in Golden State's annual business plan while prudently managing interest rate risk. During fiscal 1998, the Company continued or undertook various strategies to mitigate the adverse earnings impact of a declining and flattening yield curve. Foremost among these strategies has been the Company's focus on shifting the mix of its deposits towards checking and other daily access accounts and reducing its reliance on higher costing term certificate of deposit funding. For fiscal 1998, checking account balances grew by $614.9 million to $1.8 billion, or 17%, of total deposits at June 30, 1998 as compared to $1.2 billion, or 13%, of total deposits as of June 30, 1997. Total daily access account balances grew by nearly $900 million to $4.7 billion, or 43.7%, of total deposits at June 30, 1998 as compared to $3.8 billion, or 40.3%, of total deposits as of June 30, 1997. The shifting deposit mix helped reduce the company's cost of deposits by 31 basis points, to 4.06%, at June 30, 1998. Additionally, the Company increased its investment in fixed-rate loans by $2.0 billion to $5.2 billion, or 37%, of its gross loan portfolio at June 30, 1998 from 26% of the portfolio at June 30, 1997. These strategies, combined with other funding strategies and the generation of prime rate-based business and consumer loans, helped increase the Company's interest rate spread to 2.89% at June 30, 1998 from 2.68% at June 30, 1997, a period of generally declining interest rates and a flattening of the yield curve. The earnings and capital growth resulting from these strategies have positively impacted the Company's ability to manage its interest rate risk and to deploy its capital prudently in support of its lines of business. The Company actively monitors the impact of changes in interest rates on its net interest income. For this purpose, the Company utilizes various dynamic computer simulation models to measure the sensitivity of its net interest income and earnings forecasts to changes in market rates and possible offsetting changes in the Company's business strategies. Based on such analyses, the Company develops and implements short- and long-term strategies to mitigate the effects of adverse operating environments. The OTS measures interest rate risk through a somewhat similar computer simulation model described in its Thrift Bulletin No. 13, "Interest Rate Risk Exposure: Guidelines on Director and Officer Responsibilities" ("TB 13") as shown below. Under TB 13, institutions are required to establish limits on the sensitivity of their net interest income and net portfolio value to changes in interest rates. Unlike the Company's analyses, under TB 13 changes in interest rates are defined to consist solely of instantaneous and sustained movements in interest rates in 100 basis point increments and no possible adjustments to a company's business strategies to reflect the assumed changes in interest rates are permitted to be taken into account. Following are the estimated impacts of a parallel shift in interest rates as calculated by the Company using the TB 13 methodology:
JUNE 30, 1998 JUNE 30, 1997 ----------------------------------------------------------------------- PERCENTAGE CHANGE IN PERCENTAGE CHANGE IN ----------------------------------------------------------------------- CHANGE IN INTEREST RATES NET INTEREST NET PORTFOLIO NET INTEREST NET PORTFOLIO (IN BASIS POINTS) INCOME(1) VALUE(2) INCOME(1) VALUE(2) - ---------------- -------------- -------------- ------------- ------------------ +200.......................... -2% -24% -3% -22% +100.......................... 0% -11% -1% -9% -100.......................... 1% 2% 2% 9% -200.......................... 2% 7% 3% 17%
_________ (1) The percentage change in this column represents net interest income for 12 months in a stable interest rate environment versus the net interest income in the various rate scenarios. (2) The percentage change in this column represents the Net Portfolio Value of the Company in a stable interest rate environment versus the Net Portfolio Value in the various rate scenarios. The OTS defines "Net Portfolio Value" as the present value of expected net cash flows from existing assets minus the present value of expected net cash flows from existing liabilities plus the present value of expected net cash flows from existing off-balance sheet contracts. 60 The Maturity and Rate Sensitivity Analysis table in Item 1. "Business--Asset and Liability Management and Market Risk" sets forth the projected maturities, based upon contractual maturities as adjusted for projected prepayments and "repricing mechanisms" (provisions for changes in the interest rates of assets and liabilities), of the Company's major asset and liability categories as of June 30, 1998 used to calculate the Company's total and one-year GAP at that date. The one-year GAP measures the estimated difference between the amounts of interest-earning assets and interest-bearing liabilities maturing or repricing within one year, based on assumptions as to the expected repayment of assets and liabilities. The interest rate sensitivity of the Company's assets and liabilities could vary substantially if actual experience differs from the assumptions used. In its management of interest rate risk, the Company relies primarily on the aforementioned dynamic computer simulation models to determine its interest rate risk position rather than the static one-year GAP position. The following table is a summary of Golden State's one-year GAP, subject to the above qualifications, at the dates indicated (dollars in millions):
JUNE 30 ------------------------ 1998 1997 ---- ---- Interest-earning assets maturing or repricing within one year ("one-year assets").......... $10,919 $11,640 Interest-bearing liabilities maturing or repricing within one year ("one-year liabilities") 10,045 9,282 ------- ------- One-year maturity GAP...................................................................... $ 874 $ 2,358 ======= ======= One-year GAP as a percent of total assets.................................................. 4.8% 14.5% ======= =======
A positive one-year GAP tends, in general, to assist the Company in rising interest rate markets. However, the Company remains subject to possible interest rate spread compression, which would adversely impact the Company's net interest income, if interest rates rise. This is primarily due to the lag in the repricing of the indices to which the Company's adjustable-rate loans and mortgage-backed securities are tied, as well as the repricing frequencies and periodic interest rate caps on such adjustable-rate loans and mortgage-backed securities, and to an increase in the cost of the Company's liabilities which are subject to monthly repricing. The amount of such interest rate spread compression would depend upon the frequency, severity and duration of such interest rate fluctuations. 61 RESULTS OF OPERATIONS NET INTEREST INCOME The following table provides information on net interest income for the past three fiscal years, setting forth average balances of interest-earning assets and interest-bearing liabilities, the interest income earned and interest expense recorded thereon and the resulting average yield-cost ratios (dollars in thousands):
YEAR ENDED JUNE 30, 1998 YEAR ENDED JUNE 30, 1997 --------------------------------------------------------------------------- AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE BALANCES INCOME/ YIELD/ BALANCES INCOME/ YIELD/ (1) EXPENSE COST (1) EXPENSE COST --------------------------------------------------------------------------- Interest-earning Assets: Loans receivable, net(2)......... $12,382,205 $ 950,265 7.67% $11,341,678 $ 861,858 7.60% ----------- ---------- ----------- ---------- Mortgage-backed securities, held to maturity................. 1,050,597 71,012 6.76 N/A N/A N/A Mortgage-backed securities, available for sale(3)........... 1,259,371 78,737 6.25 N/A N/A N/A ----------- ---------- ----------- ---------- Total mortgage-backed securities, net(4)..... 2,309,968 149,749 6.48 2,243,784 149,551 6.67 ----------- ---------- ----------- ---------- Total loans and mortgage- backed securities.............. 14,692,173 1,100,014 7.49 13,585,462 1,011,409 7.44 ----------- ---------- ----------- ---------- Federal funds sold and assets purchased under 613,074 35,504 5.79 665,738 37,237 5.59 resale agreements............... ----------- ---------- ----------- ---------- Other debt and equity securities available for sale (3).......... 44,253 2,308 5.22 N/A N/A N/A Other investments(5)............. 281,547 20,119 7.15 N/A N/A N/A ----------- ---------- ------------ ---------- Total other investments (4)(6)...... 325,800 22,427 6.88 273,471 24,310 8.89 ----------- ---------- ----------- ---------- Total investments.......... 938,874 57,931 6.17 939,209 61,547 6.55 ----------- ---------- ----------- ---------- Total interest-earning assets..................... 15,631,047 1,157,945 7.41 14,524,671 1,072,956 7.39 ---------- ---------- All other assets.................. 956,834 677,837 ----------- ----------- Total assets.................... $16,587,881 $15,202,508 =========== =========== Interest-bearing Liabilities: Non-interest-bearing demand deposits................. $ 1,027,499 $ -- 0.00% $ 551,196 $ -- 0.00% Interest-bearing demand deposits................. 460,973 4,610 1.00 404,295 4,099 1.01 Savings.......................... 446,704 9,192 2.06 458,070 9,848 2.15 Money market..................... 2,228,241 88,484 3.97 1,924,309 84,149 4.37 ----------- ---------- ----------- ---------- Total daily access.............. 4,163,417 102,286 2.46 3,337,870 98,096 2.94 Certificates..................... 5,606,265 306,014 5.46 5,621,222 307,086 5.46 ----------- ---------- ----------- ---------- Total deposits.................. 9,769,682 408,300 4.18 8,959,092 405,182 4.52 ----------- ---------- ----------- ---------- Securities sold under agreements to repurchase........ 660,467 37,591 5.69 335,809 18,642 5.55 FHLB and other borrowings........ 4,761,530 271,894 5.71 4,738,502 270,148 5.70 ----------- ---------- ----------- ---------- Total borrowings................ 5,421,997 309,485 5.71 5,074,311 288,790 5.69 ----------- ---------- ----------- ---------- Total interest-bearing liabilities..................... 15,191,679 717,785 4.72 14,033,403 693,972 4.95 ---------- ---------- All other liabilities............. 268,757 188,772 Stockholders' equity.............. 1,127,445 980,333 ----------- ----------- Total liabilities and stockholders' equity........... $16,587,881 $15,202,508 =========== =========== Difference between average interest-earning assets and interest-bearing liabilities...................... $ 439,368 $ 491,268 =========== =========== Net interest income............... $ 440,160 $ 378,984 ========== ========== Yield-cost spread................. 2.69% 2.44% ==== ==== Effective net spread(7)........... 2.82% 2.61% ==== ====
YEAR ENDED JUNE 30, 1996 ---------------------------------------- AVERAGE INTEREST AVERAGE BALANCES INCOME/ YIELD/ (1) EXPENSE COST ----------- ---------- --------- Interest-earning Assets: $10,268,121 $ 803,432 7.82% Loans receivable, net(2)......... ----------- ---------- Mortgage-backed securities, held to maturity................ N/A N/A N/A Mortgage-backed securities, available for sale(3)........... N/A N/A N/A ----------- ---------- Total mortgage-backed securities, net(4)...... 3,423,747 216,812 6.33 ----------- ---------- Total loans and mortgage- backed securities.............. 13,691,868 1,020,244 7.45 ----------- ---------- Federal funds sold and assets purchased under resale agreements............... 674,159 39,347 5.84 ----------- ---------- Other debt and equity securities available for sale (3)........... N/A N/A N/A Other investments(5)............. N/A N/A N/A ----------- ---------- Total other investments (4)(6)...... 208,057 20,444 9.83 ----------- ---------- Total investments.......... 882,216 59,791 6.78 ----------- ---------- Total interest-earning assets.................. 14,574,084 1,080,035 7.41 ---------- All other assets.................. 578,912 ----------- Total assets.................... $15,152,996 =========== Interest-bearing Liabilities: Non-interest-bearing demand deposits................. $ 315,804 $ -- 0.00% Interest-bearing demand deposits................. 390,488 4,290 1.10 Savings.......................... 520,129 11,381 2.19 Money market..................... 1,520,194 69,257 4.56 ----------- ---------- Total daily access.............. 2,746,615 84,928 3.09 Certificates..................... 6,085,586 348,906 5.73 ----------- ---------- Total deposits.................. 8,832,201 433,834 4.91 ----------- ---------- Securities sold under agreements to repurchase........ 1,869,194 108,839 5.82 FHLB and other borrowings........ 3,376,056 204,297 6.05 ----------- ---------- Total borrowings................ 5,245,250 313,136 5.97 ----------- ---------- Total interest-bearing liabilities.................... 14,077,451 746,970 5.31 ---------- All other liabilities............. 130,297 Stockholders' equity.............. 945,248 ----------- Total liabilities and stockholders' equity........... $15,152,996 =========== Difference between average interest-earning assets and interest-bearing liabilities...................... $ 496,633 =========== Net interest income............... $ 333,065 ========== Yield-cost spread................. 2.10% ==== Effective net spread(7)........... 2.29% ====
62 __________ (1) Average balances are primarily computed on daily balances during the period. When such balances are not available, average balances are computed on a monthly basis. Average balances include the effect of discounts and premiums on loans, investment securities, deposits and borrowings acquired in acquisitions, as well as deferred loan fees and the effects of hedging transactions. (2) Non-accrual loans are included in the average balances for the periods, but interest on such loans is not recognized during the periods the loans are non-accrual and is therefore excluded from interest income. (3) The yields on available for sale securities are based upon historical amortized cost balances without the effects of fair value adjustments. (4) Prior to fiscal 1998 the Company aggregated income from all securities (held to maturity and available for sale). (5) Includes certificates of deposit and investment in capital stock of FHLB for fiscal 1998. (6) Includes certificates of deposit, other debt and equity securities, and investment in capital stock of FHLB for fiscal 1997 and 1996. (7) The effective net spread for a period is net interest income divided by average interest-earning assets. The following rate/volume analysis depicts the increase (decrease) in net interest income attributable to interest rate fluctuations (change in rate multiplied by prior period average balance) and volume fluctuations (change in average balance multiplied by prior period rate) when compared to the preceding year (in thousands):
YEARS ENDED JUNE 30 ------------------------------------------------------------------ 1998 VERSUS 1997 1997 VERSUS 1996 CHANGES DUE TO CHANGES DUE TO ------------------------------------------------------------------ VOLUME RATE TOTAL VOLUME RATE TOTAL ------------------------------------------------------------------ Interest income: Loans receivable, net.............................. $80,341 $ 8,066 $88,407 $ 81,639 $(23,213) $ 58,426 Mortgage-backed securities, net.................... 4,437 (4,239) 198 (78,333) 11,072 (67,261) ------- -------- ------- -------- -------- -------- Total loans and mortgage-backed securities.................................... 84,778 3,827 88,605 3,306 (12,141) (8,835) Federal funds sold and assets purchased under resale agreements............................... (3,025) 1,292 (1,733) (476) (1,634) (2,110) Other investments.................................. 4,177 (6,060) (1,883) 5,964 (2,098) 3,866 ------- -------- ------- -------- -------- -------- Total investments............................... 1,152 (4,768) (3,616) 5,488 (3,732) 1,756 ------- -------- ------- -------- -------- -------- Total interest income........................... 85,930 (941) 84,989 8,794 (15,873) (7,079) ------- -------- ------- -------- -------- -------- Interest expense: Deposits--daily access............................. 21,826 (17,636) 4,190 17,469 (4,301) 13,168 Deposits--certificates............................. (1,072) -- (1,072) (25,855) (15,965) (41,820) ------- -------- ------- -------- -------- -------- Total deposits.................................. 20,754 (17,636) 3,118 (8,386) (20,266) (28,652) Securities sold under agreements to repurchase..... 18,467 482 18,949 (85,370) (4,827) (90,197) FHLB and other borrowings.......................... 1,312 434 1,746 78,481 (12,630) 65,851 ------- -------- ------- -------- -------- -------- Total borrowings................................ 19,779 916 20,695 (6,889) (17,457) (24,346) ------- -------- ------- -------- -------- -------- Total interest expense.......................... 40,533 (16,720) 23,813 (15,275) (37,723) (52,998) ------- -------- ------- -------- -------- -------- Net interest income.................................. $45,397 $ 15,779 $61,176 $ 24,069 $ 21,850 $ 45,919 ======= ======== ======= ======== ======== ========
__________ Note: The change in interest not due solely to volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each. Net interest income increased by $61.2 million, to $440.2 million, in fiscal 1998 compared to fiscal 1997. This was attributable to an increase in average interest-earning assets and to an improvement in the yield-cost spread. Average interest-earning assets increased by $1.1 billion during fiscal 1998 and yielded $85.9 million in interest income, while average interest-bearing liabilities increased by $1.2 billion and contributed $40.5 million in interest expense, with the net impact of these volume changes resulting in an increase of $45.4 million to net interest income. The increase in average interest-earning assets was principally attributable to a $1.0 billion increase in average loans receivable. The increase in average interest-bearing liabilities primarily resulted from a $476.3 million increase in the average balance of non-interest- bearing demand deposits, as well as increases of $324.7 million and $303.9 million in the average balances of securities sold under agreements to repurchase and money market accounts. 63 The yield-cost spread increased by 25 basis points, to 2.69%, in fiscal 1998 as compared to fiscal 1997, contributing $15.8 million to the increase in net interest income. The increase in the yield-cost spread was primarily due to a decrease in the Company's cost of funds of 23 basis points, to 4.72%, that was attributable to a 34 basis point decrease in the cost of deposits, to 4.18%, partially offset by a 2 basis point increase in the cost of borrowings, to 5.71%. The decrease in the cost of funds reflects a decline in deposit costs due to a continuing shift in the mix of deposits from higher-cost certificates of deposit to lower-cost checking and other daily access accounts, and to the addition of lower-costing checking and daily access accounts obtained in recent acquisitions. Interest income on loans receivable increased by $88.4 million, to $950.3 million, in fiscal 1998 compared to last year, primarily due to portfolio growth. The average balance of loans receivable, net, increased by $1.0 billion, to $12.4 billion, during the year ended June 30, 1998, contributing $80.3 million to the increase. This increase was due to the Company's purchases in the secondary market of $824.1 million of fixed-rate loans with a weighted average yield of 8.02% and $767.9 million of adjustable rate loans with a weighted average yield of 7.43% during the last nine months of fiscal 1997. During the twelve months ended June 30, 1998, the Company purchased in the secondary market $2.0 billion of fixed-rate loans with a weighted average yield of 7.22% and $663.5 million of adjustable-rate loans with a weighted average yield of 7.32%. Further contributing to the growth in the loan portfolio was the purchase of $1.4 billion in loans with a weighted average yield of 8.48% in the April 1998 CENFED acquisition, and the purchase of $135.8 million in loans with a weighted average yield of 10.26% in the May 1997 TransWorld Bank acquisition. The growth in the loan portfolio was enhanced by an increase in portfolio yield of 7 basis points, to 7.67%, which contributed $8.1 million to the increase in interest income. The increase in portfolio yield was primarily due to the impact of the aforementioned higher yielding fixed-rate purchases in the secondary market during the last nine months of fiscal 1997, the higher yielding loans acquired from CENFED and TransWorld, and to the favorable effect of a declining level of non-accrual loans. The Company does not recognize income on non-accrual loans during the period they are considered non-accrual, but their balances are included in the asset base for yield calculation purposes. The average balances of non-accrual loans in the twelve months ended June 30, 1998 and 1997, respectively, were $114.5 million and $236.8 million. The impact of non-accrual loans was to reduce the Company's loan yield by 4 and 7 basis points, respectively, in the twelve months ended June 30, 1998 and 1997. Interest expense on daily access deposits increased by $4.2 million, to $102.3 million, in fiscal 1998, compared to fiscal 1997. The average balance in daily access accounts increased by $825.5 million, or 25%, to $4.2 billion, during the year ended June 30, 1998, compared to the year ended June 30, 1997. This growth in average balance contributed $21.8 million to the increase in interest expense. The growth in average daily access account balances was due to internally developed account growth, the addition of custodial checking accounts in October 1997 arising from the Company's purchase of servicing rights relating to $11.5 billion of mortgage loans in the fourth quarter of fiscal 1997, and the addition of daily access accounts related to acquisitions. The average cost of daily access accounts declined by 48 basis points, to 2.46%, in the year ended June 30, 1998. The decrease in the average cost of daily access accounts, which contributed $17.6 million to the reduction in interest expense during the year ended June 30, 1998, was due to the generation and acquisition of low cost deposits, consisting primarily of checking accounts. Interest expense on borrowings increased by $20.7 million, to $309.5 million, in fiscal 1998 compared to fiscal 1997, primarily due to a corresponding increase of $347.7 million, or 7%, to $5.4 billion, in the average balance of borrowings in fiscal 1998 compared to fiscal 1997. The growth in the average balances of borrowings contributed $19.8 million to the increase in interest expense during fiscal 1998. Net interest income increased by $45.9 million, to $379.0 million, in fiscal 1997 compared to fiscal 1996, because of favorable volume changes and an improvement in the yield-cost spread. Volume changes, which contributed $24.1 million to the increase in net interest income, were primarily related to changes in the mixes of both deposits and borrowings, which resulted in a reduction to interest expense of $15.3 million. On the asset side, an increase in the Bank's investment of FHLB stock and a shift in the mix from mortgage- backed securities to loans receivable increased interest income by $8.8 million. 64 The yield-cost spread increased by 34 basis points, to 2.44%, in the twelve months ended June 30, 1997, compared to the same period in fiscal 1996, primarily due to a decrease in the Bank's cost of funds of 36 basis points to 4.95%. The decrease in the Bank's cost of funds during the year ended June 30, 1997, as compared to fiscal 1996, was primarily due to a change in the mix of deposits from higher-cost certificates of deposit to lower-cost daily access accounts, the replacement of maturing higher-cost FHLB advances with lower-cost advances and to lower interest rates prevailing during the period compared to fiscal 1996. Interest income on loans receivable increased by $58.4 million, to $861.9 million, in fiscal 1997, compared to fiscal 1996, primarily due to portfolio growth. The average balance of loans receivable, net, increased by $1.1 billion, to $11.3 billion, during the year ended June 30, 1997, contributing $81.6 million to the growth. This was due to the Bank's purchases, in the secondary market, of $2.3 billion of loans during fiscal 1997. The effect of growth in the loan portfolio was offset by a decrease in portfolio yield of 22 basis points. The decrease in portfolio yield was due to the effects of the aforementioned lower interest rate environment on the Bank's portfolio of adjustable-rate loans. The effect of declining interest rates was partially offset by the effect of a declining level of non-accrual loans as the Bank does not recognize income on these assets during the period they are non-accrual, while their balances are included in the asset base for yield calculation purposes. The average balance of non-accrual loans in fiscal 1997 and 1996 was $236.8 million and $302.3 million, respectively. The impact of non-accrual loans on the yield on loans and mortgage-backed securities was a reduction in yield of 7 basis points in fiscal 1997 versus a reduction of 12 basis points in fiscal 1996. Interest income on mortgage backed securities decreased by $67.3 million, to $149.6 million, in fiscal 1997 compared to fiscal 1996, primarily due to the sale of $1.7 billion of lower-yielding CMOs in the second and third quarters of fiscal 1996. Partially offsetting the effect of portfolio reductions was an increase in the yield on mortgage-backed securities of 34 basis points, to 6.67%, in the remaining portfolio of mortgage-backed securities. Interest income on federal funds sold and assets purchased under resale agreements decreased by $2.1 million, to $37.2 million, in fiscal 1997 compared to fiscal 1996, primarily due to the lower interest rate environment prevailing in fiscal 1997, compared to fiscal 1996. The yield on federal funds sold and securities purchased under resale agreements decreased by 25 basis points, to 5.59%, during the year ended June 30, 1997, compared to fiscal 1996, reflecting a reduction by the Federal Reserve Board of the federal funds rates late in fiscal 1996. Interest income on other investments increased by $3.9 million, to $24.3 million, in fiscal 1997 compared to fiscal 1996, primarily due to an increase in the average portfolio balance of $65.4 million. During fiscal 1997, the Bank increased its investment in FHLB stock by $66.7 million to obtain additional borrowings from the FHLB in compliance with the FHLB's requirements. These purchases of FHLB stock contributed $5.0 million to the increased interest income. Interest expense on daily access deposits increased by $13.2 million, to $98.1 million, in fiscal 1997, compared to fiscal 1996, primarily due to a $591.3 million, or 22%, increase in the average balance in daily access accounts during the year ended June 30, 1997 compared to the year ended June 30, 1996. This growth in average balance contributed $17.5 million to the increase in interest expense. The growth in average daily access account balances was due to the addition of $322.1 million of daily access accounts through the acquisitions of TransWorld Bank and OneCentral Bank, and to internally-developed account growth. The increase in interest expense was partially offset by a 15 basis point reduction in the average cost of daily access accounts. The decrease in average cost was due to the low cost of deposits acquired from TransWorld and OneCentral, and to the lower interest rates prevailing during the year ended June 30, 1997, compared to fiscal 1996. Interest expense on certificate accounts decreased by $41.8 million, to $307.1 million, in fiscal 1997, compared to fiscal 1996, due to the combined effects of decreasing average balances and to the lower interest rate environment prevailing during the year ended June 30, 1997 compared to fiscal 1996. Average balances in certificate accounts decreased by $464.4 million, or 8%, due to management's efforts to change the mix of deposits toward daily access accounts. This decrease contributed $25.9 million to the reduction in interest expense on certificate accounts. The average cost of certificate accounts decreased by 27 basis points, to 5.46%, due both to the lower interest rate environment prevailing during the year ended June 30, 1997 compared to fiscal 1996, and to growth in daily access deposits, which allowed management to price certificate accounts less aggressively while maintaining approximately the same retail- wholesale funding mix. 65 Interest expense on borrowings decreased by $24.3 million, to $288.8 million, in fiscal 1997 compared to fiscal 1996, primarily due to the replacement of maturing higher-cost FHLB borrowings with lower-cost FHLB borrowings, and to the decline in the interest rate environment. The cost of borrowings decreased 28 basis points, to 5.69%, during fiscal 1997 compared to fiscal 1996. Contributing to the decrease in interest expense was a $170.9 million decrease in the average balance of borrowings in fiscal 1997 compared to fiscal 1996. PROVISION FOR LOAN LOSSES The Company recorded a net credit for loan losses of $1.7 million in fiscal 1998, compared to provision for loan losses of $25.2 million in fiscal 1997, and $40.4 million in fiscal 1996. The significant reduction in the provision was primarily due to declining NPAs and delinquent loans, lower net charge-offs and management's assessment that there is a decreased risk of loss inherent in the Company's real estate loan portfolio, partially offset by the increased risk of loss inherent in its consumer and business loan portfolios. NPAs at June 30, 1998 totaled $134.3 million, which represents a 34% decline from the $205.0 million of NPAs recorded at June 30, 1997. Net charge-offs to the allowance for loan losses totaled $22.5 million in fiscal 1998, compared to $52.3 million in fiscal 1997 and $62.7 million in fiscal 1996. The ratios of allowance to non-accrual loans and total gross loans at June 30, 1998, were 163.0% and 1.1%, respectively, compared to 116.7% and 1.4%, respectively, at June 30, 1997. The Company's determination of the level and the allocation of the allowance for loan losses and, correspondingly, the provisions for such losses, is based on various judgments, assumptions and projections regarding a number of factors, including, but not limited to, current and forecasted economic and market conditions, loan portfolio composition, historical loan loss experience, industry experience and asset classifications. LOAN SERVICING INCOME, NET Loan servicing income, net, decreased by $5.2 million or 16%, to $28.6 million, in fiscal 1998, compared to fiscal 1997. Due to the Company's purchases of servicing rights during fiscal 1997, gross servicing fees earned increased by $14.5 million, or 22%, to $79.6 million, in fiscal 1998 compared to fiscal 1997. However, the amortization of MSA increased by $19.4 million or 64%, to $49.6 million during the same period. The disproportionate increase in the amortization of MSA compared to the servicing fees earned was primarily due to the servicing fee rates on the purchased servicing rights relating to approximately $11.5 billion of predominantly fixed-rate mortgage loans being less than those associated with standard fixed-rate packages of loan servicing and, to a certain extent, to increased prepayment experience and market prepayment expectations attributable to the decline in interest rates and the flattening of the yield curve. The lower servicing fee rates associated with this purchase are offset, from an overall earnings perspective, by an increase in net interest income. The increase in net interest income results from the reduction in the cost of funds attributable to the Company keeping the custodial deposit balances associated with this servicing during the holding period between collection of borrower payments and remittance to investors, taxing authorities or insurance companies. The Company generally pays interest, at rates dictated by various states' regulations, on borrower funds held for purposes of paying property taxes and hazard insurance premiums. Such rates range up to 5% per annum. The Company does not pay interest on the principal and interest portions of borrower payments that it remits to the investors. Loan servicing income, net, increased by $9.6 million, or 40%, to $33.8 million, in fiscal 1997 compared to fiscal 1996, primarily due to increased servicing fees earned resulting from the aforementioned purchases of MSA, partially offset by the corresponding increase in the amortization of MSA. OTHER FEES AND SERVICE CHARGES Other fees and service charges increased by $12.6 million or 22%, to $69.5 million, in fiscal 1998 compared to fiscal 1997. This increase, which reflects the continuing growth in the number of transaction accounts, was due primarily to increases in loan and deposit fee income and income from ATM transactions which totaled $52.5 million in fiscal 1998, compared to $38.3 million in fiscal 1997. 66 Other fees and service charges increased by $11.1 million or 24%, to $56.9 million, in fiscal 1997 compared to fiscal 1996. This increase was due primarily to increases in deposit fee income and ATM fees of $7.6 million and $1.7 million, respectively, related to growth in the number of transaction accounts and an increase in commissions and brokerage fees of $1.9 million related to higher sales from the Company's securities brokerage subsidiary. GAIN (LOSS) ON SALE OF MORTGAGE-BACKED SECURITIES, NET The Company recorded at $4.6 million net gain on sale of mortgage-backed securities in fiscal 1998, primarily due to the reduction of the estimated recourse liability for future losses related to loans sold in prior years subject to credit loss recourse provisions. The Company recorded a loss on sale of mortgage-backed securities, net, of $1.8 million in fiscal 1997, primarily due to provisions for loss related to loans sold in prior years subject to recourse obligations. Loss on sale of mortgage-backed securities, net, of $34.2 million in fiscal 1996 primarily reflected the previously discussed $28.2 million loss on the CMO Sale and $6.6 million of recourse related losses, including fees for recourse removal transactions. See "Overview--Sale of CMO Investment Portfolio" for additional discussion regarding the CMO Sale. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses increased by $30.4 million, or 12%, to $293.7 million in fiscal 1998, compared with $263.2 million in fiscal 1997. The increase primarily reflected costs associated with the Company's new business lines, franchise growth, recent acquisitions, including CENFED, and Year 2000 compliance costs, partially offset by reduced regulatory insurance premiums. Operating expenses directly related to the new business lines, franchise growth, acquisitions and Year 2000 compliance costs approximated $42.9 million in fiscal 1998, as compared with $12.2 million in fiscal 1997. Excluding these factors, general and administrative expenses for fiscal 1998 were essentially unchanged from fiscal 1997. General and administrative expenses have increased as the Company has continued to expand its business lines, broaden the reach of its branch franchise, maintain a higher level of marketing activity and upgrade the Bank's operational capabilities. The targeted benefits resulting from the expansion of its business lines and branch franchise, namely increased net interest margin and higher fee income, have lagged the increase in expenditures attributable to the timing of the investment in new business lines, network expansion and marketing, and the increase in revenues that is intended to result from this investment. The Company has had an ongoing program that was intended to ensure that its operational and financial systems would not be adversely affected by Year 2000 data processing hardware and software failures arising from processing errors involving calculations using the Year 2000 date. Enhancements to the Company's mainframe systems have been implemented with completion of all mission critical repairs having been scheduled for November 1998. The Company has initiated renovation of its non-mainframe systems, with completion of all but one mission critical system having been scheduled for December 1998 and the one remaining mission critical system was to be completed in February 1999. The Company halted further implementation of its own Year 2000 efforts as of August 20, 1998 after receiving both shareholder and OTS approvals for the Cal Fed Merger. Future Year 2000 compliance will depend upon the ongoing systems that will be maintained by Cal Fed. Expenses related to the Year 2000 enhancements amounted to $10.0 million in fiscal 1998, compared to $0.3 million in fiscal 1997. The Company expected to incur approximately $37 million on this project, including $2 million to $3 million on software and hardware expenditures, on its program to modify, redevelop or replace its computer applications to try to make them "Year 2000" compliant. Year 2000 compliance failures could result in additional expense to the Company and significant disruption of its business. As a result of the reduced assessment from the FDIC following the SAIF recapitalization in fiscal 1997, regulatory insurance in fiscal 1998 decreased by $8.5 million or 52%, to $7.8 million, compared to fiscal 1997. 67 General and administrative expenses increased by $16.3 million to $263.2 million in fiscal 1997 compared to fiscal 1996. The increase primarily reflected costs associated with the Company's new business lines, new branches and, to a lesser degree, the acquisitions of TransWorld and OneCentral, partially offset by reduced regulatory insurance premiums. LEGAL EXPENSE--GOODWILL LAWSUIT Legal expenses related to the Company's trial in the Court of Federal Claims to determine damages in its breach of contract suit against the federal government were $19.0 million in fiscal 1998, compared to $24.1 million and $1.9 million, respectively, in fiscal 1997 and 1996. The most intensive phase of the damages trial was completed in early April 1998. Costs will be incurred during any appeals process. However, these costs are expected to be at a significantly lower rate per quarter. See Item 3. "Legal Proceedings--Goodwill Litigation Against the Government" for further discussion. ACQUISITION AND RESTRUCTURING COSTS The Company incurred acquisition and restructuring costs of $6.9 million during the twelve months ended June 30, 1998. Costs related to the CENFED and RedFed acquisitions totaled $3.8 million, and costs related to the distribution of the Litigation Tracking WarrantsTM totaled $3.1 million during fiscal 1998. REO OPERATIONS Operations of REO resulted in income of $3.1 million in fiscal 1998, as compared to losses of $6.6 million and $8.4 million in fiscal 1997 and 1996, respectively. The $9.7 million improvement in fiscal 1998 compared to fiscal 1997 resulted from a $2.7 million increase in gains on sale of REO (after market valuation adjustments), a $3.3 million reduction in specific provisions to adjust the REO portfolio to current fair value, a $2.2 million decrease in operating expenses, and a $1.5 million decrease in the general valuation allowance provision. Losses in fiscal 1997 were primarily due to $7.5 million in provisions to adjust the REO portfolio to current fair value and $6.2 million of operating expenses. These expenses were partially offset by gains realized on the sale of REO (after market valuation adjustments) of $7.2 million. Losses in fiscal 1996 were primarily due to $12.1 million in provisions to adjust the REO portfolio to current fair value, and $7.2 million of operating expenses. These expenses were partially offset by gains realized on the sale of REO (after market valuation adjustments) of $10.9 million, of which $2.1 million was recognized in the September 1995 quarter in connection with the August 1995 sale of underperforming loans and REO. The declining trend in losses in REO operations mirrored the trend in the level of new REOs and a shift in the composition of the REO inventory from multi-family residential and non-residential properties to smaller balance single-family residential properties. Total REO decreased by $24.1 million, to $37.4 million as of June 30, 1998, compared to $61.5 million at June 30, 1997, while the percentage of single-family residential properties to total REO increased to 60% as of June 30, 1998, compared to 53% at June 30, 1997. Foreclosures of single-family residences represented 66% of the total dollar amount of foreclosures for fiscal 1998, compared to 70% for fiscal 1997 and 61% for fiscal 1996. AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS Amortization of goodwill totaled $9.2 million, $5.5 million and $5.1 million in fiscal 1998, 1997 and 1996, respectively. The increase in fiscal 1998, as compared to fiscal 1997, reflected the impact of a full year of goodwill amortization resulting from the TransWorld and OneCentral acquisitions completed in the second half of fiscal 1997, as well as additional goodwill amortization arising from the CENFED acquisition in the fourth quarter of fiscal 1998. The increase in fiscal 1997, as compared to fiscal 1996, reflected the impact of the amortization of the goodwill of $45.4 million relating to the acquisitions of TransWorld and OneCentral in the second half of fiscal 1997. On an annual basis, the goodwill of $90.5 million relating to the acquisition of CENFED in the fourth quarter of fiscal 1998 will increase the Company's amortization expense in future years by $6.0 million. 68 INCOME TAX PROVISION The Company recorded income tax provisions of $93.0 million, $36.1 million and $21.3 million in fiscal 1998, 1997 and 1996, respectively. The effective tax rate is higher than the federal statutory rate, primarily due to state taxes and the effect of nondeductible goodwill. The effective tax rates in those fiscal years were 41.9%, 41.7% and 33.7%, respectively. Changes in the effective rates are discussed in Note 15 of the Notes to Consolidated Financial Statements. FORWARD-LOOKING INFORMATION The discussions contained above in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 1. "Business" are intended to provide information to facilitate the understanding and assessment of the consolidated financial condition of Golden State as reflected in the accompanying consolidated financial statements and footnotes and should be read and considered in conjunction therewith. These discussions include forward- looking statements within the meaning of Section 21E of the Exchange Act regarding management's beliefs, estimates, projections, and assumptions with respect to future operations. All forward-looking statements herein are subject to risks and uncertainties, including the risks and uncertainties detailed herein and from time to time in Golden State's SEC reports and filings. Actual results and operations for any future period may vary materially from those projected herein and from past results discussed herein. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Financial Statements on Page 86 and Financial Statements beginning on Page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Identification of Directors and Business Experience - ---------------------------------------------------
Director Term Name Age Since (1) Expiring - ---- --- --------- -------- Diane C. Creel (2)(7)(8) 49 1992 1998 Brian P. Dempsey (3)(4)(5)(6) 60 1991 2000 Richard A. Fink (3)(4)(5)(6)(8) 58 1992 1998 John F. King (5)(6)(7) 65 1994 1998 John F. Kooken (2)(4)(5) 66 1992 1999 D. Tad Lowrey (4)(6)(8) 45 1998 2000 Paul J. Orfalea (6)(7)(8) 50 1997 2000
69 Thomas S. Sayles (2)(4) 47 1997 1999 Cora M. Tellez (3)(7) 49 1997 2000 Stephen J. Trafton (5)(8) 51 1991 2000 Gilbert R. Vasquez (2)(3)(8) 58 1981 1999
(1) The date given includes years during which the director served on the Board of Glendale Federal and on the Board of GLENFED, Inc., the former holding company of Glendale Federal. (2) Member of the Audit Committee, of which Mr. Kooken is Chair. (3) Member of the Community Investment Committee, of which Mr. Vasquez is Chair. (4) Member of the Credit Review Committee, of which Mr. Dempsey is Chair. (5) Member of the Executive Committee, of which Mr. Trafton is Chair. (6) Member of the Finance Committee, of which Mr. King is Chair. (7) Member of the Officer Compensation & Personnel Committee and of the Stock Option Committee, of which Ms. Creel is Chair. (8) Will resign from the Board effective upon consummation of the Cal Fed Merger. Diane C. Creel is Chief Executive Officer and President of The Earth Technology Corporation, headquartered in Long Beach, California. She also serves as a Director of Allegheny, Teledyne, B.F. Goodrich, and The Fixed Income Funds of the American Funds Group. Ms. Creel served as Chief Operating Officer of The Earth Technology Corporation from December 1987 until January 1993. She became its President in September 1988 and its Chief Executive Officer in January 1993. She served as Chairwoman in March 1993 until January 1996 when The Earth Technology Corporation was sold to Tyco International. Brian P. Dempsey is, and has been since September 1996, Vice Chairman of the Board and a Director of Continental Savings Bank, headquartered in Seattle, Washington. From January 1995 until September 1996, Mr. Dempsey was the President of Dempsey & Associates, a financial services consulting firm. From 1961 until January 1995, Mr. Dempsey was an officer of University Savings Bank, a wholly-owned subsidiary of Glendale Federal from 1989 until 1995, becoming its Chief Executive Officer in 1984 and its Chairman in 1989. Richard A. Fink has been Vice Chairman and a Director of Golden State since June 1997, and has been Senior Executive Vice President and a Director of Glendale Federal since May 1992. He served as Chief Legal Officer from May 1992 until April 1994; as Director, Corporate Development, from April 1994 until February 1996; and has served as Chief Credit Officer since February 1996. John F. King is President and Chief Executive Officer of Weingart Center Association, a nonprofit association whose goal is to help break the cycle of the homeless. He served as a Senior Advisor to Union Bank of Switzerland from 1990 to 1993. Mr. King is a former Vice Chairman of Crocker National Bank and a former Chairman of the Board of First Interstate Bank of California. Mr. King is a Director of Ameron International, Inc., a Trustee of the University of Southern California and of the California Hospital Medical Center Foundation, a Director of the National Institute of Transplantation Foundation and of Kilroy Realty Finance, Inc. and the founding Chairperson of Kidspace. John F. Kooken retired as Vice Chairman and Chief Financial Officer of Security Pacific Corporation in 1992 after 32 years with the company. Mr. Kooken is also a director of the Centris Group, Inc. and of Pacific Gulf Properties, Inc. 70 D. Tad Lowrey is and has been since August 24, 1998, Chief Operating Officer of IndyMac Mortgage Holdings, Inc. Mr. Lowrey was President and Chief Executive Officer of CENFED Financial Corporation and of its subsidiary, CenFed Bank, a Federal Savings Bank, from March 1991 and August 1990, respectively, until April 1998 when the Company acquired CENFED Financial Corporation. He is a director of Triple Net Properties Inc., and of the Federal Home Loan Bank of San Francisco, and is the Eleventh District's representative on the Savings Association Insurance Fund Advisory Council of the Federal Deposit Insurance Corporation. Mr. Lowrey is a former director of America's Community Bankers. He serves as a director and on the executive committee of the San Gabriel Valley Council of the Boy Scouts, the Pasadena Playhouse State Theatre of California, Pacific Clinics and the Azusa Pacific University Business Advisory Council. Paul J. Orfalea founded Kinko's, Inc. in 1970 and has been its Chairperson since 1986. Mr. Orfalea is a Director of Expresso Cafe Corporation, DataProse, Inc., Santa Barbara Community College and the University of California at Santa Barbara Foundation. Thomas S. Sayles is Vice President of Pacific Enterprises and of Sempra Energy. From January 1993 until December 1993, he was Secretary of the Business, Transportation and Housing Agency of the State of California. He became Vice President of Pacific Enterprises in January 1994 and served as Senior Vice President of Energy Pacific, a joint venture between Pacific Enterprises and Enova Corporation, from January 1997 until July 1998. Cora M. Tellez is President and Chairman of Prudential Heath Care Plan of California, Inc. She is a member of the Boards of Directors of the California Association of Health Plans, Holy Names College, the S.H. Cowell Foundation and Asian Community Mental Health Services. She is also a Member of the Mayor of San Francisco's Blue Ribbon Committee on Health Care and of the Advisory Panel of the University of San Francisco's School of Dentistry. From December 1978 until June 1994 she was a Senior Vice President of Blue Shield of California. She became President and Chairman of Prudential Health Care of California, Inc. in July 1997. Stephen J. Trafton became Chairman of the Board, Chief Executive Officer, President and a Director of Golden State in June 1997. Since April 1992, Mr. Trafton has served as Chairman of the Board, Chief Executive Officer and President of Glendale Federal. Gilbert R. Vasquez is Managing Partner of Vasquez, Farukhi & Company, a certified public accounting firm in Los Angeles, California. Mr. Vasquez is a director of several non-profit organizations. From 1980 to 1993 he was a director of General Telephone Company of California and from 1987 to 1996 he was a director of Blue Cross of California. Identification of Executive Officers and Business Experience - ------------------------------------------------------------ All of the following positions are with the Bank except as expressly indicated for Messrs. Trafton, Fink, Haynes and Eller.
Name Age Position(s) Held - ---- --- ---------------- James W. Bean, Jr. 51 Senior Vice President and Chief Auditor Vincent L. Beatty 38 Executive Vice President and Director, Communications/Investor/ Relations/Corporate Development William J. Birch 50 Executive Vice President and Manager, Retail Bank James R. Eller, Jr. 51 Corporate Counsel and Secretary; Secretary of Golden State Howard C. Everakes 47 Executive Vice President and General Counsel Richard A. Fink 58 Senior Executive Vice President and Chief Credit Officer and Director; Vice Chairman and Director of Golden State
71 Michael E. Goraleski 50 Executive Vice President and President, Retail Subsidiaries John E. Haynes 53 Executive Vice President and Chief Financial Officer; Chief Financial Officer of Golden State Gregory L. Hendry 38 Senior Vice President and Chief Accounting Officer Terry D. Hess 51 Executive Vice President and Director, Business Banking Lelah L. Jenkins 52 Executive Vice President and Chief Information Officer Jeffrey D. Misakian 39 Senior Vice President and Director, Corporate Relations Minaz A. Mithani 34 Executive Vice President and Treasurer Kathryn D. Snyder 41 Executive Vice President and Director, Bank Operations and Information Systems Stephen J. Trafton 51 Chairman of the Board, Chief Executive Officer and President; Chairman, Chief Executive Officer and President of Golden State Robert R. Trujillo 47 Executive Vice President and Director, Franchise Management/Sales/ Marketing Sharon K. Winston 46 Executive Vice President and Director, Corporate Human Resources
The following biographical entries are solely with respect to the Bank. The executive officers of Golden State listed above have held the indicated positions, and no other positions, with Golden State since June 23, 1997. James W. Bean, Jr. has been Senior Vice President and Chief Auditor since 1991. Vincent L. Beatty has been Executive Vice President and Director, Communications/Investor Relations/Corporate Development, of Glendale Federal since September 1997. Mr. Beatty was appointed Senior Vice President and Director, Lending Operations, in December 1992; Senior Vice President and Director, Retail Bank Operations, in June 1994; Executive Vice President and Director, Retail Bank Operations, in October 1994; Executive Vice President and Director, Bank and Lending Operations, in January 1995; Executive Vice President and Director, Loan Sales/Operations/Corporate Development in February 1996; Executive Vice President and Director, Marketing/Communications/Corporate Relations/Corporate Development in February 1997. William J. Birch has been Executive Vice President and Manager, Retail Bank, of Glendale Federal since 1992. From 1988 until 1992 he was Senior Vice President, Corporate Administrative Services. During 1992 Mr. Birch was Executive Vice President, Bank Operations. James R. Eller, Jr. has been Corporate Counsel and Secretary of Glendale Federal since 1992. Howard C. Everakes has been General Counsel of Glendale Federal since April 1993 and Executive Vice President since April 1994. From 1989 until 1993 he was Senior Vice President/Counsel and California Legal Staff Manager. Richard A. Fink has been Senior Executive Vice President and a Director of Glendale Federal since May 1992. He served as Chief Legal Officer from May 1992 until April 1994; Director, Corporate Development, from April 1994 until February 1996; and has been the Bank's Chief Credit Officer since February 1996. Michael E. Goraleski has been Executive Vice President and President, Retail Subsidiaries, since January 1987. 72 John E. Haynes has been Executive Vice President and Chief Financial Officer of Glendale Federal since April 1992. In September 1991 he became Senior Vice President and Chief Accounting Officer. He served as Chief Accounting Officer until March 1993. He served as Chief Information Officer from January 1995 until July 1996. Gregory L. Hendry has been Senior Vice President and Chief Accounting Officer since March 1993. From February 1991 until March 1993 he was Vice President and Manager, Technical Accounting. Terry D. Hess has been Executive Vice President and Director, Business Banking, of Glendale Federal since July 1996. Mr. Hess was Executive Vice President and Chief Credit Officer from June 1991 until July 1995 and was Executive Vice President and Director, Community Business Banking from July 1995 until July 1996. Lelah L. Jenkins has been Executive Vice President and Chief Information Officer of Glendale Federal since July 1996. From March 1991 to September 1995 she was Director, Company-Wide Systems, of The Walt Disney Company. Ms. Jenkins joined Glendale Federal in September 1995 as Senior Vice President and Director, Information Services. From April 1996 until July 1996 she was Senior Vice President and Director, Technology Services. Jeffrey D. Misakian has been Senior Vice President and Director, Corporate Relations, of Glendale Federal since August 1994. From September 1990 until March 1993 Mr. Misakian was Vice President and Manager, Financial Reporting. Mr. Misakian was Senior Vice President and Director, Investor Relations and Financial Reporting, from March 1993 until August 1994. Minaz A. Mithani has been Executive Vice President of Glendale Federal since January 1998 and has been Treasurer of Glendale Federal since December 1997. From December 1992 until February 1996, Mr. Mithani was Vice President and Manager, Strategic Risk Management. From February 1996 until October 1996, he was Senior Vice President and Manager, Strategic Risk Management. From October 1996 until December 1997, he was Senior Vice President and Manager, Strategic Risk Management and Secondary Marketing. Kathryn D. Snyder has been Executive Vice President and Director, Bank Operations and Information Systems, of Glendale Federal since December 1997. She was Executive Vice President and Treasurer from November 1992 December 1997; and was also Executive Vice President, Asset and Liability Risk Management, from July 1995 until February 1996. Stephen J. Trafton has been Chairman of the Board, Chief Executive Officer and President of Glendale Federal since April 1992. He has served as a Director since June 1991. Robert R. Trujillo has been Executive Vice President and Director, Franchise Management/Sales/Marketing since February 1997. From December 1992 until June 1994 Mr. Trujillo was Senior Vice President and Manager of Marketing, Customer Service Quality; from June 1994 until October 1994 he was Senior Vice President and Director, Franchise Management; from October 1994 until February 1996 he was Executive Vice President and Director, Franchise Management; from February 1996 until February 1997 he was Executive Vice President and Director, Franchise Management and Marketing; and from February 1997 until July 1997 he was Executive Vice President and Director, Franchise Management/Sales. Sharon K. Winston has been Executive Vice President and Director, Corporate Human Resources since June 1997. From May 1992 until August 1994 she was Vice President and Manager, Staffing/Management Development/Employee Relations and Compliance of Glendale Federal. From August 1994 until June 1997, she was Senior Vice President and Director, Corporate Human Resources. Compliance with Section 16(a) of the Exchange Act - ------------------------------------------------- Section 16(a) of the Securities Exchange Act of 1934, as amended, requires directors and officers of the Company and persons who own more than 10% of any class of equity securities of the Company registered under such Act to file with the Securities and Exchange Commission, the New York Stock Exchange and the Company initial reports of ownership and reports of changes in ownership of such securities. Based solely upon a review of such reports filed with the Company and a review of representation letters from the directors and officers of the Company that no Form 5 under such Act was required to be filed by them in respect of fiscal 1998, the Company believes that all such reports were timely filed in fiscal 1998 by such directors and officers. 73 Item 11. EXECUTIVE COMPENSATION Summary Compensation Table - -------------------------- The following table summarizes the compensation earned by the Company's Chief Executive Officer and each of the four other most highly compensated executive officers of the Company during the fiscal year ended June 30, 1998 for services rendered in all capacities to the Company and its subsidiaries for the fiscal years ended June 30, 1996, 1997 and 1998.
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS ------------------------------ --------------------------------- SECURITIES FISCAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION (1) YEAR SALARY BONUS OPTIONS (#) COMPENSATION - --------------------------------------- ------ ---------- -------- ------------- ----------------- Stephen J. Trafton..................... 1998 $735,000 $700,000 0 $3,084(2) Chief Executive Officer and President 1997 $726,827 $615,900 1,000,000 $3,084(2) 1996 $650,000 $202,000 0 $2,808(2) Richard A. Fink........................ 1998 $309,577(3) $203,700 35,000 $6,812(4) Vice Chairman 1997 $296,274(3) $135,900 75,000 $7,015(4) 1996 $261,250(3) $108,000 0 $3,631(4) John E. Haynes......................... 1998 $219,154(3) $147,000 20,000 $6,407(5) Chief Financial Officer 1997 $197,589(3) $ 96,900 40,000 $5,950(5) 1996 $174,966(3) $ 74,000 0 $2,956(5) Terry D. Hess.......................... 1998 $234,577(3) $119,300 20,000 $6,350(6) Executive Vice President 1997 $224,125(3) $ 96,500 35,000 $6,034(6) and Director, Business Banking, of 1996 $215,897(3) $ 88,000 0 $3,130(6) Glendale Federal William J. Birch ...................... 1998 $219,573(3) $129,300 15,000 $6,257(7) Executive Vice President and Manager, 1997 $207,115(3) $ 92,900 35,000 $6,287(7) Retail Bank, of Glendale Federal 1996 $180,000(3) $ 65,000 0 $3,192(7)
- -------------- (1) Except as otherwise specifically indicated, positions are with Golden State. (2) Amount consists of basic and executive life insurance costs to Glendale Federal. (3) Amounts shown include salary deferred at the election of the executive officer pursuant to the Sheltered Pay Plan. (4) For fiscal 1998, the amount consists of $1,912 for basic and executive life insurance and Glendale Federal's $4,900 contribution to the Sheltered Pay Plan. For fiscal 1997, the amount consists of $1,912 for basic and executive life insurance and Glendale Federal's $5,103 contribution to the Sheltered Pay Plan. For fiscal 1996, amount consists of $1,471 for basic and executive life insurance and Glendale Federal's $2,160 contribution to the Sheltered Pay Plan. (5) For fiscal 1998, the amount consists of $1,357 for basic and executive life insurance and Glendale Federal's $5,050 contribution to the Sheltered Pay Plan. For fiscal 1997, the amount consists of $1,357 for basic and executive life insurance and Glendale Federal's $4,593 contribution to the Sheltered Pay Plan. For fiscal 1996, amount consists of $983 for basic and executive life insurance and Glendale Federal's $1,973 contribution to the Sheltered Pay Plan. (6) For fiscal 1998, the amount consists of $1,449 for basic and executive life insurance and Glendale Federal's $4,901 contribution to the Sheltered Pay Plan. For fiscal 1997, the amount consists of $1,450 for basic and executive life insurance and Glendale Federal's $4,584 contribution to the Sheltered Pay Plan. For fiscal 1996, amount consists of $1,213 for basic and executive life insurance and Glendale Federal's $1,917 contribution to the Sheltered Pay Plan. (7) For fiscal 1998, the amount consists of $1,357 for basic and executive life insurance and Glendale Federal's $4,900 contribution to the Sheltered Pay Plan. For fiscal 1997, the amount consists of $1,357 for basic and executive life insurance and Glendale Federal's $4,930 contribution to the Sheltered Pay Plan. For fiscal 1996, amount consists of $1,011 for basic and executive life insurance and Glendale Federal's $2,181 contribution to the Sheltered Pay Plan. 74 Stock Options - ------------- The following table presents information concerning options granted during the fiscal year ended June 30, 1998. No SARs were granted in fiscal 1998. OPTION GRANTS IN FISCAL 1998 INDIVIDUAL GRANTS
PERCENT OF NUMBER OF SECURITIES TOTAL OPTIONS GRANTED EXERCISE UNDERLYING OPTIONS TO EMPLOYEES OR BASE GRANT DATE GRANTED IN FISCAL PRICE PER EXPIRATION PRESENT NAME (#)(1) YEAR SHARE DATE VALUE (2) - ------------------ ------ ---- ------- ---- -------- Stephen J. Trafton -0- 0% --- ----- ---- Richard A. Fink 35,000 3.95% $28.50 8/25/07 $519,719 John E. Haynes 20,000 2.26% $28.50 8/25/07 $296,982 Terry D. Hess 20,000 2.26% $28.50 8/25/07 $296,982 William J. Birch 15,000 1.69% $28.50 8/25/07 $222,737
(1) Options to purchase common stock were granted under the Company's Stock Option and Long-Term Performance Incentive Plan, which provides for the granting of options at an exercise price equal to the fair market value of the Company's common stock on the date of grant. All options become exercisable in three equal installments beginning 12 months after the grant date. (2) Present value determinations were made using the Black-Scholes option pricing model. There is no assurance that any value realized by the optionees will be at or near the value estimated by the Black-Scholes model. The estimated present values under that model are based on a seven- year holding period, as opposed to the ten-year term of the options, and on the following assumptions with respect to volatility and the risk-free rate, forfeiture percentage and dividend yield. Based upon the daily closing prices of the Company's common stock from August 1993, when Glendale Federal's common stock first started trading, until the grant date of August 25, 1997, the model used annualized volatility of 37.6472%. For the risk-free rate, the model uses the yield on a seven year treasury note of 6.39% as reported in the Federal Reserve Statistical Release. For the forfeiture percentage, the model uses 5%. For the dividend yield, the model uses zero. AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR ENDED JUNE 30, 1998 AND FISCAL YEAR END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE- UNDERLYING UNEXERCISED MONEY OPTIONS/SARs AT OPTIONS/SARs AT JUNE 30, 1998 (1) JUNE 30, 1998 (2) ------------------------------------ --------------------------------- SHARES ACQUIRED VALUE NAME ON EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------- --------------- -------- ---------------- --------------- --------------- --------------- Stephen J. Trafton 1,210,000 $31,499,963 416,666 333,334 $7,317,697 $5,854,178 Richard A. Fink 60,000 $ 1,987,500 230,000 85,000 $5,540,625 $1,107,813 John E. Haynes 120,000 $ 3,649,700 63,334 46,666 $1,356,053 $ 599,572 Terry D. Hess 50,000 $ 1,461,250 91,667 43,333 $2,086,152 $ 541,035 William J. Birch 51,000 $ 1,397,832 106,666 38,334 $2,650,214 $ 508,223
(1) The stock options shown become exercisable in full upon a change in control of the Company. The Cal Fed Merger will constitute such a change in control and, accordingly, all outstanding options will become exercisable upon consummation of the Cal Fed Merger. (2) Value is based upon the difference between (i) the sum of the closing prices on June 30, 1998, the end of the Company's fiscal year, of (A) the Company's common stock on the consolidated tape for New York Stock Exchange listed securities and (B) the Company's Litigation Tracking Warrants on NASDAQ and (ii) the exercise price. 75 Pension Plans - ------------- The following table sets forth, in straight life annuity amounts that are not subject to any deduction for Social Security or other offset amounts, the estimated annual benefits payable upon retirement at age 65 to participants in the Company's Pension Plan. Remuneration is average base salary (excluding amounts attributable to performance incentive compensation, commissions, overtime pay or other forms of additional compensation) for the five highest consecutive years in the final 10 years of service. PENSION PLAN TABLE
Years of Service --------------------------------------------------------------- Remuneration 15 20 25 30 35 - ------------------- ------- ------- -------- -------- -------- $125,000........... $29,311 $39,081 $ 48,851 $ 58,621 $ 68,391 $150,000........... $35,873 $47,831 $ 59,789 $ 71,746 $ 83,704 $175,000*.......... $42,436 $56,581 $ 70,726 $ 84,871 $ 99,016 $200,000*.......... $48,998 $65,331 $ 81,664 $ 97,996 $114,329 $250,000*.......... $62,123 $82,831 $103,539 $124,246 $125,000**
- -------------- * Under current Internal Revenue Code provisions, the allowable compensation limit is $160,000 beginning in 1997 (indexed in future years). Participants will be eligible for a grandfathered benefit as of December 31, 1993 based on the higher 1993 allowable compensation limit of $235,840. ** Under current Internal Revenue Code provisions, the maximum allowable annual benefit for a participant retiring at age 65 is $125,000. At June 30, 1998, Messrs. Trafton, Fink, Haynes, Hess and Birch had 8, 6, 25, 12 and 20 years of credited service under the Glendale Federal Pension Plan, respectively. Their compensation for purposes of the Glendale Federal Pension Plan was $160,000 each. Compensation of Directors - ------------------------- Annual Fees and Meeting Fees. The Boards of Directors of Golden State and of Glendale Federal consist of the same persons. Golden State does not pay any fees to directors. Directors of Glendale Federal, who are not also officers of the Company or its subsidiaries, are paid an annual fee of $30,000. Each such director is paid $1,400 for each meeting of the Board of Directors of Glendale Federal attended and $750 for each Glendale Federal committee meeting attended up to a maximum of $1,100 for any combination of committee meetings attended on the same day, subject to a limit of $2,500 for any combination of Board and committee meetings attended in any calendar month, which limit is subject to increase at the discretion of the Chairman of the Board. For telephonic Board or committee meetings, fees are determined on a case by case basis by the Chairman of the Board based on preparation, content and time, but not to exceed $750 per meeting for committees or $1,400 per meeting for the Board. Directors of Glendale Federal, who are not also officers of the Company or its subsidiaries, are also paid $333 per month for serving as chair of a standing committee of the Board. Directors of Glendale Federal are reimbursed their reasonable out-of- pocket expenses incurred in the fulfillment of their Board responsibilities. Stock Option Grants. Directors who are not also officers of the Company or its subsidiaries receive annual grants of stock options to purchase 5,000 shares of common stock pursuant to Golden State's Stock Option and Long-Term Performance Incentive Plan. 76 Directors' Retirement Plan. Glendale Federal maintains a retirement plan for non-employee directors who currently serve, or who previously served, on its Board of Directors or on the Board of Directors of Glendale Federal's former parent, GLENFED, Inc. (collectively for purposes of this section the "Board"). The plan provides that a non-employee director who has at least five years, except as indicated below, of Board service (including service on the board of an institution acquired by the Company) shall, after termination of Board membership, be entitled to receive a monthly benefit equal in amount to one- twelfth of the annual Board retainer in effect at the time of termination plus the monthly fee paid at such time for attending a Board meeting, for the number of years equal to the number of years of Board service, but not to exceed twenty years. A Director leaving the Board with less than five years of Board service only receives such benefit if the Director is retiring at the Annual Meeting of Glendale Federal immediately following attainment of age 70. Payments under the plan normally commence immediately following the director's termination. In the event of a change of control of the Company, the plan provides for an immediate lump sum payment to all active and retired directors equal to the sum of the monthly retirement benefits payable under the plan without application of any discount factor. Employment Contracts; Termination of Employment and Change of Control - --------------------------------------------------------------------- Arrangements - ------------ Trafton Employment Agreement. Mr. Trafton has an employment agreement with Glendale Federal relating to his employment prior to a change of control of the Company (the "Trafton Employment Agreement"). Unless otherwise extended by agreement of the parties, the Trafton Employment Agreement terminates on December 31, 2000 and provides for an annual base salary of not less than $735,000, which is to be reviewed annually by Glendale Federal's Board of Directors. Glendale Federal may terminate Mr. Trafton's employment at any time for cause or due to Mr. Trafton's disability, and Mr. Trafton may resign for good reason without breaching the Trafton Employment Agreement. In the event of his death or disability, Glendale Federal must pay Mr. Trafton his base salary through the date of death or termination for disability and the pro rata amount of any incentive compensation determined to be due for the portion of the incentive period then completed. In the event that Glendale Federal terminates the Trafton Employment Agreement for cause, if Mr. Trafton resigns other than for good reason or if Mr. Trafton's employment is terminated by Glendale Federal or a regulatory body for regulatory reasons, Mr. Trafton would be entitled to receive only his base salary to the date of termination. If the Trafton Employment Agreement is terminated prior to the expiration of its term other than by the death of Mr. Trafton or by Glendale Federal due to disability or for cause, or if Mr. Trafton resigns for good reason (collectively, an "Other Termination"), then, Mr. Trafton is entitled to receive liquidated damages equal to his regular base salary for a period of thirty-six months, if the Other Termination occurs at a time when two years or more remain in the term of the Trafton Employment Agreement; twenty-four months if the Other Termination occurs at a time when two years or less but more than one year remains in the term of the Trafton Employment Agreement; and twelve months if the Other Termination occurs at a time when one year or less remains in the term of the Trafton Employment Agreement. Mr. Trafton may elect annually to have any liquidated damages paid either in installments or in a discounted lump-sum. As part of his liquidated damages in connection with an Other Termination, the Trafton Agreement also provides that Mr. Trafton is entitled to receive reimbursement of his legal fees and expenses incurred to obtain a favorable judgment or arbitration award with respect to any Other Termination, to medical, life and long term disability benefits, to a pro rata portion of any incentive compensation determined to be due for the portion of the incentive period completed at the time of an Other Termination and to any vested benefits under Glendale Federal's employee benefit and retirement plans. All payments upon the termination of Mr. Trafton's employment must be in compliance with applicable banking regulations and are subject to reduction to the extent necessary to cause the aggregate of all such payments to be $100 less than the amount that would be deemed an "excess parachute payment" as defined in the Internal Revenue Code. Mr. Trafton's agreement further provides that, for purposes of an Other Termination, the total amount payable to him may not exceed three times his average annual compensation during the most recent five taxable years of employment with Glendale Federal. Based thereon, the maximum payment to Mr. Trafton in connection with an Other Termination at June 30, 1998 would have been $3,270,645. Certain executive officers of Glendale Federal (the "Covered Executive Officers"), including Messrs. Trafton, Fink, Haynes, Hess and Birch, are parties to change of control agreements with Glendale Federal. The description of such agreements contained under the subheading "Interests of Certain Persons in the Mergers - Existing Employment Agreements" under the heading "THE MERGERS" contained in the Company's proxy statement dated July 15, 1998 is hereby incorporated by reference. 77 Messrs. Trafton and Fink are parties to a Litigation Management Agreement with the Company and Glendale Federal. The description of such agreement contained under the subheading "Interests of Certain Persons in the Mergers - Litigation Management Agreement" under the heading "THE MERGERS" contained in the Company's proxy statement dated July 15, 1998 is hereby incorporated by reference. Report of the Officer Compensation and Personnel Committee - ---------------------------------------------------------- The Officer Compensation and Personnel Committee of the Board of Directors of Glendale Federal and the Stock Option Committee of Golden State (collectively, the "Committee") establish and administer executive compensation and benefit policies and programs for all executive officers. All of such policies and programs are those of Glendale Federal, except that stock awards are made by Golden State. The Committee recommends to the full Board of Directors of Glendale Federal for its approval the compensation and benefits of Mr. Trafton, who is the Chief Executive Officer of both Golden State and Glendale Federal ("CEO"). The Committee approves the compensation and benefits of all officers reporting directly to the CEO. The Committee reviews individual compensation and benefit actions for all other executive officers, as approved by the CEO, within the framework of plans and programs established by the Committee. The Committee also administers Golden State's Stock Option and Long-Term Performance Incentive Plan (the "Plan") and approves all stock option grants. Executive Compensation Goal and Policy. The primary goal of the Committee is to ensure that the overall compensation, employee benefits and management development policies of the Company are in accordance with the business goals and strategies of the Company, consistent with the financial strength of the Company, and consistent and competitive with employment practices in the financial services industry contributing to the primary objective of maximizing stockholder value. The Committee believes that this singular objective of maximizing stockholder value is best supported by an executive officer compensation policy which: 1. Focuses executive attention on those annual objectives which will lead to enhanced stockholder value. 2. Delivers competitive total compensation opportunities through stock options issued at 100% of fair market value. Specifically, the Committee compares compensation for the senior executives of the Company to the compensation practices of similar sized United States commercial banks and savings institutions, and in the case of the CEO and one other executive, also compares their compensation to the compensation practices of a specific peer group of 14 large commercial and savings banks and savings and loan associations of which three are included in the Keefe Bruyette & Woods Index, used for the purposes of the performance graph appearing elsewhere in this proxy statement. These analyses are conducted by an independent, nationally recognized executive compensation consulting firm. The Committee's policy in regard to the 12 senior executives in fiscal 1998 was to target both base salary and total annual cash compensation opportunity (base salary and target annual incentive) around the median of competitive practice. Stock option grants, which have no value unless the share price increases, have been used to bring total compensation opportunity to between the median and third quartile (50th to 75th percentile) of competitive practice. There are three executive officers not included in the senior executive group whose compensation is determined under Glendale Federal's middle management compensation plans, and consists of base salary, short-term incentive cash compensation paid through Glendale Federal's Management Incentive Plan ("MIP") and a long-term incentive compensation opportunity provided through the grant of options under the Plan. Annual Incentive Opportunity. During fiscal 1998, annual incentive opportunity was provided through the Executive Incentive Plan ("EIP"). In general, target annual cash compensation opportunity (base salary and target annual incentive) was about at competitive medians for the 12 senior executives. For the CEO, the target annual incentive for fiscal 1998 was 70% of salary, with a maximum potential payout of 105% of salary. For all other senior executives, the target annual incentive for fiscal 1998 was 50% of salary, with a maximum potential payout of 75% of salary. 78 Under the EIP, each executive was assigned a mix of corporate and individual performance goals. For the CEO, this mix was 80% corporate and 20% individual. For the other executive officers, this mix varied from 60% corporate and 40% individual to 30% corporate and 70% individual. Corporate and individual goals were approved by the Committee. For fiscal 1998, corporate goals and payment schedules were established by the Committee for net earnings, efficiency ratio, return on average equity, charge-offs, non-performing assets, core capital ratio, risk based capital ratio and checking accounts designated as a percent of deposits. For the second level executives covered by the MIP, for fiscal 1998, the Committee approved the corporate goals, which were the same as for the EIP, with the CEO approving the individual goals. Following the close of fiscal 1998, the Committee reviewed Glendale Federal's fiscal 1998 results against the established criteria and performance schedules. Based upon their evaluation of performance against the established criteria and performance schedules, the corporate performance portion of the EIP award for each participant was paid above the target level. The Committee also reviewed individual performance results against established goals and payment schedules for each EIP participant and determined the amount of this portion of each participant's EIP award to be paid. Individual goals were tailored to each position, and included both financial and operational objectives for the particular executive's area of responsibility. The Committee approved the awards for all executive officers of Glendale Federal who participated in the EIP and recommended Mr. Trafton's award to the Board. The CEO approved the awards for the remaining three executive officers who participated in the MIP. The average executive officer award, excluding Mr. Trafton's award, was 126% of target. The Board of Directors approved the award for Mr. Trafton following the Committee's review. Long-Term Incentives. In fiscal 1997, the Committee established stock option grant guidelines for the then 11 senior executives. These guidelines were developed in conjunction with an analysis of executive compensation developed by an independent, nationally recognized executive compensation consulting firm. This competitive analysis included the prevalence and value of the supplemental executive retirement plans which a number of peer company executives have, but which neither Golden State nor Glendale Federal provides. The guidelines were developed on the basis of providing each executive with a total compensation opportunity between the median and the third quartile (50th to 75th percentile) of competitive practice, after taking account of each executive's annual compensation opportunity (base salary and target annual incentive). By providing a significant portion of total compensation opportunity to executives in the form of stock options, the Committee seeks to ensure that their interests are closely aligned with the interests of the stockholders. Because a significant portion of these executives' total compensation is at risk based on the market performance of Golden State's common stock, the Committee believes that this increased risk is properly compensated with a total compensation opportunity level on average somewhat above the median of the executives' peers. In fiscal 1998, the Committee determined that new stock option grants should be made to all executive officers (excluding the CEO) and approved grants for each of them under the Plan. These grants are described below. CEO Compensation. Glendale Federal has two employment agreements with Mr. Trafton, the terms of which are set forth above under "Employee Contracts; Termination of Employment, and Change of Control Arrangements." In fiscal 1998, the Committee made no change in Mr. Trafton's base salary of $735,000 per year, or in Mr. Trafton's target annual incentive of 70% of salary. Eighty percent of Mr. Trafton's actual fiscal 1998 annual incentive award was based on corporate results against established EIP goals for net earnings, efficiency ratio, return on average equity, charge-offs, non-performing assets, core capital ratio, risk-based capital ratio and checking accounts designated as a percent of deposits. In addition, 20% of Mr. Trafton's annual incentive was based on the following individual performance goals which were established by the Committee at the beginning of fiscal 1998: . Adaptability to changing environment and building stockholder value. . Stockholder and Board relations. . Goodwill Lawsuit . Management Continuity/Succession Plan 79 Based upon the overall performance of the Company and Mr. Trafton meeting the aforementioned goals, the Committee rated his performance as exceptional. As a result of the assessment, Mr. Trafton's fiscal 1998 EIP award was approved by the Board of Directors at $700,000. Fiscal 1998 Stock Option Grants. In early fiscal 1998, the Committee completed a review of the competitive compensation position of the senior executives of the Company, assisted by a nationally recognized executive compensation consulting firm. Mr. Trafton received no stock option grants in fiscal 1998, since he had received a stock option grant in fiscal 1997 intended to provide his long term incentive opportunity for three years, or until fiscal 2000. Based on its review of the competitive data and recommendations by Mr. Trafton, the Committee approved stock options granted at fair market value for the other 12 senior executives totaling 215,000 shares. These grants were intended to position long-term compensation around the median of competitive practice for these senior executives. Deductibility. In 1993, Congress enacted Section 162(m) of the U.S. Internal Revenue Code of 1986, effective for tax years beginning in 1994. This legislation precludes a public corporation from taking a deduction for compensation in excess of $1 million per year for its chief executive officer and any of its four other highest-paid executive officers who are employed on the last day of the fiscal year. Certain performance-based compensation is specifically exempt from the deduction limit. Any taxable compensation derived from the exercise of stock options should be exempt from the limit on the corporate tax deduction. The base salaries and annual incentive awards paid for fiscal year 1998 were not exempt. However, the compensation limit for the year was exceeded by only one covered officer. The Committee believes that, although there may be circumstances in which the best interest of the stockholders are better served otherwise, significant compensation expenses generally should be deductible. OFFICER COMPENSATION AND PERSONNEL COMMITTEE Diane C. Creel (Chair) John F. King Paul J. Orfalea Cora M. Tellez STOCK PRICE PERFORMANCE GRAPH The Stock Price Performance Graph below (the "Graph") compares the cumulative total returns of the Company, the S&P 500 Index and a Keefe, Bruyette & Woods Inc. index of 50 commercial, regional and savings banks ("the KBW 50"). Prior to August 26, 1993, all shares of common stock of Glendale Federal were owned by GLENFED, Inc. As part of the recapitalization of Glendale Federal that was completed on that date, GLENFED, Inc. was merged into a subsidiary of Glendale Federal and the stockholders of GLENFED, Inc. became stockholders Glendale Federal. On July 24, 1997, the Company became the holding company for Glendale Federal, with each share of Glendale Federal being exchanged for one share of the Company. The Graph reflects information relating to the period commencing August 27, 1993, the first full day on which shares of Glendale Federal's common stock were traded on the New York Stock Exchange and the Pacific Stock Exchange, and ending on June 30, 1998. 80 The Graph shall not be deemed incorporated by reference by any general statement incorporating this Form 10-K into any filing under the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates this information by reference. [GRAPH APPEARS HERE] INDEX TOTAL SHAREHOLDER /1/ PERIOD ENDING
Base Period/2/ S&P (Fiscal Year Covered) Golden State 500 INDEX/4/ KBW 50/3/ - -------------------- ------------ ------------ ---------- Measurement Pt- Aug-93 100 100 100 FYE Dec-93 78.08 102.21 98.36 FYE Jun-94 115.07 98.75 103.86 FYE Dec-94 105.48 103.56 93.34 FYE Jun-95 136.99 124.49 120.97 FYE Dec-95 193.15 142.47 149.50 FYE Jun-96 198.63 156.86 166.11 FYE Dec-96 254.79 175.18 211.48 FYE Jun-97 286.30 211.29 254.25 FYE Dec-97 410.27 233.63 309.18 FYE Jun-98 383.96 275.01 345.17
1 Total Shareholder Return assumes reinvestment of dividends. Data provided by Standard & Poor's CompuStat. 2 Period commencing August 27, 1993 3 The KBW 50 Index represents major commercial, regional and savings banks as compiled by Keefe, Bruyette & Woods, Inc. 4 Total Shareholder Return for Golden State Bancorp is adjusted for the Litigation Tracking Warrant issued to each share of common stock on May 29, 1998. Data provided by Standard & Poor's CompuStat. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information included under the subheadings "Beneficial Ownership of Golden State Common Stock by Management" and "Beneficial Ownership of Common Stock by Others" under the heading "INFORMATION ABOUT GOLDEN STATE" appearing in the Company's proxy statement dated July 15, 1998 is hereby incorporated by reference. 81 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Indebtedness of Management. Glendale Federal offers home mortgage and consumer loans to officers, directors and full-time employees. These loans are made in the ordinary course of business and, in the judgment of management, do not involve more than the normal risk of collectability or present other unfavorable features. Loans made to senior executive officers and directors since 1989 are made on substantially the same terms as those prevailing at the time for comparable transactions with non-affiliated persons. Loans made to other officers and employees are also made on such terms except that the interest rate and loan fees charged to other officers and employees, and with respect to loans made to senior executive officers and directors prior to 1989, are made under preferential terms pursuant to an employee loan program. All such employee mortgage loans are written at Glendale Federal's prevailing rates at the time of origination, but provide for a reduced interest rate while the borrower is employed by Glendale Federal. The employee loan policy provides that for adjustable rate mortgage loans the reduced rate is Glendale Federal's weighted average cost of interest bearing liabilities, plus 1/4 of 1%, adjusted semiannually. For consumer loans, including equity loans, the reduced rate is Glendale Federal's stated rate for its customers, less 1.0%. In addition, employees must pay all normal loan origination fees and closing costs, except that loan points and appraisal fees are not charged in connection with adjustable rate first mortgage loans. The rate of interest borne by a mortgage loan reverts to the normal rate provided in the loan instruments upon termination of employment, except that employees (and in certain instances their spouses) who retire or whose employment is terminated due to permanent disability continue to receive the preferential interest rate as long as they occupy the premises securing the mortgage loan as their principal residence. The following table sets forth information as of June 30, 1998 relating to loans made to each individual who is a director or executive officer of the Company, whose indebtedness to Golden State or its subsidiaries exceeded $60,000 at any time since July 1, 1997 and who has a loan at an employee loan rate. Other outstanding loans to directors and executive officers of Golden State or Glendale Federal in the ordinary course of business that were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons are not shown.
HIGHEST BALANCE EFFECTIVE OUTSTANDING DURING BALANCE AT ORIGINAL RATE AT YEAR ENDED JUNE 30, NOTE RATE JUNE 30, 1998 DATE NAME LOAN JUNE 30, 1998 1998 (%) (%) MADE ---- ---- ------------------ ---- --- --- ---- Vincent L. Beatty........ Mortgage $261,627 $258,593 7.500 5.016 1990 Michael E. Goraleski..... Mortgage $124,774 $119,594 10.264 5.016 1983 John E. Haynes........... Mortgage $461,519 $455,996 9.875 5.016 1990 Terry D. Hess............ Mortgage $586,306 $579,028 10.375 5.016 1989 Robert R. Trujillo....... Mortgage $286,598 $283,096 8.875 5.016 1990
82 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
EXHIBIT NUMBER ------- 2.1 Agreement and Plan of Reorganization dated as of February 4, 1998 by and among Golden State, Golden State Financial Corporation, First Nationwide (Parent) Holdings Inc., First Nationwide Holdings Inc., First Gibraltar Holdings Inc. and Hunter's Glen/Ford, Ltd., as amended by Amendment No. 1 thereto dated as of July 13, 1998 (incorporated by reference to Appendix A to Golden State's Proxy Statement dated July 15, 1998). 2.2 Stock Option Agreement dated February 4, 1998 between Golden State and First Nationwide (Parent) Holdings Inc. (incorporated by reference to Appendix B to Golden State's Proxy Statement dated July 15, 1998). 3.1 Certificate of Incorporation of Golden State. 3.2 Articles of Amendment to the Certificate of Incorporation of Golden State. 3.3 Bylaws of Golden State. 4.1 Article FOURTH of the Certificate of Incorporation of Golden State (included in Exhibit 3.1) 4.2 Certificate of Designation of Golden State for Noncumulative Convertible Preferred Stock, Series A. 4.3 Warrant Agreement dated as of February 23, 1993 between Glendale Federal and Chemical Trust Company of California, as amended by Amendment No. 1 dated July 24, 1997 by and among Glendale Federal, ChaseMellon Shareholder Services LLC as successor to Chemical Trust Company of California and Golden State. 4.4 Warrant Agreement dated as of August 15, 1993 between Glendale Federal and Chemical Trust Company of California, as amended by Amendment No. 1 dated July 24, 1997 by and among Glendale Federal, ChaseMellon Shareholder Services LLC as successor to Chemical Trust Company of California and Golden State. 4.5 Warrant Agreement dated as of May 4, 1998 between Golden State and ChaseMellon Shareholder Services L.L.C. 10.1 Board of Directors Retirement Plan, as amended. 10.2 Amended and Restated Stock Option and Long-Term Performance Incentive Plan. 10.3 Amended and Restated Employment Agreement between Golden State and Stephen J. Trafton dated January 1, 1998. 10.4 Employment Agreement between Golden State and Stephen J. Trafton dated December 16, 1997. 10.5 Form of employment agreement. Executed agreements are with Vincent L. Beatty, William J. Birch, Howard C. Everakes, Richard A. Fink, Michael E. Goraleski, John E. Haynes, Terry D. Hess, Lelah L. Jenkins, Minaz A. Mithani, Kathryn D. Snyder, Robert R. Trujillo and Sharon K. Winston. 10.6 Litigation Management Agreement dated as of February 4, 1998 by and among Golden State, Glendale Federal, California Federal Bank, A Federal Savings Bank, Stephen J. Trafton and Richard A. Fink (incorporated by reference to Appendix C to Golden State's Proxy Statement dated July 15, 1998). 21 List of Subsidiaries. 23.1 Consent of KPMG Peat Marwick LLP. 27 Financial Data Schedule
FINANCIAL STATEMENTS AND SCHEDULES See Index to Financial Statements on page 86, and Financial Statements commencing on page F-1. Financial Statement Schedules have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto. REPORTS ON FORM 8-K FILED DURING THE QUARTER ENDED JUNE 30, 1998 On May 5, 1998, Golden State filed with the SEC, a Form 8-K, dated April 21, 1998, to report that the Company had completed its acquisition of CENFED Financial Corporation ("CENFED"), parent company of CenFed Bank. The terms of the transaction provided for a tax-free exchange of 1.2 shares of Golden State common stock for each outstanding share of CENFED's common stock. The Company also reported that, on April 23, 1998, its Board of Directors had declared a distribution of its Litigation Tracking Warrants (LTW(TM)s) for May 29, 1998, to holders of the common stock of Golden State of record on May 7, 1998, on the basis of one LTW(TM) for each share held as of the close of business on that date. The Board of Directors also reserved additional LTW(TM)s for future issuance in connection with conversions or exercises of the Company's outstanding Series A Preferred Stock, its two outstanding classes of common stock purchase warrants and employee stock options. 83 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. GOLDEN STATE BANCORP INC. Date: September 10, 1998 By: /s/ Stephen J. Trafton ------------------------------------- Stephen J. Trafton Chairman of The Board, Chief Executive Officer and President PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND ON THE DATE INDICATED:
/s/ Stephen J. Trafton Date: September 10, 1998 ----------------------------------------------------------- Stephen J. Trafton Chairman of The Board, Chief Executive Officer and President (Principal Executive Officer) /s/ John E. Haynes Date: September 10, 1998 ----------------------------------------------------------- John E. Haynes Chief Financial Officer (Principal Financial Officer) /s/ Gregory L. Hendry Date: September 10, 1998 ----------------------------------------------------------- Gregory L. Hendry Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) /s/ Diane C. Creel Date: September 10, 1998 ----------------------------------------------------------- Diane C. Creel, Director /s/ Brian P. Dempsey Date: September 10, 1998 ----------------------------------------------------------- Brian P. Dempsey, Director /s/ Richard A. Fink Date: September 10, 1998 ----------------------------------------------------------- Richard A. Fink, Director /s/ John F. King Date: September 10, 1998 ----------------------------------------------------------- John F. King, Director /s/ John F. Kooken Date: September 10, 1998 ----------------------------------------------------------- John F. Kooken, Director
84 /s/ D. Tad Lowrey Date: September 10, 1998 ------------------------------------------------------ D. Tad Lowrey, Director /s/ Paul J. Orfalea Date: September 10, 1998 ------------------------------------------------------ Paul J. Orfalea, Director /s/ Thomas S. Sayles Date: September 10, 1998 ------------------------------------------------------ Thomas S. Sayles, Director /s/ Cora M. Tellez Date: September 10, 1998 ------------------------------------------------------ Cora M. Tellez, Director ------------------------------------------------------ Gilbert R. Vasquez, Director
85 INDEX TO FINANCIAL STATEMENTS
Page ------ Annual Financial Statements Independent Auditors' Report............................................................................. F-1 Consolidated Statements of Financial Condition as of June 30, 1998 and 1997.............................. F-2 Consolidated Statements of Operations for years ended June 30, 1998, 1997 and 1996....................... F-3 Consolidated Statements of Changes in Stockholders' Equity for years ended June 30, 1998, 1997 and 1996.................................................................................... F-4 Consolidated Statements of Cash Flows for years ended June 30, 1998, 1997 and 1996....................... F-5 Notes to Consolidated Financial Statements............................................................... F-7
86 GOLDEN STATE BANCORP INC. INDEPENDENT AUDITORS' REPORT The Board of Directors Golden State Bancorp Inc. We have audited the accompanying consolidated statements of financial condition of Golden State Bancorp Inc. and subsidiaries (the Company) as of June 30, 1998 and 1997, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the three-year period ended June 30, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Golden State Bancorp Inc. and subsidiaries as of June 30, 1998 and 1997 and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1998 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Los Angeles, California July 20, 1998 F-1 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
June 30 -------------------------- 1998 1997 -------------------------- ASSETS Cash and amounts due from banks...................................................................... $ 311,278 $ 221,557 Federal funds sold and assets purchased under resale agreements...................................... 172,000 632,000 Certificates of deposit--substantially restricted.................................................... 2,200 4,005 Other debt and equity securities available for sale, at fair value................................... 126,149 27,794 Mortgage-backed securities held to maturity, at amortized cost (fair value: $921,555 in 1998 and $1,166,941 in 1997).......................................................... 914,593 1,162,825 Mortgage-backed securities available for sale, at fair value......................................... 1,460,770 1,116,709 Loans receivable, net of allowance for loan losses of $156,482 in 1998 and $163,759 in 1997.................................................................................. 13,742,673 11,886,090 Loans held for sale, at lower of cost or market...................................................... 31,907 19,003 Real estate held for sale or investment.............................................................. 6,327 8,689 Real estate acquired in settlement of loans.......................................................... 37,393 61,500 Interest receivable.................................................................................. 114,009 102,940 Investment in capital stock of Federal Home Loan Bank, at cost....................................... 300,339 259,587 Premises and equipment, at cost, less accumulated depreciation....................................... 146,893 134,936 Mortgage servicing assets............................................................................ 243,314 284,472 Goodwill and other intangible assets, less accumulated amortization ($31,261 in 1998 and $22,110 in 1997)......................................................................... 180,463 99,533 Other assets......................................................................................... 326,429 196,619 ----------- ----------- $18,116,737 $16,218,259 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Deposits ............................................................................................ $10,698,265 $ 9,356,909 Securities sold under agreements to repurchase....................................................... 175,551 768,682 Borrowings from the Federal Home Loan Bank........................................................... 5,613,458 4,788,000 Other borrowings..................................................................................... 63,936 10,782 Other liabilities and accrued expenses............................................................... 281,806 221,540 Income taxes payable................................................................................. 45,044 60,272 ----------- ----------- Total liabilities........................................................................ 16,878,060 15,206,185 ----------- ----------- STOCKHOLDERS' EQUITY: Preferred stock, Series A, $1.00 par value per share and $25.00 liquidation preference per share (5,000,000 shares authorized; 4,617,484 shares issued and outstanding at June 30, 1998; 4,621,982 shares issued and outstanding at June 30, 1997)........................................ 4,617 4,622 Common stock, $1.00 par value per share (250,000,000 shares authorized; 60,173,551 shares issued in 1998; 50,348,509 shares issued and outstanding at June 30, 1997)....................... 60,173 50,349 Additional paid-in capital........................................................................... 1,049,822 793,111 Net unrealized holding loss on debt and equity securities available for sale......................... (1,607) (1,154) Retained earnings--substantially restricted.......................................................... 283,787 165,146 Common stock in treasury, at cost (4,688,400 shares in 1998)........................................ (158,115) -- ----------- ----------- Total stockholders' equity.............................................................. 1,238,677 1,012,074 ----------- ----------- $18,116,737 $16,218,259 =========== ===========
See accompanying Notes to Consolidated Financial Statements F-2 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE DATA)
Years Ended June 30 --------------------------------------- 1998 1997 1996 --------------------------------------- Interest income: Loans receivable...................................................................... $ 950,265 $ 861,858 $ 803,432 Mortgage-backed securities............................................................ 149,749 149,551 216,812 Investments........................................................................... 57,931 61,547 59,791 ---------- ---------- ---------- Total interest income............................................................... 1,157,945 1,072,956 1,080,035 ---------- ---------- ---------- Interest expense: Deposits.............................................................................. 408,300 405,182 433,834 Short-term borrowings................................................................. 37,591 18,642 108,839 Other borrowings...................................................................... 271,894 270,148 204,297 ---------- ---------- ---------- Total interest expense.............................................................. 717,785 693,972 746,970 ---------- ---------- ---------- Net interest income................................................................. 440,160 378,984 333,065 Provision for loan losses............................................................... (1,727) 25,204 40,350 ---------- ---------- ---------- Net interest income after provision for loan losses................................. 441,887 353,780 292,715 Other income: Loan servicing income, net............................................................ 28,550 33,795 24,208 Other fees and service charges........................................................ 69,526 56,901 45,769 Gain (loss) on sale of loans, net..................................................... 605 (291) (690) Gain (loss) on sale of mortgage-backed securities, net................................ 4,562 (1,804) (34,222) Other income (loss), net.............................................................. 1,645 62 (707) ---------- ---------- ---------- Total other income.................................................................. 104,888 88,663 34,358 ---------- ---------- ---------- Other expenses: Compensation and employee benefits.................................................... 135,966 114,270 101,502 Computer support and item processing.................................................. 37,686 25,545 20,474 Occupancy expense, net................................................................ 34,215 31,777 29,698 Advertising and promotion............................................................. 21,816 24,416 24,798 Furniture, fixtures and equipment..................................................... 15,078 12,585 11,605 Stationery, supplies and postage...................................................... 14,228 11,628 10,158 Regulatory insurance.................................................................. 7,843 16,317 27,491 Other general and administrative expenses............................................. 26,838 26,686 21,209 ---------- ---------- ---------- Total general and administrative expenses........................................... 293,670 263,224 246,935 SAIF special assessment............................................................... -- 55,519 -- Legal expense--goodwill lawsuit....................................................... 19,045 24,058 1,929 Acquisition and restructuring costs................................................... 6,939 -- -- Operations of real estate held for sale or investment................................. (664) 935 1,242 Operations of real estate acquired in settlement of loans............................. (3,111) 6,623 8,426 Amortization of goodwill and other intangible assets.................................. 9,151 5,530 5,147 ---------- ---------- ---------- Total other expenses................................................................ 325,030 355,889 263,679 ---------- ---------- ---------- Earnings before income tax provision.................................................... 221,745 86,554 63,394 Income tax provision.................................................................... 92,996 36,131 21,342 ---------- ---------- ---------- Net earnings........................................................................ $ 128,749 $ 50,423 $ 42,052 ========== ========== ========== Earnings applicable to common shareholders: Net earnings.......................................................................... $ 128,749 $ 50,423 $ 42,052 Dividends declared on preferred stock................................................. (10,108) (10,841) (16,156) Premium on exchange of preferred stock for common stock............................... -- (4,173) (9,443) ---------- ---------- ---------- $ 118,641 $ 35,409 $ 16,453 ========== ========== ========== Earnings per common share: Basic................................................................................. $2.27 $0.72 $0.39 Diluted............................................................................... $1.78 $0.64 $0.36
See accompanying Notes to Consolidated Financial Statements F-3 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Preferred Stock Series A Common Stock Additional ------------------------- ------------------------- Paid-in Shares Amount Shares Amount Capital ------------- --------- ---------- ---------- ------------ Balance, June 30, 1995............................. 8,050,000 $ 8,050 40,719,718 $40,720 $ 793,372 Exchange of Series A Preferred Stock for common stock...................................... (2,226,118) (2,226) 5,901,771 5,902 (3,676) Net unrealized holding loss on debt and equity securities available for sale..................... -- -- -- -- -- Stock options exercised............................ 106,000 106 1,028 5-year warrants exercised.......................... -- -- 2,209 2 -- Dividends declared on Series A preferred stock ($2.188 per share)................................ -- -- -- -- -- Net earnings....................................... -- -- -- -- -- ---------- ------- ---------- ------- ---------- Balance, June 30, 1996............................. 5,823,882 5,824 46,729,698 46,730 790,724 Exchange of Series A Preferred Stock for common stock...................................... (1,201,900) (1,202) 3,103,872 3,104 (1,902) Net unrealized holding gain on debt and equity securities available for sale..................... -- -- -- -- -- Stock options exercised............................ -- -- 512,125 512 4,263 5-year warrants exercised.......................... -- -- 414 1 -- 7-year warrants exercised.......................... -- -- 2,400 2 26 Dividends declared on Series A preferred stock ($2.188 per share)................................ -- -- -- -- -- Net earnings....................................... -- -- -- -- -- ---------- ------- ---------- ------- ---------- Balance, June 30, 1997............................. 4,621,982 4,622 50,348,509 50,349 793,111 Exchange of Series A Preferred Stock for common stock...................................... (4,498) (5) 10,813 11 (6) Net unrealized holding loss on debt and equity securities available for sale..................... -- -- -- -- -- Stock options exercised............................ -- -- 2,344,951 2,345 52,643 5-year warrants exercised.......................... -- -- 276 -- -- 7-year warrants exercised.......................... -- -- 78,110 78 859 Dividends declared on Series A preferred stock ($2.188 per share)................................ -- -- -- -- -- Issuance of common stock to acquire CENFED......... -- -- 7,390,557 7,390 203,706 Golden State formation costs....................... -- -- -- -- (491) Escheatment of GLENFED Inc. shares................. -- -- 335 -- -- Purchase of common stock in treasury............... -- -- -- -- -- Net earnings....................................... -- -- -- -- -- ---------- ------- ---------- ------- ---------- Balance, June 30, 1998............................. 4,617,484 $ 4,617 60,173,551 $60,173 $1,049,822 ========== ======= ========== ======= ========== Net Unrealized Holding Gain (Loss) on Debt Common Stock and Equity In Treasury Total Securities Retained --------------------- Stockholders' Available for Sale Earnings* Shares Amount Equity ------------------- ---------- ------- ------- ------------- Balance, June 30, 1995............................. $ 37 $ 99,668 -- -- $ 941,847 Exchange of Series A Preferred Stock for common stock...................................... -- -- -- -- -- Net unrealized holding loss on debt and equity securities available for sale..................... (11,428) -- -- -- (11,428) Stock options exercised............................ -- -- 1,134 5-year warrants exercised.......................... -- -- -- -- 2 Dividends declared on Series A preferred stock ($2.188 per share)................................ -- (16,156) -- -- (16,156) Net earnings....................................... -- 42,052 -- -- 42,052 -------- -------- ---------- --------- ---------- Balance, June 30, 1996............................. (11,391) 125,564 -- -- 957,451 Exchange of Series A Preferred Stock for common stock...................................... -- -- -- -- -- Net unrealized holding gain on debt and equity securities available for sale..................... 10,237 -- -- -- 10,237 Stock options exercised............................ -- -- -- -- 4,775 5-year warrants exercised.......................... -- -- -- -- 1 7-year warrants exercised.......................... -- -- -- -- 28 Dividends declared on Series A preferred stock ($2.188 per share)................................ -- (10,841) -- -- (10,841) Net earnings....................................... -- 50,423 -- -- 50,423 -------- -------- ---------- --------- ---------- Balance, June 30, 1997............................. (1,154) 165,146 -- -- 1,012,074 Exchange of Series A Preferred Stock for common stock...................................... -- -- -- -- (453) Net unrealized holding loss on debt and equity securities available for sale..................... (453) -- -- -- Stock options exercised............................ -- -- -- -- 54,988 5-year warrants exercised.......................... -- -- -- -- -- 7-year warrants exercised.......................... -- -- -- -- 937 Dividends declared on Series A preferred stock ($2.188 per share)................................ -- (10,108) -- -- (10,108) Issuance of common stock to acquire CENFED......... -- -- -- -- 211,096 Golden State formation costs....................... -- -- -- -- (491) Escheatment of GLENFED Inc. shares................. -- -- -- -- -- Purchase of common stock in treasury............... -- -- (4,688,400) (158,115) (158,115) Net earnings....................................... -- 128,749 -- -- 128,749 -------- -------- ---------- --------- ---------- Balance, June 30, 1998............................. $ (1,607) $283,787 (4,688,400) $(158,115) $1,238,677 ======== ======== ========== ========= ==========
- -------------- * substantially restricted See accompanying Notes to Consolidated Financial Statements F-4 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED JUNE 30 ---------------------------------------- 1998 1997 1996 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings............................................................................... $ 128,749 $ 50,423 $ 42,052 Adjustments to reconcile net earnings to net cash provided by operating activities: Amortization of discounts and accretion of premiums, net................................ 7,167 11,064 8,054 Accretion of deferred loan fees......................................................... (3,305) (4,355) (5,546) Provision for loan losses............................................................... (1,727) 25,204 40,350 Amortization of mortgage servicing assets............................................... 49,245 27,342 22,559 Provision for impairment of mortgage servicing assets................................... 6,142 4,047 -- (Gain) loss on sale of loans, net....................................................... (605) 291 690 (Gain) loss on sale of mortgage-backed securities, net.................................. (4,562) 1,804 34,222 Depreciation............................................................................ 16,186 15,065 16,115 Provision for losses on real estate..................................................... 2,670 7,706 11,610 Gain on sale of real estate............................................................. (10,641) (7,220) (10,880) Amortization of goodwill and other intangible assets.................................... 9,151 5,530 5,147 (Benefit) provision for deferred income taxes........................................... (7,685) 10,364 19,132 Net change in loans originated or purchased for resale.................................. 62,422 39,249 (2,649) Decrease (increase) in interest receivable.............................................. 460 (8,851) 7,158 FHLB stock dividend received............................................................ (16,096) (13,693) (9,612) (Increase) decrease in other assets..................................................... (127,001) 434 20,298 Increase (decrease) in other liabilities................................................ 121,755 177,937 (27,698) Other items............................................................................. (2,679) 630 (24,286) ---------- --------- --------- Total adjustments....................................................................... 100,897 292,548 104,664 ---------- --------- --------- Net cash provided by operating activities.................................................. 229,646 342,971 146,716 ========== ========= ========= CASH FLOWS FROM INVESTING ACTIVITIES: Net change in certificates of deposit with original maturities of 3 months or less......... 3,805 1,971 (5,027) Net change in other debt and equity securities with original maturities of 3 months or less 390 (3,809) 9,268 Purchase of certificates of deposit........................................................ (2,000) (3,000) (4,800) Purchase of other debt and equity securities held to maturity.............................. -- (3,000) (5,000) Proceeds from maturities of certificates of deposit........................................ -- 7,810 9,100 Proceeds from maturities of other debt and equity securities held to maturity.............. -- 7,800 20,045 Purchase of other debt and equity securities available for sale............................ (392) (2,113) -- Proceeds from sales and maturities of other debt and equity securities available for sale.. 6,156 161,760 -- Purchase of mortgage-backed securities held to maturity.................................... -- -- (2,982) Principal payments on mortgage-backed securities held to maturity.......................... 245,588 190,545 495,999 Purchase of mortgage-backed securities available for sale.................................. (588,712) (505,083) (113,218) Principal payments on mortgage-backed securities available for sale........................ 457,318 285,404 355,975 Proceeds from sale of mortgage-backed securities available for sale........................ 124,811 -- 1,671,934 Loans originated for investment, net of refinances......................................... (720,064) (590,924) (364,471) Loans purchased for investment............................................................. (2,707,817) (2,430,461) (2,107,509) Net change in undisbursed loan funds....................................................... (1,591) (10,353) 7,507 Principal payments on loans held for investment............................................ 2,859,780 1,894,857 1,428,501 Proceeds from sale of loans held for investment............................................ -- -- 159,079 Cash invested in real estate............................................................... (11,735) (12,515) (16,115) Cash received from real estate investments and sale of real estate acquired in settlement of loans.............................................................................. 98,175 101,679 108,482 Purchase of FHLB stock..................................................................... (1,067) (53,052) (17,187) Redemption of FHLB stock................................................................... -- -- 19,756 Net (increase) decrease in premises and equipment.......................................... (18,191) (19,810) 20,559 Payments under agreements to purchase mortgage servicing assets............................ (21,558) (197,091) (26,479) Payment for purchase of CENFED Financial Corporation....................................... (3,232) -- -- Payment for purchase of TransWorld Bank.................................................... -- (64,419) -- Payment for purchase of OneCentral Bank.................................................... -- (11,111) -- ---------- --------- --------- Net cash (used in) provided by investing activities........................................ (280,336) (1,254,915) 1,643,417 ========== ========= =========
Statement continued on next page F-5 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED) (IN THOUSANDS)
YEARS ENDED JUNE 30 --------------------------------------- 1998 1997 1996 ---- ---- ---- CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in deposits.................................................. $ (59,697) $ 227,776 $ (10,904) Net change in short-term borrowings with original maturities of 3 months or less..... (717,197) 10,632 (1,937,126) Proceeds from fundings of FHLB advances.............................................. 4,024,000 2,300,000 2,988,000 Repayments of FHLB advances.......................................................... (3,460,000) (1,350,000) (2,645,000) Proceeds from other borrowings....................................................... 45,000 -- -- Repayment of other borrowings........................................................ (10,712) (2,492) (18,284) Proceeds from issuance of common stock............................................... 27,243 4,804 1,136 Common stock purchased for treasury.................................................. (158,115) -- -- Payment of dividends on preferred stock.............................................. (10,111) (11,827) (17,044) ----------- ----------- ----------- Net cash (used in) provided by financing activities.................................. (319,589) 1,178,893 (1,639,222) ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents................................. (370,279) 266,949 150,911 Cash and cash equivalents at beginning of year....................................... 853,557 586,608 435,697 ----------- ----------- ----------- Cash and cash equivalents at end of year............................................. $ 483,278 $ 853,557 $ 586,608 =========== =========== ===========
See accompanying Notes to Consolidated Financial Statements F-6 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 NOTE 1: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES PRINCIPLES OF CONSOLIDATION AND PRESENTATION The consolidated financial statements include the accounts of Golden State Bancorp Inc. and its subsidiaries ("Golden State" or the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation, including 200,686 common shares of Glendale Federal Bank, Federal Savings Bank ("Glendale Federal" or the "Bank") held by a subsidiary of the Bank at June 30, 1998. Certain reclassifications have been made to prior years' consolidated financial statements to conform to the June 30, 1998 presentation. Golden State was formed to become the holding company for Glendale Federal in a reorganization that was approved by Glendale Federal's stockholders and completed on July 24, 1997. As part of the holding company formation, shares of Glendale Federal's common stock automatically became an equal number of shares of Golden State common stock and shares of Glendale Federal's Noncumulative Preferred Stock, Series E, automatically became an equal number of shares of Golden State's Noncumulative Convertible Preferred Stock, Series A. Glendale Federal's two classes of warrants became exercisable solely to purchase common stock of Golden State. The members of the board of directors of Glendale Federal also became the board of directors of Golden State. On November 26, 1997, Golden State Financial Corporation ("Golden State Financial") was formed as a wholly-owned subsidiary of Golden State for the purpose of becoming an intermediate holding company to effect the acquisition of CENFED Financial Corporation ("CENFED"), the parent company of CenFed Bank, A Federal Savings Bank ("CenFed Bank"). CENFED was merged with and into Golden State Financial on April 21, 1998, with Golden State Financial as the surviving entity in the merger. On May 8, 1998, Golden State Bancorp contributed its shares of Glendale Federal to Golden State Financial and CenFed Bank was merged into Glendale Federal, with Glendale Federal as the surviving entity. Golden State has no significant assets or business other than its ownership of Golden State Financial, and Golden State Financial has no significant assets or business other than its ownership of Glendale Federal. The Bank's business consists primarily of attracting checking and savings deposits from the public; originating real estate, business and consumer loans; and purchasing loans secured by mortgages on residential real estate. The Bank, through its subsidiaries, also provides general insurance and securities brokerage services. RISKS AND UNCERTAINTIES In the normal course of its business, the Company encounters two significant types of risk: economic risk and regulatory risk. There are four main components of economic risk: interest rate risk, credit risk, market risk and concentrations of credit risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on different bases, than its interest-earning assets. Credit risk is the risk of default on the Company's loan portfolio that results from borrowers' inability or unwillingness to make contractually required payments. Market risk refers to the risk of decline in the value of collateral underlying loans receivable and the value of real estate held by the Company, and in the valuation of loans held for sale, mortgage-backed securities available for sale and mortgage servicing assets. Concentration of credit risk refers to the risk that, if the Company extends a significant portion of its total outstanding credit to borrowers in a specific geographical area or industry or on the security of a specific form of collateral, the Company may experience disproportionately high levels of default and losses if those borrowers, or the value of the type of collateral, is adversely affected by factors that are particularly applicable to such borrowers or collateral. The Company's lending activities are principally in California, with the largest concentration of the Company's loan portfolio being secured by real estate located in Southern California. The ability of the Company's borrowers to repay amounts owed is dependent on several factors, including the economic conditions in the borrower's geographic region and the borrower's financial condition. The Company and the Bank are subject to the regulations of various government agencies. Regulatory risk refers, among other things, to the fact that these regulations can and do change significantly from period to period. In addition, the Bank undergoes periodic examinations by regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required loss allowances and operating restrictions resulting from the regulators' judgments based on information available to them at the time of their examination. F-7 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 The Company has had an ongoing program that was intended to ensure that its operational and financial systems would not be adversely affected by Year 2000 data processing hardware and software failures arising from processing errors involving calculations using the Year 2000 date. Enhancements to the Company's mainframe systems have been implemented with completion of all mission critical repairs having been scheduled for November 1998. The Company has initiated renovation of its non-mainframe systems, with completion of all but one mission critical system having been scheduled for December 1998 and the one remaining mission critical system was to be completed in February 1999. The Company halted further implementation of its own Year 2000 efforts as of August 20, 1998 after receiving both shareholder and Office of Thrift Supervision approvals for the Cal Fed Merger. Future Year 2000 compliance will depend upon the ongoing systems that will be maintained by Cal Fed. Expenses related to the Year 2000 enhancements amounted to $10.0 million in fiscal 1998, compared to $0.3 million in fiscal 1997. The Company expected to incur approximately $37 million on this project, including $2 million to $3 million on software and hardware expenditures, on its program to modify, redevelop or replace its computer applications to try to make them "Year 2000" compliant. Year 2000 compliance failures could result in additional expense to the Company and significant disruption of its business. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the dates of the balance sheets and revenues and expenses for the periods covered, including the allowance for loan losses, mortgage servicing assets and the realization of deferred tax assets. Actual results could differ significantly from those estimates and assumptions. SHORT-TERM HIGHLY LIQUID INVESTMENTS The Company's short-term highly liquid investments consist of federal funds sold and assets purchased under agreements to resell. The Company invests in these assets to maximize its return on liquid funds. Glendale Federal is required by the Federal Reserve System to maintain non- interest earning cash reserves against certain of its transaction accounts and term deposit accounts. At June 30, 1998 and 1997, the required reserves totaled $92,688,000 and $61,892,000, respectively. Actual reserves totaled $92,690,000 and $62,454,000 at June 30, 1998 and 1997, respectively. INVESTMENTS IN DEBT AND EQUITY SECURITIES The Company's investment in debt securities consists principally of U.S. Treasury securities, obligations of municipalities and mortgage-backed securities purchased by the Company or created when the Company exchanges pools of loans for mortgage-backed securities ("securitized loans"). The Company classifies its investment in debt and equity securities as held to maturity securities, trading securities and available for sale securities, as applicable. Securities are designated as held to maturity if the Company has the positive intent and the ability to hold the securities to maturity. Held to maturity securities are carried at amortized cost, adjusted for the amortization of any related net deferred origination costs and premiums or the accretion of any related net deferred origination fees and discounts into interest income using the interest method over the estimated remaining period until maturity. Unrealized losses on held to maturity securities, reflecting a decline in value judged by the Company to be other than temporary, are charged to income and reported under the caption "Gain (loss) on sale of mortgage-backed securities, net" in the Consolidated Statements of Operations. F-8 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 The Company classifies securities as available for sale when at the time of purchase it determines that such securities may be sold at a future date or if the Company does not have the positive intent or ability to hold such securities to maturity. Securities designated as available for sale are recorded at fair value. Changes in the fair value of debt and equity securities available for sale are included in shareholders' equity as unrealized holding gains or losses net of the related tax effect. Unrealized losses on available for sale securities reflecting a decline in value judged to be other than temporary are charged to income in the Consolidated Statement of Operations. Realized gains or losses on available for sale securities are determined on the specific identification basis. Deferred net origination costs or fees, and purchased premiums and discounts, are amortized and accreted to interest income using the interest method over the estimated remaining period until maturity. The Company classifies securities it intends to sell presently as trading securities. Such securities are generally comprised of securities created by the Company to facilitate the sale of loans originated and held for sale. Trading securities are recorded at fair value, determined by the lesser of quoted market prices for similar securities or commitment prices for those securities under mandatory commitments to sell. Changes in fair value of debt and equity securities are recognized in earnings in the period in which the change occurs under the caption "Gain (loss) on sale of mortgage-backed securities, net" in the Consolidated Statements of Operations. The Company held no trading securities at June 30, 1998 and 1997. In November 1995, the Financial Accounting Standards Board (the "FASB") issued implementation guidance for Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). The guidance caused the Company to reassess the appropriateness of the classifications of its securities and account for resulting reclassifications at fair value in accordance with SFAS 115. During the second quarter of fiscal 1996, the Company, in accordance with the implementation guidance, reclassified $2.8 billion of mortgage-backed securities from held to maturity to available for sale. Pursuant to the transfer to available for sale and the subsequent sale of $1.7 billion of CMOs, the Company recorded a pre-tax loss on sale of mortgage-backed securities of $28.2 million during fiscal 1996. See Note 7: "Mortgage-Backed Securities" for additional information. LOANS HELD FOR SALE The Company may designate certain of its loans receivable as being held for sale. In determining the level of loans held for sale, the Company considers whether such loans would be sold in response to liquidity needs, asset/liability management requirements, regulatory capital needs and other factors. The Company originates and/or purchases loans that meet certain yield and other guidelines for its own portfolio. Such loans are designated as held for investment at the time of origination or purchase based on a specific identification method. Loans that do not meet such guidelines are designated as held for sale. Loans held for sale are recorded at the lower of aggregate cost or market value. Unrealized losses are recorded as a reduction in earnings and are included under the caption "Gain (loss) on sale of loans, net" in the Consolidated Statements of Operations. Realized gains and losses from the sale of loans receivable are computed under the specific identification method. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at an amount management deems adequate to cover estimated inherent losses. In determining the allowance for loan losses to be maintained, management evaluates many factors, including management's judgment as to appropriate asset classifications, prevailing and forecasted economic and market conditions, industry experience, historical loss experience, loan portfolio composition, management's assessment of the borrowers' ability to repay and repayment performance, and the fair value of the underlying collateral. The determination of the allowance for loan losses is based on estimates that are particularly susceptible to changes in the economic environment and market conditions. Management believes that, as of June 30, 1998 and 1997, the allowance for loan losses is adequate based on information currently available to it. Deterioration in the economies of the Company's principal market areas could adversely impact the Company's loan portfolios and increases in non- performing assets and higher charge-offs could result. Such adverse effects could also require a larger allowance for loan losses. F-9 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 The Company considers a loan to be impaired when, based upon current information and events, it believes it is probable that the Company will be unable to timely collect all amounts due according to the contractual terms of the loan agreement. Non-accrual income property loans, non-accrual single-family loans or borrowing relationships with unpaid balances greater than $500,000, non-accrual business banking loans with unpaid balances of greater than $100,000, troubled debt restructurings, and certain performing loans are measured individually for impairment. Loans not included in the preceding categories are collectively measured for impairment. Specific valuation allowances are established for impaired collateralized loans at the difference between the loan amount and the fair value of the related collateral, reduced by estimated selling costs, and for unsecured loans at either the present value or the expected future cash flows from the loan, discounted at the loan's effective interest rate, or at the loan's observable market price. Impairment losses are recognized through an increase in the allowance for loan losses and a corresponding charge to the provision for loan losses. Adjustments to impairment losses due to changes in the fair value of the collateral properties for impaired loans are included in the provision for loan losses. Impaired loans may be left on accrual status during the period the Company is pursuing repayment of the loan. When an impaired loan is either sold, transferred to REO or written down, any related valuation allowance is charged off against the allowance for loan losses. Impaired loans are placed on non-accrual status at the point that either: (1) they become 90 days delinquent; or (2) the Company determines the borrower is incapable of, or has ceased efforts toward, continuing performance under the terms of the loan. Increases to the general allowance are charged to the provision for loan losses. Specific valuation allowances are provided for when management identifies a loan or a portion thereof as to which default is deemed probable. Charge-offs to the allowance for loan losses are made when all, or a portion, of the loan is confirmed as a loss based upon management's review of the loan or through repossession of the underlying security or through a troubled debt restructuring transaction. Recoveries of previously charged-off amounts are credited to the allowance. TROUBLED DEBT RESTRUCTURINGS Loans whose terms are modified due to borrower difficulties in repaying amounts owed under the loan's original terms are classified as Troubled Debt Restructurings ("TDRs"). TDRs are reported as such based on whether the restructuring was made at an interest rate equal to or greater than the rate that the Company was willing to accept for loans presenting comparable credit risk at the time of the restructuring for a loan of comparable risk and whether the loan is impaired based on the terms of the restructuring agreement. Loans that are restructured at rates greater than or equal to the rate the Company was willing to accept at the time of restructuring and that are not impaired based on the terms of the restructuring are reported as TDRs only in the year of the restructuring. All other TDRs are reported in years following the restructuring until repaid. INTEREST INCOME RECOGNITION--LOANS RECEIVABLE Interest income is accrued as it is earned. Loans are placed on non-accrual status after being delinquent more than 90 days, or earlier if the borrower is deemed by management to be unable to continue performance. When a loan is placed on non-accrual status, interest accrued but not received is reversed. While a loan is on non-accrual status, interest is recognized only as cash is received and if no portion of the loan's carrying value is classified "Doubtful". Loans are returned to accrual status only when the loan is reinstated and ultimate collectibility of current interest is no longer in doubt. Interest income on impaired loans is recognized based on the loan's accrual and classification status as discussed above. Loan origination fees and direct origination costs are deferred at origination and the net amounts deferred are accreted or amortized to interest income over the contractual lives of the loans, using the interest method. Accretion of discounts and net deferred origination fees and amortization of premiums and net deferred origination costs is discontinued when loans are placed on non-accrual status. F-10 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 GAINS AND LOSSES FROM SALE OF LOANS The Company sells whole mortgage loans and participations in mortgage loans to institutional and private investors. Gains and losses resulting from the sales of loans are determined on the specific identification method and reflect the extent that the sales proceeds and the allocated fair value of any retained interests exceed or are less than the Company's investment in the loans (which includes the unpaid principal balance of the loans, unearned discounts, premiums and deferred fees and costs at the time of sale). To the extent sales of loans involve the sale of part of a loan or a pool of loans with disproportionate credit or prepayment risks, the cost basis is allocated based upon the relative fair market value of the portion sold to the portion retained on the date of sale. In most cases, the Company sells loans and continues to service such loans for the investor. During fiscal 1997, the Company adopted Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS 122"). SFAS 122 was superseded, for transactions recorded after December 31, 1996, by Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS 125"). Both SFAS 122 and SFAS 125 require, and the Company recorded, the recognition of a servicing asset or liability and other retained interests as an allocation of the carrying amount of the assets sold between the asset sold and the servicing obligation and other retained interests based on the relative fair value of the assets sold to the interests retained. The resulting Mortgage Servicing Asset ("MSA") or liability is amortized in proportion to and over the period of estimated net servicing income or loss. The Company evaluates the MSA for impairment or increased obligation based on the MSA's fair value. The Company estimates fair values by discounting servicing asset cash flows using discount and prepayment rates that it believes market participants would use. The assets are summarized by risk attribute strata and a valuation allowance is recorded as the sum of the impairment amounts for all strata with impairment. For purposes of defining impairment strata, the Company groups loans by interest rate, by whether the loan is government-insured, and by whether the loan has a fixed or adjustable interest rate. If loans are sold with recourse, the estimated liability under the recourse provision is provided for in the computation of the gain or loss. For loan sales after December 31, 1996, in accordance with the requirements of SFAS 125 (described under the caption "Current Accounting Pronouncements", following), the liability for loans sold with recourse is recorded at the fair value of the liability. For loan sales through December 31, 1996, the liability is recorded at the present value of the future recourse obligation, discounted at a risk- free rate of return as of the date of the sale. There were no loan sales with recourse between December 31, 1996 and June 30, 1998. LOAN SERVICING AND MORTGAGE SERVICING RIGHTS The Company services mortgage loans for investors. Fees earned for servicing loans owned by investors are reported as income when the related mortgage loan payments are due. Accrued servicing fees relating to loans past due more than 90 days are reversed. Loan servicing costs are charged to expense as incurred. Loans serviced for others are not included with loans receivable or any other asset in the accompanying Consolidated Statements of Financial Condition. The Company from time-to-time enters into transactions to acquire the rights to service pools of loans for others and collect the servicing and related fees. The amount paid by the Company for these rights is capitalized as MSA. The Company also sells loans and retains the right to service the loans for the investors. As discussed in "Gains and Losses from Sale of Loans," preceding, the Company also records MSA arising from sales of loans. MSA is amortized in proportion to, and over the period that the servicing rights generate net servicing fee income. SFAS 125 also requires that MSA be evaluated for impairment based on the asset's fair value. The Company estimates fair values by discounting servicing asset cash flows using discount and prepayment rates that it believes market participants would use. For purposes of measuring impairment, MSA is stratified by the Company based upon whether the loans are fixed-rate or adjustable-rate, and whether the loans are government- insured. F-11 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 ACCOUNTING FOR REAL ESTATE Real estate acquired in settlement of loans ("REO") is recorded at the lower of fair value, generally as determined by recent appraisals, reduced by estimated selling costs, or the recorded investment in the loan at the time of foreclosure. Thereafter, the property is carried at the lower of acquisition cost or fair value reduced by estimated selling costs, as reflected by subsequent appraisals or sales agreements. Specific valuation allowances on REO are recorded through a charge to operations for estimated costs to sell and if there is a further deterioration in fair value. The Company also provides a general allowance for inherent losses on REO recorded through a charge to operations. Real estate held for sale or investment ("REI") is carried at the lower of cost or fair value less estimated costs to sell. Changes in estimated selling and disposal costs, and declines in fair values are provided through a valuation allowance. Net gains or losses on disposal of REO and REI are charged to operations as incurred. Gains on real estate sales financed by the Company are recognized only when the transactions meet the down-payment and continuing investment criteria of Statement of Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate." Losses are recognized when identified. PREMISES AND EQUIPMENT AND DEPRECIATION Depreciation and amortization of premises is included in "Occupancy expense, net" and depreciation and amortization of equipment is included in "Other general and administrative expenses" in the Consolidated Statements of Operations. Depreciation and amortization of premises and equipment is computed using the straight-line method over the estimated useful lives of the assets. The cost of leasehold improvements is amortized using the straight-line method over the lesser of the life of the asset or the remaining term of the related lease. Maintenance and repairs on premises and equipment are charged to expense as incurred. Material improvements are capitalized. GOODWILL AND OTHER INTANGIBLE ASSETS Assets acquired and liabilities assumed in acquisitions accounted for under the purchase method of accounting were recorded at their fair value as of the date of the acquisition. The excess cost over fair value of the net assets acquired was classified as goodwill and is being amortized over periods ranging from 10 to 40 years on a straight-line basis. The purchase accounting discount or premium resulting from each acquisition is accreted or amortized into interest income using the interest method over the loans' remaining contractual lives, adjusted for actual principal prepayments. At June 30, 1998, goodwill totaled $149.8 million and had a weighted average remaining life of 15.2 years. In fiscal 1997, the Company acquired OneCentral Bank ("OneCentral") with total assets of $74.3 million for $11.1 million in cash, which includes out-of-pocket expenses, and TransWorld Bancorp ("TransWorld") with total assets of $372.4 million for $64.4 million in cash, including out-of-pocket expenses. The Company recorded goodwill of $5.8 million and $40.0 million, respectively, in the OneCentral and TransWorld transactions, which is being amortized over 15 years using the straight-line method. The goodwill relating to these acquisitions had a remaining balance of $42.0 million at June 30, 1998. In fiscal 1998, the Company acquired CENFED. The terms of the transaction provided for a tax-free exchange of 1.2 shares of Golden State common stock for each outstanding share of CENFED's common stock. Pursuant to the terms of the transaction, Golden State issued 7,390,557 shares of its common stock for a total purchase price of $211.1 million, or $28.563 per share. The Company recorded goodwill of $90.5 million, which is being amortized over 15 years using the straight-line method. The goodwill relating to this acquisition had a remaining balance of $89.5 million at June 30, 1998. As discussed in Note 24: "Subsequent Events," on July 11, 1998, the Company completed its acquisition of RedFed Bancorp, parent company of Redlands Federal Bank. Pursuant to this acquisition, the Company recorded goodwill of $62.8 million. F-12 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 In fiscal 1995, the Company acquired $194 million in deposits of Independence One Bank of California, Federal Savings Bank ("Independence One") and $812 million in deposits of Union Federal Bank ("Union Federal"). The Company paid a purchase premium of $4.4 million for the Independence One deposits and a purchase premium of $6.9 million for the Union Federal deposits. The Company accepted as part of the consideration for assuming Union Federal's deposit liabilities certain of Union Federal's assets at their existing gross book values. These purchase premiums, together with an adjustment to record the assets acquired from Union Federal at fair value, totaled $42.9 million, and are reflected under the caption "Goodwill and other intangible assets" in the Consolidated Statements of Financial Condition. These intangible assets are being amortized over 10 years using the straight-line method. At June 30, 1998, these intangible assets totaled $30.6 million with a remaining life of seven years. Periodically, the Company evaluates the recoverability of its deposit purchase premium assets based upon the rate of attrition of deposit relationships acquired. Goodwill is evaluated for impairment on the basis of the estimated undiscounted cash flows of the acquired franchise. DERIVATIVE FINANCIAL INSTRUMENTS The Company has in the past used various strategies to minimize interest rate risk, including interest rate futures contracts and interest rate exchange agreements ("swaps"). The Company's accounting policy relating to interest rate futures contracts is to amortize deferred gains and losses on futures contracts into interest income or expense over the expected remaining life of the hedged asset or liability. The conditions for obtaining and maintaining hedge accounting treatment require identification of the asset or liability to be hedged and linking the swap to the asset or liability being hedged. The notional amounts of outstanding interest rate swaps are off-balance sheet items and therefore are not reflected in the Consolidated Statements of Financial Condition. Any gains or losses from selling the swaps simultaneously with the underlying assets or liabilities are currently recognized. Any gains or losses from selling only the swap, without the assets or liabilities, are deferred and amortized over the life of the assets or liabilities. Net interest income (expense) resulting from the differential between exchanging floating rate and fixed rate interest payments is recorded on a current basis and is included with the interest income or expense of the related asset or liability in the Consolidated Statements of Operations. The Company does not hold any derivative financial instruments for trading purposes. As of June 30, 1998 and 1997, there were no interest rate swaps outstanding. As detailed under "Current Accounting Pronouncements" following, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") in June of 1998. As discussed under "Current Accounting Pronouncements," SFAS 133 will require adjustments to the Company's accounting policy during the quarter ending September 30, 1999. As the Company presently does not use derivative financial instruments in its hedging practices, changes to the Company's accounting policies would have no effect on the company's statements of financial position or results of operations at June 30, 1998 for the year then-ended. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE The Company enters into sales of securities under agreements to repurchase ("reverse repurchase agreements") only with selected primary dealers. These reverse repurchase agreements are treated as financings: the dollar amount of securities underlying the agreements remains in the asset accounts, and the obligations to repurchase securities sold are reflected as liabilities in the Consolidated Statements of Financial Condition. INCOME TAXES The Company and its subsidiaries file a consolidated Federal income tax return. F-13 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 The Company uses the asset and liability method of accounting for income taxes. 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. NET INCOME PER SHARE Net income per share of common stock is based on the weighted-average number of common and common equivalent shares outstanding, excluding common shares in treasury, during the year. CURRENT ACCOUNTING PRONOUNCEMENTS In February 1997, the FASB issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128") and Statement of Financial Accounting Standards No. 129, "Disclosure of Financial Information About Capital Structure" ("SFAS 129"). SFAS 128 simplifies the standards found in Accounting Principles Board Opinion No. 15 ("APB 15") for computing earnings per share ("EPS"), and makes them comparable to international standards. Basic EPS, which replaces primary EPS required by APB 15, is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS, which replaces fully diluted EPS required by APB 15, gives effect to all dilutive potential common shares that were outstanding during the period, regardless of when the dilutive securities must be exercised, converted or issued. Under APB 15 only dilutive securities with conversion privileges taking effect within 10 years from the end of the fiscal period were considered in the computation of fully diluted EPS. SFAS 128 retains the treasury stock method and the "if converted" method from APB 15 for convertible securities in the computation of diluted EPS. Both methods assume the conversion of a security at the beginning of the earliest period reported or at the date of issue, if later. However, under SFAS 128, the number of common shares assumed repurchased on the exercise of warrants or options is no longer capped at 20% of the already outstanding common stock. In a departure from APB 15, SFAS 128 requires the use of the average market price of the common stock during the period when calculating diluted EPS, rather than the higher of the average or closing price for the period. SFAS 128 is effective for financial statements for both interim and annual periods ending after December 15, 1997 and earlier application is not permitted. The Company adopted SFAS 128 effective December 31, 1997 and accordingly restated prior period EPS data. SFAS 129 supersedes capital structure disclosure requirements found in previous accounting pronouncements and consolidates them into one statement for ease of retrieval and greater visibility for non-public entities. These disclosures are required for financial statements for periods ending after December 15, 1997. SFAS 129 makes no changes to previous accounting pronouncements that applied to the Company; accordingly, adoption of SFAS 129 has no impact on the Company's results of operations and financial condition. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the inclusion of comprehensive income, either in a separate statement for comprehensive income, or as part of a combined statement of income and comprehensive income in a full-set of general-purpose financial statements. F-14 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances, excluding those resulting from investments by and distributions to owners. SFAS 130 requires that comprehensive income be presented beginning with net income, adding the elements of comprehensive income not included in the determination of net income, to arrive at comprehensive income. SFAS 130 also requires that an enterprise display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS 130 is effective for the Company's fiscal year beginning July 1, 1998. SFAS 130 requires the presentation of information already contained in the Company's financial statements and therefore is not expected to have an impact on the Company's financial position or results of operation. In June 1997, the FASB also issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for the reporting of information about operating segments by public business enterprises in their annual and interim financial reports issued to shareholders. SFAS 131 requires that a public business enterprise report financial and descriptive information, including profit or loss, certain specific revenue and expense items, and segment assets, about its reportable operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. SFAS 131 is effective for the Company's financial statements for fiscal years beginning after December 15, 1997. Management is in the process of evaluating the effect, if any, adoption of SFAS 131 will have on the financial statements. In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132, "Employees' Disclosure about Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 changes disclosure requirements, but does not change measurement standards, of pension and other postretirement benefit plans. SFAS 132 standardizes the disclosure requirements for retirement and other postretirement benefit plans that are subject to previous accounting standards, and requires disclosure of additional information regarding such plans that will facilitate financial analysis. SFAS 132 is effective for the Bank's fiscal year ending June 30, 1999. SFAS 132 requires changes in disclosures only, and therefore is not expected to have an effect on the Company's financial position or results of operations. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 replaces, amends and nullifies previous statements of financial accounting standards and Emerging Issues Task Force consensuses to provide a comprehensive framework for accounting and reporting for derivative instruments and hedging activities. SFAS 133 requires recognition of all derivative instruments as either assets or liabilities in the statement of financial condition. Gain or loss recognition is determined based on the intended use and resulting designation of the derivative instrument: . Gains or losses on derivative instruments not designated as hedging instruments are recognized in the period of change in fair value. . Gains or losses on derivative instruments designated as hedging the exposure to changes in the fair value of a recognized asset, liability or firm commitment are recognized in earnings in the period of the fair value change, together with the offsetting fair value loss or gain on the hedged item. . Gains or losses on derivative instruments designated as hedging exposure to variable cash flows arising from a forecasted transaction are initially reported, to the extent the fair value change is offset by the change in the forecasted cash flows, as a component of other comprehensive income. The portion of the change in fair value in excess of the offsetting change in forecasted cash flows is reported in earnings in the period of the change. . Gains or losses on derivative instruments designated as foreign currency hedges of net investments in foreign operations are reported in other comprehensive income as part of the foreign currency translation adjustment. SFAS 133 precludes the use of nonderivative financial instruments as hedging instruments, except that nonderivative financial instruments denominated in a foreign currency may be designated as a hedge of the foreign currency exposure of an unrecognized firm commitment denominated in a foreign currency or a net investment in a foreign operation. F-15 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 SFAS 133 is effective for the Company's quarter ending September 30, 1999. During that quarter, all existing derivative instruments identified as hedging instruments must be re-evaluated and designated and documented in compliance with SFAS 133. At June 30, 1998, the Company had no derivative financial instruments. Therefore, as of June 30, 1998, SFAS 133 would have no impact on the Company's statement of financial condition or results of operations. However, should the Company enter into derivative instrument transactions during its fiscal year ended June 30, 1999, there will be an indeterminate effect on the Company's financial condition and results of operations for the fiscal quarter ending September 30, 1999. NOTE 2: SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION For the purpose of the statement of cash flows, cash and cash equivalents include "Cash and amounts due from banks" and "Federal funds sold and assets purchased under resale agreements". Supplemental disclosure of cash flow information is as follows (in thousands):
YEARS ENDED JUNE 30 --------------------------------------------- 1998 1997 1996 ------------ ------------- -------------- Cash paid for: Interest................................................................... $714,696 $707,087 $ 738,407 Income taxes............................................................... 64,024 24,672 12,623 Non-cash investing and financing activities: Principal reductions to loans due to foreclosure........................... 96,448 156,820 186,157 Loans exchanged for mortgage-backed securities............................. 171,737 42,222 145,826 Loans made to facilitate the sale of real estate held for investment and real estate acquired in settlement of loans.............. 35,576 60,118 85,157 Exchange of preferred stock for common stock............................... 5 1,202 2,226 Issuance of common stock in exchange for preferred stock................... 11 3,104 5,902 Issuance of common stock in the acquisition of CENFED Financial Corporation................................................... 211,096 -- -- Transfer of mortgage-backed and other debt and equity securities to available for sale........................................ -- 7,935 2,818,831 Transfers of loans from held for investment to held for sale: Liquidation of troubled credits......................................... 36,598 28,846 24,344 Sale of loans serviced by others........................................ 45,824 -- -- Loans originated for investment, subsequently identified to sale portfolio..................................................... -- 1,596 -- Transfers of loans from held for sale to held for investment: Loans originated for sale, subsequently identified to investment portfolio.................................................. 5,677 -- 1,275 Troubled credits previously transferred to held for sale, but deemed non-salable................................................ -- 3,768 3,064 Other................................................................... -- -- 73 Fair value of CENFED Financial Corporation net assets acquired............. 123,805 -- -- Fair value of TransWorld net assets acquired............................... -- 24,377 -- Fair value of OneCentral net assets acquired............................... -- 5,306 --
The transfers from held for investment loans were primarily of troubled loans which the Company sold to remove the credit and/or collateral risk arising from the credit. The transfer in fiscal 1996 of troubled credits back to held for investment represents a single loan that was deemed unsalable in fiscal 1996. During fiscal 1998, 1997 and 1996, the Company received income tax refunds of $314,000, $8,383,000 and $6,630,000, respectively. F-16 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 NOTE 3: EARNINGS PER SHARE INFORMATION The Company adopted SFAS 128, "Earnings Per Share" effective December 31, 1997 and accordingly restated prior period EPS data. See Note 1: "Basis of Presentation and Summary of Significant Accounting and Reporting Policies - Current Accounting Pronouncements" for a discussion of SFAS 128. Information used to calculate basic EPS and diluted EPS is as follows (dollars in thousands, except per share data):
YEARS ENDED JUNE 30 ----------------------------------------------------------------------------------------------- 1998 1997 1996 ---------------------------------- ---------------------------- ------------------------------ PER-SHARE PER-SHARE PER-SHARE EARNINGS SHARES AMOUNTS EARNINGS SHARES AMOUNTS EARNINGS SHARES AMOUNTS ---------- ------ --------- --------- ------ --------- -------- ------ --------- BASIC EPS Net earnings (a) $128,749 $ 50,423 $ 42,052 Dividends on preferred stock (10,108) (10,841) (16,156) Premium on conversion of preferred stock -- (4,173) (9,443) -------- -------- -------- Earnings applicable to common shareholders (a) 118,641 52,354 $2.27 35,409 49,095 $0.72 16,453 42,185 $0.39 ===== ===== ===== DILUTED EPS Effect of Dilutive Securities: Options and warrants -- 8,807 -- 6,074 -- 3,810 Convertible preferred stock 10,108 11,109 -- -- -- -- -------- ------ -------- ------ -------- ------ Earnings applicable to common shareholders plus assumed conversions $128,749 72,270 $1.78 $ 35,409 55,169 $0.64 $ 16,453 45,995 $0.36 ======== ====== ===== ======== ====== ===== ======== ====== ===== - ----------------------------------- Supplemental Diluted EPS Computation (b): Earnings as per diluted computation above $128,749 72,270 $ 35,409 55,169 $ 16,453 45,995 Dividends on preferred stock -- -- 10,841 12,098 16,156 18,482 Interest on convertible subordinated debentures, net of tax effect 99 15 468 15 576 15 -------- ------ -------- ------ -------- ------ $128,848 72,285 $1.78 $ 46,718 67,282 $0.69 $ 33,185 64,492 $0.51 ======== ====== ===== ======== ====== ===== ======== ====== =====
(a) These figures agree with the related amounts in the Consolidated Statements of Operations. (b) This calculation, which includes securities that could potentially dilute basic EPS in the future and is anti-dilutive for the periods presented, is submitted in accordance with Regulation S-K Item 601(b)(11) and paragraph 40(c) of SFAS No. 128. The weighted average number of common shares outstanding for fiscal 1998 excludes common shares in treasury. The weighted average numbers of common shares outstanding for fiscal 1998, 1997 and 1996 exclude 200,686 shares held by a subsidiary of the Company. Such shares are eliminated in consolidation. F-17 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 During fiscal 1997 and 1996, the Company entered into separately negotiated agreements with certain holders of its then Series E (now Series A) preferred stock providing, in the aggregate, for exchanges of 1,201,900 shares and 2,226,118 shares, respectively, of the preferred stock for 3,103,872 shares and 5,901,771 shares, respectively, of the Company's common stock. The exchanges were made at premiums above the stated conversion rate of 2.404 shares of the Company's common stock for each share of the preferred stock. In accordance with applicable accounting guidance for calculating earnings per share, the excess of the fair value of the Company's common stock transferred by the Company to the holders of the preferred stock over the fair value of the Company's common stock issuable pursuant to the original conversion terms has been subtracted from net earnings to arrive at the earnings applicable to common shareholders in the calculation of earnings per share. The premium adjustment totaled $4.2 million and $9.4 million in fiscal 1997 and 1996, respectively, and reduced the Company's diluted earnings per share results by $0.07 per share and $0.19 per share, respectively. On April 23, 1998, the Company's Board of Directors declared a distribution of its Litigation Tracking Warrants(TM) ("LTW(TM)s") as of May 29, 1998, to holders of the common stock of Golden State of record on May 7, 1998, on the basis of one LTW(TM) for each share held as of the close of business on that date. The LTW(TM)s represent the right to receive, upon exercise of the LTW(TM)s, Golden State common stock equal in value to 85 percent of the net after-tax proceeds, if any, from Glendale Federal's pending goodwill lawsuit against the U.S. Government. The LTW(TM)s would be exercisable after notification by Golden State of its receipt of proceeds from a final judgment in or settlement of the litigation. The LTW(TM)s would expire 60 days after such notification is given. At June 30, 1998, 60.2 million LTW(TM)s were issued and outstanding. The distribution of the LTW(TM)s will not affect Golden State's diluted shares outstanding prior to the time they become exercisable because the amount of the proceeds from the Goodwill Litigation and the number of shares of common stock to be issued cannot be determined until the LTW(TM)s become exercisable. See Note 19: "Stockholders' Equity," for additional information. On July 11, 1998, Golden State acquired RedFed in a tax-free, stock-for-stock merger. Pursuant to the terms of the transaction, Golden State issued 5,221,995 shares of its common stock, resulting in a total recorded purchase price of $158.3 million. In connection with its acquisition of RedFed, Golden State undertook a stock repurchase program, pursuant to which Golden State purchased 5,222,200 shares of its common stock in the open market. At June 30, 1998, the Company had 4,688,400 shares of its common stock in treasury that had been repurchased under this program at an aggregate cost of $158.1 million. Golden State had 55,485,151 shares of common stock outstanding, net of 4,688,400 shares in treasury, at June 30, 1998. Had the Company completed the acquisition of RedFed on June 30, 1998, Golden State would have had 60,173,346 shares of common stock outstanding at June 30, 1998. NOTE 4: ACQUISITIONS On April 21, 1998, Golden State acquired CENFED. Pursuant to the terms of the transaction, Golden State issued 7,390,557 shares of its common stock for a total purchase price of $211.1 million. Under the purchase method of accounting, the goodwill of $90.5 million recorded in this transaction will be amortized over 15 years using the straight-line method. At April 21, 1998, CENFED operated 18 branches and had $1.9 billion in assets, including $1.4 billion of loans receivable, net, and $354 million of mortgage-backed securities, net. CENFED's liabilities included $1.4 billion of deposits and $403 million of borrowings. These amounts are unaudited. The merger of CenFed Bank with Glendale Federal Bank was completed on May 8, 1998. F-18 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 The following table summarizes the composition of loans acquired in the CENFED merger at April 21, 1998 (in thousands):
PERCENT OF AMOUNT TOTAL ------ ----- Real estate................................................. $1,404,306 99.2% ---------- ----- Consumer: Term loans................................................ 2,477 0.2 Lines of credit........................................... 511 -- ---------- ----- 2,988 0.2 ---------- ----- Commercial: SBA loans................................................. 8,530 0.6 Lines of credit........................................... 34 -- ---------- ----- 8,564 0.6 ---------- ----- $1,415,858 100.0% ========== =====
The following table summarizes the composition of deposits acquired in the CENFED merger at April 21, 1998 (in thousands):
PERCENT OF AMOUNT TOTAL ------ ----- Checking....................................................... $ 110,832 7.9% Savings........................................................ 55,847 4.0 Money Market................................................... 170,402 12.2 ---------- ----- Total daily access....................................... 337,081 24.1 ---------- ----- Short-term certificates (1 year or less)....................... 458,496 32.7 Long-term certificates (over 1 year)........................... 513,066 36.6 Jumbo and brokered certificates................................ 92,410 6.6 ---------- ----- Total certificates....................................... 1,063,972 75.9 ---------- ----- $1,401,053 100.0% ========== =====
The following unaudited pro forma financial information presents the combined results of operations of Golden State and CENFED, after giving effect to certain adjustments, including amortization of goodwill, additional depreciation expense, and related income tax effects, and assuming the acquisition occurred at the beginning of the periods presented. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had Golden State and CENFED constituted a single entity during such periods.
YEARS ENDED JUNE 30, ----------------------------------- 1998 1997 ---- ---- (in thousands, except per share data) ----------------------------------- (unaudited) Pro forma net interest income.................................. $483,195 $436,539 Pro forma net earnings......................................... $136,213 $ 59,087 Pro forma earnings per share: Basic..................................................... $ 2.16 $ 0.78 Diluted................................................... $ 1.74 $ 0.70
F-19 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 On May 16, 1997, the Company completed its acquisition of TransWorld Bancorp ("TransWorld") and its principal subsidiary TransWorld Bank, which added nine bank offices to the Company's retail network. At that date, TransWorld had $372.4 million in assets, including $163.2 million of U.S. Government and federal agency debt securities and $135.8 million in gross real estate, commercial and consumer loans, and $336.3 million in deposits. The Company paid $64.4 million which includes out-of-pocket expenses, for the transaction and, under the purchase method of accounting, recognized goodwill of $40.0 million after recording the net assets acquired from TransWorld at fair value. On January 31, 1997, the Company completed its acquisition of OneCentral Bank ("OneCentral"). At that date, OneCentral had $74.3 million in assets, including $38.0 million in gross real estate, commercial and consumer loans, and $68.8 million in deposits. The Company paid $11.1 million which includes out-of-pocket expenses, for the transaction and, under the purchase method of accounting, recognized goodwill of $5.8 million after recording the net assets acquired from OneCentral at fair value. The following table summarizes, as of the respective acquisition dates, the composition of loans purchased from TransWorld and OneCentral (in thousands):
PERCENT OF TRANSWORLD ONECENTRAL TOTAL TOTAL ---------- ---------- ----- ----- Real estate................................................... $ 62,028 $16,741 $ 78,769 45% -------- ------- -------- --- Consumer: Term loans.................................................. 6,727 -- 6,727 4 Lines of credit............................................. 6,155 3,699 9,854 6 -------- ------- -------- --- 12,882 3,699 16,581 10 -------- ------- -------- --- Commercial: Term loans.................................................. 52,780 16,356 69,136 40 SBA loans................................................... 7,894 -- 7,894 5 Lines of credit............................................. 182 1,196 1,378 - -------- ------- -------- --- 60,856 17,552 78,408 45 -------- ------- -------- --- $135,766 $37,992 $173,758 100% ======== ======= ======== ===
The following table summarizes, as of the respective acquisition dates, the composition of deposits purchased from TransWorld and OneCentral (in thousands):
PERCENT OF TRANSWORLD ONECENTRAL TOTAL TOTAL ---------- ---------- ----- ----- Checking......................................................... $139,428 $33,969 $173,397 43% Savings.......................................................... 11,919 1,697 13,616 3 Money Market..................................................... 108,127 26,964 135,091 33 -------- ------- -------- --- Total daily access......................................... 259,474 62,630 322,104 79 -------- ------- -------- --- Short-term certificates (1 year or less)......................... 52,830 3,356 56,186 14 Long-term certificates (over 1 year)............................. 7,631 2,823 10,454 3 Jumbo and brokered certificates.................................. 16,413 -- 16,413 4 -------- ------- -------- --- Total certificates......................................... 76,874 6,179 83,053 21 -------- ------- -------- --- $336,348 $68,809 $405,157 100% ======== ======= ======== ===
NOTE 5: FEDERAL FUNDS SOLD AND ASSETS PURCHASED UNDER RESALE AGREEMENTS Federal funds sold and assets purchased under resale agreements at the dates indicated are summarized below at cost, which approximates market (in thousands):
JUNE 30 ---------------------- 1998 1997 ---------------------- Federal funds sold...................................... $ 27,000 $ -- Securities purchased under resale agreements............ 145,000 482,000 Whole loans purchased under resale agreements........... -- 150,000 -------- -------- $172,000 $632,000 ======== ========
F-20 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 The following table provides further information with respect to assets purchased under resale agreements at June 30, 1998 (in thousands):
JUNE 30, 1998 --------- Balance at year end..................................... $145,000 Average amount outstanding during the year.............. 554,140 Maximum amount outstanding at any month-end............. 725,000
No amounts outstanding with individual brokers at June 30, 1998 exceeded ten percent of stockholders' equity. The weighted average interest rate on federal funds sold and assets purchased under resale agreements was 6.36% and 6.49% at June 30, 1998 and 1997, respectively. Interest receivable on these securities was approximately $31,000 and $115,000 at June 30, 1998 and 1997, respectively, and is included in "Interest receivable" in the accompanying Consolidated Statements of Financial Condition. Assets purchased under resale agreements were collateralized by certain mortgage-backed securities and whole loans at June 30, 1998 and 1997. At June 30, 1998 and 1997, the Company held only assets purchased under agreements to resell identical assets. The assets underlying the agreements are held by a third party trustee for the Company until the maturities of the agreements. NOTE 6: OTHER DEBT AND EQUITY SECURITIES The following tables summarize the Company's other debt and equity securities available for sale with related remaining maturity data as of the dates indicated (in thousands):
JUNE 30, 1998 ------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---- ----- ------ ----- Available for sale: U.S. Government and Federal Agency obligations: Maturing within 1 year............................................ $ 12,398 $ 6 $ -- $ 12,404 Maturing in 1-5 years............................................. 24,879 161 -- 25,040 Maturing in 5-10 years............................................ 1,948 79 -- 2,027 Obligations of municipalities: Maturing after 10 years............................................ 82,372 1,391 -- 83,763 Equity securities.................................................... 2,410 505 -- 2,915 -------- ------ ---------- -------- Total.......................................................... $124,007 $2,142 $ -- $126,149 ======== ====== ========== ========
JUNE 30, 1997 -------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---- ----- ------ ----- Available for sale: U.S. Government and Federal Agency obligations: Maturing within 1 year............................................ $14,807 $ 6 $ -- $14,813 Maturing in 1-5 years............................................. 4,976 3 (5) 4,974 Maturing in 5-10 years............................................ 5,924 -- (21) 5,903 Equity securities.................................................... 1,758 346 -- 2,104 ------- ---- ---- ------- Total.......................................................... $27,465 $355 $(26) $27,794 ======= ==== ==== =======
F-21 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 Fair values at June 30, 1998 and 1997 were based upon quotations for similar or identical securities. The weighted average interest rate on other debt and equity securities was 4.21% and 5.32% at June 30, 1998 and 1997, respectively. Interest receivable on these securities was approximately $1,235,000 and $259,000 at June 30, 1998 and 1997, respectively, and is included in "Interest receivable" in the accompanying Consolidated Statements of Financial Condition. During fiscal 1998, the Company sold $2.0 million of other debt securities available for sale. No gain or loss was recorded on the sale. During fiscal 1997, the Company sold $156,357,000 in securities from the TransWorld and OneCentral acquisitions at a gross realized loss of $2,000. These securities were all classified as available for sale at the dates of the acquisitions. There were no sales of other debt and equity securities during fiscal 1996. Other debt securities include net discounts amounting to approximately $14,700,000 and $91,000 at June 30, 1998 and 1997, respectively. Approximately $19,883,000 of other debt securities were pledged as collateral for borrowings at June 30, 1998. No other debt securities were pledged as collateral for securities sold under agreements to repurchase or other borrowings at June 30, 1997. NOTE 7: MORTGAGE-BACKED SECURITIES The following tables summarize the Company's mortgage-backed securities held to maturity and available for sale as of the dates indicated (in thousands):
JUNE 30, 1998 ------------------------------------------------------------ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE ---- ----- ------ ---------- Held to maturity: FNMA............................................................ $ 336,493 $ 9,371 $ (229) $ 345,635 FHLMC........................................................... 220,233 4,415 (195) 224,453 GNMA............................................................ 183,270 1,177 (694) 183,753 Pass-through securities......................................... 157,338 16 (4,449) 152,905 Other........................................................... 17,259 -- (2,450) 14,809 ---------- ------- -------- ---------- $ 914,593 $14,979 $ (8,017) $ 921,555 ========== ======= ======== ========== Available for sale: Pass-through securities......................................... $ 518,050 $ 543 $ (9,254) $ 509,339 GNMA............................................................ 490,263 2,780 (685) 492,358 FHLMC........................................................... 243,938 1,526 (541) 244,923 FNMA............................................................ 164,195 416 (38) 164,573 Collateralized mortgage obligations............................. 48,722 499 -- 49,221 Other........................................................... 516 29 (189) 356 ---------- ------- -------- ---------- $1,465,684 $ 5,793 $(10,707) $1,460,770 ========== ======= ======== ==========
F-22 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996
JUNE 30, 1997 ------------------------------------------------------------ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE ---- ----- ------ ---------- Held to maturity: FNMA............................................................ $ 423,111 $10,462 $ (898) $ 432,675 FHLMC........................................................... 264,946 1,631 (413) 266,164 GNMA............................................................ 238,862 931 (1,774) 238,019 Pass-through securities......................................... 214,188 2,338 (5,080) 211,446 Other........................................................... 21,718 -- (3,081) 18,637 ---------- ------- -------- ---------- $1,162,825 $15,362 $(11,246) $1,166,941 ========== ======= ======== ========== Available for sale: Pass-through securities......................................... $ 512,983 $ 606 $ (8,202) $ 505,387 GNMA............................................................ 521,586 5,500 -- 527,086 FHLMC........................................................... 44,837 130 (58) 44,909 FNMA............................................................ 14,066 41 (39) 14,068 Collateralized mortgage obligations............................. 24,823 6 (62) 24,767 Other........................................................... 634 88 (230) 492 Residual collateralized mortgage obligations.................... 100 -- (100) -- ---------- ------- -------- ---------- $1,119,029 $ 6,371 $ (8,691) $1,116,709 ========== ======= ======== ==========
The Company recorded unrealized losses of $2.8 million and $1.3 million in its stockholders' equity accounts at June 30, 1998 and 1997, respectively, net of tax, on the mortgage-backed securities available for sale portfolio. The carrying values of mortgage-backed securities as of June 30, 1998 and 1997 were net of unamortized premiums of approximately $19,348,000 and $35,558,000, respectively, and deferred loan origination fees, net of deferred loan origination costs, on loans securitized by the Company of approximately $2,139,000 and $2,636,000 at June 30, 1998 and 1997, respectively. The weighted average interest rates of mortgage-backed securities were 6.37% and 6.78% at June 30, 1998 and 1997, respectively. Interest receivable related to mortgage-backed securities outstanding at June 30, 1998 and 1997 totaled $15,825,000 and $15,276,000, respectively. The Company uses mortgage-backed securities as collateral for various borrowings. At June 30, 1998 and 1997, approximately $666,159,000 and $786,976,000, respectively, of mortgage-backed securities were pledged as collateral for various borrowings. During fiscal 1996, the Company sold $1.7 billion of its fixed-rate collateralized mortgage obligations ("CMOs") and recorded a pre-tax loss of $28.2 million on the sale. The Company's decision to sell most of its CMO portfolio was part of a strategic realignment of the Company's mortgage-backed securities portfolio in which $2.8 billion of mortgage-backed securities were reclassified from "held to maturity" to "available for sale" during the quarter ended December 31, 1995, in compliance with implementation guidance for SFAS 115. The reclassification included the Company's $1.8 billion fixed-rate CMO portfolio and $1.0 billion of its adjustable-rate pass-through securities portfolio. The Company has no immediate plans to sell the remaining CMOs or the pass-through securities. The following table presents proceeds from the sale of mortgage-backed securities and gross realized gains and losses for the periods indicated (in thousands):
YEARS ENDED JUNE 30 ------------------------------------------------ 1998 1997 1996 ---- ---- ---- Proceeds from sales....................................................... $297,029 $41,602 $1,816,876 ======== ======= ========== Gross realized gains...................................................... $ 8,088 $ 638 $ 7,821 Gross realized losses..................................................... (3,526) (2,442) (42,043) -------- ------- ---------- Net gain (loss)........................................................... $ 4,562 $(1,804) $ (34,222) ======== ======= ==========
F-23 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 The net gain (loss) on sale of mortgage-backed securities includes the following components for the periods indicated (in thousands):
YEARS ENDED JUNE 30 ------------------------------------------------ 1998 1997 1996 ---- ---- ---- Cash gain (loss)....................................................... $ 481 $ (620) $(29,095) Deferred fees recognized on sale....................................... 1,491 469 1,402 Recourse provision and fees............................................ 3,523 (1,499) (6,568) Pair-offs gain (loss).................................................. (853) (119) 315 Sale expenses.......................................................... (80) (35) (276) ------ ------- -------- $4,562 $(1,804) $(34,222) ====== ======= ========
See Note 8: "Loans Receivable," for a discussion of loans sold with recourse. NOTE 8: LOANS RECEIVABLE COMPOSITION Loans receivable held for investment at the dates indicated are summarized as follows (in thousands):
JUNE 30 ------------------------------ 1998 1997 -------------- -------------- Residential loans: Existing structures: 1-4 units..................................................................... $10,270,699 $ 8,766,536 5-36 units.................................................................... 1,504,288 1,472,654 37 or more units.............................................................. 313,575 345,052 Construction: 1-4 units..................................................................... -- 7,726 5-36 units.................................................................... 570 4,895 Non-residential loans: Existing structures........................................................... 1,333,879 1,196,703 Construction.................................................................. -- 531 Land loans......................................................................... 22,754 9,779 Home equity and improvement loans.................................................. 56,335 28,563 ----------- ----------- Total real estate loans.................................................... 13,502,100 11,832,439 ----------- ----------- Commercial loans................................................................... 289,459 160,061 Consumer loans: Equity........................................................................... 69,594 45,709 Unsecured........................................................................ 50,502 39,712 Deposit account.................................................................. 16,737 15,702 Auto and recreational vehicle.................................................... 8,699 13,838 Mobile home...................................................................... 4,518 5,724 ----------- ----------- Total consumer loans....................................................... 150,050 120,685 ----------- ----------- Total gross loans receivable............................................... 13,941,609 12,113,185 Less: Unearned discounts (net of premiums)............................................. 21,861 38,824 Undisbursed loan funds........................................................... 216 1,807 Deferred loan origination fees................................................... 20,377 22,705 Allowance for loan losses........................................................ 156,482 163,759 ----------- ----------- Loans receivable, net...................................................... $13,742,673 $11,886,090 =========== ===========
The Company had residential real estate loans and SBA loans held for sale totaling $28.6 million and $3.3 million, respectively, as of June 30, 1998, compared with $19.0 million of residential real estate loans and no SBA loans as of June 30, 1997. F-24 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 The weighted average interest rate of loans receivable (including those classified as held for sale), giving effect to accretion of discounts and deferred loan fees, was 7.75% and 7.73% at June 30, 1998 and 1997, respectively. These rates were reduced by the effect of non-accrual loans, which resulted in a decrease of the weighted average interest rate on loans of six and nine basis points at June 30, 1998 and 1997, respectively. Interest receivable on loans receivable (including interest on loans classified as held for sale) was approximately $92,125,000 and $82,680,000 at June 30, 1998 and 1997, respectively, and is included in "Interest receivable" in the accompanying Consolidated Statements of Financial Condition. The carrying value of loans pledged to secure certain deposits and borrowings was $6.4 billion and $5.4 billion at June 30, 1998 and 1997, respectively. CREDIT RISK AND CONCENTRATION A summary of activity in the allowance for loan losses during fiscal 1998, 1997 and 1996 is as follows (dollars in thousands):
REAL ESTATE CONSUMER COMMERCIAL LOANS LOANS LOANS TOTAL -------------------------------------------------------- Balance--June 30, 1995........................ $200,874 $ 4,092 $ 4,176 $209,142 Provision for loan losses..................... 43,517 926 (4,093) 40,350 Charge-offs................................... (69,205) (2,842) (974) (73,021) Recoveries.................................... 3,597 1,098 5,590 10,285 -------- ------- ------- -------- Balance--June 30, 1996........................ 178,783 3,274 4,699 186,756 Provision for loan losses..................... 23,008 6,707 (4,511) 25,204 Charge-offs................................... (55,385) (3,043) (68) (58,496) Recoveries.................................... 1,582 1,062 3,575 6,219 Acquisition of OneCentral Bank................ -- -- 1,030 1,030 Acquisition of TransWorld Bank................ 219 -- 2,827 3,046 -------- ------- ------- -------- Balance--June 30, 1997........................ 148,207 8,000 7,552 163,759 Provision for loan losses..................... (20,434) 16,859 1,848 (1,727) Charge-offs................................... (23,652) (3,408) (1,992) (29,052) Recoveries.................................... 1,357 901 4,341 6,599 Acquisition of CENFED......................... 16,889 14 -- 16,903 -------- ------- ------- -------- Balance--June 30, 1998........................ $122,367 $22,366 $11,749 $156,482 ======== ======= ======= ======== Percent of type of gross loans receivable..... 0.90% 14.91% 4.04% 1.12%
The following is a summary of non-accrual loans, troubled debt restructurings and other impaired loans (in thousands):
JUNE 30 ------------------------------------ 1998 1997 1996 ------------------------------------ Non-accrual loans.............................................................. $ 95,994 $140,295 $192,445 Troubled debt restructurings................................................... 21,465 31,064 9,194 Recorded investment in other impaired loans.................................... 54,060 51,846 70,289 -------- -------- -------- $171,519 $223,205 $271,928 ======== ======== ========
F-25 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 At June 30, 1998 and 1997, impaired loans and the related specific loan loss allowances were as follows (in thousands):
JUNE 30 --------------------------------------------------------------------- 1998 1997 --------------------------------------------------------------------- ALLOWANCE ALLOWANCE RECORDED FOR CARRYING RECORDED FOR CARRYING INVESTMENT LOSSES VALUE INVESTMENT LOSSES VALUE --------------------------------------------------------------------- Non-accrual loans: With specific allowances.................... $ 10,220 $ 2,652 $ 7,568 $ 20,036 $ 4,550 $ 15,486 Without specific allowances................. 24,204 -- 24,204 39,845 -- 39,845 -------- ------- ------- -------- ------- -------- 34,424 2,652 31,772 59,881 4,550 55,331 -------- ------- ------- -------- ------- -------- TDRs: With specific allowances.................... 1,581 582 999 16,648 323 16,325 Without specific allowances................. 19,884 -- 19,884 14,416 -- 14,416 -------- ------- ------- -------- ------- -------- 21,465 582 20,883 31,064 323 30,741 -------- ------- ------- -------- ------- -------- Other impaired loans: With specific allowances.................... 42,555 10,175 32,380 42,046 9,078 32,968 Without specific allowances................. 11,505 -- 11,505 9,800 -- 9,800 -------- ------- ------- -------- ------- -------- 54,060 10,175 43,885 51,846 9,078 42,768 -------- ------- ------- -------- ------- -------- Total impaired loans.................... $109,949 $13,409 $96,540 $142,791 $13,951 $128,840 ======== ======= ======= ======== ======= ========
Other impaired loans without specific allowances, totaling $11.5 million and $9.8 million as of June 30, 1998 and 1997, respectively, in the table above, include loans for which a portion of the loan balance has been charged off. The average carrying value of impaired loans for the years ended June 30, 1998, 1997 and 1996 was $108 million, $164 million and $175 million, respectively. Interest income of $4.3 million, $7.4 million and $7.8 million for fiscal 1998, 1997 and 1996, respectively, was recognized on impaired loans during the period of impairment. Loans on non-accrual status as of June 30, 1998, 1997 and 1996 had interest due but not recognized of approximately $6.1 million, $7.1 million and $10.5 million, respectively. The amount of interest income on these loans that was included in net earnings in fiscal 1998, 1997 and 1996 was $3.0 million, $5.3 million and $5.8 million, respectively. Net interest forgone related to troubled debt restructurings totaled $0.4 million, $0.5 million and $0.2 million in 1998, 1997 and 1996, respectively. Interest income recorded on troubled debt restructurings for fiscal 1998, 1997 and 1996 was $1.8 million, $2.4 million and $0.7 million, respectively. The Company has no commitments to lend additional funds to borrowers whose loans were classified as non-performing or troubled debt restructurings. The following table further identifies the Company's non-accrual loans by state and by property type as of June 30, 1998 (in thousands):
CALIFORNIA FLORIDA OTHER TOTAL ------------------------------------------------- Single-family 1-4 units.................................................. $44,922 $11,754 $13,512 $70,188 Multi-family: 5-36 units............................................................. 7,615 -- -- 7,615 37 or more units....................................................... 417 -- -- 417 Non-residential: Office buildings....................................................... 6,333 -- -- 6,333 Shopping centers....................................................... 3,146 604 -- 3,750 Warehouse/Storage...................................................... 24 386 -- 410 Hotels/Motels.......................................................... 607 -- -- 607 Commercial/industrial.................................................. 3,404 -- -- 3,404 ------- ------- --------- ------- Total non-residential............................................. 13,514 990 -- 14,504 Commercial............................................................... 1,828 -- -- 1,828 Consumer................................................................. 1,442 -- -- 1,442 ------- ------- --------- ------- $69,738 $12,744 $13,512 $95,994 ======= ======= ========= =======
F-26 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 The following table further identifies the Company's non-accrual loans by state and by property type as of June 30, 1997 (in thousands):
California Florida Other Total --------------------------------------------------- Single-family 1-4 units.................................................. $ 61,776 $13,815 $7,398 $ 82,989 Multi-family: 5-36 units............................................................. 21,087 -- -- 21,087 37 or more units....................................................... 3,121 -- -- 3,121 Non-residential: Office buildings....................................................... 5,014 314 -- 5,328 Shopping centers....................................................... 21,341 -- -- 21,341 Mobile home park....................................................... 1,503 -- -- 1,503 Commercial/industrial.................................................. 2,323 177 -- 2,500 -------- ------- --------- -------- Total non-residential............................................. 30,181 491 -- 30,672 Commercial............................................................... 859 -- -- 859 Consumer................................................................. 1,567 -- -- 1,567 -------- ------- --------- -------- $118,591 $14,306 $7,398 $140,295 ======== ======= ========= ========
As of June 30, 1998 and 1997, except for $222,000 and $516,000 of single- family restructured loans in Florida, respectively, all of the Company's restructured loans were in California. The following table summarizes the Company's gross loan portfolio, including loans held for sale, by state and by property type as of June 30, 1998 (in thousands):
California Florida Other(1) Total ----------- -------- ------------- ------------ Single-family 1-4 units........................................... $ 7,123,809 $610,984 $2,620,845 $10,355,638 Multi-family: 5-36 units...................................................... 1,464,327 40,531 -- 1,504,858 37 or more units................................................ 270,639 40,741 2,195 313,575 Non-residential: Office buildings................................................ 365,532 25,771 901 392,204 Shopping centers................................................ 317,364 28,006 5,988 351,358 Warehouse/storage............................................... 120,868 12,697 -- 133,565 Hotels/motels................................................... 61,613 7,082 1,889 70,584 Industrial parks................................................ 89,716 1,692 -- 91,408 Land............................................................ 16,343 6,209 202 22,754 Commercial/industrial........................................... 271,427 25,580 -- 297,007 ----------- -------- ---------- ----------- Total non-residential........................................ 1,242,863 107,037 8,980 1,358,880 Commercial........................................................ 290,515 -- -- 290,515 Consumer.......................................................... 150,050 -- -- 150,050 ----------- -------- ---------- ----------- $10,542,203 $799,293 $2,632,020 $13,973,516 =========== ======== ========== ===========
(1) The state with the largest loan balance in this category is Virginia with $232 million, substantially all of which is single-family. F-27 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 The following table summarizes the Company's gross loan portfolio, including loans held for sale, by state and by property type as of June 30, 1997 (in thousands):
California Florida Other(1) Total ---------- -------- ---------- ----------- Single-family 1-4 units............................................ $5,898,034 $657,266 $2,266,528 $ 8,821,828 Multi-family: 5-36 units....................................................... 1,431,089 46,189 271 1,477,549 37 or more units................................................. 282,970 59,566 2,516 345,052 Non-residential: Office buildings................................................. 359,341 33,437 6,934 399,712 Shopping centers................................................. 299,034 32,558 8,981 340,573 Warehouse/storage................................................ 69,626 17,574 -- 87,200 Hotels/motels.................................................... 10,487 8,987 7,245 26,719 Industrial parks................................................. 90,563 2,124 -- 92,687 Land............................................................. 6,825 2,745 207 9,777 Mobile home parks................................................ 21,771 7,296 2,240 31,307 Commercial/industrial............................................ 190,331 28,707 -- 219,038 ---------- -------- ---------- ----------- Total non-residential......................................... 1,047,978 133,428 25,607 1,207,013 Commercial......................................................... 156,966 -- 3,095 160,061 Consumer........................................................... 118,480 2,174 31 120,685 ---------- -------- ---------- ----------- $8,935,517 $898,623 $2,298,048 $12,132,188 ========== ======== ========== ===========
(1) The state with the largest loan balance in this category is New York with $245 million, substantially all of which is single-family. The Company's collateral requirements are the same, regardless of the region in which the loans are originated. Loans originated and purchased are secured by real estate with a principal amount of generally no more than 80% of the appraised value. Loans with LTV ratios in excess of 80% require private mortgage insurance ("PMI"), or if they meet certain criteria, can be made at higher interest rates and fees at the option of the loan applicant. These loans are priced higher in rate, fee and margin than those for which mortgage insurance is obtained to recognize the increased credit risk assumed by the Company. This option is available only on loans with a maximum loan amount of $300,000 and an LTV ratio of no more than 90% without negative amortization features, where the purpose of the loan is to purchase, or to refinance an existing loan secured by, a one-unit, single-family residence. The following table summarizes the Company's first trust deed real estate loan portfolio by original loan-to-value ratio, including those classified as held for sale, at the dates indicated (dollars in thousands):
June 30 --------------------------------------------------------- 1998 1997 --------------------------------------------------------- Amount Percent Amount Percent -------------- ---------- -------------- ---------- Loans with LTV ratio less than or equal to 80%..... $11,675,044 87% $10,107,249 86% Loans with LTV ratio greater than 80%: With PMI......................................... 713,240 5 715,165 6 Without PMI...................................... 1,025,262 8 964,844 8 ----------- --- ----------- --- $13,413,546 100% $11,787,258 100% =========== === =========== ===
F-28 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 In previous years, the Company sold certain loans with limited credit loss recourse provisions. These provisions require the Company to repurchase loans on which the borrower has defaulted. The present value of all future estimated loan losses are provided for at the time of such sales. Subsequent adjustments to estimates of future losses are charged to gain or loss on sale of mortgage- backed securities. In fiscal 1991, the Company entered into certain transactions whereby its recourse obligations were reduced to reduce risk-based capital requirements (the "recourse reduction transactions"). In each transaction, the Company retained the risk of first loss up to a specified level for which the Company maintains a liability for recourse obligations. The remainder of the Company's recourse obligations were transferred to an independent third party. In fiscal 1996, for certain recourse reduction transactions, the recourse reduction agreements expired or were canceled by the Company and the full amount of the recourse obligations reverted back to the Company from the independent third party. There were no sales of loans and mortgage-backed securities with recourse provisions in fiscal 1998, 1997 or 1996. The Company had recourse obligations for approximately $886.0 million of loans sold with recourse at June 30, 1998 for which the Company is contingently liable for up to $465.5 million in future losses. The Company's recorded liability under these obligations was $10.2 million and $13.7 million at June 30, 1998 and 1997, respectively, and is included in "Other liabilities and accrued expenses" in the accompanying Consolidated Statements of Financial Condition. A summary of the balance of loans sold with recourse at the dates indicated is as follows (in thousands):
JUNE 30 -------------------------- 1998 1997 -------------------------- Loans with original loan-to-value ("LTV") ratios less than or equal to 80%.............................................................. $537,589 $ 713,078 Loans with original LTV ratios greater than 80%: With Private Mortgage Insurance ("PMI").......................................... 40,789 84,675 Without PMI...................................................................... 126,045 46,660 -------- ---------- 704,423 844,413 Recourse reduction transactions..................................................... 181,530 246,282 -------- ---------- $885,953 $1,090,695 ======== ========== Recorded liability for recourse..................................................... $ 10,210 $ 13,724 ======== ==========
NOTE 9: REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS, NET A summary of REO, net of specific valuation allowances, by property type is as follows (in thousands):
JUNE 30 ------------------------ 1998 1997 ------------------------ Single-family...................................... $23,006 $34,116 Multi-family....................................... 3,087 10,347 Non-residential.................................... 12,182 5,955 Land............................................... -- 14,214 ....... ------- ------- 38,275 64,632 General allowance.................................. (882) (3,132) ------- ------- $37,393 $61,500 ======= =======
A summary of the activity in the allowance for losses on REO, including specific and general allowances, is as follows (in thousands):
YEARS ENDED JUNE 30 ------------------------------------------------ 1998 1997 1996 ---- ---- ---- Beginning balance................................... $ 22,906 $ 26,688 $ 30,719 Provision for losses................................ 2,670 7,539 12,110 Addition due to CENFED acquisition............... 750 -- -- Charge-offs......................................... (21,534) (11,321) (16,141) -------- -------- -------- Ending balance...................................... $ 4,792 $ 22,906 $ 26,688 ======== ======== ========
F-29 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 The following table identifies the Company's REO by state and property type as of June 30, 1998 (in thousands):
CALIFORNIA FLORIDA OTHER TOTAL ---------- ------- ------- -------- Single-family 1-4 units.......................................... $16,778 $2,758 $3,470 $23,006 Multi-family 5-36 units.......................................... 3,087 -- -- 3,087 Non-residential: Office buildings.............................................. 5,208 197 -- 5,405 Shopping centers.............................................. 1,929 -- -- 1,929 Mobile home park.............................................. 526 -- -- 526 Hotels/motels................................................. 53 -- 3,276 3,329 Commercial/industrial......................................... 993 -- -- 993 ------- ------ ------ ------- Total non-residential...................................... 8,709 197 3,276 12,182 ------- ------ ------ ------- $28,574 $2,955 $6,746 38,275 ======= ====== ====== General allowance................................................ (882) ------- $37,393 =======
The following table identifies the Company's REO by state and property type as of June 30, 1997 (in thousands):
CALIFORNIA FLORIDA OTHER TOTAL ---------- ------- ------ -------- Single-family 1-4 units.......................................... $28,207 $ 4,170 $1,739 $34,116 Multi-family: 5-36 units.................................................... 8,309 105 -- 8,414 37 or more units.............................................. 1,933 -- -- 1,933 Non-residential: Office buildings.............................................. 1,625 60 -- 1,685 Shopping centers.............................................. 298 -- -- 298 Hotels/motels................................................. 102 -- 3,468 3,570 Land.......................................................... 365 13,849 -- 14,214 Industrial park............................................... 402 -- -- 402 ------- ------- ------ ------- Total non-residential...................................... 2,792 13,909 3,468 20,169 ------- ------- ------ ------- $41,241 $18,184 $5,207 64,632 ======= ======= ====== General allowance................................................ (3,132) ------- $61,500 =======
Income (loss) from REO operations is summarized as follows (in thousands):
YEARS ENDED JUNE 30 ------------------------------------------ 1998 1997 1996 ---- ---- ---- Gain on sale of REO........................................................ $ 9,866 $ 7,164 $ 10,880 Provision for losses....................................................... (2,670) (7,539) (12,110) Net operating expenses..................................................... (4,085) (6,248) (7,196) ------- ------- -------- $ 3,111 $(6,623) $ (8,426) ======= ======= ========
F-30 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 NOTE 10: INVESTMENT IN CAPITAL STOCK OF FEDERAL HOME LOAN BANK ("FHLB") The Company's investment in capital stock of FHLB, at cost, totaled $300,339,000 and $259,587,000 at June 30, 1998 and 1997, respectively. The Company earned 5.9%, 6.3% and 5.4% from dividends received during fiscal 1998, 1997 and 1996, respectively. Dividends receivable on FHLB stock totaled approximately $4,096,000 and $3,871,000 at June 30, 1998 and 1997, respectively, and is included in "Interest receivable" in the accompanying Consolidated Statements of Financial Condition. As a member of the FHLB system, the Company is required to maintain an investment in the capital stock of the FHLB in an amount at least equal to the greatest of 1% of residential mortgage assets, 5% of outstanding borrowings (advances) from the FHLB, or 0.3% of total assets. FHLB capital stock is pledged to secure FHLB advances. NOTE 11: PREMISES AND EQUIPMENT Premises and equipment at the dates indicated are summarized as follows (in thousands):
JUNE 30 -------------------------------- 1998 1997 ---- ---- Buildings and leasehold improvements.................... $ 166,680 $ 163,780 Furniture, fixtures and equipment....................... 125,414 105,062 Land.................................................... 22,764 22,726 --------- --------- 314,858 291,568 Less accumulated depreciation and amortization.......... (167,965) (156,632) --------- --------- $ 146,893 $ 134,936 ========= =========
In fiscal 1996, the Company sold its former headquarters facility for approximately $30 million. The Company recorded a pre-tax loss on this sale of $2.5 million during fiscal 1996, which is included in "Other income (loss), net" in the Consolidated Statements of Operations. Operating expenses include provisions for depreciation and amortization of $16,186,000, $14,849,000 and $15,755,000 for fiscal 1998, 1997 and 1996, respectively. The Company leases certain of its office buildings and branch offices, as well as certain equipment, under non-cancelable operating leases. Rental expense incurred in fiscal 1998, 1997 and 1996 was $17,266,000, $16,093,000, and $15,140,000, respectively. Minimum future lease payments on building and equipment leases at June 30, 1998 were as follows (in thousands): Due in one year......................................................... $20,435 Due in two years........................................................ 18,183 Due in three years...................................................... 15,795 Due in four years....................................................... 11,703 Due in five years....................................................... 10,410 Due thereafter.......................................................... 51,105
F-31 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 NOTE 12: MORTGAGE SERVICING ASSETS In accordance with SFAS 125, the Company combined its mortgage servicing rights and capitalized servicing fees beginning with the year ended June 30, 1997. The following table summarizes the activity in mortgage servicing assets and related valuation allowance for the periods indicated (in thousands):
YEARS ENDED JUNE 30 ------------------------------------------------------ 1998 1997 1996 ---- ---- ---- MORTGAGE SERVICING ASSETS ACTIVITY: Beginning balance....................................... $288,519 $127,399 $ 99,122 Purchases............................................... 1,021(1) 187,343 50,836 Addition due to CENFED acquisition...................... 8,318 -- -- Servicing rights arising from the sale of loans with servicing rights retained.......... 4,890 1,119 -- Amortization............................................ (49,245) (27,342) (22,559) -------- -------- -------- Ending balance.......................................... $253,503 $288,519 $127,399 ======== ======== ======== VALUATION ALLOWANCE ACTIVITY: Beginning balance....................................... $ (4,047) $ -- Additions charged to loan servicing income.............. (6,142) (4,047) -------- -------- Ending balance.......................................... $(10,189) $ (4,047) ======== ========
- -------------- (1) Consists of capitalized costs and adjustments related to prior years' purchases. The following table summarizes activity in the portfolio of mortgage loans serviced for others (in millions):
YEARS ENDED JUNE 30 --------------------------------------------------- 1998 1997 1996 ---- ---- ---- Beginning portfolio of mortgage loans serviced for others... $29,598 $14,168 $11,678 Add: Servicing purchased.................................... 447 17,184 3,696 Servicing retained on loans sold....................... 386 92 -- Less: Amortization, prepayments and foreclosures............ (5,162) (1,846) (1,206) ------- ------- ------- Ending portfolio of mortgage loans serviced for others...... $25,269 $29,598 $14,168 ======= ======= =======
NOTE 13: DEPOSITS Deposits at the dates indicated are summarized as follows (dollars in thousands):
JUNE 30 ----------------------------------------------------------------------------- 1998 1997 --------------------------------------- ----------------------------------- WEIGHTED PERCENT WEIGHTED PERCENT AVERAGE OF TOTAL AVERAGE OF TOTAL RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS --------- ----------- --------- --------- ---------- --------- Checking..................................... 0.31% $ 1,812,869 16.9% 0.37% $1,198,011 12.8% Savings...................................... 2.00 477,199 4.5 2.15 452,225 4.8 Money market................................. 3.93 2,379,249 22.2 4.25 2,119,553 22.7 Certificates: 5.00% and lower............................. 4.77 1,503,191 14.1 4.83 1,046,824 11.2 5.01%--6.00%................................ 5.52 4,095,310 38.3 5.56 4,277,651 45.7 6.01%--7.00%................................ 6.28 340,288 3.2 6.24 227,948 2.4 7.01%--8.00%................................ 7.28 84,266 0.8 7.24 32,839 0.4 8.01%--9.00%................................ 8.59 5,222 0.0 8.27 1,595 0.0 9.01%--10.00%............................... 9.43 671 0.0 9.45 263 0.0 ----------- ----- ---------- ----- Total certificates......................... 5.41 6,028,948 56.4 5.46 5,587,120 59.7 ----------- ----- ---------- ----- 4.06% $10,698,265 100.0% 4.37% $9,356,909 100.0% =========== ===== ========== =====
F-32 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 The average interest rate is based upon stated interest rates without giving consideration to daily compounding of interest or forfeiture of interest because of premature withdrawal. Accrued interest payable on deposits at June 30, 1998 and 1997 was $3,728,000 and $3,186,000, respectively, which is included in "Other liabilities and accrued expenses" in the Consolidated Statements of Financial Condition. The aggregate remaining maturities of deposits at June 30, 1998 are as follows (in thousands): No stated maturity........................... $ 4,669,317 Maturing within one year: 1st quarter................................ 2,073,745 2nd quarter................................ 1,397,799 3rd quarter................................ 627,468 4th quarter................................ 641,943 Maturing within two years.................... 1,074,087 Maturing within three years.................. 91,230 Maturing within four years................... 79,496 Maturing within five years................... 31,564 Maturing thereafter.......................... 11,616 ----------- Total.............................. $10,698,265 ===========
Certificates of deposit with balances greater than $100,000 had the following remaining maturities at June 30, 1998 (in thousands): 3 months and under............................... $ 366,975 Over 3 months to 6 months........................ 320,416 Over 6 months to 12 months....................... 208,376 Over 12 months................................... 251,048 ---------- $1,146,815 ==========
Interest expense on deposits by type is summarized as follows (in thousands):
YEARS ENDED JUNE 30 ----------------------------------------- 1998 1997 1996 ---- ---- ---- Checking...................................... $ 4,610 $ 4,099 $ 4,290 Savings....................................... 9,192 9,848 11,381 Money market.................................. 88,484 84,149 69,257 Certificates.................................. 306,014 307,086 348,906 -------- -------- -------- $408,300 $405,182 $433,834 ======== ======== ========
At June 30, 1998 and 1997, approximately $307,894,000 and $113,564,000, respectively, of the Company's real estate loans and mortgage-backed securities were pledged as collateral for certain public deposits. F-33 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 NOTE 14: BORROWINGS SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Securities sold under agreements to repurchase are summarized as follows (dollars in thousands):
YEARS ENDED JUNE 30 ----------------------------------------------------- 1998 1997 1996 ---- ---- ---- Balance at year end......................................... $ 175,551 $768,682 $ 758,050 Average amount outstanding during the year.................. 660,467 335,809 1,869,194 Maximum amount outstanding at any month-end................. 1,355,403 776,302 2,987,948 Weighted average interest rate during the year.............. 5.69% 5.55% 5.82% Weighted average interest rate on year-end balances......... 5.72% 5.66% 5.50%
Securities sold under agreements to repurchase are collateralized as follows (in thousands):
JUNE 30 ----------------------------------------------------------- 1998 1997 ---- ---- BOOK VALUE BOOK VALUE INCLUDING INCLUDING ACCRUED ACCRUED MARKET INTEREST MARKET VALUE INTEREST VALUE ------------ ------------ ------------ ----------- Mortgage-backed securities; book value includes interest receivable of $1,189 in 1998 and $5,167 in 1997................................. $180,614 $180,534 $788,516 $788,638
The Company incurred interest expense on securities sold under agreements to repurchase of $37.6 million, $18.6 million, and $108.8 million during fiscal 1998, 1997 and 1996, respectively. Mortgage-backed securities sold under agreements to repurchase at June 30, 1998 were contractually due July 1998. These agreements require the Company to repurchase identical securities to those which were sold. The securities underlying the agreements were delivered to the dealers who arranged the transactions. No amounts outstanding with individual brokers at June 30, 1998 exceeded ten percent of stockholders' equity. FEDERAL HOME LOAN BANK At June 30, 1998, the Company had a line of credit with the Federal Home Loan Bank of San Francisco enabling the Company to borrow up to 35% of the amount of the total consolidated assets of Glendale Federal. Based on the amount of these assets at June 30, 1998, the Company's credit limit with the FHLB was approximately $6.3 billion. At June 30, 1997, the Company had a fixed amount credit limit of approximately $5.7 billion. All advances from the FHLB are collateralized with mortgage loans and FHLB stock. FHLB advances are summarized as follows (dollars in thousands):
WEIGHTED WEIGHTED BALANCE AT AVERAGE BALANCE AT AVERAGE JUNE 30, 1998 RATE JUNE 30, 1997 RATE --------------- ------------ --------------- ----------- Fixed-rate, fixed-term................ $2,989,000 5.59% $1,900,000 5.75% Variable-rate, fixed-term............. 2,624,000 5.54 2,888,000 5.70 ---------- ---------- Sub-total........................ 5,613,000 5.57% 4,788,000 5.72% Purchase accounting premium...... 458 -- -- -- ---------- ---------- $5,613,458 $4,788,000 ========== ==========
F-34 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 The purchase accounting premium of $458,000 was recorded in connection with the FHLB advances assumed as part of the April 1998 CENFED acquisition. The Company incurred interest expense on FHLB advances of approximately $270 million, $269 million, and $202 million during fiscal 1998, 1997, and 1996, respectively. These advances are secured by investments in stock of the FHLB totaling $300.3 million and $259.6 million at June 30, 1998 and 1997, respectively, as well as certain mortgage loans and mortgage-backed and other debt securities aggregating approximately $6.6 billion and $5.3 billion at June 30, 1998 and 1997, respectively. The maturities of FHLB advances, with corresponding weighted average interest rates, at June 30, 1998 are as follows (dollars in thousands):
WEIGHTED AVERAGE AMOUNT RATE ------------ ------------ Maturing in one year............................ $3,928,000 5.48% Maturing in two years........................... 245,000 5.53 Maturing in three years......................... 1,000,000 5.74 Maturing in five years.......................... 440,000 5.97 ---------- Sub-total.................................. 5,613,000 5.57% Purchase accounting premium................ 458 -- ---------- $5,613,458 ==========
Included in the "Maturing in one year" category are $700 million of fixed- rate FHLB advances with a weighted average interest rate of 5.12% and an original maturity date of 2003, but which the FHLB has the option to call in fiscal 1999. At June 30, 1998, interest rates, both fixed and variable, ranged from 4.86% to 6.42%. At June 30, 1997, the range was 5.39% to 5.98%. OTHER BORROWINGS Other borrowings are summarized as follows (dollars in thousands):
JUNE 30 ------------------------------ 1998 1997 ---- ---- Short-term borrowing with $10,000 due July 1998 and the remaining $35,000 due the earlier of November 1998 or 15 days after the completion of the CalFed Merger which is expected to take place on September 11, 1998; bearing interest at 75 basis points above the London Interbank Offered Rate........................................................... $45,000 $ -- Senior debentures due December 2001, with interest at 11.17%................................ 18,866 -- Notes payable with weighted average interest rates of 8.75% and 7.82% at June 30, 1998 and 1997, respectively................................................. 70 276 Convertible subordinated debentures due March 2001, with interest at 7.75%.................. -- 10,506 ------- ------- $63,936 $10,782 ======= =======
Short-term Borrowing The short-term borrowing was obtained in June 1998 from a commercial bank to purchase shares of the Company's common stock in connection with its acquisition of RedFed in July 1998. See Note 24: "Subsequent Events" for more information on the CalFed Merger and the RedFed acquisition. F-35 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 Senior Debentures The senior debentures were assumed in the CENFED acquisition in April 1998. The balance at June 30, 1998, is comprised of $17,750,000 of principal and $1,116,000 of purchase accounting premium. In July 1998, prior to maturity, all of this debt was redeemed at a redemption price equal to 100% of the principal amount, together with accrued and unpaid interest and a $2.8 million premium over the Company's book value of such debentures. Convertible Subordinated Debentures All of the convertible subordinated debentures outstanding at June 30, 1997, were redeemed in September 1997 at a redemption price equal to 100% of the principal amount, together with accrued and unpaid interest. The Company incurred interest expense on other borrowings of $1.7 million, $1.5 million and $2 million during fiscal 1998, 1997 and 1996, respectively. No collateral was pledged for other borrowings at June 30, 1998 or 1997. NOTE 15: INCOME TAXES Following is a summary of the Company's income tax expense (in thousands):
Years Ended June 30 -------------------------------------------- 1998 1997 1996 ---- ---- ----- Current taxes: Federal.......................................... $ 77,798 $14,481 $ 2,210 State............................................ 22,883 11,286 -- -------- ------- ------- $100,681 $25,767 $ 2,210 -------- ------- ------- Deferred taxes: Federal.......................................... (9,435) 12,153 12,755 State............................................ 1,750 (1,789) 6,377 -------- ------- ------- (7,685) 10,364 19,132 -------- ------- ------- Income tax provision............................... $ 92,996 $36,131 $21,342 ======== ======= =======
The following is a summary of the income tax liability (in thousands):
June 30 ---------------------------- 1998 1997 ---- ---- Current taxes...................................... $ 7,934 $15,150 Deferred taxes..................................... 37,110 45,122 ------- ------- $45,044 $60,272 ======= =======
A reconciliation from the statutory Federal income tax provision rate to the consolidated effective income tax provision rate follows:
Years Ended June 30 ------------------------------------ 1998 1997 1996 ---- ---- ---- Statutory Federal income tax rate.............................. 35.0% 35.0% 35.0% Increases (reductions) in taxes resulting from: State franchise tax rate, net of Federal income tax effect... 6.9 7.2 6.6 Valuation allowance on deferred tax assets................... -- (0.1) (12.5) Other........................................................ -- (0.4) 4.6 ---- ---- ----- Consolidated effective income tax rate......................... 41.9% 41.7% 33.7% ==== ==== =====
F-36 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 The components of the net deferred tax liability are as follows (in thousands):
June 30 ------------------------------- 1998 1997 ---- ---- Deferred tax liabilities: Loan fees.......................................................................... $ 46,737 $ 50,367 Settlement of pension obligations.................................................. 8,442 8,204 FHLB stock dividends............................................................... 45,692 35,109 Gains on sales of loans............................................................ 11,110 7,253 Other.............................................................................. 14,195 9,146 -------- -------- Gross deferred tax liabilities....................................................... 126,176 110,079 -------- -------- Deferred tax assets: State franchise tax................................................................ 8,071 5,432 Net operating loss and tax credit carryovers....................................... 4,571 9,764 Provision for losses on loans...................................................... 45,531 28,169 Mortgage servicing assets.......................................................... 12,089 6,285 Net unrealized holding loss on mortgage-backed securities available for sale....... 1,166 839 Other.............................................................................. 17,638 14,468 -------- -------- Gross deferred tax assets............................................................ 89,066 64,957 -------- -------- Net deferred tax liability........................................................... $ 37,110 $ 45,122 ======== ========
Management has assessed the realizability of the Company's deferred tax assets and has concluded that it is more likely than not that all deferred tax assets will be realized. For taxable years beginning prior to January 1, 1996, a savings institution that met certain definitional tests relating to the composition of its assets and the sources of its income (a "qualifying savings institution") was permitted to establish reserves for bad debts, and to make annual additions thereto under the "experience" method. Alternatively, a qualifying savings institution could elect, on an annual basis, to use the "percentage of taxable income" method to compute its allowable addition to its bad debt reserve on qualifying real property loans (generally loans secured by an interest in improved real estate). The applicable percentage was 8% for tax periods after 1987. The Company utilized the experience method in these years. On August 20, 1996, the President signed the Small Business Job Protection Act (the "Act") into law. One provision of the Act repealed the reserve method of accounting for bad debts for savings institutions effective for taxable years beginning after 1995. The Company, therefore, is required to use the "specific charge-off" method on its 1996 and subsequent federal income tax returns. The Company is required to recapture its "applicable excess reserves", which are its federal tax bad debt reserves in excess of the base year reserve amount described in the following paragraph. The Company will include one-sixth of its applicable excess reserves in taxable income in each year from 1996 through 2001. As of December 31, 1995, the Company had approximately $72 million of applicable excess reserves. As of June 30, 1996, the Company had fully provided for the tax related to this recapture. The base year reserves will continue to be subject to recapture and the Company could be required to recognize a tax liability if: (1) the Company fails to qualify as a "bank" for federal income tax purposes; (2) certain distributions are made with respect to the stock of the Company; (3) the bad debt reserves are used for any purpose other than to absorb bad debt losses; or (4) there is a change in federal tax law. The enactment of this legislation is expected to have no material impact on the Company's operations or financial position. In accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes," a deferred tax liability has not been recognized for the tax bad debt base year reserves of the Company. The base year reserves are generally the balance of reserves as of December 31, 1987 reduced proportionately for reductions in the Company's loan portfolio since that date. The amount of those reserves was approximately $153 million at December 31, 1987. The amount of the unrecognized deferred tax liability at June 30, 1998 was approximately $54 million. This deferred tax liability could be recognized in the future under the conditions described in the preceding paragraph. F-37 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 In July 1993, the Company received notices from the California Franchise Tax Board proposing to assess taxes for the years 1988, 1989 and 1990 in the amount of $5.3 million. The Company protested the proposed taxes and, in September 1996, made a payment to the Franchise Tax Board in settlement of the disputed amount. The payment was charged to existing reserves. NOTE 16: FINANCIAL INSTRUMENTS FAIR VALUE Fair value estimates, methods, and assumptions are set forth below for the Company's financial instruments. Short-Term Investments and Debt and Equity Securities The fair value of short-term investments and debt and equity securities is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. The following table represents the carrying amount and fair value of investments and mortgage-backed securities at June 30, 1998 and 1997 (in thousands):
June 30, 1998 June 30, 1997 ------------------------------ ------------------------------ Carrying Carrying Amount Fair Value Amount Fair Value ------ ----------- ------ ---------- Short-term investments.................................... $ 174,200 $ 174,200 $ 636,005 $ 651,254 ========== ========== ========== ========== Debt securities: Maturing within 1 year.................................. $ 12,404 $ 12,404 $ 14,813 $ 14,813 Maturing in 1-5 years................................... 25,040 25,040 4,974 4,974 Maturing in 5-10 years.................................. 2,027 2,027 5,903 5,903 Maturing after 10 years................................. 83,763 83,763 -- -- Equity securities......................................... 2,915 2,915 2,104 2,104 ---------- ---------- ---------- ---------- $ 126,149 $ 126,149 $ 27,794 $ 27,794 ========== ========== ========== ========== Mortgage-backed securities: Adjustable-rate......................................... $2,033,912 $2,038,363 $1,975,116 $1,977,454 Fixed-rate.............................................. 341,451 343,962 304,418 306,196 ---------- ---------- ---------- ---------- $2,375,363 $2,382,325 $2,279,534 $2,283,650 ========== ========== ========== ==========
Loans Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as single-family residential mortgage, multi-family, non-residential, commercial and consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and non-performing categories. The fair value of performing loans is calculated by discounting cash flows through their estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan, adjusted to reflect differences in servicing costs. The estimate of maturity is based on market prepayment estimates for each loan classification. Fair value for non-performing loans is based on estimated cash flows discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined by using available market information. F-38 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 The following table presents information for loans, including loans held for sale and net of allowance for loan losses as of June 30, 1998 and 1997 (in thousands):
June 30, 1998 June 30, 1997 ------------------------------------- --------------------------------- Carrying Carrying Amount Fair Value Amount Fair Value ------ ---------- ------ ----------- Single-family 1-4 units:............................. $10,307,070 $10,333,005 $ 8,769,249 $ 8,821,167 Multi-family: 5-36 units......................................... 1,473,771 1,439,368 1,433,697 1,354,117 37 or more units................................... 301,851 296,006 328,556 313,512 Non-residential...................................... 1,327,892 1,307,366 1,171,733 1,127,805 Consumer............................................. 127,684 127,187 112,685 112,262 Commercial........................................... 278,766 278,455 152,509 153,585 ----------- ----------- ----------- ----------- 13,817,034 13,781,387 11,968,429 11,882,448 Less unearned discounts, undisbursed loan funds and deferred loan fees................... (42,454) -- (63,336) -- ----------- ----------- ----------- ----------- $13,774,580 $13,781,387 $11,905,093 $11,882,448 =========== =========== =========== ===========
Deposit Liabilities The fair value of deposits with no stated maturity, such as savings accounts, checking and NOW accounts, and money market checking/savings accounts, is equal to the amount payable on demand as of June 30, 1998 and 1997. The fair value of certificates of deposit is based on the discounted value of contractual cash flows using estimated market rates that reflect certificates of deposit with similar terms and maturities. The following table presents information for deposit liabilities (in thousands):
June 30, 1998 June 30, 1997 ------------------------------------ ---------------------------------- Carrying Carrying Amount Fair Value Amount Fair Value ------ ---------- ------ ---------- Checking............................................. $ 1,812,869 $ 1,812,869 $1,198,011 $1,198,011 Savings.............................................. 477,199 477,199 452,225 452,225 Money market......................................... 2,379,249 2,379,249 2,119,553 2,119,553 Certificates with remaining maturities: In six months or less.............................. 3,471,544 3,471,560 2,551,447 2,552,549 Between six months and one year.................... 1,269,411 1,268,341 1,628,382 1,629,630 Between one and three years........................ 1,165,317 1,168,130 1,336,395 1,337,201 Beyond three years................................. 122,676 123,505 70,896 69,330 ----------- ----------- ---------- ---------- $10,698,265 $10,700,853 $9,356,909 $9,358,499 =========== =========== ========== ==========
Borrowings The estimate of the fair value of the Company's borrowings was based on the discounted value of the future cash flows expected to be paid on such borrowings using estimated market discount rates that reflect borrowings with similar terms and maturities. F-39 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 The following table represents the carrying amount and fair value of the Company's borrowings at June 30, 1998 and 1997 (in thousands):
June 30, 1998 June 30, 1997 ------------------------------------------------------- Carrying Carrying Amount Fair Value Amount Fair Value ------ ---------- ------ ---------- Securities sold under agreements to repurchase.................................................... $ 175,551 $ 174,879 $ 768,682 $ 766,068 Borrowings from the FHLB........................................ 5,613,458 5,614,652 4,788,000 4,765,643 Short-term borrowing............................................ 45,000 45,000 -- -- Senior debentures............................................... 18,866 20,531 -- -- Convertible subordinated debentures............................. -- -- 10,506 10,506 Notes payable................................................... 70 70 276 276 ---------- ---------- ---------- ---------- $5,852,945 $5,855,132 $5,567,464 $5,542,493 ========== ========== ========== ==========
Mortgage Servicing Assets The carrying amount and fair value of the Company's MSA at June 30, 1998 were $243 million and $298 million, respectively. The carrying amount and fair value of the Company's MSA at June 30, 1997 were $284 million and $353 million, respectively. The fair value of the Company's servicing portfolio is estimated by applying market assumptions for the serviced loans to estimate servicing-related income and expenses over the underlying loans' estimated lives, and discounting the estimated future net servicing income at the current market discount rate. Fair value is significantly influenced by market prepayment expectations. Prepayment expectations are influenced by the difference between the loans' interest rates and current market interest rates. During periods of decreasing interest rates, the market anticipates that homeowners will be more likely to refinance their existing mortgage loans; during periods of increasing interest rates, the market anticipates that homeowners will be less inclined to refinance their existing mortgage loans. The slower prepayments anticipated in times of rising interest rates result in a longer estimated period of net servicing income for the existing servicing portfolio, and therefore increases its value. Conversely, the faster prepayments anticipated in times of declining interest rates result in a shorter estimated period of net servicing income and therefore decreases the value of the Company's servicing portfolio. Other Financial Instruments Financial instruments of the Company, as included in the Consolidated Statements of Financial Condition, for which fair value approximates the carrying amount at June 30, 1998 and 1997 include "Cash and amounts due from banks", "Interest receivable", "Investment in capital stock of Federal Home Loan Bank", recourse liability, and accounts payable and accrued expenses. Commitments As discussed further in Note 17: "Commitments and Contingent Liabilities," the Company had various commitments outstanding as of June 30, 1998 and 1997 which are not reflected in the accompanying consolidated financial statements. The fair value of the commitments is estimated to approximate the fees currently charged or paid to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The uncertainty involving the attempt to determine the likelihood, as well as the timing of a commitment being drawn upon, coupled with the lack of established markets and the diversity of fee structures that exist, would not result in what the Company believes to be a meaningful estimate of fair value. F-40 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on-and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets or liabilities include deferred tax liabilities, premises and equipment, mortgage servicing assets and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. NOTE 17: COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business there are outstanding various commitments and contingent liabilities which are not reflected in the accompanying consolidated financial statements. Management does not anticipate any material loss as a result of these transactions. The following is a summary of commitments and contingent liabilities (in thousands):
June 30 ----------------------------- 1998 1997 ---- ---- Commitments to sell loans and mortgage-backed securities................................... $122,820 $ 14,000 Standby and commercial letters of credit................................................... 4,767 1,432 Unused lines of credit..................................................................... 556,777 363,203 Commitments to originate loans receivable: Adjustable-rate.......................................................................... 20,173 18,961 Fixed-rate............................................................................... 77,243 24,884 Commitments to purchase loans receivable: Adjustable-rate.......................................................................... -- 90,419 Fixed-rate............................................................................... 75,000 207,162
Agreements to sell loans and mortgage-backed securities contain representations and warranties regarding the underwriting and documentation of the underlying loans. To the extent the Company is deemed to have breached any of these representations and warranties, the sales agreement allows the purchaser to demand repurchase of the loans causing the breach. The Company does not anticipate it will be required to make material repurchases or incur material losses related to loans and mortgage-backed securities it has sold or committed to sell at June 30, 1998. As more fully discussed in Note 8: "Loans Receivable," in the past, the Company sold loans and mortgage-backed securities with recourse for credit losses. The Company provided for the estimated recourse losses at the time of sale, and evaluates, on a quarterly basis, the adequacy of the liability for recourse losses. However, significant changes in future losses may require additions to the recourse liability recorded in the caption "Other liabilities and accrued expenses" in the Consolidated Statements of Financial Condition. Commitments to sell residential mortgage loans for a fixed price are generally entered into between the date the application is taken and the date the loans are sold into the secondary market. Risks arise from the possible inability of counter-parties to meet the terms of commitments and movement in interest rates and related prices. F-41 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 The Company makes contractual commitments to extend credit, which are legally binding agreements to lend money to customers at predetermined interest rates for a specified period of time. The Company applies its credit standards when underwriting and extending these commitments, and periodically reassesses the customers' credit worthiness through ongoing credit reviews. Additional risks associated with providing these commitments arise when these commitments are drawn upon, such as the demands on liquidity that the Company would experience if a significant portion were drawn down at once. However, this is considered unlikely, as many commitments expire without having been drawn upon. Upon approval of a loan application, the Company normally gives the applicant a commitment that the Company will make the approved loan within a specified time period, normally 10 to 45 days, at a rate of interest and on other terms determined on the basis of market conditions as of the date of the commitment. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies, but may include accounts receivable; inventory, property, plant and equipment; income-producing commercial properties; and agricultural products. For single-family lending, collateral consists of trust-deeds on one-to four-unit residential real estate. The Company does not anticipate any significant loss as a result of its commitments to originate loans as of June 30, 1998. On February 1, 1994, the Company entered into a five-year contract for the outsourcing of its data processing and item processing operations. The contract is based on certain volume levels. If the contract is terminated prior to its expiration, a termination charge would be incurred, the amount of which would be dependent upon the nature of the termination and the time remaining on the contract. The Company and certain of its subsidiaries are involved in litigation arising in the normal course of business. Although the legal responsibility and financial impact with respect to such litigation cannot presently be ascertained, the Company does not anticipate that the final resolution of these matters will result in the payment of monetary damages that would be material in relation to the consolidated financial condition or results of operations of the Company. NOTE 18: REGULATORY CAPITAL FIRREA and the regulations promulgated thereunder established certain minimum levels of regulatory capital for savings institutions subject to Office of Thrift Supervision ("OTS") supervision. The Bank must follow specific capital guidelines stipulated by the OTS which involve quantitative measures of the Bank's assets, liabilities and certain off-balance sheet items. An institution that fails to comply with its regulatory capital requirements must obtain OTS approval of a capital plan and can be subject to a capital directive and certain restrictions on its operations. At June 30, 1998, the minimum regulatory capital requirements were: . Tangible and core capital, consisting principally of stockholders' equity, but excluding most intangible assets such as goodwill and any net unrealized holding gains or losses on debt securities available for sale equal to 1.5% and 3% of assets, respectively. . Risk-based capital consisting of core capital plus certain subordinated debt and other capital instruments and, subject to certain limitations, general valuation allowances on loans receivable, equal to 8 percent of the amount of risk-weighted assets. At June 30, 1998, the Bank was "well capitalized" under the prompt corrective action ("PCA") regulations adopted by the OTS pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). To be categorized as "well capitalized", the Bank must maintain minimum core capital, Tier I risk- based capital and risk-based capital ratios as set forth in the table below. The Bank's capital amounts and classification are subject to review by federal regulators about components, risk-weightings and other factors. There are no conditions or events since June 30, 1998 that management believes have changed the institution's category. F-42 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 The following table summarizes the Bank's actual capital and required capital as of June 30, 1998 and 1997 (dollars in thousands):
Tier 1 Tangible Core Risk-based Risk-based Capital Capital Capital Capital ------- ------- ------- ------- June 30, 1998 - ------------- Actual capital: Amount..................................................... $1,077,884 $1,077,884 $1,077,884 $1,177,116 Ratio...................................................... 6.02% 6.02% 10.57% 11.54% FIRREA minimum required capital: Amount..................................................... $ 268,427 $ 536,854 N/A $ 816,080 Ratio...................................................... 1.50% 3.00% N/A 8.00% FDICIA well capitalized required capital: Amount..................................................... N/A $ 894,756 $ 612,060 $1,020,099 Ratio...................................................... N/A 5.00% 6.00% 10.00% June 30, 1997 - ------------- Actual capital: Amount..................................................... $ 913,333 $ 913,333 $ 913,333 $1,017,226 Ratio...................................................... 5.67% 5.67% 10.02% 11.17% FIRREA minimum required capital: Amount..................................................... $ 241,781 $ 483,562 N/A $ 731,890 Ratio...................................................... 1.50% 3.00% N/A 8.00% FDICIA well capitalized required capital: Amount..................................................... N/A $ 805,936 $ 551,818 $ 911,963 Ratio...................................................... N/A 5.00% 6.00% 10.00%
The following table reconciles the Bank's capital in accordance with generally accepted accounting principles ("GAAP") to the Bank's tangible, core and risk- based capital as of June 30, 1998 and 1997 (in thousands):
June 30 -------------------------------- 1998 1997 ---- ---- Capital of Glendale Federal in accordance with GAAP...................................... $1,278,399 $1,012,074 Adjustments for tangible and core capital: Net unrealized holding loss on available for sale securities........................... 1,612 1,154 Goodwill and other intangible assets................................................... (180,463) (99,533) Disallowed mortgage servicing.......................................................... (10,788) -- Disallowed capitalized software........................................................ (10,094) -- Investments in and advances to non-permissible subsidiaries............................ (782) (362) ---------- ---------- Total tangible capital................................................................... 1,077,884 913,333 Adjustments for core capital............................................................. -- -- ---------- ---------- Total core capital....................................................................... 1,077,884 913,333 Adjustments for risk-based capital: Allowance for general loan losses(1)................................................... 127,705 113,006 Equity risk investments required to be deducted........................................ (17,735) (9,113) Low level recourse deduction........................................................... (10,738) -- ---------- ---------- Total risk-based capital................................................................. $1,177,116 $1,017,226 ========== ==========
(1) Limited to 1.25% of risk-weighted assets. F-43 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 NOTE 19: STOCKHOLDERS' EQUITY On July 23, 1997, shareholders of Glendale Federal Bank, Federal Savings Bank approved the formation of Golden State Bancorp Inc. as the holding company for the Bank. The formation of the holding company became effective on July 24, 1997 and the Bank became a wholly-owned subsidiary of Golden State on that date. Shares of Glendale Federal's common stock automatically became an equal number of shares of Golden State common stock and shares of Glendale Federal's Noncumulative Preferred Stock, Series E, automatically became an equal number of shares of Golden State's Noncumulative Convertible Preferred Stock, Series A. Glendale Federal's two classes of warrants became exercisable solely to purchase common stock of Golden State. The board of directors of Glendale Federal are also the board of directors of Golden State. Golden State was capitalized with a dividend of $14.9 million from Glendale Federal to be used for general working capital purposes and for payment of dividends on Golden State's preferred stock. DESCRIPTION OF COMPANY SECURITIES Common Stock In a special meeting on April 23, 1998, Golden State shareholders voted to amend the Company's articles of incorporation to increase the total number of authorized shares of common stock from 100 million shares to 250 million shares with a par value of $1.00 per share. Holders of common stock are entitled to receive dividends when, as and if declared by the Board of Directors of the Company out of assets of the Company legally available for payment, subject to the superior rights of the holders of any series of preferred stock that may be issued. See Note 24: "Subsequent Events," for information regarding the impact on common stock from the Cal Fed Merger, expected to close September 11, 1998. Preferred Stock The Series A (formerly Series E) Preferred Stock has a par value of $1.00 per share and a liquidation preference of $25 per share. The Series A Preferred Stock provides for noncumulative dividends, when, as and if declared, at an annual rate of 8.75% of its liquidation preference and is convertible, at the option of the holders thereof, into common stock at any time at a conversion price of $10.40 per share, subject to adjustment in certain events. Subject to applicable laws and regulations, the Series A Preferred Stock will be redeemable, in whole or in part, at the option of the Company, on 20 to 45 days notice, from time to time at any time on or after October 1, 1998 at the following per share redemption prices, plus in each case an amount equal to any dividends that have been declared thereon but remain unpaid as of the date of redemption, if redeemed during the twelve-month period beginning October 1 of each of the following years:
Redemption Price per share of Series A Convertible Preferred Stock --------------- Year ---- 1998............................................................................. $26.09375 1999............................................................................. 25.87500 2000............................................................................. 25.65625 2001............................................................................. 25.43750 2002............................................................................. 25.21875 2003 and thereafter.............................................................. 25.00000
The Company intends to redeem all of its Series A Preferred Stock on October 1, 1998 at a redemption price of $26.09375 per share. As of June 30, 1998, there were 4,617,484 shares of Series A Preferred Stock issued and outstanding. F-44 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 During fiscal 1997 the Company entered into separately negotiated agreements with certain holders of its then Series E (now Series A) preferred stock providing, in the aggregate, for exchanges of 1,201,900 shares of the preferred stock for 3,103,872 shares of the Company's common stock. The exchanges were made at premiums above the stated conversion rate of 2.404 shares of the Company's common stock for each share of the preferred stock. See Note 3: "Earnings Per Share Information," for additional information. Goodwill Litigation Tracking Warrants On May 29, 1998, Golden State distributed Litigation Tracking WarrantsTM ("LTWTMs") to its security holders representing the right to receive, upon exercise of the LTWTMs, Golden State common stock equal in value to 85 percent of the net after-tax proceeds, if any, from Glendale Federal's pending goodwill lawsuit against the U.S. Government (the "Goodwill Litigation") on the basis of one LTWTM for each share held as of the close of business on that date. The LTWTMs are exercisable after notification by Golden State of its receipt of proceeds from a final judgment in or settlement of the litigation. The LTWTMs will expire 60 days after such notification is given. The Board of Directors also reserved additional LTWTMs for future issuance in connection with conversions or exercises of the Company's outstanding Series A Preferred Stock, its two outstanding classes of common stock purchase warrants and employee stock options. The total number of LTWTMs issued to holders of common stock and reserved for such future issuances is approximately 85.8 million. At June 30, 1998, there were 60.2 million LTWTMs issued and outstanding. Stock Repurchase Program In connection with its acquisition of RedFed in a tax-free, stock-for-stock merger, Golden State undertook a stock repurchase program, pursuant to which the Company intended to purchase shares of its common stock in the open market. At June 30, 1998, the Company had 4,688,400 shares of its common stock in treasury that had been repurchased under this program at an aggregate cost of $158.1 million. See Note 3: "Earnings Per Share Information," and Note 24: "Subsequent Events," for additional information. Warrants The Company has a class of common stock purchase warrants outstanding (the "Warrants"), totaling 12,789 at June 30, 1998, that were issued in March 1993 in connection with an exchange of preferred stock for outstanding subordinated debentures and capital notes. Each Warrant entitles the registered holder thereof to receive from the Company one share of common stock for ten Warrants for no additional consideration at any time until the expiration of the Warrants on March 10, 1999. The number of shares of common stock for which a Warrant may be exercised is subject to adjustment from time to time upon the occurrence of certain events. Registered holders exercised a total of 2,760 Warrants in fiscal 1998. The Company has also issued transferable Standby Warrants, of which 10.77 million were outstanding at June 30, 1998. Registered holders exercised a total of 78,110 Standby Warrants in fiscal 1998. Each Standby Warrant entitles the holder thereof to purchase one share of common stock and one LTWTM for a purchase price of $12.00 per share. The Standby Warrants are exercisable at any time through August 21, 2000. RESTRICTION ON STOCKHOLDERS' EQUITY AND DIVIDENDS Dividends on the Company's common stock may not be paid unless full cash dividends on the Company's Series A Preferred Stock have been declared and paid or set aside for payment for the immediately preceding dividend period. OTS regulations limit a savings institution's ability to make capital distributions, which include the payment of dividends, based on the institution's capital position. The rule establishes "safe-harbor" amounts of capital distributions that institutions can make after providing notice to the OTS, but without needing prior approval. Institutions can distribute amounts in excess of the safe harbor only with the prior approval of the OTS. F-45 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 An institution that exceeds its minimum capital requirements is permitted to make capital distributions in specified amounts based on its regulatory capital levels without prior OTS approval unless it is deemed to be "in need of more than normal supervision," in which case OTS approval of the distribution may be required. The OTS retains the authority in all cases, however, to prohibit any capital distribution that would otherwise be authorized under its regulations if the OTS determines that the capital distribution would constitute an unsafe or unsound practice and in each case requires prior notification of any proposed dividend or other capital distribution. The Company does not currently expect to pay cash dividends on its common stock or make other capital distributions, other than preferred stock dividends, in the foreseeable future. Retained earnings at June 30, 1998 and 1997 include approximately $48 million for which no provision for Federal income tax has been made. These amounts represent allocations of earnings to bad debt reserves for tax purposes and are a restriction upon retained earnings. If, in the future, this portion of retained earnings and an additional approximately $105 million of similar tax basis reserves from acquired associations are reduced for any purpose other than tax bad debt losses, Federal income taxes may be imposed at the then applicable rates. NOTE 20: EMPLOYEE BENEFIT PLAN The Company has several pension plans (collectively, the "Plan") covering substantially all of its employees. The benefits are based on years of service and the employees' average earnings in the five highest consecutive Plan years for the last 10 years of employment. The Company uses, for financial reporting purposes, the projected unit credit method and continues to base its funding policy on the individual entry age normal method. The following table sets forth the Plan's funded status as of March 31, 1998 and 1997 and amounts recognized in the Company's statements of financial condition at June 30, 1998 and 1997 (in thousands):
JUNE 30 --------------------------- 1998 1997 ---- ---- Actuarial present value of benefit obligations: Vested accumulated benefits................................................................. $58,958 $46,896 Non-vested accumulated benefits............................................................. 2,366 1,780 ------- ------- Total accumulated benefits............................................................... $61,324 $48,676 ======= ======= Projected benefit obligation for service rendered to date..................................... $73,033 $57,902 Plan assets at fair value; primarily listed stocks, U.S. Government obligations and savings certificates of the Company...................................................... 96,493 80,129 ------- ------- Funded status--Plan assets in excess of projected benefit obligation.......................... 23,460 22,227 Items not yet recognized in earnings: Unrecognized net gain....................................................................... (5,421) (4,724) Prior service cost not yet recognized in net periodic pension cost.......................... 176 193 ------- ------- Prepaid pension cost included in "Other assets" at end of period.............................. $18,215 $17,696 ======= =======
Net periodic pension income for fiscal 1998, 1997 and 1996 included the following components (in thousands):
YEARS ENDED JUNE 30 ------------------------------------------------ 1998 1997 1996 ---- ---- ---- Service cost-benefits earned during the period................................... $ 2,325 $ 2,376 $ 2,246 Interest cost on projected benefit obligation.................................... 4,874 4,483 4,306 Actual return on Plan assets..................................................... (18,895) (2,621) (11,566) Net amortization and deferral.................................................... 11,177 (5,095) 3,732 -------- ------- -------- Net periodic pension income...................................................... $ (519) $ (857) $ (1,282) ======== ======= ========
F-46 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 The following table presents certain significant assumptions used in determining plan obligations and net pension expense at the dates indicated:
YEARS ENDED JUNE 30 ------------------------------------------------ 1998 1997 1996 ---- ---- ---- Weighted average discount rate used to calculate benefit obligations............ 7.00% 8.25% 8.00% Assumed rate of increase in future compensation................................. 4.00% 4.50% 4.50% Expected long-term rate of return on plan assets................................ 9.50% 9.50% 9.50%
The Company has established a savings plan for its employees which allows participants to make contributions by salary deduction equal to 15% or less of their salary pursuant to section 401(k) of the Internal Revenue Code. Employees' contributions vest immediately; the Company's partial matching contributions vest over five years. The Company's contributions to the plan in fiscal 1998, 1997 and 1996 were $1,981,000, $1,713,000 and $739,000, respectively. KEY EXECUTIVE RETIREMENT SUPPLEMENT PLANS During fiscal 1992, GLENFED, the former holding company of Glendale Federal, substantially terminated two non-qualified post-retirement pension supplement plans previously maintained for certain senior executive officers of GLENFED, as well as one other such plan assumed by the Bank in its acquisition of another association. Participants fully vested at the time of such substantial termination (as well as one officer scheduled to vest within four months of such date) were offered the opportunity to receive a lump-sum settlement in lieu of the contractual benefits under the plans. Three non-vested participants will receive no benefits under the plans. During fiscal 1998, five vested participants were receiving benefits under the plans. DIRECTORS' RETIREMENT PLANS The Company maintains directors' retirement plans for non-employee directors who serve on its Board of Directors (the "Directors' Plan"). The Directors' Plan provides that a non-employee director shall, after termination of Board membership, be entitled to receive a monthly payment equal to: (1) the monthly Board retainer in effect at the time of termination; plus (2) the fee paid at such time for attending a Board meeting, for the number of years equal to the number of years of Board service, but not to exceed twenty years. Payments of such amounts normally commence at the later of the director's termination date or the director's attainment of age 65. NOTE 21: STOCK OPTION PLAN The Company has a stock option plan (the "Option Plan") that provides for the granting of options to employees and directors. The Option Plan has a term of five years and allows for awards totaling up to 7.2 million shares of common stock. Options granted generally have terms of ten years each. All options granted will become exercisable upon a change in control of the Company. In October 1994, the Company's shareholders approved amendments to the Option Plan which, among other things: (1) provide for annual grants of options to acquire 5,000 shares to each non-employee Director; and (2) provide for equitable adjustments of the exercise or purchase price and the number or class of shares covered by outstanding awards to preserve the benefit of such awards in the event of payment of a dividend or distribution to shareholders of the Company in property or cash in an amount in excess of the Company's normal dividend or distribution policy in effect at the time. Grants to directors are made on the first day following each annual meeting of the Company's shareholders with an exercise price equal to the closing price on the New York Stock Exchange of the Company's common stock on such date and vest on the date of the next succeeding annual meeting. F-47 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 The following is a summary of the transactions under the Company's stock option plan:
WEIGHTED NUMBER OF RANGE OF AVERAGE SHARES OPTION PRICES EXERCISE PRICE ------ ------------- -------------- Outstanding at June 30, 1995........................... 3,316,250 $6.375-$12.625 $ 9.99 Granted................................................ 742,000 14.50-16.125 14.58 Canceled or expired.................................... (73,750) 9.00-14.50 13.16 Exercised.............................................. (106,000) 6.375-14.50 10.71 ---------- Outstanding at June 30, 1996........................... 3,878,500 6.375-16.125 10.79 Granted................................................ 1,830,000 17.50-17.75 17.57 Canceled or expired.................................... (51,250) 12.625-17.75 14.11 Exercised.............................................. (512,125) 6.375-16.125 9.00 ---------- Outstanding at June 30, 1997........................... 5,145,125 6.375-17.75 13.34 Granted................................................ 925,500 28.50-35.00 28.78 Canceled or expired.................................... (36,166) 14.50-28.50 21.39 Exercised.............................................. (2,344,951) 6.375-17.75 11.22 ---------- Outstanding at June 30, 1998........................... 3,689,508 $6.375-$35.00 18.49 ==========
The number of options exercisable at June 30, 1998, 1997 and 1996 was 1,453,884, 2,869,750 and 2,244,293, respectively, and the weighted average exercise price of those exercisable options was $13.17, $10.57 and $9.76, respectively. All options will become exercisable at the completion of the Cal Fed Merger, which is expected to take place on September 11, 1998. The number of options available for future grants under the Company's stock option plan at June 30, 1998, 1997 and 1996 was 493,041, 1,382,375 and 661,125, respectively. Information about stock options outstanding at June 30, 1998 was as follows:
OUTSTANDING EXERCISABLE ----------- ----------- WEIGHTED AVERAGE REMAINING WEIGHTED WEIGHTED RANGE OF CONTRACTUAL LIFE AVERAGE EXERCISE AVERAGE EXERCISE EXERCISE PRICES (IN YEARS) NUMBER PRICE NUMBER PRICE --------------- ---------- ------ ----- ------ ----- $6.375-$9.00 5.2 206,250 $ 8.68 206,250 $ 8.68 9.75-14.50 6.6 1,029,234 12.79 891,234 12.53 15.50-17.75 8.1 1,543,024 17.52 356,400 17.36 28.50-35.00 9.2 911,000 28.79 -- -- --------- --------- $6.375-$35.00 8.2 3,689,508 $18.49 1,453,884 $13.17 ========= =========
The Company applies APB Opinion 25 in accounting for its stock-based compensation plan. Accordingly, no compensation expense has been recognized for its stock options. Had the Company determined compensation cost based on the fair value at the grant dates of its stock options consistent with SFAS 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts as follows:
YEARS ENDED JUNE 30 ----------------------------------------------------- 1998 1997 1996 ---- ---- ---- (in thousands, except per share data) Net earnings: As reported.................................................... $128,749 $50,423 $42,052 Pro forma...................................................... 121,815 45,223 39,634 Earnings per share: Basic: As reported................................................. $ 2.27 $ 0.72 $ 0.39 Pro forma................................................... 2.13 0.62 0.33 Diluted: As reported................................................. $ 1.78 $ 0.64 $ 0.36 Pro forma................................................... 1.69 0.55 0.31
F-48 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 The weighted average grant-date fair value of stock options granted during fiscal 1998, 1997 and 1996 was $14.99, $9.41 and $8.06, respectively. The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
YEARS ENDED JUNE 30 ------------------------------------------- 1998 1997 1996 ---- ---- ---- Dividend yield.............................................................. 0% 0% 0% Expected volatility......................................................... 37.7% 38.6% 42.1% Risk-free interest rate..................................................... 6.4% 6.8% 6.5% Expected life of option..................................................... 7 years 7 years 7 years
During the initial phase-in period, the effects of applying SFAS 123 for these pro forma disclosures are not likely to be representative of the effects on reported income for future years as options vest over several years and additional awards are generally made each year. F-49 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 NOTE 22: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
QUARTERS ENDED --------------------------------------------------------- JUNE 30, MARCH 31, DEC. 31, SEPT. 30, 1998 1998 1997 1997 ---- ---- ---- ---- (in thousands, except per share data) Interest income.................................................... $ 305,063 $ 276,563 $ 285,233 $ 291,086 Interest expense................................................... 185,386 168,905 178,559 184,935 --------- --------- --------- --------- Net interest income................................................ 119,677 107,658 106,674 106,151 Provision for loan losses.......................................... (2,144) (1,577) (1,103) 3,097 --------- --------- --------- --------- Net interest income after provision for loan losses................ 121,821 109,235 107,777 103,054 Other income....................................................... 29,413 24,382 25,982 25,111 General and administrative expenses................................ (77,192) (72,971) (72,561) (70,946) Legal expense--goodwill lawsuit.................................... (3,814) (5,254) (5,258) (4,719) Acquisition and restructuring costs................................ (3,506) (946) (2,487) -- Other expenses..................................................... (1,532) 763 (2,138) (2,469) --------- --------- --------- --------- Earnings before income tax provision............................... 65,190 55,209 51,315 50,031 Income tax provision............................................... 25,890 23,188 22,404 21,514 --------- --------- --------- --------- Net earnings....................................................... $ 39,300 $ 32,021 $ 28,911 $ 28,517 ========= ========= ========= ========= Earnings per common share: Basic............................................................ $0.64 $0.58 $0.52 $0.52 Diluted.......................................................... $0.51 $0.45 $0.41 $0.41 Dividends per common share declared and paid....................... -- -- -- -- Common stock price range: High............................................................. $ 41 13/16(1) $ 39 3/8 $ 37 3/4 $ 31 7/8 Low.............................................................. $ 29 3/4(1) $ 29 7/8 $ 30 1/16 $ 26 1/8 QUARTERS ENDED --------------------------------------------------------- JUNE 30, MARCH 31, DEC. 31, SEPT. 30, 1997 1997 1996 1996 ---- ---- ---- ---- (in thousands, except per share data) Interest income.................................................... $ 276,347 $ 268,355 $ 267,585 $ 260,669 Interest expense................................................... 176,479 171,834 174,353 171,306 --------- --------- --------- --------- Net interest income................................................ 99,868 96,521 93,232 89,363 Provision for loan losses.......................................... 3,878 6,143 7,829 7,354 --------- --------- --------- --------- Net interest income after provision for loan losses................ 95,990 90,378 85,403 82,009 Other income....................................................... 23,685 22,717 21,199 21,062 General and administrative expenses................................ (67,811) (63,370) (63,469) (68,574) SAIF special assessment............................................ 3,153 -- -- (58,672) Legal expense--goodwill lawsuit.................................... (10,338) (8,202) (4,931) (587) Other expense...................................................... (2,542) (3,541) (4,080) (2,925) --------- --------- --------- --------- Earnings (loss) before income tax provision (benefit).............. 42,137 37,982 34,122 (27,687) Income tax provision (benefit)..................................... 17,843 15,090 10,900 (7,702) --------- --------- --------- --------- Net earnings (loss)................................................ $ 24,294 $ 22,892 $ 23,222 $ (19,985) ========= ========= ========= ========= Earnings (loss) per common share: Basic............................................................ $0.43 $0.40 $0.35 $(0.50) Diluted.......................................................... $0.36 $0.33 $0.30 $(0.50) Dividends per common share declared and paid....................... -- -- -- -- Common stock price range: High............................................................. $ 27 $ 28 1/8 $ 23 7/8 $ 20 Low.............................................................. $ 22 1/4 $ 22 1/2 $ 17 3/8 $ 15 7/8
- ---------------- (1) The Company distributed its LTW(TM)s to its stockholders, on the basis of one LTW(TM) for each outstanding share, on May 29, 1998. See Note 19: "Stockholders' Equity - Goodwill Litigation Tracking Warrants" for additional information on LTW(TM)s. F-50 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 NOTE 23: PARENT COMPANY FINANCIAL INFORMATION The following are the condensed financial statements of Golden State Bancorp Inc. as of June 30, 1998 and for the year ended June 30, 1998 (dollars in thousands):
STATEMENT OF FINANCIAL CONDITION JUNE 30, 1998 ------------------- ASSETS Cash and amounts due from banks................................................................ $ 1,324 Equity securities available for sale........................................................... 40 Dividends receivable from subsidiary........................................................... 2,525 Investment in subsidiary....................................................................... 1,237,386 ---------- $1,241,275 ========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Dividends payable on Preferred Stock, Series A................................................. $ 2,525 Income taxes payable........................................................................... 73 Total liabilities......................................................................... ---------- $ 2,598 ---------- STOCKHOLDERS' EQUITY: Preferred stock, Series A, $1.00 par value per share and $25.00 liquidation preference per share (5,000,000 shares authorized; 4,617,484 shares issued and outstanding at June 30, 1998).. 4,617 Common Stock, $1.00 par value per share (250,000,000 shares authorized; 60,173,551 shares issued) ....................................................................................... 60,173 Additional paid-in capital..................................................................... 1,049,822 Net unrealized holding loss on debt and equity securities available for sale................... (1,607) Retained earnings - substantially restricted................................................... 283,787 Common Stock in treasury, at cost: (4,688,400 shares).......................................... (158,115) ---------- Total stockholders' equity................................................................ 1,238,677 ---------- $1,241,275 ========== STATEMENT OF OPERATIONS YEAR ENDED JUNE 30, 1998 ------------- Equity in undistributed earnings of subsidiaries.............................................. $ 128,819 Income tax provision.......................................................................... 70 Net earnings.................................................................................. ---------- $ 128,749 ==========
F-51 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996
STATEMENT OF CASH FLOWS YEAR ENDED JUNE 30, 1998 ------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings....................................................................................... $ 128,749 Adjustment to reconcile net earnings to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries, net of taxes.................................. (128,749) --------- Net cash from operating activities................................................................. -- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equity securities available for sale................................................... (31) Net cash used in investing activities.............................................................. --------- (31) --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock............................................................. 26,716 Payment of dividends on preferred stock............................................................ (7,584) Dividends received from subsidiaries............................................................... 140,524 Common stock purchased for treasury................................................................ (158,115) Payment of holding company formation costs......................................................... (186) --------- Net cash provided by financing activities.......................................................... 1,355 --------- Net increase in cash and cash equivalents.......................................................... 1,324 Cash and cash equivalents at beginning of year..................................................... -- --------- Cash and cash equivalents at end of year........................................................... $ 1,324 =========
NOTE 24: SUBSEQUENT EVENTS On July 11, 1998, Golden State acquired RedFed Bancorp Inc. ("RedFed") and its federal savings bank subsidiary, Redlands Federal Bank, in a tax-free, stock- for-stock merger. Pursuant to the terms of the transaction, Golden State issued 5,221,995 shares of its common stock, resulting in a total recorded purchase price of $158.3 million. Under the purchase method of accounting, the goodwill of $62.8 million recorded in this transaction will be amortized over 15 years using the straight-line method. At July 11, 1998, RedFed operated 15 branches and had $1.0 billion in assets, including $893.7 million of loans receivable, net. RedFed's liabilities included $864.1 million of deposits and $78.7 million of borrowings. These amounts are unaudited. In connection with its acquisition of RedFed, Golden State undertook a stock repurchase program, pursuant to which Golden State purchased 5,222,200 shares of its common stock in the open market. At June 30, 1998, the Company had 4,688,400 shares of its common stock in treasury that had been repurchased under this program at an aggregate cost of $158.1 million. On February 4, 1998, and as amended as of July 13, 1998, Golden State entered into an agreement and plan of reorganization (the "Cal Fed Merger Agreement") with First Nationwide (Parent) Holdings, Inc. ("First Nationwide"), First Nationwide Holdings, Inc. ("FNH"), and certain other parent entities of California Federal Bank, A Federal Savings Bank ("Cal Fed"). FNH is controlled, through intermediate entities, by MacAndrews and Forbes Holdings Inc. ("MAF") and Gerald J. Ford ("Ford"), the Chairman of the Board and Chief Executive Officer of Cal Fed. after giving effect to the Cal Fed Merger, the combined parent company, Golden State, will continue to be a publicly traded company, FNH will be merged with and into Golden State Financial, and Glendale Federal will be merged with and into Cal Fed. F-52 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998, 1997 AND 1996 The transaction will take the form of a merger of First Nationwide into the Company, with the Company being the surviving entity. The Company's pre-merger stockholders will own 55% to 58% of the combined entity on a fully diluted basis, immediately after the merger, before giving effect to any shares that may be issuable pursuant to the Litigation Tracking Warrants(TM) or to the possible issuance of contingent additional shares of Golden State common stock to affiliates of MAF and Ford under the Cal Fed Merger Agreement that could substantially increase the percentage ownership of the MAF and Ford affiliates. The Cal Fed Merger Agreement also contemplates that two-thirds of the Board of Directors of Golden State immediately after the Cal Fed Merger will be individuals designated by affiliates of MAF and Ford. For accounting purposes, this transaction will be accounted for using the purchase method of accounting, with First Nationwide as the acquiring entity and with the assets, liabilities and other items of the Company, together with the applicable income tax effect of such fair value adjustments, being combined at fair value on the merger date with those of First Nationwide at historical basis. The terms of the Cal Fed Merger provide that the Company's pre-merger stockholders will own 58% of the combined entity on a fully diluted basis, immediately after the merger, if the adjusted volume-weighted average trading price (the "Adjusted Average Price") of the Common Stock is $32 per share or less, and will own 55% of the combined entity on such basis if the Adjusted Average Price is $33 or more per share, with intermediate ownership percentages being applicable in the event the Adjusted Average Price is between $32 and $33. The Adjusted Average Price of Golden State Common Stock will be the daily volume-weighted average price per share for Golden State Common Stock on the New York Stock Exchange for 15 randomly selected trading days during a 30 trading- day period following the above-described distribution of the LTW(TM)s, to Golden State stockholders and ending three days before the closing date of the Cal Fed Merger, adjusted to subtract the value attributable to the 15% of the value of the potential recovery in the Goodwill Litigation that is not included for purposes of calculating the number of shares of Golden State Common Stock issuable upon exercise of the LTW(TM)s. Following the Cal Fed Merger, the Company will have between 130 and 140 million fully diluted shares of common stock outstanding. Because the Company will survive the Cal Fed Merger, the LTW(TM)s will remain exercisable for common stock of the Company after the Cal Fed Merger. At June 30, 1998, First Nationwide, through its subsidiary Cal Fed, operated 225 branches and had $34.1 billion in assets, including $20.4 billion in loans receivable, net and $16.0 billion in deposits. These amounts are unaudited. The Cal Fed Merger received Office of Thrift Supervision approval on August 12, 1998 and the approval of the stockholders of the Company on August 17, 1998, and is expected to close on September 11, 1998. F-53 EX-3.1 2 CERTIFICATE OF INCOPORATION OF GOLDEN STATE EXHIBIT 3.1 PAGE 1 STATE OF DELAWARE OFFICE OF THE SECRETARY OF STATE -------------------------------- I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF INCORPORATION OF "GOLDEN STATE BANCORP INC.", FILED IN THIS OFFICE ON THE NINTH DAY OF JUNE, A.D. 1997, AT 9 O'CLOCK A.M. A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS FOR RECORDING. [SEAL APPEARS HERE] /s/ Edward J. Freel ----------------------------------- [SEAL APPEARS HERE] Edward J. Freel, Secretary of State 2760614 8100 AUTHENTICATION: 8505672 971189385 DATE: 06-11-97 CERTIFICATE OF INCORPORATION OF GOLDEN STATE BANCORP INC. FIRST: The name of this corporation is "Golden State Bancorp Inc." SECOND: The address of this corporation's registered office in the State of Delaware is 1013 Centre Road in the City of Wilmington, County of New Castle. The name of its registered agent at such address is Corporation Service Company. THIRD: The purpose of this corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: The total number of shares of all classes of stock which this corporation shall have authority to issue is one hundred fifty million (150,000,000), of which one hundred million (100,000,000) shall be common stock, par value $1.00 per share, and fifty million (50,000,000) shall be serial preferred stock, par value $1.00 per share. The shares of preferred stock may be issued from time to time in one or more series. The board of directors of this corporation shall have authority to fix by resolution or resolutions the designations and the powers, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof, including without limitation the voting rights, dividend rate, conversion rights, redemption price and liquidation preference, of any series of shares of preferred stock, to fix the number of shares of any such series, and to increase or decrease the number of shares of any such series (but not below the number of shares thereof then outstanding). In case the number of shares of any such series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution or resolutions originally fixing the number of shares of such series. FIFTH: The name and mailing address of the incorporator of this corporation is: Glendale Federal Bank, Federal Savings Bank 414 North Central Avenue Glendale, California 91203 SIXTH: The business and affairs of this corporation shall be under the direction of a board of directors. The authorized number of directors shall in no case be fewer than five nor more than fifteen. The exact number of directors is hereby initially fixed at nine, but may be changed to different numbers from time to time by the board of directors pursuant to resolutions adopted by the affirmative vote of a majority of the entire board of directors. A. Election of Directors. The directors of this corporation shall be --------------------- divided into three classes, as nearly equal in number as possible: the first class, the second class and the third class. Each director shall serve for a term ending on the third annual meeting following the annual meeting at which such director was elected; provided, however, that the directors first elected ----------------- to the first class serve for a term ending upon the election of directors at the annual meeting next following the end of the calendar year 1996, the directors first elected to the second class shall serve for a term ending upon the election of directors at the second annual meeting next following the end of the calendar year 1996, and the directors first elected to the third class shall serve for a term ending upon the election of directors at the third annual meeting next following the end of the calendar year 1996. At each annual election commencing at the first annual meeting of stockholders, the successors to the class of directors whose term expires at that time shall be elected by the stockholders to hold office for a term of three years to succeed those directors whose term expires, so that the term of one class of directors shall expire each year, unless, by reason of any intervening changes in the authorized number of directors, the board of directors shall have designated one or more directorships whose term then expires as directorships of another class in order more nearly to achieve equality of number of directors among the classes of directors. Notwithstanding the requirement that the three classes of directors shall be as nearly equal in number of directors as possible, in the event of any change in the authorized number of directors, each director then continuing to serve as such shall nevertheless continue as a director of the class of which he or she is a member until the expiration of his or her current term, or his or her prior resignation, disqualification, disability or removal. Stockholders shall be entitled to cumulate votes in the election of directors in the manner provided in Section 214 of the Delaware General Corporation Law. B. Newly Created Directorships and Vacancies. Any vacancies on the board ------------------------------------------ of directors resulting from death, resignation, retirement, disqualification, removal from office or other cause shall be filled by the affirmative vote of a majority of directors then in office, although less than a quorum, or by the sole remaining director, or, in the event of the failure of the directors or sole remaining director so to act, by the stockholders at the next election of directors; provided, that if the holders of any class or classes of stock or series thereof of this corporation, voting separately, are entitled to elect one or more directors, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. Directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of the class to which they have been elected expires. A director elected to fill a vacancy by reason of an increase in the number of directorships shall be elected by a majority vote of the directors then in office, although less than a quorum of the board of directors, to serve until the next election of the class for which such director shall have been chosen. If the number of directors is changed, any increase or decrease shall be apportioned among the three classes so as to make all classes -2- as nearly equal in number as possible. If, consistent with the preceding requirement, the increase or decrease may be allocated to more than one class, the increase or decrease may be allocated to any such class the board of directors selects in its discretion. No decrease in the number of directors constituting the board of directors shall shorten the term of any incumbent director. C. Removal. A director may be removed only for cause as determined by ------- the affirmative vote of the holders of at least a majority of the shares then entitled to vote in an election of directors, which vote may only be taken at a meeting of stockholders called expressly for that purpose. Cause for removal shall be deemed to exist only if the director whose removal is proposed has been convicted of a felony by a court of competent jurisdiction or has been adjudged by a court of competent jurisdiction to be liable for gross negligence or misconduct in the performance of such director's duty to the corporation and such adjudication is no longer subject to direct appeal. SEVENTH: A. Higher Vote Required for Certain Business Combinations. In addition ------------------------------------------------------ to any affirmative vote of holders of a class or series of capital stock of this corporation required by law or the provisions of this Certificate of Incorporation and except as otherwise expressly provided in Paragraph B of this Article SEVENTH, a Business Combination (as hereinafter defined) with or upon a proposal by a Related Person (as hereinafter defined) shall be approved only upon the affirmative vote of the holders of at least two-thirds of the Voting Stock (as hereinafter defined) of this corporation voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or regulation. B. When higher vote is not required. The provisions of Paragraph A of -------------------------------- this Article SEVENTH shall not be applicable to any particular Business Combination and such Business Combination shall require only such affirmative vote as is required by law, regulation or any other provision of this Certificate of Incorporation, if all of the conditions specified in any one of the following Subparagraphs (i), (ii) or (iii) are met: (i) Approval by Directors. The Business Combination has been --------------------- approved by a vote of a majority of all the Continuing Directors (as hereinafter defined); or (ii) Combination with Subsidiary. The Business Combination is solely --------------------------- between this corporation and a subsidiary of this corporation and such Business Combination does not have the direct or indirect effect set forth in Subparagraph C(ii)(e) of this Article SEVENTH; or (iii) Price and Procedural Conditions. The proposed Business ------------------------------- Combination will be consummated within three years after the date the Related Person became a Related Person (the "Determination Date") and all of the following conditions have been met: -3- (a) The aggregate amount of cash and fair market value (as of the date of the consummation of the Business Combination) of consideration other than cash, to be received per share of common stock in such Business Combination by holders thereof shall be at least equal to the highest of the following: (x) the highest per share price, including any brokerage commissions, transfer taxes and soliciting dealers' fees (with appropriate adjustments for recapitalizations, reclassifications, stock splits, reverse stock splits and stock dividends) paid by the Related Person for any shares of common stock acquired by it, including those shares acquired by the Related Person before the Determination Date, or (y) the fair market value of the common stock of the corporation (as determined by the Continuing Directors) on the date the Business Combination is first proposed (the "Announcement Date"). (b) The aggregate amount of cash and fair market value (as of the date of the consummation of the Business Combination) of consideration other than cash, to be received per share of any class or series of preferred stock in such Business Combination by holders thereof shall be at least equal to the highest of the following: (x) the highest per share price, including any brokerage commissions, transfer taxes and soliciting dealers' fees (with appropriate adjustments for recapitalizations, reclassifications, stock splits, reverse stock splits and stock dividends) paid by the Related Person for any shares of such class or series of preferred stock acquired by it, including those shares acquired by the Related Person before the Determination Date; (y) the fair market value of such class or series of preferred stock of the corporation (as determined by the Continuing Directors) on the Announcement Date; and (z) the highest preferential amount per share of such class or series of preferred stock to which the holders thereof would be entitled in the event of voluntary or involuntary liquidation, dissolution or winding up of the affairs of the corporation (regardless of whether the Business Combination to be consummated constitutes such an event). (c) The consideration to be received by holders of a particular class or series of outstanding common or preferred stock shall be in cash or in the same form as the Related Person has previously paid for shares of such class or series of stock. If the Related Person has paid for shares of any class or series of stock with varying forms of consideration, the form of consideration given for such class or series of stock in the Business Combination shall be either cash or the form used to acquire the largest number of shares of such class or series of stock previously acquired by it. (d) No Extraordinary Event (as hereinafter defined) occurs after the Related Person has become a Related Person and prior to the consummation of the Business Combination. (e) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act -4- of 1934, as amended, and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) is mailed to public stockholders of the corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy of information statement is required pursuant to such Act or subsequent provisions, although such proxy or information statement need only be filed with the Securities and Exchange Commission if a filing is required by such Act or subsequent provisions) and shall contain at the front thereof in a prominent place the recommendation, if any, of the Continuing Directors as to the advisability or inadvisability of the Business Combination and of any investment banking firm selected by a majority of the Continuing Directors as to the fairness of the Business Combination from the point of view of the stockholders of the corporation other than the Related Person. C. Certain Definitions. For purposes of this ------------------- Article SEVENTH: (i) The term "person" shall mean any individual, corporation, partnership, limited liability company, bank, association, joint stock company, trust, syndicate, unincorporated organization or similar company, or a group of "persons" acting or agreeing to act together for the purpose of acquiring, holding, voting or disposing of securities of the corporation, including any group of "persons" seeking to combine or pool their voting or other interests in the equity securities of the corporation for a common purpose, pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. (ii) "Business Combination" shall mean any of the following transactions, when entered into by this corporation or a subsidiary of this corporation with, or upon a proposal by, a Related Person: (a) the acquisition, merger or consolidation of this corporation or any subsidiary of this corporation; or (b) the sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one or a series of transactions) of any assets of this corporation or any subsidiary of this corporation having an aggregate fair market value of $25 million or more; or (c) the issuance of transfer by this corporation or any subsidiary of this corporation (in one or a series of transactions) of securities of this corporation or that subsidiary having an aggregate fair market value of $25 million or more; or (d) the adoption of a plan or proposal for the liquidation or dissolution of this corporation; or (e) the reclassification of securities (including a reverse stock split), recapitalization, consolidation or any other transaction (whether or not involving a -5- Related Person) which has the direct or indirect effect of increasing the voting power, whether or not then exercisable, of a Related Person in any class or series of capital stock of this corporation or any subsidiary of this corporation; or (f) any agreement, contract or other arrangement providing directly or indirectly for any of the foregoing or any amendment or repeal of this Article SEVENTH. (iii) "Related Person" shall mean any person (other than this corporation, a subsidiary of this corporation, or any profit sharing, employee stock ownership or other employee benefit plan of this corporation or a subsidiary of this corporation or any trustee of or fiduciary with respect to any such plan acting in such capacity) that is the direct or indirect beneficial owner (as defined in Rule 13d-3 and Rule 13d-5 under the Securities Exchange Act of 1934, as in effect on January 1, 1997) of more than ten percent (10%) of the outstanding Voting Stock of this corporation, and any Affiliate or Associate of any such person. (iv) "Continuing Director" shall mean any member of the board of directors of this corporation who is not affiliated with a Related Person and who was a member of the board of directors of this corporation immediately prior to the time that the Related Person became a Related Person, and any successor to a Continuing Director who is not affiliated with the Related Person and is recommended to succeed a Continuing Director by a majority of Continuing Directors who are then members of the board of directors of this corporation. (v) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 under the Securities Exchange Act of 1934, as in effect on January 1, 1997. (vi) "Extraordinary Event" shall mean, as to any Business Combination and Related Person, any of the following events that is not approved by a majority of all Continuing Directors: (a) any failure to declare and pay at the regular date therefor any full quarterly dividend (whether or not cumulative) on outstanding preferred stock; or (b) any reduction in the annual rate of dividends paid on the common stock (except as necessary to reflect any subdivision of the common stock); or (c) any failure to increase the annual rate of dividends paid on the common stock as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction that has the effect of reducing the number of outstanding shares of the common stock; or -6- (d) the receipt by the Related Person, after the Determination Date, of a direct or indirect benefit (except proportionately as a stockholder) from any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by this corporation or any subsidiary of this corporation, whether in anticipation of or in connection with the Business Combination or otherwise. (vii) A majority of all Continuing Directors shall have the power to make all determinations with respect to this Article SEVENTH, including, without limitation, the transactions that are Business Combinations, the persons who are Related Persons, the time at which a Related Person became a Related Person, and the fair market value of any assets, securities or other property, and any such determinations of such Continuing Directors shall be conclusive and binding. (viii) "Voting Stock" shall mean all outstanding shares of the common or preferred stock of this corporation entitled to vote generally in the election of directors and each reference to a proportion of Voting Stock shall refer to shares constituting such proportion of the number of shares entitled to be cast, excluding all shares beneficially owned or controlled by the Related Person. (ix) In the event of any Business Combination in which this corporation survives, the phrase "consideration other than cash" as used in Paragraphs B(iii)(a) and B(iii)(b) of this Article SEVENTH shall include the shares of common stock and/or the shares of any class of preferred or other stock retained by the holders of such shares. D. No Effect on Fiduciary Obligations of Related Persons. Nothing ----------------------------------------------------- contained in this Article SEVENTH shall be construed to relieve any Related Person from any fiduciary obligation imposed by law. EIGHTH: Special meetings of the stockholders may be called by the Chairman of the Board of Directors of this Corporation or by a majority of the directors then in office. NINTH: This corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation in the manner now or hereafter prescribed by statue. Nothwithstanding the foregoing, the affirmative vote of the holders of at least two-thirds (or such greater proportion as may otherwise be required pursuant to any specific provision of this Certificate of Incorporation) of the total votes eligible to be cast at a legal meeting shall be required to amend, repeal or adopt any provisions inconsistent with Articles SIXTH, SEVENTH, EIGHTH, this Article NINTH and Articles TENTH, ELEVENTH, TWELFTH, THIRTEENTH and FOURTEENTH of this Certificate of Incorporation. TENTH: Bylaws may be adopted, amended or repealed by the affirmative vote of the holders of at least two-thirds of the total votes eligible to be cast at a legal meeting of stockholders or by a resolution adopted by a majority of the directors then in office. -7- ELEVENTH: Any action required to be taken or which may be taken at any annual or special meeting of the stockholders of this corporation may be taken by written consent without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the stockholders of this corporation entitled to vote thereon. TWELFTH: Stockholder nominations of persons for election as directors of this corporation and stockholders proposal must, in order to be voted upon, be made in writing and delivered to the secretary of this corporation at least five days, or such other period as may be provided in the bylaws, prior to the date of the meeting at which such nominations or proposals are proposed to be voted upon. THIRTEENTH: A director of this corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except: (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived any improper personal benefit. If the Delaware General Corporation Law is hereafter amended to further eliminate or limit the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Any repeal or modification of the foregoing paragraph by the stockholders of the corporation shall not adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification. FOURTEENTH: A. Actions, Suits or Proceedings Other than by or in the ----------------------------------------------------- Right of the Corporation. The corporation shall indemnify any person who was or - ------------------------ is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he or she is or was or has agreed to become a director or officer of the corporation, or is or was serving or has agreed to serve at the request of the corporation as a director or officer or another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity, against costs, charges, expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her on his or her behalf in connection with such action, suit or proceeding and any appeal therefrom, if he or she acted in good faith and in a manner he or she reasonably believed to be within the scope of his or her authority and in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgement, order, settlement, conviction, or upon a plea of nolo contendere or its --------------- equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be within the scope of his or her authority and in, or not opposed to, the best interests of the corporation or, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful. -8- B. Actions or Suits by or in the Right of the Corporation. The ------------------------------------------------------- corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgement in its favor by reason of the fact that he or she is or was or has agreed to become a director or officer of the corporation, or is or was serving or has agreed to serve at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity, against cost, charges and expenses (including attorneys' fees) actually and reasonable incurred by him or her or on his or her behalf in connection with the defense or settlement of such action or suit and any appeal therefrom, if he or she acted in good faith and in a manner he or she reasonably believed to be within the scope of his or her authority and in, or not opposed to, the best interests of the corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of such liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such costs, charges and expenses which the Court of Chancery or such other court shall deem proper. C. Indemnification for Costs, Charges and Expenses of Successful ------------------------------------------------------------- Party. Notwithstanding the other provisions of this Article FOURTEENTH, to the - ----- extent that a director or officer has been successful, on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in defense of any action, suit or proceeding referred to in Sections A and B of this Article FOURTEENTH, or in defense of any claim, issue or matter therein, he or she shall be indemnified against all costs, charges and expenses (including attorneys' fees) actually and reasonably incurred by him or her on his or her behalf in connection therewith. D. Determination of Right to Indemnification. Any indemnification ----------------------------------------- under Sections A and B of this Article FOURTEENTH (unless ordered by a court) shall be paid by the corporation unless a determination is made (i) by the board of directors by a majority vote of the directors who were not parties to such action, suit or proceeding, or if such majority of disinterested directors so directs, (ii) by independent legal counsel in a written opinion, or (iii) by the stockholders, that indemnification of the director or officer is not proper in the circumstances because he or she has not met the applicable standard of conduct set forth in Sections A and B or this Article FOURTEENTH. E. Advance of Costs, Charges and Expenses. Costs, charges and -------------------------------------- expenses (including attorneys' fees) incurred by a person referred to in Sections A or B of this Article FOURTEENTH in defending a civil or criminal action, suit or proceeding shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding; provided, however, that -------- ------- the payment of such costs, charges and expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer) in advance of the final disposition of such action, suit or proceeding shall be made only on receipt of an undertaking by or on behalf of the director or officer to repay all amounts so advanced in the event that it shall ultimately be determined that such director or officer is not -9- entitled to be indemnified by the corporation as authorized in this Article FOURTEENTH. Such costs, charges and expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the majority of the directors deems appropriate. The majority of the directors may, in the manner set forth above, and upon approval of such director or officer of the corporation, authorize the corporation's counsel to represent such person, in any action, suit or proceeding, whether or not the corporation is a party to such action, suit or proceeding. F. Procedure for Indemnification. Any indemnification under Sections ----------------------------- A, B or C or advance of costs, charges and expenses under Section E of this Article FOURTEENTH shall be made promptly, and in any event within 60 days, upon the written request of the director or officer. The right to indemnification or advances as granted by this Article FOURTEENTH shall be enforceable by the director or officer in any court of competent jurisdiction, if the corporation denies such request, in whole or in part, or if no disposition thereof is made within 60 days. Such person's costs and expenses incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the corporation. It shall be a defense to any such action (other than an action brought to enforce a claim for the advance of costs, charges and expenses under Section E of this Article FOURTEENTH where the required undertaking, if any, has been received by the corporation) that the claimant has not met the standard of conduct set forth in Sections A or B of this Article FOURTEENTH, but the burden of proving such defense shall be on the corporation. Neither the failure of the corporation (including its board of directors, its independent legal counsel and its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in Sections A or B of this Article FOURTEENTH, or the fact that there has been an actual determination by the corporation (including its board of directors, its independent legal counsel and its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. G. Settlement. The corporation shall not be obligated to reimburse the ---------- costs of any settlement to which it has not agreed. If any action, suit or proceeding, including any appeal, within the scope of Sections A or B of this Article FOURTEENTH, the person to be indemnified shall have unreasonably failed to enter into a settlement thereof offered or assented to by the opposing party or parties in such action, suit or proceeding, then, notwithstanding any other provision hereof, the indemnification obligation of the corporation to such person in connection with such action, suit or proceeding shall not exceed the total of the amount at which settlement could have been made and the expenses incurred by such person prior to the time such settlement could reasonable have been effected. H. Subsequent Amendment. No amendment, termination or repeal of this -------------------- Article FOURTEENTH or of relevant provisions of the Delaware General Corporation Law or any other applicable laws shall affect or diminish in any way the rights of any director or officer of the corporation to indemnification under the provisions hereof with respect to any action, suit or -10- proceeding arising out of, or relating to, any actions, transactions or facts occurring prior to the final adoption of such amendment, termination or repeal. I. Other Rights: Continuation of Right to Indemnification. The ------------------------------------------------------ indemnification provided by this Article FOURTEENTH shall not be deemed exclusive of any other rights to which a director, officer, employee or agent seeking indemnification may be entitled under any law (common or statutory), agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in any other capacity while holding office or while employed by or acting as agent for the corporation, and shall continue as to a person who has ceased to be a director, officer, employee or agent, and shall inure to the benefit of the estate, heirs, executors and administrators of such person. Nothing contained in this Article FOURTEENTH shall be deemed to prohibit, and the corporation is specifically authorized to enter into, agreements with officers and directors providing indemnification rights and procedures different from those set forth herein. All rights to indemnification under this Article FOURTEENTH is in effect. This Article FOURTEENTH shall be binding upon any successor corporation to this corporation, whether by way of acquisition, merger, consolidation or otherwise. J. Savings Clause. If this Article FOURTEENTH or any portion hereof -------------- shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each director or officer of the corporation as to any costs, charges, expenses (including attorney's fees), judgments, fines and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of the corporation, to the full extent permitted by any applicable portion of this Article FOURTEENTH that shall not have been invalidated and to the full extent permitted by applicable law. K. Subsequent Legislation. If the Delaware General Corporation Law is ---------------------- hereafter amended to further expand the indemnification permitted to directors and officers of the corporation, then the corporation shall indemnify such persons to the fullest extent permitted by the Delaware General Corporation Law, as so amended. -11- THE UNDERSIGNED, being the sole incorporator herein before named, for the purpose of forming a corporation pursuant to the General Corporation Law of the State of Delaware, does hereby make, file and record this Certificate of Incorporation, hereby declaring and certifying that this is its act and deed and that the facts stated herein are true this 20th day of May 1997. ---- GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK By /s/ Stephen J. Trafton ----------------------------------- Name: Stephen J. Trafton Title: Chairman of the Board, Chief Executive Officer and President Attest: /s/ James R. Eller --------------------------------------- Name: James R. Eller Title: Secretary -12- EX-3.2 3 ARTICLES OF AMENDMENT TO THE CERT. OF INCOR. EXHIBIT 3.2 PAGE 1 State of Delaware Office of the Secretary of State ---------------------------- I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT OF "GOLDEN STATE BANCORP INC.", FILED IN THIS OFFICE ON THE TWENTY-THIRD DAY OF APRIL, A.D. 1998, AT 12 O'CLOCK P.M. [SEAL OF STATE /s/ Edward J. Freel OF DELAWARE] ----------------------------------- Edward J. Freel, Secretary of State 2660614 8100 AUTHENTICATION: 9041992 981154808 DATE: 04-23-98 ARTICLES OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF GOLDEN STATE BANCORP INC. Pursuant to Section 242 of the Delaware General Corporation Law, the undersigned corporation hereby adopts the following Articles of Amendment to its Certificate of Incorporation: ARTICLE ONE. The following amendment to the Certificate of Incorporation was adopted by the Board of Directors of the Corporation on April 23, 1998: ARTICLE FOURTH of the Certificate of Incorporation is hereby amended to read as follows: FOURTH: The total number of shares of all classes of stock which this corporation shall have authority to issue is three hundred million (300,000,000), of which two hundred and fifty million (250,000,000) shall be common stock, par value $1.00 per share, and fifty million (50,000,000) shall be serial preferred stock, par value $1.00 per share. ARTICLE TWO. The following amendment to the Certificate of Designation of the Noncumulative Convertible Preferred Stock, Series A, was adopted by the Board of Directors of the Corporation on November 17, 1997: Section IV.C(3) of the Certificate of Designation is hereby amended by (i) inserting the subparagraph reference "(a)" immediately following "(3)" and (ii) adding a new paragraph (b) as follows: (b) In the event that the Company shall, at any time or from time to time while any shares of the Series A Preferred Stock are outstanding, issue to holders of Common Stock as a dividend or distribution, any litigation tracking warrants ("LTWs"), then (i) if a holder of the Series A Preferred Stock converts its shares of Series A Preferred Stock prior to the date upon which such warrants to purchase shares of Common Stock become exercisable (the "Triggering Date"), such holder shall receive (A) the number of shares of Common Stock into which such shares of Series A Preferred Stock are convertible without giving any effect to such dividend or distribution of LTWs and (B) the number of LTWs equal to the number of LTWs such holder would have received had such holder converted its Series A Preferred Stock into Common Stock immediately prior to the record date for the distribution of the LTWs and receive LTWs in such dividend or distribution or (ii) if a holder of the Series A Preferred Stock converts its shares of Series A Preferred Stock into Common Stock on or after the Triggering Date, such holder shall receive the number of shares of Common Stock equal to the number of shares of Common Stock such holder would have received had such holder (x) converted its shares of Series A Preferred Stock into shares of Common Stock and LTWs immediately prior to the Triggering Date and (y) then exercised such LTWs for the shares of Common Stock underlying such LTWs immediately after the Triggering Date. As a result of an adjustment pursuant to clause (ii) above, the Conversion Price of the Series A Preferred Stock shall be increased by an amount equal to the aggregate exercise price of the number of LTWs underlying the Series A Preferred Stock immediately prior to the Triggering Date. ARTICLE THREE. The number of shares of the corporation outstanding at the time of such adoption was 51,327,541; and the number of shares entitled to vote thereon was 51,113,949. ARTICLE FOURTH. The holders of a majority of the shares outstanding and entitled to vote on said amendment have voted to adopt said amendment at a Special Meeting of Shareholders held on April 23, 1998. GOLDEN STATE BANCORP INC. BY: /s/ James R. Eller, Jr. ----------------------------- James R. Eller, Secretary Dated: April 23, 1998 EX-3.3 4 BYLAWS OF GOLDEN STATE EXHIBIT 3.3 BYLAWS OF GOLDEN STATE BANCORP INC. ----------------------------------- Adopted June 23, 1997 As Amended July 22, 1997 ARTICLE I OFFICES SECTION 1. Registered Office. Golden State Bancorp Inc. (hereinafter ----------------- referred to as the "Corporation") shall at all times maintain a registered office in the State of Delaware, which, except as otherwise determined by the Board of Directors of the Corporation (hereinafter referred to as the "Board"), shall be in the City of Wilmington, County of New Castle. SECTION 2. Other Offices. The Corporation may also have offices at ------------- such other places within or without the State of Delaware as the Board shall from time to time designate or the business of the Corporation shall require. ARTICLE II Stockholders SECTION 1. Place of Meetings. All annual and special meetings of ----------------- stockholders shall be held at such places within or without the State of Delaware as may from time to time be designated by the Board and specified in the notice of meeting. SECTION 2. Annual Meeting. A meeting of the stockholders of the -------------- Corporation for the election of directors and for the transaction of any other business of the Corporation shall be held annually at 10:00 a.m. on the forth Tuesday of October, if not a legal holiday, and if a legal holiday, then on the next day following such day which is not a legal holiday, or at such other date and time as the Board may determine and specify in the notice of the meeting. SECTION 3. Special Meetings. A special meeting of the stockholders may ---------------- be called by the Chairman of the Board of Directors of the Corporation or a majority of the Board then in office, and shall be called by the Chairman of the Board of Directors of the Corporation or by a majority of the Board of Directors upon the written request of the holders of not less than 10% of the outstanding capital stock of the Corporation entitled to vote at a meeting. Business transacted at any special meeting of the stockholders shall be confined to the purpose or purposes stated in the notice of such meeting. 1 SECTION 4. Conduct of Meetings. Annual and special meetings of the ------------------- stockholders shall be conducted in accordance with Delaware law unless otherwise prescribed by the Bylaws. The Chairman of the Board, or in the absence of the Chairman of the Board, the highest ranking officer of the Corporation who is present, or such other person as the Board shall have designated, shall call to order any meeting of the stockholders and act as chairman of the meeting. The Secretary of the Corporation, if present at the meeting, shall be the secretary of the meeting. In the absence of the Secretary of the Corporation, the secretary of the meeting shall be such person as the chairman of the meeting shall appoint. The chairman of any meeting of the stockholders, unless otherwise prescribed by law or regulation or unless the Chairman of the Board has otherwise determined, shall determine the order of business and the procedure at the meeting. SECTION 5. Notice of Meetings. Written notice stating the place, day and ------------------ hour of the meeting and the purpose or purposes for which the meeting of the stockholders is called shall be delivered not less than ten nor more than sixty days before the date of the meeting, either personally or by mail, by or at the direction of the Chairman of the Board, the Secretary or the directors requesting the meeting, to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed given when deposited in the United States mail, postage prepaid, addressed to the stockholder at his or her address as it appears on the stock transfer books or records of the Corporation as of the record date prescribed in Section 6 of this Article II. When any meeting of the stockholders, either annual or special, is adjourned for more than thirty days or if, after adjournment, a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the time and place of any other adjourned meeting of the stockholders, other than an announcement at the meeting at which such adjournment is taken. SECTION 6. Fixing of Record Date. For the purpose of determining --------------------- stockholders entitled to notice of or to vote at any meeting of the stockholders or any adjournment thereof, or stockholders entitled to receive payment of any dividend, or in order to make a determination of stockholders for any other proper purpose under Delaware law, the Board may fix, in advance, a date as the record date for any such determination of stockholders. Such date shall not be more than sixty days and not less than ten days before the date of such meeting, nor more than sixty days prior to any other action. SECTION 7. Voting Lists. The Secretary of the Corporation, or other ------------ officer or agent of the Corporation having charge of the stock transfer books for shares of the capital stock of the Corporation, shall prepare and make, at least ten days before each meeting of the stockholders, a complete list of the stockholders entitled to vote at such meeting, or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting as required by applicable law. Such list shall also be produced and kept open at the time and place of the meeting during the whole time 2 thereof and shall be subject to the inspection of any stockholder present at the meeting. The stock transfer books shall be the only evidence as to who are the stockholders entitled to examine the stock transfer books, or to vote in person or by proxy at any meeting of stockholders. SECTION 8. Quorum. A majority of the outstanding shares of the ------ Corporation entitled to vote at a meeting of the stockholders, represented in person or by proxy, shall constitute a quorum at a meeting. If less than a majority of the outstanding shares are represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally called. The stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. SECTION 9. Proxies. At any meeting of the stockholders, every ------- stockholder having the right to vote shall be entitled to vote in person, or by proxy appointed by an instrument in writing and complying with the requirements of Delaware law. SECTION 10. Voting by the Corporation. Neither treasury shares of its ------------------------- own capital stock held by the Corporation, nor shares held by another corporation, a majority of the shares of which entitled to vote for the election of directors are held by the Corporation, shall be entitled to vote or be counted for quorum purposes at any meeting of the stockholders; provided, however, that the Corporation may vote shares of its capital stock held by it, or by any such other corporation, if such shares of capital stock are held by the Corporation or such other corporation in a fiduciary capacity. SECTION 11. New Business. At any meeting of stockholders, only such ------------ business shall be conducted, and only such proposals shall be acted upon as shall have been brought before the meeting (a) by, or at the direction of, the majority of the Board of Directors, (b) by the Chairman or (c) by any stockholder of the Corporation who complies with the notice procedures set forth in this Section. For a proposal to be properly brought before the meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to, or mailed and received at, the principal executive offices of the Corporation not less than five days prior the scheduled annual meeting at which the business or proposal is proposed to be presented, regardless of any postponements or adjournments of that meeting to a later date. The provisions of this Section shall not prevent the consideration and approval or disapproval at the stockholders' meeting of reports of officers, directors and committees of the Board of Directors, but, in connection with such reports, no new business shall be acted upon at such meeting unless stated, filed and received as herein provided. 3 SECTION 12. Informal Action by Stockholders. Any action required to be ------------------------------- taken at a meeting of the stockholders, or any other action which may be taken at a meeting of stockholders, may be taken without a meeting if consent in writing, setting forth the action so taken, shall be signed by all of the stockholders entitled to vote with respect to the subject matter of such action. SECTION 13. Inspectors of Election. In advance of any meeting of ---------------------- stockholders, the Board may appoint any persons other than nominees for office as inspectors of election to act at such meeting or any adjournment thereof. If inspectors of election be not so appointed, or if any persons so appointed fail to appear or refuse to act, the presiding officer of any such meeting may, and on the request of any stockholder or a stockholder's proxy shall, make such appointment at the meeting. The number of inspectors shall be either one or three. If appointed at a meeting on the request of one or more stockholders or proxies, the majority of shares represented in person or by proxy shall determine whether one or three inspectors are to be appointed. The duties of such inspectors shall include: determining the number of shares of stock and the voting power of each share, the shares of stock represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of the proxies; receiving votes, ballots or consents; hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes or consents; determining the result, and such acts as may be proper to conduct the election or vote with fairness to all stockholders. ARTICLE III BOARD OF DIRECTORS SECTION 1. General Powers. The business and affairs of the Corporation -------------- shall be managed by or under the direction of the Board. The Board shall annually elect a Chairman of the Board and a President, and may elect one or more Vice Chairmen from among its members, and shall designate, when present, either the Chairman or the President or a Vice Chairman to preside at its meetings. SECTION 2. Number. The Board shall consist of not less than five nor ------ more than fifteen members. The exact number of directors has been initially fixed in the Corporation's Certificate of Incorporation at nine, but may be changed from time to time by the Board pursuant to resolutions adopted by a majority of the entire Board. SECTION 3. Election of Directors. The Board shall be divided into three --------------------- classes, as nearly equal in number as possible: the first class, the second class and the third class. Each director shall serve for a term ending on the third annual meeting following the annual meeting of the stockholders at which such director was elected; provided, however, that the directors first elected -------- ------- to the first class shall serve for a term ending upon the election of directors at the annual meeting next following the end of the calendar year 1996, the directors first elected to the second class shall serve for a term ending upon the election of directors at the second annual meeting next following the end of the calendar year 1996, and 4 the directors first elected to the third class shall serve for a term ending upon the election of directors at the third annual meeting next following the end of the calendar year 1996. At each annual election commencing at the first annual meeting of the stockholders, the successors to the class of directors whose term expires at that time shall be elected by the stockholders to hold office for a term of three years to succeed those directors whose term expires, so that the term of one class of directors shall expire each year, unless, by reason of any intervening changes in the authorized number of directors, the Board shall have designated one or more directorships whose term then expires as directorships of another class in order more nearly to achieve equality of number of directors among the classes. Notwithstanding the requirement that the three classes shall be as nearly equal in number of directors as possible, in the event of any change in the authorized number of directors, each director then continuing to serve as such shall nevertheless continue as a director of the class of which he or she is a member until the expiration of his or her current term, or his or her prior resignation, disqualification, disability or removal. Stockholders shall be entitled to cumulate their votes in the election of directors in the manner provided in Section 214 of the Delaware General Corporation Law. SECTION 4. Nomination of Directors. Nominations of candidates for ----------------------- election as directors at any meeting of stockholders may be made (i) by, or at the direction of, a majority of the Board of Directors, or (ii) by any stockholder entitled to vote at such annual meeting. Only persons nominated in accordance with procedures set forth in this Section shall be eligible for election as directors. Nominations, other than those made by, or at the direction of, the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation as set forth in this Section. To be timely, a stockholder's notice shall be delivered to, or mailed and received at, the principal executive offices of the Corporation not less than five days prior to the scheduled date for meeting, regardless of any postponements or adjournments of that meeting to a later date. The Board of Directors may reject any nomination by a stockholder not timely made in accordance with the requirements of this Section. SECTION 5. Regular Meetings. Meetings of the Board shall be held at such ---------------- time, and at such places within or without the State of Delaware, as shall be fixed by the Board. No call shall be required for regular meetings for which the time and place has been fixed. Members of the Board of Directors may participate in regular meetings by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other. 5 SECTION 6. Special Meetings. Special Meetings of the Board may be called by ---------------- or at the request of the Chairman of the Board, the President or a majority of the directors. The persons authorized to call special meetings of the Board may fix any place as the place for holding any special meeting of the Board called by such persons. Members of the Board of Directors may participate in special meetings by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other. SECTION 7. Notice. Written notice of any special meeting of the Board ------ shall be given to each director at least one day prior thereto delivered personally, by facsimile or by telegram or at least 2 days prior thereto delivered by a guaranteed overnight delivery service or at least five days prior thereto delivered by mail at the last address given by the director to the Corporation for such purpose. Such notice shall be deemed to be delivered when deposited in the United States mail so addressed, with postage thereon prepaid, if mailed, when deposited with the delivery service, if sent by guaranteed overnight delivery, when the facsimile confirmation is received, if sent by facsimile or when delivered to the telegraph company if sent by telegram. Any director may waive notice of any meeting by a writing filed with the Secretary. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except in the event a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the Board need be specified in the notice or waiver of notice of such meeting. SECTION 8. Quorum. A majority of the number of directors fixed pursuant to ------ Section 2 of this Article III shall constitute a quorum for the transaction of business at any meeting of the Board, but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time. Notice of any adjourned meeting shall be given in the same manner as prescribed by Section 6 of this Article III. SECTION 9. Manner of Acting. The act of the majority of the directors ---------------- present at a meeting at which a quorum is present shall be the act of the Board. SECTION 10. Action Without a Meeting. Any action required or permitted to ------------------------ be taken by the Board at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors. SECTION 11. Resignation. Any director may resign at any time by sending a ----------- written notice of such resignation to the Corporation addressed to the Chairman of the Board, the President or the Board. Unless otherwise specified therein, such resignation shall take effect upon receipt thereof. SECTION 12. Vacancies. Any vacancy occurring in the Board may be filled in --------- accordance with the Certificate of Incorporation. SECTION 13. Compensation. Directors, as such, may receive a stated salary ------------ for their services. By resolution of the Board, a reasonable fixed sum, and reasonable expenses of attendance, if any, may be allowed for actual attendance at each regular or special meeting of the Board. Members of either standing or special committees may be allowed such compensation for actual attendance at committee meetings as the Board may determine. Directors may also, subject to applicable law, be entitled to receive stock options and benefits under a retirement plan. SECTION 14. Presumption of Assent. A director of the Corporation who is --------------------- present at a meeting of the Board at which action is taken shall be presumed to have assented to the action taken unless his or her dissent or abstention shall be entered in the minutes of the meeting or unless he or she shall file a written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the Corporation within five days after the date a copy of the minutes of the meeting is received. Such right to dissent shall not apply to a director who voted in favor of such action. SECTION 15. Removal. At a meeting of stockholders called expressly for ------- that purpose, a director may be removed only for cause as determined by the affirmative vote of the holders of a majority of the shares then entitled to vote in an election of directors, which vote may only be taken at a meeting of stockholders called expressly for that purpose. Cause for removal shall be deemed to exist only if the director whose removal is proposed has been convicted of a felony by a court of competent jurisdiction or has been adjudged by a court of competent jurisdiction to be liable for gross negligence or misconduct in the performance of such director's duty to the Corporation and such adjudication is no longer subject to direct appeal. SECTION 16. Qualifications. Each director shall at all times be the -------------- beneficial owner of not less than 100 shares of capital stock of the Corporation. No person of an age 70 years or older shall be eligible for election, reelection, appointment or reappointment to the board of directors of the Corporation. No director shall serve as such beyond the annual meeting of the Corporation immediately following the attainment of age 70. ARTICLE IV EXECUTIVE AND OTHER COMMITTEES SECTION 1. Appointment. The Board, by resolution adopted by a majority of ----------- the Board, may designate the Chief Executive Officer and two or more of the other directors to constitute an Executive Committee. The designation of any committee pursuant to this Article IV and the delegation of authority thereto shall not operate to relieve the Board, or any director, of any responsibility imposed by law or regulation, except to the extent provided by law. 7 SECTION 2. Authority. The Executive Committee, when the Board is not in --------- session, shall have and may exercise all of the authority of the Board except to the extent, if any, that such authority shall be limited by the resolution appointing the Executive Committee, or as otherwise expressly provided by law, the Certificate of Incorporation or the Bylaws. SECTION 3. Tenure. Subject to the provisions of Section 8 of this Article ------ IV, each member of the Executive Committee shall hold office until a successor is designated as a member of the Executive Committee. SECTION 4. Meetings. Regular meetings of the Executive Committee may be -------- held without notice at such times and places as the Executive Committee may fix from time to time. Special meetings of the Executive Committee may be called by any member thereof upon not less than one day's notice stating the place, date and hour of the meeting, which notice may be written or oral. Any member of the Executive Committee may waive notice of any meeting and no notice of any meeting need by given to any member thereof who attends in person. The notice of a meeting of the Executive Committee need not state the business proposed to be transacted at the meeting. Regular or special meetings may be held by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other. SECTION 5. Quorum. A majority of the members of the Executive Committee ------ shall constitute a quorum for the transaction of business at any meeting thereof, and action of the Executive Committee must be authorized by the affirmative vote of a majority of the members present at a meeting at which a quorum is present. SECTION 6. Action Without a Meeting. Any action required or permitted to ------------------------ be taken by the Executive Committee at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the members of the Executive Committee. SECTION 7. Vacancies. Any vacancy in the Executive Committee may be --------- filled by a resolution adopted by a majority of the Board. SECTION 8. Resignations and Removal. Any member of the Executive ------------------------ Committee may be removed at any time with or without cause by resolution adopted by a majority of the Board. Any member of the Executive Committee may resign from the Executive Committee at any time by giving written notice to the Chairman of the Board, the President or the Board. Unless otherwise specified thereon, such resignation shall take effect upon receipt. The acceptance of such resignation shall not be necessary to make it effective. 8 SECTION 9. Procedure. The Executive Committee shall elect a presiding --------- officer from its members and may fix its own rules of procedures which shall not be inconsistent with the Bylaws. It shall keep regular minutes of its proceedings and report the same to the Board for its information. SECTION 10. Other Committees. The Board may by resolution establish any of ---------------- an audit committee, a nominating committee or such other committees composed of directors as they may determine to be necessary or appropriate for the conduct of the business of the Corporation and may prescribe the duties, constitution and procedures thereof. ARTICLE V OFFICERS SECTION 1. Positions. The officers of the Corporation shall be a Chairman --------- of the Board, a Vice Chairman, a Chief Executive Officer, a President, one or more Vice Presidents, a Secretary and a Treasurer or a Vice President in charge of financial matters, each of whom shall be elected by the Board. Any number of such offices may be held by the same person. The Board may designate one or more Vice Presidents as Executive Vice President, Senior Vice President or such other designation as the Board may determine. The Board may also elect or authorize the appointment of such officers as the business of the Corporation may require. The officers shall have such authority and perform such duties as the Board may from time to time authorize or determine. In the absence of action by the Board, the officers shall have such powers and duties as generally pertain to their respective offices. SECTION 2. Election and Term of Office. The officers of the Corporation --------------------------- shall be elected annually at the first meeting of the Board held after each annual meeting of the stockholders. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as possible. Each officer shall hold office until his or her successor shall have been duly elected and qualified or until his or her death, resignation or removal in the manner hereinafter provided. Election or appointment of an officer, employee or agent shall not by itself create any contractual rights. The Board may authorize the Corporation to enter into an employment contract with an officer, but no contract shall impair the right of the Board to remove any officer at any time in accordance with Section 3 of this Article V. SECTION 3. Removal. Any officer may be removed by the Board whenever in ------- its judgment the best interests of the Corporation will be served thereby, but such removal, other than for cause, shall be without prejudice to the contract rights, if any, of the person so removed. SECTION 4. Vacancies. A vacancy in any office because of death, --------- resignation, removal, disqualification or otherwise, may be filled by a majority vote of the Board for the unexpired portion of the term. 9 SECTION 5. Remuneration. The remuneration of the officers shall be fixed ------------ from time to time by the Board or its delegees. ARTICLE VI CONTRACTS, LOANS, CHECKS AND DEPOSITS SECTION 1. Contracts. To the extent permitted by applicable law, the --------- Certificate of Incorporation or the Bylaws, the Board may authorize any officer, employee or agent of the Corporation to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation. Such authority may be general or confined to specific instances. SECTION 2. Loans. No loans shall be contracted on behalf of the ----- Corporation and no evidence of indebtedness shall be issued in its name unless authorized by the Board. Such authority may be general or confined to specific instances. SECTION 3. Checks, Drafts, Etc. All checks, drafts or other orders for ------------------- the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by one or more officers, employees or agents of the Corporation in such manner as shall from time to time be determined by the Board. SECTION 4. Deposits. All funds of the Corporation not otherwise employed -------- shall be deposited from time to time to the credit of the Corporation in any duly authorized depositories as the Board may select. ARTICLE VII CERTIFICATES FOR SHARES AND THEIR TRANSFER SECTION 1. Certificates for Shares. Certificates representing shares of ----------------------- capital stock of the Corporation shall be in such form as shall be determined by the Board. Such certificates shall be signed by the Chairman of the Board, the Chief Executive Officer or any other officer of the Corporation authorized by the Board, attested by the Secretary or an Assistant Secretary, and sealed with the corporate seal or a facsimile thereof. The signatures of such officers upon a certificate may be facsimiles if the certificate is manually signed on behalf of a transfer agent or a registrar other than the Corporation itself or one of its employees. Each certificate for shares of capital stock shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares are issued, with the number of shares issued and date of issue, shall be entered on the stock transfer books of the Corporation. All certificates surrendered to the Corporation for transfer shall be canceled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and canceled, except that in the case of a lost, stolen or destroyed certificate, a new certificate may be issued therefor upon such terms and indemnity to the Corporation as the Board may prescribe as sufficient to indemnify the Corporation against any claim that may be made against it on account of such loss, theft or destruction. 10 SECTION 2. Transfer of Shares. Transfer of shares of capital stock of ------------------ the Corporation shall be made only on its stock transfer books. Authority for such transfer shall be given only by the holder of record thereof or by his or her legal representative, who shall furnish proper evidence of such authority, or by his or her attorney thereunto duly authorized by power of attorney duly executed and filed with the Corporation. Such transfer shall be made only on surrender for cancellation of the certificate for such shares. The person in whose name shares of capital stock stand on the books of the Corporation shall be deemed by the Corporation to be the owner thereof for all purposes. ARTICLE VIII FISCAL YEAR, ANNUAL AUDIT The fiscal year of the Corporation shall end on the 30th day of June of each year. The Corporation shall be subject to an annual audit as of the end of its fiscal year by independent accountants appointed by and responsible to the Board. The appointment of such accountants shall be subject to annual ratification by the stockholders. ARTICLE IX DIVIDENDS Subject to applicable law, the Certificate of Incorporation or the Bylaws, the Board may, from time to time, declare and the Corporation may pay, dividends on the outstanding shares of capital stock of the Corporation. ARTICLE X CORPORATE SEAL The corporate seal of the Corporation shall be in such form as the Board shall prescribe. ARTICLE XI AMENDMENTS Bylaws may be adopted, amended or repealed by the vote of two thirds of the outstanding stock of the Corporation entitled to vote thereon or by a resolution adopted by a majority of the directors then in office. ARTICLE XII INDEMNIFICATION SECTION 1. Actions, Suits or Proceedings Other than by or in the Right ----------------------------------------------------------- of the Corporation. The Corporation shall indemnify any person who was or is a - ------------------ party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or 11 in the right of the Corporation) by reason of the fact that he or she is or was or has agreed to become a director or officer of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a director or officer of another corporation, partnership, limited liability company, limited liability partnership, joint venture, trust or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity, against costs, charges, expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her or on his or her behalf in connection with such action, suit or proceeding and any appeal therefrom, if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a --------------- presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be within the scope of his or her authority and in, or not opposed to the best interests of the Corporation, or, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful. SECTION 2. Actions or Suits by or in the Right of the Corporation. The ------------------------------------------------------ Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he or she is or was or has agreed to become a director or officer of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a director or officer of another corporation, partnership, limited liability company, limited liability partnership, joint venture, trust or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity, against costs, charges and expenses (including attorneys' fees) actually and reasonably incurred by him or her or on his or her behalf in connection with the defense or settlement of such action or suit and any appeal therefrom, if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interest of the Corporation except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for gross negligence or misconduct in the performance of his or her duty to the Corporation unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of such liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such costs, charges and expenses which the Court of Chancery or such other court shall deem proper. SECTION 3. Indemnification for Costs, Charges and Expenses of Successful ------------------------------------------------------------- Party. Notwithstanding the other provisions of this Article XII, to the extent - ----- that a director or officer has been successful, on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in defense of any action, suit or proceeding referred to in Sections 1 and 2 of this Article XII, or in defense of any claim, issue or matter therein, 12 he or she shall be indemnified against all costs, charges and expenses (including attorneys' fees) actually and reasonably incurred by him or her or on his or her behalf in connection therewith. SECTION 4. Determination of Right to Indemnification. Any ----------------------------------------- indemnification under Sections 1 and 2 of this Article XII (unless ordered by a court) shall be paid by the Corporation unless a determination is made by (i) the board of directors by a majority vote of the directors who were not parties to such action, suit or proceeding, or if such majority of disinterested directors so directs, (ii) by independent legal counsel in a written opinion, or (iii) by the stockholders, that indemnification of the director or officer is not proper in the circumstances because he or she has not met the applicable standard of conduct set forth in Sections 1 and 2 of this Article XII. SECTION 5. Advance of Costs, Charges and Expenses. Costs, charges -------------------------------------- and expenses (including attorneys' fees) incurred by a person referred to in Sections 1 or 2 of this Article XII in defending a civil or criminal action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding; provided, however, that the -------- ------- payment of such costs, charges and expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer) in advance of the final disposition of such action, suit or proceeding shall be made only upon receipt of an undertaking by or on behalf of the director or officer to repay all amounts so advanced in the event that it shall ultimately be determined that such director or officer is not entitled to be indemnified by the Corporation as authorized in this Article XII. Such costs, charges and expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the majority of the directors deems appropriate. The majority of the directors may, in the manner set forth above, and upon approval of such director or officer of the Corporation, authorize the Corporation's counsel to represent such person, in any action, suit or proceeding, whether or not the Corporation is a party to such action, suit or proceeding. SECTION 6. Procedure for Indemnification. Any indemnification under ----------------------------- Sections 1, 2 and 3, or advance of costs, charges and expenses under Section 5 of this Article XII shall be made promptly, and in any event within 60 days, upon the written request of the director or officer. The right to indemnification or advances as granted by this Article XII shall be enforceable by the director or officer in any court of competent jurisdiction, if the Corporation denies such request, in whole or in part, or if no disposition thereof is made within 60 days. Such person's costs and expenses incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the Corporation. It shall be a defense to any such action (other than an action brought to enforce a claim for the advance of costs, charges and expenses under Section 5 of this Article XII where the required undertaking, if any, has been received by the Corporation) that the claimant has not met the standard of conduct set forth in Sections 1 or 2 or this Article XII, but the burden of proving such defense shall be on the Corporation. 13 Neither the failure of the Corporation (including its board of directors, its independent legal counsel and its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in Sections 1 or 2 of this Article XII, nor the fact that there has been an actual determination by the Corporation (including its board of directors, its independent legal counsel and its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. SECTION 7. Settlement. The Corporation shall not be obligated to ---------- reimburse the costs of any settlement to which it has not agreed. If in any action, suit or proceeding, including any appeal, within the scope of Sections 1 or 2 of this Article XII, the person to be indemnified shall have unreasonably failed to enter into a settlement thereof, then, notwithstanding any other provision hereof, the indemnification obligation of the Corporation to such person in connection with such action, suit or proceeding shall not exceed the total of the amount at which settlement could have been made and the expenses incurred by such person prior to the time such settlement could reasonably have been effected. SECTION 8. Subsequent Amendment. No amendment, termination or repeal of -------------------- this Article XII or of relevant provisions of the Delaware General Corporation Law or any other applicable laws shall affect or impair in any way the rights of any director or officer of the Corporation to indemnification under the provisions hereof with respect to any action, suit or proceeding arising out of, or relating to, any actions, transactions or facts occurring prior to the final adoption of such amendment, termination or appeal. SECTION 9. Other Rights; Continuation of Right to Indemnification. The ------------------------------------------------------ indemnification provided by this Article XII shall not be deemed exclusive of any other rights to which a director, officer, employee or agent seeking indemnification may be entitled under any law (common or statutory), agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding office or while employed by or acting as agent for the Corporation, and shall continue as to a person who has ceased to be a director, officer, employee or agent, and shall inure to the benefit of the estate, heirs, executors and administrators of such person. Nothing contained in this Article XII shall be deemed to prohibit, and the Corporation is specifically authorized to enter into, agreements with officers and directors providing indemnification rights and procedures different from those set forth herein. All rights to indemnification under this Article XII shall be deemed to be a contract between the Corporation and each director or officer of the Corporation who serves or served in such capacity at any time while this Article XII is in effect. Any repeal or modification of this Article XII or any repeal or modification of relevant provisions of the Delaware General Corporation Law or any other applicable laws shall not in any way diminish any rights to indemnification of a director, officer, employee or agent or the obligations of the Corporation arising hereunder. This Article XII shall be binding upon any successor Corporation to this Corporation, whether by way of acquisition, merger, consolidation or otherwise. 14 SECTION 10. Insurance. The Corporation shall purchase and maintain --------- insurance on behalf of any person who is or was or has agreed to become a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, limited liability company, limited liability partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her or on his or her behalf in any such capacity, or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify him or her against such liability under the provisions of this Article XII; provided, that such -------- insurance is available on acceptable terms, which determination shall be made by a vote of a majority of the directors. SECTION 11. Savings Clause. If this Article XII or any portion hereof shall --------------- be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each director or officer of the Corporation as to costs, charges and expenses (including attorneys' fees), judgments, fine and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of the Corporation, to the full extent permitted by any applicable portion of this Article XII that shall not have been invalidated and to the full extent permitted by applicable law. SECTION 12. Subsequent Legislation. If the Delaware General Corporation Law ---------------------- is amended after approval by the stockholders of this Article to further expand the indemnification permitted to directors and officers of the Corporation, then the corporation shall indemnify such persons to the fullest extent permitted by the Delaware General Corporation Law, as so amended. 15 EX-4.2 5 CERTIFICATE OF DESIGNATION EXHIBIT 4.2 STATE OF DELAWARE PAGE 1 OFFICE OF THE SECRETARY OF STATE -------------------------------- I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF DESIGNATION OF "GOLDEN STATE BANCORP INC.", FILED IN THIS OFFICE ON THE TWENTY- SECOND DAY OF JULY, A.D., 1997 AT 9 O'CLOCK A.M. A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS FOR RECORDING. [SEAL OF THE STATE OF DELAWARE] /s/ Edward J. Freel --------------------------- [SEAL] Edward J. Freel, Secretary of State AUTHENTICATION: 8569866 DATE: 07-22-97 EXHIBIT 4.2 CERTIFICATE OF DESIGNATION OF GOLDEN STATE BANCORP INC. FOR NONCUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES A GOLDEN STATE BANCORP INC., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Company"), in accordance ------- with the provisions of Section 151 (g) thereof, HEREBY CERTIFIES: That pursuant to the authority conferred upon the Board of Directors by the Certificate of Incorporation, the Board of Directors on June 23, 1997 duly adopted the following resolution creating a series of preferred stock to be designated "Noncumulative Convertible Preferred Stock, Series A" and to consist of 5,000,000 shares: WHEREAS, the Certificate of Incorporation of the Company provides that the Company shall have authority to issue up to 50,000,000 shares of preferred stock; and WHEREAS, the Certificate of Incorporation of the Company provides that the Board of Directors is authorized to fix by resolution the designations and the powers, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof, including without limitation the voting rights, the dividend rate and preference, redemption rights and liquidation preference, of any series of shares of preferred stock, to fix the number of shares constituting any such series and to increase or decrease the number of shares of any such series; and WHEREAS, the Series A Preferred Stock referred to and provided for herein is to be issued in exchange for outstanding shares of the Noncumulative Preferred Stock, Series E (the "Glendale Federal Series E Preferred Stock") ----------------------------------------- heretofore issued by Glendale Federal Bank, Federal Savings Bank ("Glendale"), -------- which exchange is to be effected in connection with the reorganization transaction (the "Reorganization") pursuant to which the Company is to become -------------- the sole stockholder of and holding company for Glendale; A-1 NOW, THEREFORE, BE IT RESOLVED, that the designation, powers, preferences and relative, participating, optional and other special rights of the Noncumulative Convertible Preferred Stock, Series A, and the qualifications, limitations and restrictions thereof, are as set forth below: I. Designation and Rank. -------------------- There is hereby established a series of shares of preferred stock, which series of preferred stock shall be designated as the "Noncumulative Convertible Preferred Stock, Series A" (the "Series A Preferred Stock"). The ------------------------ authorized number of shares of Series A Preferred Stock shall be 5,000,000. Each share of Series A Preferred Stock shall have a par value of $1.00 per share and a liquidation preference of $25.00 per share as hereinafter provided. The Series A Preferred Stock shall be superior and prior in rank to all classes of common stock of the Company (collectively, the "Common Stock") ------------ and to all other classes and series of equity securities of the Company now or hereafter authorized, issued or outstanding other than the Series A Preferred Stock and any other class or series of equity securities of the Company that is expressly designated as ranking on a parity with (the "Parity Stock") or senior ------------ to (the "Senior Stock") the Series A Preferred Stock as to either or both of ------------ dividend rights and rights upon liquidation, winding up or dissolution of the Company. The Series A Preferred Stock shall be junior to all creditors of the Company. The Common Stock and all other classes and series of equity securities of the Company that do not constitute Parity Stock or Senior Stock are collectively referred to herein as "Junior Stock." There shall be no limitation ------------ on the number of shares, series or classes of Parity Stock and Junior Stock that may be created or established. The number of shares of Series A Preferred Stock may be increased or decreased from time to time by action of not less than a majority of the members of the board of directors then in office; provided, that no decrease effected -------- solely through such action of the board of directors shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants, if any, to purchase shares of Series A Preferred Stock, or upon the conversion of any outstanding securities issued by the Company that are convertible into shares of Series A Preferred Stock. II. Dividends. --------- A. Payment of Dividends. Holders of shares of Series A Preferred -------------------- Stock shall be entitled to receive, when, as and if declared by the board of A-2 directors or a duly authorized committee thereof, out of funds legally available therefor, noncumulative cash dividends at an annual rate (the "Annual Dividend --------------- Rate") of 8.75% of the amount of the per share liquidation preference of the - ---- Series A Preferred Stock. Such noncumulative cash dividends shall be payable, if declared, quarterly on January 1, April 1, July 1 and October 1 in each year, or, if such day is not a business day, then on the next business day (each such date being referred to herein as a "Dividend Payment Date"). The first Dividend --------------------- Payment Date shall be October 1, 1997. Each declared dividend shall be payable to the holders of Series A Preferred Stock of record whose names appear on the stock books of the Company at the close of business on such record dates, not more than 60 calendar days nor less than 30 calendar days preceding the related Dividend Payment Date, as determined by the board of directors or a duly authorized committee thereof (each such date being referred to herein as a "Record Date"). Quarterly dividend periods (each a "Dividend Period") shall ----------- --------------- commence on and include December 1, March 1, June 1, and September 1 of each year and end on and include the day next preceding the commencement of the next following Dividend Period; provided, that the first Dividend Period shall -------- commence on the day of commencement of the Dividend Period in which shares of Series A Preferred Stock first shall be issued and outstanding and shall end on and include the last day of such Dividend Period, it being hereby intended that such First Dividend Period shall permit the payment of dividends on the Series A Preferred Stock in the amount sufficient to equal the full dividend in respect of such Dividend Period that would be paid in respect of the Glendale Federal Series E Preferred Stock in exchange for which the Series A Preferred Stock is to be issued if the Series E Preferred Stock had remained outstanding throughout such Dividend Period, but no more than such amount shall be paid in the aggregate in respect of such Dividend Period on the Glendale Federal Series E Preferred Stock and the Series A Preferred Stock taken together. The amount of dividends per share for each full Dividend Period shall be computed by dividing by four an amount equal to (i) the Annual Dividend Rate, (ii) multiplied by the amount of the liquidation preference of such share. Dividends for any period of less than a full three months shall be computed on the basis of a 360-day year composed of twelve 30 day months and the actual number of days elapsed in such period. B. Dividends Noncumulative. The right of holders of Series A ----------------------- Preferred Stock to receive dividends shall be noncumulative. Accordingly, if the board of directors or a duly authorized committee thereof does not declare a dividend to be payable in respect of any Dividend Period, the holders of shares of Series A Preferred Stock shall have no right to receive a dividend in respect of such Dividend Period, and the Company shall have no obligation to pay a dividend in respect of such Dividend Period, at any time thereafter, whether or not dividends are declared and payable in respect of any future Dividend Period. A-3 C. Priority as to Dividends. No full dividends shall be declared or paid ------------------------ or set apart for payment on any class or series of equity securities ranking, as to dividends, on a parity with the Series A Preferred Stock for any Dividend Period (in whole or in part) unless full dividends have been or contemporaneously are declared and paid (or declared and a sum sufficient for the payment thereof set apart for such payment) on the Series A Preferred Stock for such Dividend Period. If dividends are not paid in full (or declared and a sum sufficient for such full payment is not so set apart) in any Dividend Period upon the Series A Preferred Stock and any other equity security ranking on a parity with the Series A Preferred Stock as to dividends, dividends declared upon shares of Series A Preferred Stock and such other equity security shall be declared pro rata based upon the respective amounts that would have been paid on the Series A Preferred Stock and such other equity security had dividends been paid thereon in full. The Company shall not declare, pay or set apart funds for the payment of any dividend or other distribution (other than in Common Stock or other Junior Stock) with respect to any Common Stock or other Junior Stock of the Company, or purchase or redeem, or set apart funds for the purchase or redemption of, any such Common Stock or other Junior Stock through a sinking fund or otherwise, (i) unless and until the Company shall have paid full dividends on the Series A Preferred Stock in respect of the four most recent Dividend Periods (or such lesser number of Dividend Periods as shares of Series A Preferred Stock have been outstanding), or funds have been paid over to the dividend disbursing agent of the Company for payment of such dividends (or set apart for such purpose if the Company then has no separate dividend disbursing agent), and (ii) the Company has declared a cash dividend on the Series A Preferred Stock at the Annual Dividend Rate for the current Dividend Period, and sufficient funds have been paid over to the dividend disbursing agent for the Company for the payment of such cash dividend for such current Dividend Period (or set apart for such purpose if the Company then has no separate dividend disbursing agent). No dividend shall be paid or set aside for holders of Series A Preferred Stock for any Dividend Period unless full dividends have been paid or set aside for the holders of each class or series of equity securities of the Company, if any, ranking prior to the Series A Preferred Stock as to dividends for such Dividend Period. III. Redemption ---------- A. General. The shares of Series A Preferred Stock are not subject to ------- mandatory redemption, and shall not be redeemable prior to October 1, 1998. On or after October 1, 1998, the Company may, at its option, redeem the shares of Series A Preferred Stock at any time or from time to time, in whole or in part, upon notice as provided in paragraph III.B. below, by resolution of the board of directors, at the following redemption prices per share: If redeemed during the twelve-month period beginning on October 1 of the years indicated below,
Redemption Redemption Year Price Year Price ---- ---------- ---- ---------- 1998 $ 26.09375 2001 $25.43750 1999 $ 25.87500 2002 $25.21875 2000 $ 25.65625 2003 $25.00000
and thereafter at a redemption price equal to the $25.00 liquidation preference per share of Series A Preferred Stock plus, in each case, an amount equal to any declared but unpaid dividend, without interest. The holders of shares of the Series A Preferred Stock shall not have the option or right to compel the Company to redeem any shares of Series A Preferred Stock. If less than all of the outstanding shares of Series A Preferred Stock are to be redeemed, the Company shall select the shares that are to be redeemed pro rata, by lot or by a substantially equivalent method. On and after the date selected for redemption, dividends shall cease to accrue on the shares of Series A Preferred Stock called for redemption, and such shares shall be deemed no longer to be outstanding; provided, that the redemption price (including any -------- declared but unpaid dividends to the date fixed for redemption) has been duly paid or provided for. If a notice to convert shares of Series A Preferred Stock as provided in paragraph IV.B below relating to shares of Series A Preferred Stock that are to be redeemed shall be received by the Company, and the certificates representing such shares shall be surrendered to the Company, on or prior to the fifth day immediately preceding the redemption date specified in the Notice of Redemption relating to such shares, then such shares may not be redeemed. B. Notice of Redemption. Notice of any redemption, setting forth (i) -------------------- the date and place fixed for redemption, (ii) the redemption price and (iii) a statement that dividends on the shares of Series A Preferred Stock to be redeemed will cease to accrue on the stated date fixed for redemption, shall be mailed, postage prepaid, at least 20 days but not more than 45 days prior to such redemption date to each holder of record of Series A Preferred Stock to be redeemed at his or her address as the same shall appear on the stock books of the Company. If less than all of the shares of Series A Preferred Stock owned by such holder are then to be redeemed, such notice shall specify the number of shares thereof that are to be redeemed and the numbers of the certificates representing such shares. If such notice of redemption shall have been so mailed, and if on or immediately preceding the redemption date specified in such notice all funds A-5 necessary for such redemption shall have been set aside by the Company separate and apart from its other funds in trust for the account of the holders of the shares of Series A Preferred Stock to be redeemed so as to be and continue to be available therefor, then, on and immediately following such redemption date, notwithstanding that any certificate for shares of Series A Preferred Stock so called for redemption shall not have been surrendered for cancellation, the shares of Series A Preferred Stock so called for redemption shall be deemed no longer to be outstanding and all rights with respect to such shares of Series A Preferred Stock so called for redemption shall forthwith cease and terminate, except for the right of the holders thereof to receive out of the funds so set aside in trust the amount payable on redemption thereof, but without interest, upon surrender (and endorsement or assignment for transfer, if required by the Company) of the certificates for such shares of Series A Preferred Stock. In the event that holders of shares of Series A Preferred Stock that shall have been redeemed shall not within two years (or any longer period if required by law) immediately following the redemption date therefor claim any amount deposited in trust with a bank or trust company for the redemption of such shares, such bank or trust company shall, upon demand and if permitted by applicable law, pay over to the Company any such unclaimed amount so deposited with it, and shall thereupon be relieved of all responsibility in respect thereof, and thereafter the holders of such shares shall, subject to applicable escheat laws, look only to the Company for payment of the redemption price thereof, but without interest from the date of redemption. C. Status of Shares Redeemed. Shares of Series A Preferred Stock redeemed, -------------------------- purchased or otherwise acquired for value by the Company shall, after such acquisition, have the status of authorized and unissued shares of preferred stock and may be reissued by the Company at any time as shares of any series of preferred stock other than as shares of Series A Preferred Stock. IV. Conversion ---------- A. General. Holders of Series A Preferred Stock shall be entitled to convert ------- any or all of their shares of Series A Preferred Stock into fully paid and nonassessable shares of Common Stock. Shares of Series A Preferred Stock may initially be converted into shares of Common Stock at a conversion price per share of Common Stock (the "Conversion Price") initially as set forth in ---------------- subparagraph C.(1) below, and subject to adjustment as provided herein. The number of shares of Common Stock issuable upon conversion of each share of Series A Preferred Stock shall be equal to $25.00 divided by the Conversion Price then in effect; provided, that no fractional shares shall be issued upon -------- conversion of any shares of Series A Preferred Stock. If the calculation of the number of shares of Common Stock issuable upon such conversion in accordance with the preceding sentence A-6 results in a fraction, an amount shall be paid by the Company in cash to the holder of the shares of Series A Preferred Stock being converted of record as of the date of such conversion based upon the Current Market Price of the Common Stock (determined as provided in subparagraph IV.C. hereof) as of the date of conversion. B. Surrender of Certificates. Each conversion of shares of Series A ------------------------- Preferred Stock shall be effected by the surrender of the certificate representing the shares of Series A Preferred Stock to be converted at the office of the Company or trust company appointed by the Company for such purpose (or at such other location or locations in the continental United States as may from time to time be designated by the Secretary of the Company in a notice to the registered holders of shares of Series A Preferred Stock), together with any required stock transfer tax stamps and a written notice by the holder of such Series A Preferred Stock stating such holder's desire to convert such shares into Common Stock, the number (in whole shares) of shares to be converted, and the name or names (with addresses) in which such holder wishes the certificate or certificates for the shares of Common Stock to be issued and shall include instructions for delivery thereof. Promptly after such surrender and the receipt by the Company of such written notice, each person named in the prescribed notice shall be entitled to become, and shall be registered in the original stock books of the Company as, the record holder of the number of shares of Common Stock issuable upon such conversion. In the event less than all of the shares of Series A Preferred Stock represented by a certificate are to be converted by a holder, upon such conversion the Company shall issue and deliver, or cause to be issued and delivered, to the holder a certificate or certificates for the shares of Series A Preferred Stock not so converted. If the Company calls for the redemption of any shares of Series A Preferred Stock, the rights of conversion provided for herein shall cease and terminate, as to the shares designated for such redemption, at the close of business on the fifth day immediately preceding the redemption date specified in the notice provided in paragraph III.B., unless the Company defaults in the payment of the redemption price therefor. C. Conversion Price Determination and Adjustment. --------------------------------------------- (1) The Conversion Price shall be equal to $10.40 (2) In the event the Company shall, at any time or from time to time while any shares of Series A Preferred Stock are outstanding, (i) declare and pay a dividend on its Common Stock that is payable in shares of Common Stock, (ii) subdivide its outstanding Common Stock into a greater number of shares, (iii) combine its outstanding Common Stock into a smaller number of shares, or (iv) issue by reclassification of or capital reorganization relating to its Common Stock any shares of capital stock of the Company, the Conversion Price A-7 in effect immediately prior to such action shall be adjusted so that the holder of any shares of Series A Preferred Stock thereafter surrendered for conversion shall be entitled to receive the number and kind of shares of capital stock of the Company that such holder would have owned immediately following, and as a result of, such action had such shares of Series A Preferred Stock been converted immediately prior to the record date for such action (or if no record date is established in connection with such event, the effective date for such action). An adjustment made pursuant to this subparagraph C.(2) shall become effective immediately following the record date in the event of a stock dividend and shall become effective immediately following the effective date in the event of any subdivision, combination or reclassification. If, as a result of an adjustment made pursuant to this subparagraph C.(2), the holder of any shares of Series A Preferred Stock thereafter surrendered for conversion shall become entitled to receive shares of two or more classes of capital stock of the Company, the board or directors (whose determination with respect to the matter shall be conclusive and shall be described in a resolution adopted with respect thereto) shall determine the allocation of the adjusted Conversion Price between or among shares of such classes of capital stock. (3) In the event that the Company shall, at any time or from time to time while any shares of the Series A Preferred Stock are outstanding, issue to holders of shares of Common Stock as a dividend or distribution, including by way of reclassification, recapitalization, merger or otherwise, any right or warrant to purchase shares of Common Stock at a purchase price per share that is less than the Current Market Price of a share of Common Stock on the record date for such dividend or distribution or if, upon the occurrence of some event, holders of then outstanding rights or warrants become entitled by the terms of such rights or warrants to purchase shares of Common Stock at such a purchase price, then the Conversion Price shall be adjusted by multiplying such Conversation Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding on the day immediately preceding such record date or event plus the number of shares of Common Stock that could be purchased at the Current Market Price of a share of Common Stock on such record date or event for the maximum aggregate consideration payable upon exercise in full of all such rights or warrants, and the denominator of which shall be the number of shares of Common Stock outstanding on the day immediately preceding such record date or event plus the maximum number of shares of Common Stock that could be acquired upon exercise in full of all such rights or warrants, such adjustment to become effective immediately prior to the opening of business on the day immediately following such record date or event. (4) In the event that the Company shall, at any time or from time to time while any shares of the Series A Preferred Stock are outstanding, issue to holders of shares of Common Stock as a dividend or distribution, including A-8 by way of reclassification, recapitalization, merger or otherwise, any evidence of indebtedness or assets (including rights or warrants to purchase capital stock or other securities, but excluding any rights or warrants referred to in subparagraph C.(3) hereof, any dividend or distribution paid in cash out of the surplus or retained earnings of the Company and any dividend or distribution referred to in subparagraph C.(2) hereof), then the Conversion Price in effect immediately prior to such action shall be adjusted by multiplying such Conversion Price by a fraction, the numerator of which shall be the Current Market Price of a share of Common Stock on the record date for such issuance, less the fair market value (as determined by the board of directors, whose determination shall be conclusive) of the portion of the assets or evidences of indebtedness so distributed allocable to one share of Common Stock, and the denominator of which shall be the Current Market Price of a share of Common Stock, such adjustment to become effective immediately prior to the opening of business on the day immediately following such record date. (5) In the event that the Company shall, at any time or from time to time while any shares of the Series A Preferred Stock are outstanding, issue, sell or exchange shares of Common Stock (other than pursuant to any right or warrant to purchase or acquire shares of Common Stock referred to in subparagraph C.(3) hereof and other than pursuant to any dividend reinvestment plan or employee or director incentive or benefit plan or arrangement, including any employment, severance or consulting agreement of the Company or any subsidiary of the Company heretofore or hereafter adopted) for consideration having a fair market value (as determined by the board of directors, whose determination of the matter shall be conclusive) on the date of such issuance, sale or exchange less than the Current Market Price of such shares on the date of such issuance, sale or exchange, then the Conversion Price in effect immediately prior to such action shall be adjusted by multiplying such Conversion Price by a fraction, the numerator of which shall be the sum of (i) the Current Market Price of the shares of Common Stock outstanding on the day the first public announcement of such issuance, sale or exchange plus (ii) the fair market value of the consideration received by the Company in respect of such issuance, sale or exchange of shares of Common Stock (including any amount received by the Company in connection with the issuance of a right or warrant), and the denominator of which shall be the product of (A) the Current Market Price of a share of Common Stock on the day the first public announcement of such issuance, sale or exchange, multiplied by (B) the sum of the number of shares of Common Stock outstanding on such day and the number of shares of Common Stock so issued, sold or exchanged by the Company, such adjustment to become effective immediately prior to the opening of business on the day immediately following the date of such issuance. (6) For all purposes relating to the Series A Preferred Stock: the "Current ------- Market Price" of a security on any day shall mean the average of the - ------------ A-9 Closing Prices (as hereinafter defined) of such security for the ten consecutive Trading Days (as hereinafter defined) ending on the Trading Day immediately preceding the day in question; the "Closing Price" of a security shall mean the ------------- last sale price for such security as shown on the New York Stock Exchange Composite Transactions Tape, or if no such sale has taken place on such day, then the average of the closing bid and ask prices for such security on the New York Stock Exchange, or, if such security is not listed or admitted to trading on the New York Stock Exchange, then on the principal national securities exchange on which such security is listed or admitted to trading, or, if such security is not listed or admitted to trading on any national securities exchange, then on the National Association of Securities Dealers Automated Quotations National Market System, or, if such security is not quoted on such National Market System, then the average of the closing bid and ask prices as furnished by any New York Stock Exchange member firm selected from time to time by the board of directors of the Company for such purposes (other than the Company or any affiliate thereof); and "Trading Day" shall mean a day on which ----------- the New York Stock Exchange or, if such security is not listed or admitted to trading thereon, the principal national securities exchange on which the Common Stock is listed or admitted to trading is open for the transaction of business or, if the Common Stock is not so listed or admitted, then any day that is not a Saturday, Sunday or other day on which depositary institutions in the City of Los Angeles or the City of New York are authorized or obligated by law to close. (7) Whenever the Conversion Price is adjusted as provided herein, the Company shall (i) compute the adjusted Conversion Price and cause to be prepared a certificate signed by the chief financial or accounting officer of the Company setting forth the adjusted Conversion Price and showing in reasonable detail the facts upon which such adjustment is based and the computation thereof, (ii) file such certificate with the transfer agent for the Series A Preferred Stock, and (iii) notify the registered holders of the Series A Preferred Stock of such adjustment and the adjusted Conversion Price. (8) Notwithstanding the provisions of the paragraph IV.C., no adjustment in the Conversion Price shall be required unless such adjustment (plus any adjustments not previously made) would require an increase or decrease of at least one percent (1%) in the Conversion Price; provided, that any adjustments -------- which by reason of this subparagraph IV.C.(8) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. Notwithstanding any other provision of this paragraph IV.C., the Company shall not be required to make any adjustment to the Conversion Price for the issuance of any shares of Common Stock pursuant to any plan providing for the reinvestment of dividends or interest payable on securities of the Company and the investment of additional optional accounts in shares of Common Stock under such plan. The Company may make such adjustments in the Conversion Price, in addition to those required by this paragraph IV.C., as it considers to be advisable in A-10 order to avoid or diminish any income tax to holders of the Series A Preferred Stock resulting from any dividend or distribution or other reason. The Company shall have the power to resolve any ambiguity or correct any error in this paragraph IV.C. and its actions in doing so shall be final and conclusive. D. Consolidation, Merger or Certain Other Actions. In the event of a ---------------------------------------------- consolidation or merger or similar transaction (however named) pursuant to which the outstanding shares of Common Stock are by operation of law exchanged for, or changed, reclassified or converted into other stock or securities, or cash or other property, or any combination thereof ("Consideration"), there shall be no ------------- adjustment to the Conversion Price by virtue thereof, but the outstanding shares of Series A Preferred Stock shall be assumed by and shall become preferred stock of any successor or resulting entity (including the Company and any entity that directly or indirectly owns all or any part of the outstanding capital stock of such successor or resulting entity), having in respect of such entity insofar as possible the same powers, preferences, and relative, participating, optional or other special rights, and qualifications, limitations or restrictions, that the Series A Preferred Stock had immediately prior to such transaction, except that after such transaction each share of Series A Preferred Stock shall be convertible, otherwise on the terms and conditions provided hereby, into the Consideration so receivable by a holder of the number of shares of Common Stock into which such shares of Series A Preferred Stock could have been converted immediately prior to such transaction if such holder failed to exercise any rights of election to receive any kind or amount of Consideration receivable upon such transaction. If the Company shall enter into any agreement providing for any such transaction, then the Company shall as soon as practicable thereafter give notice of such agreement and the material terms thereof to each holder of Series A Preferred Stock. E. Reserved Shares. The Company shall reserve out of the authorized but --------------- unissued shares of its Common Stock, sufficient shares of such Common Stock to provide for the conversion of shares of Series A Preferred Stock from time to time as such shares of Series A Preferred Stock are presented for conversion. The Company shall take all action necessary so that all shares of Common Stock that may be issued upon conversion of shares of Series A Preferred Stock will upon issue be validly issued, fully paid and nonassessable, and free from all liens and charges in respect of the issuance or delivery thereof. F. Repayment of Certain Dividends to the Company. Any funds that at any --------------------------------------------- time shall have been deposited by the Company or on its behalf with a paying or disbursing agent for the purpose of paying dividends on any shares of Series A Preferred Stock which shall not be required for such purpose because of the conversion of such shares of Series A Preferred Stock shall forthwith after such conversion be repaid to the Company by such paying or disbursing agent. A-11 V. Liquidation Preference. ---------------------- A. Liquidating Distributions. In the event of any liquidation, ------------------------- dissolution or winding up of the Company, whether voluntary or involuntary, the holders of shares of Series A Preferred Stock shall be entitled to receive for each share thereof, out of the assets of the Company legally available for distribution to shareholders under applicable law, or the proceeds thereof, before any payment or distribution of such assets or proceeds shall be made to holders of shares of Common Stock or any other Junior Stock (subject to the rights of the holders of any class or series of equity securities having preference with respect to distributions upon liquidation and the Company's general creditors, including its depositors), liquidating distributions in the amount of $25.00 per share, plus an amount per share equal to any dividends theretofore declared but unpaid, without interest. If the amounts available for distribution in respect of shares of Series A Preferred Stock and any other outstanding Parity Stock are not sufficient to satisfy the full liquidation rights of all of the outstanding shares of Series A Preferred Stock and such Parity Stock, then the holders of such outstanding shares shall share ratably in any such distribution of assets in proportion to the full respective preferential amounts to which they are entitled. After payment of the full amount of the liquidation distribution to which they are entitled pursuant to this paragraph V.A., the holders of shares of Series A Preferred Stock will not be entitled to any further participation in any liquidation distribution of assets by the Company. All distributions made in respect of Series A Preferred Stock in connection with such a liquidation, dissolution or winding up of the Company shall be made pro rata to the holders entitled thereto. B. Consolidation, Merger or Certain Other Actions. Neither the merger or ---------------------------------------------- other business combination of the Company with or into any other person, nor the sale of all or substantially all of the assets of the Company, shall be deemed to be a liquidation, dissolution or winding up of the Company for purposes of this paragraph V. VI. Voting Rights. ------------- A. General. The holders of Series A Preferred Stock shall not be entitled ------- to any voting rights, except to the extent, if any, required by applicable law or as set forth below in this paragraph VI. B. Right to Elect Directors. If dividends on the shares of Series A ------------------------ Preferred Stock shall not have been paid for six Dividend Periods the authorized number of directors of the Company shall thereupon be increased by two. Subject A-12 to compliance with any requirement for regulatory approval of (or non-objection to) persons serving as directors, the holders of shares of Series A Preferred Stock, voting together as a class with the holders of any other stock constituting Parity Stock as to dividends and upon which the same voting rights as those of the Series A Preferred Stock have been conferred and are irrevocable, shall have the exclusive right to elect the two additional directors at the Company's next annual meeting of shareholders and at each subsequent annual meeting until dividends have been paid or declared on the Series A Preferred Stock and set apart for payment for four consecutive Dividend Periods. Such directors shall be deemed to be in a class separate from the classes of directors established by Article Six of the Certificate of Incorporation of the Company. The term of such directors elected thereby shall terminate upon the payment or the declaration and setting aside for payment of full dividends on the Series A Preferred Stock for four consecutive Dividend Periods. C. Certain Voting Rights. So long as any shares of Series A Preferred --------------------- Stock are outstanding, the Company shall not (1) without the consent or vote of the holders of at least two-thirds of the outstanding shares of Series A Preferred Stock, voting separately as a class, (a) amend, alter, or repeal or otherwise change any provision of the Certificate of Incorporation of the Company or this Section of the Certificate of Designation if such amendment, alteration, repeal or change would materially and adversely affect the rights, preferences, powers or privileges of the Series A Preferred Stock, or (b) authorize, create, issue or increase the authorized or issued amount of any class or series of any equity securities of the Company, or any warrants, options or other rights convertible or exchangeable into any class or series of any equity securities of the Company, ranking prior to the Series A Preferred Stock, either as to dividend rights or rights on liquidation, dissolution or winding up of the Company; or (2) without the consent or vote of the holders of at least fifty percent of the outstanding shares of Series A Preferred Stock, voting separately as a class, incur any Indebtedness which is senior in right of payment to the Series A Preferred Stock. For purposes of this paragraph VI.C., "Indebtedness" shall mean (i) indebtedness for money borrowed, (ii) indebtedness evidenced by notes, debentures, bonds or other securities, and (iii) any renewals, deferrals, increases or extensions of indebtedness of the kinds described in the preceding clauses (i) and (ii), but shall not include any of the foregoing types of indebtedness incurred by a subsidiary of the Company, or the proceeds of which are to be applied to redeem or repurchase all then outstanding shares of Series A Preferred Stock. The creation or issuance of stock that is Parity Stock or Junior Stock in respect of the payment of dividends or the distribution of assets upon liquidation, dissolution or winding up of the Company, or a merger, consolidation, reorganization or other business combination in which the Company is not the surviving or successor entity, or an amendment that increases the number of authorized shares of Series A Preferred Stock or substitutes the surviving entity in A-13 a merger or consolidation for the Company, shall not be deemed to be a material and adverse change requiring a vote of the holders of shares of Series A Preferred Stock pursuant to this paragraph VI.C. VII. No Sinking Fund. --------------- No sinking fund shall be established for the retirement or redemption of shares of Series A Preferred Stock. VIII. Preemptive Rights. ----------------- No holder of shares of Series A Preferred Stock shall have any preemptive rights in respect of any shares of the Company that may be issued. IX. No Other Rights. -------------- The shares of Series A Preferred Stock shall not have any powers, designations, preferences or relative, participating, optional and other special rights except as set forth in the Certificate of Incorporation, including this Certificate of Designation or as otherwise required by law. X. Compliance with Applicable Law. ------------------------------ Payments by the Company to holders of Series A Preferred Stock in respect of dividends or the redemption of shares of Series A Preferred Stock shall be subject to any restrictions and limitations placed on capital distributions by the Company under applicable law and regulations. A-14 IN WITNESS WHEREOF, Golden State Bancorp Inc. has caused this Certificate of Designation to be duly executed by John E. Haynes, its Chief Financial Officer, and attested to by James R. Eller, Jr. its Secretary, as of July 18, 1997. GOLDEN STATE BANCORP INC. BY /s/ John E. Haynes --------------------------- John E. Haynes Chief Financial Officer Attest: /s/ James R. Eller, Jr. - --------------------------------- James R. Eller, Jr., Secretary A-15 EX-4.3 6 WARRANT AGREEMENT DATED AS OF FEBRUARY 23, 1993 EXHIBIT 4.3 WARRANT AGREEMENT between GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK and CHEMICAL TRUST COMPANY OF CALIFORNIA, Warrant Agent ---------------------------------------------------------------- Dated as of February 23, 1993 WARRANT AGREEMENT AGREEMENT, dated as of February __, 1993 between Glendale Federal Bank, Federal Savings Bank, a federally chartered stock savings bank (the "Bank"), and Chemical Trust Company of California, Warrant Agent (the "Warrant Agent"). WHEREAS, the Bank proposes to issue and deliver its warrant certificates (the "Warrant Certificates") evidencing warrants (the "Warrants") to acquire, under certain circumstances, up to an aggregate of 110,000 shares, subject to adjustment, of its common stock, par value $1.00 per share (the "Common Stock"), in connection with an exchange offer by the Bank to issue 100 shares of its 12% Noncumulative Perpetual Preferred Stock, Series B (the "New Preferred Stock") in exchange for each $1,000 principal amount of the Bank's outstanding 14-7/8% Capital Notes due August 15, 1997 (the "Notes"); and, WHEREAS, each such Warrant will entitle the registered owner thereof to acquire one share of the Bank's Common Stock, subject to adjustment. In consideration of the foregoing, and for the purpose of defining the terms and provisions of the Warrants and the respective rights and obligations thereunder of the Bank and the record holders of the Warrants, the Bank and the Warrant Agent each hereby agrees as follows: ARTICLE I ISSUANCE AND EXECUTION OF WARRANTS Section 1.01 Form of Warrant Certificates. The text of each Warrant ---------------------------- Certificate (and the related forms of exercise and assignment) shall be substantially in the form attached hereto as Exhibit A and may have such legends and endorsements typed, stamped, printed, lithographed or engraved thereon as the Bank may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any law or with any rule or regulation pursuant thereto or - 2 - with any rule or regulation of any securities exchange on which the Warrants may be listed, or to conform to customary usage. Section 1.02 Execution and Countersignature of Warrant Certificates. Warrant ------------------------------------------------------ Certificates shall be executed on behalf of the Bank by its Chief Executive Officer, President or any Vice President and attested by its Secretary or an Assistant Secretary, and delivered to the Warrant Agent, and shall be countersigned and delivered by the Warrant Agent upon the written order of the Bank signed by any such officer of the Bank. Each Warrant Certificate shall be dated the date of its countersignature by the Warrant Agent either upon initial issuance or upon division, exchange, substitution or transfer. Warrant Certificates shall be executed on behalf of the Bank either manually or by facsimile signature printed thereon. The Warrant Agent shall countersign the Warrant Certificate manually, and no Warrant Certificate shall be valid for any purpose unless so countersigned. In case any officer whose signature has been placed upon any Warrant Certificate ceases to be such before such Warrant Certificate is issued, it may be issued with the same effect as if such officer had not ceased to be such at the date of issuance. ARTICLE II EXERCISE PRICE, TERM, REDEMPTION AND METHOD OF EXERCISE Section 2.01 Exercise Price. Each Warrant Certificate shall, when -------------- countersigned by the Warrant Agent, entitle the holder of record thereof (the "Warrant Holder"), subject to the provisions thereof and of this Agreement, to receive one share of Common Stock for each Warrant represented thereby at an exercise price of zero ($0.00) per share. Section 2.02 Warrant Rights and Term. Each Warrant shall entitle the Warrant ----------------------- Holder, upon exercise thereof and subject to the provisions thereof and of this Agreement, including provisions relating to adjustments upon the occurrence of certain events as set forth in Article III hereof, to receive one fully paid and nonassessable share of Common Stock at any time after one year from the date of initial issuance of Warrants hereunder until the expiration of the Warrant at 5:00 p.m., New York City time, on the sixth anniversary of such date or, if such date is not a business day in the City of New York, then on the next succeeding business day (the "Expiration Date"). - 3 - Section 2.03 Expiration. Each Warrant not exercised by 5:00 p.m., New York ---------- City time, on the Expiration Date shall become void, and all rights thereunder and all rights in respect thereof under this Agreement shall thereupon cease. Section 2.04 Method of Exercise. Exercise of a Warrant shall be effected by ------------------ surrender of the Warrant Certificate evidencing such Warrant to the Warrant Agent, with one of the forms on the reverse of or attached to the Warrant Certificate duly executed. In the event that any Warrant Holder shall exercise rights with respect to less than all of the Warrants evidenced by a Warrant Certificate surrendered upon exercise of Warrants, a new Warrant Certificate for the balance of such Warrants shall be countersigned and delivered to, or in accordance with the instructions of, such Warrant Holder. Upon surrender of a Warrant Certificate in conformity with the foregoing provisions, the Warrant Agent (after requisitioning any certificates for shares of Common Stock from the Bank's transfer agent, if necessary) shall deliver to, or in accordance with the instructions of, the Warrant Holder certificates for the total number of whole shares of Common Stock for which the Warrants evidenced by such Warrant Certificates are being exercised (subject to the provisions of Section 4.04) in such names and denominations as the Warrant Holder has directed; provided, however, that, if, on the date of surrender of -------- ------- such Warrant Certificate, the transfer books for the Common Stock shall be closed, the certificates for the shares of Common Stock shall be issuable as of the date on which such books shall next be open (whether before, on or after the Expiration Date) at the Exercise Price and upon the other conditions in effect on the date of such surrender. Section 2.05 Cancellation of Warrants. In the event the Bank shall purchase ------------------------ or otherwise acquire Warrants, the same shall thereupon be delivered to the Warrant Agent and be cancelled by it and retired. The Warrant Agent shall cancel any Warrant surrendered for exchange, substitution, transfer or exercise in whole or in part. ARTICLE III ADJUSTMENTS TO WARRANTS UPON CERTAIN EVENTS Section 3.01 Mechanical Adjustments. The number of shares of Common Stock ---------------------- issuable upon the exercise of each Warrant (such shares being referred to in this Article III as the "Warrant Shares") shall be subject to adjustment as follows: - 4 - (a) Stock Dividends; Stock Splits; Reverse Stock Splits; Reclassifications. ---------------------------------------------------------------------- In case the Bank shall (i) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock or (iv) issue by reclassification of its shares of Common Stock other securities of the Bank (excluding any such reclassification in connection with a consolidation or merger in which the Bank is the continuing corporation), the number of Warrant Shares issuable upon exercise of each Warrant immediately prior thereto shall be adjusted so that each Warrant Holder shall be entitled to receive the kind and number of Warrant Shares or other securities of the Bank which he would have owned or have been entitled to receive after the happening of any of the events described above, had such Warrant been exercised immediately prior to the happening of such event or any record date with respect thereto. An adjustment made pursuant to this paragraph (a) shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. (b) Rights; Options; Warrants. In case the Bank shall issue rights, options ------------------------- or warrants to all holders of its shares of Common Stock, without any charge to such holders, entitling them (for a period expiring within 45 days after the record date mentioned below in this paragraph (b)) to subscribe for or purchase shares of Common Stock at a price per share which is lower at the record date mentioned below than the then current market price per share of Common Stock (as determined pursuant to paragraph (f) hereof), the number of Warrant Shares thereafter issuable upon the exercise of each Warrant shall be determined by multiplying the number of Warrant Shares theretofore purchasable upon exercise of each Warrant by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding on such record date plus the number of additional shares of Common Stock offered for subscription or purchase, and of which the denominator shall be the number of shares of Common Stock outstanding on such record date plus the number of shares which the aggregate offering price of the total number of shares of Common Stock so offered would purchase at the then current market price per share of Common Stock. Such adjustment shall be made whenever such rights, options or warrants are issued, and shall become effective retroactively immediately after the record date for the determination of shareholders entitled to receive such rights, options or warrants. - 5 - (c) Issuance of Common Stock at Lower Values. In case the Bank shall, in a ---------------------------------------- transaction in which Section 3.01(b) is inapplicable, issue or sell shares of Common Stock, or rights, options, warrants or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock, at a price per share of Common Stock (determined in the case of such rights, options, warrants or convertible or exchangeable securities, by dividing (A) the total amount receivable by the Bank in consideration of the sale and issuance of such rights, options, warrants or convertible or exchangeable securities, plus the total consideration, if any, payable to the Company upon exercise, conversion or exchange thereof, by (B) the total number of shares of Common Stock covered by such rights, options, warrants or convertible or exchangeable securities) that is lower than the then current market value per share of the Common Stock in effect immediately prior to such sale or issuance (as determined pursuant to paragraph (f) hereof), then the number of shares of Common Stock thereafter issuable upon the exercise of all Warrants then outstanding shall be determined by multiplying the number of shares of Common Stock theretofore issuable upon exercise of all Warrants then outstanding by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding on the date of issuance of such shares of Common Stock or rights, options, warrants or convertible or exchangeable securities, plus the number of additional shares of Common Stock offered for subscription or purchase or to be issued upon conversion or exchange of such convertible or exchangeable securities and of which the denominator shall be the number of shares of Common Stock outstanding on the date of issuance of such shares of Common Stock or rights, options, warrants or convertible or exchangeable securities, plus the number of shares which the aggregate consideration to be received by the Bank in connection with such issuance would purchase at the then current market value per share of Common Stock. For the purposes of such adjustments, the shares of Common Stock which the holder of any such rights, options, warrants or convertible or exchangeable securities shall be entitled to subscribe for or purchase shall be deemed to be issued and outstanding as of the date of the sale and issuance of the rights, warrants or convertible or exchangeable securities and the consideration received by the Bank therefor shall be deemed to be the consideration received by the Bank for such rights, options, warrants or convertible or exchangeable securities, plus the consideration or - 6 - premiums stated in such rights, options, warrants or convertible or exchangeable securities to be paid for the shares of Common Stock covered thereby. In case the Bank shall issue and sell shares of Common Stock or rights, options, warrants or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock for a consideration consisting, in whole or in part, of property other than cash or its equivalent, then in determining the "price per share of Common Stock" and the "consideration" receivable by or payable to the Bank for purposes of the first sentence of this Section 3.01(c), the Board of Directors of the Bank shall determine, in good faith, the fair value of such property, and such determination shall be conclusive; provided, however, that if the Board of -------- ------- Directors of the Bank determines that the aggregate fair value of such property equals or exceeds $50,000,000, the Board of Directors shall have obtained the advice of a nationally recognized investment banking firm in support of such determination. In case the Bank shall issue and sell rights, options, warrants or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock, together with one or more other securities as part of a unit at a price per unit, then in determining the "price per share of Common Stock" and the "consideration" receivable by or payable to the Bank for purposes of the first sentence of this Section 3.01(c), the Board of Directors of the Bank shall determine, in good faith, the fair value of the rights, options, warrants or convertible or exchangeable securities then being sold as part of such unit, and such determination shall be conclusive; provided, -------- however, that if the Board of Directors of the Bank determines that the - ------- aggregate fair value of such securities equals or exceeds $50,000,000, the Board of Directors shall have obtained the advice of a nationally recognized investment banking firm in support of such determination. Any adjustment to the number of shares of Common Stock issuable upon exercise of all Warrants then outstanding made pursuant to this Section 3.01(c) shall be allocated among each Warrant then outstanding on a pro rata basis. (d) Distribution of Debt, Assets, Subscription Rights or Convertible ---------------------------------------------------------------- Securities. In case the Bank shall distribute to all holders of its shares of - ---------- Common Stock shares of stock other than Common Stock or evidences of its indebtedness or assets (excluding cash dividends or - 7 - distributions payable out of consolidated earnings or retained earnings and dividends or distributions referred to in paragraph (a) above) or rights, options or warrants or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock (excluding those referred to in paragraph (b) above), then in each case the number of Warrant Shares thereafter issuable upon the exercise of each Warrant shall be determined by multiplying the number of Warrant Shares theretofore issuable upon the exercise of each Warrant, by a fraction of which the numerator shall be the current market price per share of Common Stock (as determined pursuant to paragraph (f) hereof) on the record date mentioned below in this paragraph (d), and of which the denominator shall be the current market price per share of Common Stock on such record date, less the then fair value (as determined by the Board of Directors of the Bank, whose determination shall be conclusive) of the portion of the shares of stock other than Common Stock or assets or evidences of indebtedness so distributed or of such subscription rights, options or warrants, or of such convertible or exchangeable securities applicable to one share of Common Stock; provided, however, that if the Board of Directors of the Bank -------- ------- determines that the aggregate fair value of such securities equals or exceeds $50,000,000, the Board of Directors shall have obtained the advice of a nationally recognized investment banking firm in support of such determination. Such adjustment shall be made whenever any such distribution is made, and shall become effective on the date of distribution retroactive to the record date for the determination of shareholders entitled to receive such distribution. (e) Expiration of Rights, Options and Conversion Privileges. Upon the ------------------------------------------------------- expiration of any rights, options, warrants or conversion or exchange privileges that have previously resulted in an adjustment hereunder, if any thereof shall not have been exercised, the number of shares of Common Stock issuable upon the exercise of each Warrant shall, upon such expiration, be readjusted and shall thereafter, upon any future exercise, be such as they would have been had they been originally adjusted (or had the original adjustment not been required, as the case may be) as if (i) the only shares of Common Stock so issued were the shares of Common Stock, if any, actually issued or sold upon the exercise of such rights, options, warrants or conversion or exchange rights and (ii) such shares of Common Stock, if any, were issued or sold for the consideration actually received by the Bank upon such exercise plus the consideration, if any, actually received by the Bank (before consideration of - 8 - underwriting documents and placement fees) for issuance, sale or grant of all such rights, options, warrants or conversion or exchange rights whether or not exercised; provided, further, that no such readjustment shall have the effect of -------- ------- decreasing the number of shares issuable upon exercise of each Warrant by a number, in excess of the number of the adjustment initially made in respect to the issuance, sale or grant of such rights, options, warrants or conversion or exchange rights. (f) Current Market Price. For the purpose of any computation under this -------------------- Agreement, the "current market price" per share of Common Stock on any date shall be deemed to be the average of the daily Closing Prices of the shares of Common Stock for the thirty (30) consecutive Trading Days preceding the applicable date. The "Closing Price" for each day shall be (i) the last reported sale price regular way or, in case no such sale takes place on such date, the average of the closing bid and asked quotations regular way, in either case on the New York Stock Exchange, or, if the Common Stock is not listed or admitted to trading on such exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading; or (ii) if the Common Stock is not listed or admitted to trading on any national securities exchange, the last reported sale price regular way or, in case no such sale takes place on such day, the average of the closing bid and asked quotations regular way, in either case on the National Market system of the National Association of Securities Dealers, Inc. ("NASD"); or (iii) if not authorized for trading or quotation on such system, the average of the highest reported bid and lowest reported asked quotations as furnished by the NASD or similar organization if the NASD is no longer reporting such information; or (iv) if no such prices or quotations are available, the fair market value of the Common Stock as determined by good faith action of the Board of Directors of the Bank (whose determination shall be conclusive if based on the financial advice of a nationally recognized investment banking firm and shall be described in a statement delivered to each Warrant Holder). A "Trading Day" shall be any day that the principal national securities exchange on which the Common Stock listed or admitted to trading is open for the transaction of business or, if not so listed or admitted, that the New York Stock Exchange is open for the transaction of business. (g) Adjustment for De Minimis Change. No adjustment in the number of Warrant -------------------------------- Shares purchasable hereunder shall be required unless such adjustment would - 9 - require an increase or decrease of at least 1% in the number of Warrant Shares purchasable upon the exercise of each warrant; provided, however, -------- ------- that any adjustments which by reason of this Section 3.01 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations shall be made to the nearest one thousandth of a share. Section 3.02 Notice of Adjustment. Whenever the number of Warrant Shares -------------------- purchasable upon the exercise of each Warrant is adjusted, as herein provided, the Bank shall cause the Warrant Agent promptly to mail to each Warrant Holder, in accordance with Section 6.08, a notice of such adjustment or adjustments, prepared and signed by the Chief Financial Officer or Secretary of the Bank, which sets forth the number of Warrant Shares issuable upon the exercise of each Warrant after such adjustment, a brief statement of the facts requiring such adjustment and the computation by which such adjustment was made. Section 3.03 Effect of Sale, Merger or Consolidation. In the event of any --------------------------------------- capital reorganization of the Bank, or of any reclassification (other than a change in par value) of the Common Stock, or of any conversion of the Common Stock into securities of another corporation, or the consolidation of the Bank with, or the merger of the Bank with or into, any other corporation where the Common Stock is converted into other securities or property (including cash) or in the event of the sale of all or substantially all of the properties and assets of the Bank to any other corporation (each such event hereinafter being referred to as a "Capital Change"), each Warrant shall be exercisable after such Capital Change, upon the terms and conditions specified in this Agreement, only for the number of shares of stock or other securities or property (including cash) of the Bank or of the corporation into which shares of Common Stock are converted or resulting from such consolidation or surviving such merger or to which such sale shall be made, as the case may be, to which the shares of Common Stock issuable (immediately prior to such Capital Change) upon exercise of such Warrant would have been entitled upon such Capital Change. In any such case, if necessary, the provisions set forth in this Article III with respect to the rights and interests thereafter of the holders of the Warrants shall be appropriately adjusted so as to be reasonably applicable to any shares of stock or other securities or property thereafter deliverable on the exercise of the Warrants. The subdivision or combination of shares of Common Stock at any time outstanding into a greater or lesser number of shares of Common Stock shall not be deemed to be a reclassification of the Common Stock of the Bank for the - 10 - purpose of this Section. The Bank shall not effect any consolidation, merger or sale resulting in a Capital Change, unless prior to or simultaneously with the consummation thereof, any successor corporation or corporation purchasing such assets shall assume, by written instrument executed and delivered to the Warrant Agent, the obligation to deliver to the holder of each Warrant such shares of stock, securities or property (including cash) as the Warrant Holders may be entitled to receive upon exercise of the Warrants in accordance with the foregoing provisions, and the other obligations of the Bank under this Warrant Agreement. Section 3.04 Effect of Adjustment on Warrant Certificates. The form of -------------------------------------------- Warrant Certificate need not be changed because of any change the number of Warrant Shares issuable upon the exercise of a Warrant or the number of Warrants outstanding pursuant to this Article, and Warrant Certificates issued before or after such change may state the same Exercise Price, the same number of Warrants and the same number of Warrant Shares issuable upon exercise of Warrants as are stated in the Warrant Certificates theretofore issued pursuant to this Agreement. The Bank may, however, at any time, in its sole discretion, make any change in the form of Warrant Certificate that it may deem appropriate and that does not affect the substance thereof, and any Warrant Certificates thereafter issued or countersigned, whether in exchange or substitution for an outstanding Warrant Certificate or otherwise, may be in the form as so changed. ARTICLE IV RIGHTS OF WARRANT HOLDERS Section 4.01 No Rights as Stockholders. No Warrant Holder, as such, ------------------------- shall be entitled to vote or to receive dividends or shall otherwise be deemed to be the holder of shares of Common Stock for any purpose, nor shall anything contained herein or in any Warrant Certificate be construed to confer upon any Warrant Holder, as such, any of the rights of a stockholder of the Bank or any right to vote upon or give or withhold consent to any action of the Bank (whether upon any reorganization, issuance of securities, reclassification or conversion of Common Stock, consolidation, merger, sale, lease, conveyance or otherwise), receive notice of meetings or other action affecting stockholders (except for notices expressly provided for in this Agreement) or receive dividends or subscription rights, until such Warrant Certificate shall have been surrendered for exercise as provided in this Agreement and shares of Common Stock thereunder shall have become issuable - 11 - and until such person shall have been deemed to have become a holder of record of such shares. If, at the date of surrender of such Warrant Certificate, the transfer books for the Common Stock shall be closed, certificates for the shares of Common Stock shall be issuable on the date on which such books shall next be open (whether before, on or after the Expiration Date) and, until such date, the Bank shall be under no duty to deliver any certificate for such shares of Common Stock. No Warrant Holder shall, upon the exercise of Warrants, be entitled to any dividends if the record date with respect to payment of such dividends shall be a date prior to the date such shares of Common Stock became issuable upon the exercise of such Warrants. Section 4.02 Lost Warrants. If any Warrant Certificate is lost, stolen, ------------- mutilated or destroyed, the Warrant Agent may, upon receipt of evidence satisfactory to the Bank and the Warrant Agent of such loss, theft, mutilation or destruction and on such terms as to indemnity or otherwise as the Bank and the Warrant Agent may in their discretion require (which shall, in the case of a mutilated Warrant Certificate, include the surrender thereof), issue a new Warrant Certificate of like denomination and tenor as the lost, stolen, mutilated or destroyed Certificate, and the Warrant Agent shall countersign and deliver such new Certificate. Applicants for such substitute Warrant Certificates shall also comply with such other reasonable regulations and pay any such reasonable charges as the Bank or the Warrant Agent may prescribe. In the event any Warrant Certificate is lost, stolen, mutilated or destroyed, and the owner thereof desires to exercise the Warrants evidenced thereby, the Company may, in lieu of issuing a substitute Warrant Certificate, authorize the exercise thereof upon receipt of the above evidence and on such terms of indemnity as it may require. Section 4.03 Maintenance of Sufficient and Proper Shares of Common Stock ----------------------------------------------------------- (1) The Bank shall at all times reserve and keep available a number of authorized shares of Common Stock sufficient to permit the exercise in full of all outstanding Warrants and will cause to be available to the Warrant Agent a sufficient number of certificates therefor. (2) If at any time hereafter the Common Stock shall become listed on a national securities exchange, prior to the issuance of any shares of Common Stock upon the exercise of Warrants, the Bank shall use its best efforts to secure the listing of shares of Common Stock issuable upon the exercise of the Warrants upon any and all such securities exchanges. - 12 - (3) If any shares of Common Stock issuable upon the exercise of the Warrants require registration or approval of any governmental authority, or the taking of any other action under the laws of the United States or any political subdivision thereof or any other jurisdiction before such shares of Common Stock may be legally and validly issued, then the Bank shall in good faith and with reasonable diligence endeavor to secure such registration or approval or to take such other action as may be appropriate to allow for the lawful issuance of shares of Common Stock upon exercise of the Warrants; provided that no shares of -------- Common Stock shall be issued for the period during which the Bank is endeavoring to obtain such registration or approval or is taking such other action. Warrant Holders may exercise Warrants during any such period as provided herein and shall be entitled to the issuance of the shares of Common Stock on such date as the shares of Common Stock may be legally and validly issued upon the other conditions in effect on the date of surrender of the Warrant Certificates. Section 4.04 Fractional Shares and Warrants ------------------------------ (1) Anything contained herein to the contrary notwithstanding, the Bank shall not be required to issue any fraction of a share of Common Stock in connection with the exercise of Warrants. Warrants may not be exercised in such number as would result (except for the provisions of this Section) in the issuance of a fraction of a share of Common Stock unless the Warrant Holder is presenting for exercise Warrant Certificates representing all Warrants then owned of record by such Warrant Holder. In such event, the Bank shall, upon the exercise of all of such Warrants, issue to such Warrant Holder the aggregate number of shares of Common Stock called for thereby, rounded to the nearest whole number of shares. (2) Anything herein to the contrary notwithstanding, the Bank shall not be required to issue fractions of Warrants on any distribution of Warrants to Warrant Holders or to distribute Warrant Certificates that evidence fractional Warrants. Section 4.05 Transfer and Exchange of Warrants. The Warrant Certificates --------------------------------- shall be issued in registered form only. The Bank shall cause to be kept at the office of the Warrant Agent a register in which, subject to such reasonable regulations as the Warrant Agent may prescribe, the Bank shall provide for the registration of Warrant Certificates and of transfers or exchanges of Warrant Certificates as herein provided. - 13 - At the option of the Warrant Holder, Warrant Certificates may be exchanged at such office, and upon payment of the charges hereinafter provided. Whenever any Warrant Certificates are so surrendered for exchange, the Bank shall execute, and the Warrant Agent shall countersign and deliver, the Warrant Certificates that the Warrant Holder making the exchange is entitled to receive. All Warrant Certificates issued upon any registration of transfer or exchange of Warrant Certificates shall be the valid obligations of the Bank, evidencing the same obligations, and entitled to the same benefits under this Agreement, as the Warrant Certificates surrendered for such registration of transfer or exchange. Every Warrant Certificate surrendered for registration of transfer or exchange shall (if so required by the Bank or the Warrant Agent) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Bank and the Warrant Agent, duly executed by the Warrant Holder thereof or his attorney duly authorized in writing. No service charge shall be made for any registration of transfer or exchange of Warrant Certificates. The Bank may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Warrant Certificates. Any Warrant Certificate when duly endorsed in blank shall be deemed negotiable and when a Warrant Certificate shall have been so endorsed, the Warrant Holder thereof may be treated by the Bank, the Warrant Agent and all other persons dealing therewith as the absolute owner thereof for any purpose and as the person entitled to exercise the rights represented thereby, or to the transfer thereof on the register of the Bank maintained by the Warrant Agent, any notice to the contrary notwithstanding; but until such transfer on such register, the Bank and the Warrant Agent may treat the registered Warrant Holder thereof as the owner for all purposes. ARTICLE V WARRANT AGENT Section 5.01 Nature of Duties and Responsibilities Assumed. The Bank hereby --------------------------------------------- appoints the Warrant Agent to act as agent of the Bank as set forth in this Agreement. The Warrant Agent hereby accepts the appointment as agent of the Bank and agrees to perform that agency upon the terms and conditions - 14 - herein set forth, by all of which the Bank and the Warrant Holders, by their acceptance thereof, shall be bound. Whenever in the performance of its duties under this Agreement, the Warrant Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Bank prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by the Chief Executive Officer, the President, any Vice President or the Secretary of the Company and delivered to the Warrant Agent; and such certificate shall be full authorization to the Warrant Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. The Warrant Agent shall be liable hereunder only for its own negligence, bad faith or willful misconduct. The Warrant Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Warrant Certificates (except its countersignature on the Warrant Certificates and such statements or recitals as described the Warrant Agent or action taken or to be taken by it) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Bank only. The Warrant Agent shall not have any liability or responsibility in respect of the legality, validity or enforceability of this Agreement or the execution and delivery hereof (except the due execution hereof by the Warrant Agent) or in respect of the validity or execution of any Warrant Certificate (except its countersignature thereof); nor shall it be responsible or liable for any breach by the Bank of any covenant or condition contained in this Agreement or in any Warrant Certificate; nor shall it be responsible or liable for the making of any change in the number of shares of Common Stock required under the provisions of Article III or responsible for the manner, method or amount of any such change or the ascertaining of the existence of any facts that would require any such adjustment or change; nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any shares of Common Stock to be issued pursuant to this Agreement or any Warrant Certificate or as to whether any shares of Common Stock will, when issued, be validly issued, fully paid and nonassessable. The Warrant Agent shall be under no obligation to institute any action, suit or legal proceeding or take any other action likely to involve expense unless the Bank or one or more registered holders of Warrants shall furnish the Warrant Agent with reasonable security and indemnity for any - 15 - costs and expenses which may be incurred. All rights of action under this Agreement or under any of the Warrants may be enforced by the Warrant Agent without the possession of any of the Warrants or the production thereof at any trial or other proceeding relative thereto, and any such action, suit or proceeding instituted by the Warrant Agent shall be brought in its name as Warrant Agent, and any recovery of judgment shall be for the ratable benefit of the Holders of the Warrants, as their respective rights or interests may appear. The Warrant Agent shall promptly notify the Bank in writing of any claim made or action, suit or proceeding instituted against it arising out of or in connection with this Agreement. The Warrant Agent is hereby authorized and directed to accept written instructions with respect to the performance of its duties hereunder from the Chief Executive Officer, the President, any Vice President or the Secretary of the Company, and to apply to any such officer for advice or instructions in connection with the Warrant Agent's duties, and it shall not be liable for any action taken or suffered to be taken or omitted by it in good faith in accordance with the instructions of any such officer. The Warrant Agent will not be responsible or liable for any failure of the Bank to comply with any of the covenants contained in this Agreement or in the Warrant Certificates to be complied with by the Bank. The Warrant Agent will not incur any liability or responsibility to the Bank or to any Warrant Holder for any action taken, or any failure to take action, in reliance on any notice, resolution, waiver, consent, order, certificate, or other paper, document or instrument reasonably believed by the Warrant Agent to be genuine and to have been signed, sent or presented by the proper party or parties. The Warrant Agent may execute and exercise any of the rights and powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys, agents or employees, provided reasonable care has been exercised in the selection and in the continued employment of any such attorney, agent or employee. The Bank will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further acts, instruments and assurances as may reasonably be required by the Warrant Agent in order to enable it to carry out or perform its duties under this Agreement. The Warrant Agent will act hereunder solely as agent of the Bank in a ministerial capacity, and its duties will be determined solely by the provisions hereof. The Warrant Agent will not be liable for anything which it may do or refrain from - 16 - doing in connection with this Agreement except for its own negligence, bad faith or willful conduct. Section 5.02 Right to Consult Counsel. The Warrant Agent may at any time ------------------------ consult with legal counsel satisfactory to it (who may be legal counsel for the Bank), and the opinion of such counsel shall be full and complete authorization and protection to the Warrant Agent as to any action taken, suffered or omitted by it in good faith in accordance with such opinion; provided, however, that the Warrant Agent shall have exercised reasonable care in the selection of such counsel. Section 5.03 Compensation and Reimbursement. The Bank agrees to pay to the ------------------------------ Warrant Agent from time to time compensation for all services rendered by it hereunder as the Bank and the Warrant Agent may agree from time to time, and to reimburse the Warrant Agent for reasonable expenses and disbursements incurred in connection with the execution and administration of this Agreement (including the reasonable compensation and the expenses of its counsel), and further agrees to indemnify the Warrant Agent for, and to hold it harmless against, any loss, liability or expense incurred without negligence, bad faith or willful misconduct on its part, arising out of or in connection with the acceptance and administration of this Agreement, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. Section 5.04 Warrant Agent May Hold Bank Securities. The Warrant Agent and -------------------------------------- any stockholder, director, officer or employee of the Warrant Agent may buy, sell or deal in any of the Warrants or other securities of the Bank or its affiliates or have a pecuniary interest in any transaction in which the Bank or its affiliates may be interested, or contract with or lend money to the Bank or its affiliates or otherwise act as fully and freely as though it were not the Warrant Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Bank or for any other legal entity. Section 5.05 Change of Warrant Agent. The Warrant Agent may resign and be ----------------------- discharged from its duties under this Agreement upon 60 days' prior notice in writing mailed, by registered or certified mail, to the Bank. The Bank may remove the Warrant Agent or any successor warrant agent upon 60 days' prior notice in writing, mailed to the Warrant Agent or successor warrant agent, as the case may be, by registered or certified mail. If the Warrant Agent shall resign or be removed or shall otherwise become incapable of acting, the Bank shall appoint a successor to the Warrant Agent and shall, - 17 - within 30 days following such appointment, give notice thereof in writing to each registered holder of the Warrant Certificates. If the Bank shall fail to make such appointment within a period of 30 days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Warrant Agent, then the Bank agrees to perform the duties of the Warrant Agent hereunder until a successor warrant agent is appointed. After appointment the successor warrant agent shall be vested with the same powers, rights, duties and responsibilities as if it had, been originally named as Warrant Agent without further act or deed; but the former Warrant Agent shall deliver and transfer to the successor Warrant Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Failure to give any notice provided for in this Section, however, or any defect therein shall not affect the legality or validity of the resignation or removal of the Warrant Agent or the appointment of the successor warrant agent, as the case may be. ARTICLE VI GENERAL Section 6.01 Purchase of Warrants by the Bank. The Bank shall have the -------------------------------- right, except as limited by law or other agreement, to purchase or otherwise acquire Warrants at such times, in such manner and for such consideration as it may deem appropriate. Section 6.02 Cancelled Warrants. The Warrant Agent shall cancel any ------------------ Warrant Certificate delivered to it for exercise, in whole or in part, or delivered to it for transfer, or for split-up, combination, exchange or substitution and shall deliver to the Bank, in a manner satisfactory to the Bank, such cancelled Warrant Certificates. Section 6.03 Taxes on Issuance of Shares of Common Stock. The Bank shall ------------------------------------------- from time to time promptly pay all documentary stamp taxes, if any, that may be imposed upon the Bank or the Warrant Agent with respect to the issuance or delivery of shares of Common Stock upon the exercise of Warrants, but the Bank shall not be obligated to pay any transfer taxes with respect to the issuance or delivery of the Warrant Certificates or shares of Common Stock in a name other than that of the Warrant Holder. - 18 - Section 6.04 Dates and Times. If any date set forth in this Warrant --------------- Agreement shall fall on a day other than a full business day in New York City, said date shall be deemed to be the next full business day succeeding that date. All times shall be the legal time then in effect in New York City. Section 6.05 Amendments to Warrant Agreement. The Bank and the Warrant ------------------------------- Agent may, jointly, without the consent or concurrence of the Warrant Holders, by supplemental agreement or otherwise, make any amendments, alterations, deletions or corrections in this Agreement that they deem necessary or desirable: (a) to cure any ambiguity or correct any defect, inconsistency, clerical omission or mistake, or manifest error contained herein; (b) to confer additional rights upon the Warrant Holders; or (c) in any other respect that is not inconsistent with the provisions of the Warrants and which does not adversely affect the rights of the Warrant Holders hereunder. The Bank and the Warrant Agent also may supplement or amend the Warrant Agreement in any other respect without notice to any Warrant Holder but with the written consent of the holders of at least 50% in number of the Warrants then outstanding; provided, -------- however, that no such supplement or amendment may (i) make any modification of - ------- the terms upon which the Warrants are exercisable or (ii) change the percentage of the holders of the Warrants who must consent to such amendment or supplement, without the consent of each Warrant Holder affected thereby. Section 6.06 Binding Agreements. All of the covenants and provisions of ------------------ this Agreement by or for the benefit of the Bank or the Warrant Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. Nothing expressed in this Agreement and nothing that may be implied from any of the provisions hereof is intended, or shall be construed, to confer upon or give to any person or corporation, other than the Bank, the Warrant Agent and the Warrant Holders, any legal or equitable right, remedy or claim under or by reason of this Agreement or of any covenant, condition, stipulation, promise or agreement herein, and all covenants, conditions, stipulations, promises and agreements contained in this Agreement shall be for the sole and exclusive benefit of the Bank, the Warrant Agent, the Warrant Holders and their respective successors and assigns. Section 6.07 Copies of Agreement with Warrant Agent. A copy of this -------------------------------------- Agreement, as such may be amended from time to time, shall be available for inspection by any Warrant Holder at the office of the Warrant Agent, as designated in Section 6.08, during normal business hours. As a condition of such inspection, the Warrant Agent may require any such Warrant Holder to submit his or her Warrant Certificate for inspection. - 19 - Section 6.08 Notices. Any communication, notice or demand to be given ------- hereunder shall be duly given if in writing and delivered, or sent by first class mail, certified or registered, postage prepaid and addressed as follows: (a) If to the Bank: Glendale Federal Bank, FSB 700 N. Brand Boulevard Glendale, California 91203 Attention: Secretary (b) If to the Warrant Agent: Chemical Trust Company of California 300 South Grand Avenue, 2nd Floor Los Angeles, California 90071 Attention: Office Manager (c) If to a Warrant Holder, at such person's last known address as such shall appear on the registration books maintained by the Warrant Agent. Any party may change the address to which any communications, notice or demand shall be given by giving notice of such change in conformity with the provisions of this Section. Section 6.09 Governing Law. This Agreement and each Warrant issued hereunder ------------- shall be governed by and construed in accordance with the laws of the State of California, without giving effect to conflict of laws. Section 6.10 Headings. The Article and Section headings herein are for -------- convenience only and are not part of this Agreement and shall not affect the interpretation thereof. Section 6.11 Counteparts. This Agreement may be executed in any number of ----------- counterparts, each of which so executed shall be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. - 20 - IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto as of the day and year first above written. GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK By: /s/ Richard A. Fink -------------------------- Name: Richard A. Fink Title: Senior Executive Vice President and Chief Legal Officer Attest: /s/ James R. Eller, Jr. - ------------------------ Secretary CHEMICAL TRUST COMPANY OF CALIFORNIA As Warrant Agent By: /s/ Derek R. Lenington ---------------------------- Name: Derek R. Lenington Title: Vice-President Attest: /s/ Michael E. Dzieciolowski - ---------------------------- Assistant Vice President EXHIBIT A (FORM OF WARRANT CERTIFICATE) No. Certificate for Warrants VOID AFTER 5:00 P.M. NEW YORK CITY TIME [FEBRUARY , 1999] GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK WARRANTS TO PURCHASE COMMON STOCK This Warrant Certificate certifies that ________________, or registered assigns, is the registered holder of the number of Warrants set forth above. Each Warrant entitles the holder thereof, subject to the provisions contained herein and in the Warrant Agreement referred to below, to receive from Glendale Federal Bank, Federal Savings Bank, a federally chartered stock savings bank (the "Bank"), one fully paid and nonassessable share of Common Stock, par value $1.00 per share, of the Bank ("Common Stock"), at the exercise price of zero ($0.00) per share, at any time after one year from the date of initial issuance of the Warrants under the Warrant Agreement referred to below until the expiration of the Warrant at 5:00 p.m., New York City time, on the sixth anniversary of such date or, if such anniversary date is not a business day in the City of New York, then on the next succeeding business day (the "Expiration Date".) This Warrant Certificate is issued under and in accordance with the Warrant Agreement, dated as of _______________, A - 2 1993 (the "Warrant Agreement"), between the Bank and Chemical Trust Company of California, warrant agent (the "Warrant Agent," which term includes any successor Warrant Agent under the Warrant Agreement), and is subject to the terms and provisions contained in the Warrant Agreement, to all of which terms and provisions the holder of this Warrant Agreement consents by acceptance hereof. The Warrant Agreement is hereby incorporated herein by reference and made a part hereof. Reference is hereby made to the Warrant Agreement for a full statement of the respective rights, duties, obligations and immunities thereunder of the Bank, the Warrant Agent and the holders of the Warrants. Copies of the Warrant Agreement, as such may be amended from time to time, are available for inspection at the Los Angeles office of the Warrant Agent. The number of shares of Common Stock issuable upon the exercise of each Warrant is subject to adjustment as provided in the Warrant Agreement. All shares of Common Stock issuable by the Bank upon the exercise of Warrants shall, upon such issue, be duly and validly issued and fully paid and non-assessable. In order to exercise a Warrant, the registered holder hereof must surrender this Warrant Certificate at the office of the Warrant Agent, with the Exercise Subscription Form on the reverse hereof duly executed by the holder hereof, with signature guaranteed as therein specified. A - 3 This Warrant Certificate, with or without other Warrant Certificates, upon surrender to the Warrant Agent, may be exchanged for another Warrant Certificate or Warrant Certificates evidencing a like aggregate number of Warrants. If this Warrant Certificate shall be exercised in part, the holder hereof shall be entitled to receive upon surrender hereof another Warrant Certificate or Warrant Certificates evidencing the number of Warrants not exercised. No holder of this Warrant Certificate shall be deemed to be the holder of Common Stock or any other securities of the Bank that may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained in the Warrant Agreement or herein be construed to confer upon the holder of this Warrant Certificate as such any of the rights of a stockholder of the Bank or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any reorganization, issuance of stock, reclassification or conversion of stock, change of par value, or exchange of stock to no par value, consolidation, merger, conveyance or otherwise) or to receive notice of meetings, or to receive dividends or subscription rights or otherwise, until this Warrant Certificate shall have been exercised and the Common Stock issuable upon the exercise hereof shall have become issuable as provided in the Warrant Agreement. A - 4 This Warrant Certificate and all rights hereunder are transferable by the registered holder hereof, in whole or in part, on the register of the Bank, upon surrender of this Warrant Certificate for registration of transfer at the office of the Warrant Agent maintained for such purpose, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Bank and the Warrant Agent duly executed by, the Holder hereof or his attorney duly authorized in writing, with signature guaranteed as specified in the attached Form of Assignment. Upon any partial transfer, the Bank will issue and deliver to such holder a new Warrant Certificate or Certificates with respect to any portion not so transferred. No service charge shall be made for any registration of transfer or exchange of the Warrant Certificates, but the Bank may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Each taker and holder of this Warrant Certificate by taking or holding the same consents and agrees that this Warrant Certificate when duly endorsed in blank shall be deemed negotiable and that when this Warrant Certificate shall have been so endorsed, the holder hereof may be treated by the Bank, the Warrant Agent and all other persons dealing with this Warrant Certificate as the absolute owner hereof for any purpose and as the person entitled to exercise the rights represented hereby, or to the transfer hereof on the register of the Bank maintained by the Warrant Agent, any notice to the A - 5 contrary notwithstanding, but until such transfer on such register, the Bank and the Warrant Agent may treat the registered Holder hereof as the owner for all purposes. Anything herein to the contrary notwithstanding, in no event shall the Bank or the Warrant Agent be obligated to issue Warrant Certificates evidencing other than a whole number of Warrants or issue certificates evidencing other than a whole number of shares of Common Stock upon the exercise of this Warrant Certificate. This Warrant Certificate and the Warrant Agreement are subject to amendment as provided in the Warrant Agreement. All terms used in this Warrant Certificate that are defined in the Warrant Agreement shall have the meanings assigned to them in the Warrant Agreement. This Warrant Certificate shall not be valid for any purpose until it shall have been countersigned by the Warrant Agent. GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK Dated: ____________, 1993 By:_______________________ Name: Title: Countersigned: CHEMICAL TRUST COMPANY OF CALIFORNIA By:____________________ Name: Title: A - 6 FORM OF REVERSE OF WARRANT CERTIFICATE EXERCISE SUBSCRIPTION FORM (To be executed only upon exercise of Warrant) TO: Glendale Federal Bank, Federal Savings Bank The undersigned irrevocably exercises ____________________ of the Warrants for the acquisition of one share (subject to adjustment) of Common Stock, par value $1.00 per share, of Glendale Federal Bank, Federal Savings Bank, for each Warrant represented by the Warrant Certificate, on the terms and conditions specified in the within Warrant Certificate and the Warrant Agreement therein referred to, surrenders this Warrant Certificate and all right, title and interest therein to Glendale Federal Bank, Federal Savings Bank, and directs that the shares of Common Stock deliverable upon the exercise of such Warrants be registered or placed in the name and at the address specified below and delivered thereto. Dated:______________, 19__ (1) ------------------------------ (Signature of Owner) ------------------------------ (Street Address) ------------------------------ (City) (State) (Zip Code) Signature Guaranteed by: ------------------------------ - ---------------------- (1) The signature must correspond with the name as written upon the face of the within Warrant Certificate in every particular, without alteration or enlargement or any change whatever, and must be guaranteed by an eligible guarantor institution pursuant to S.E.C. Rule 17Ad-15. A-7 Securities to be issued to: Please insert social security or identifying number: Name: Street Address: City, State and Zip Code: Any unexercised Warrants evidenced by the within Warrant Certificate to be issued to: Please insert social security or identifying number: Name: Street Address: City, State and Zip Code: A - 8 FORM OF ASSIGNMENT FOR VALUE RECEIVED the undersigned registered holder of the within Warrant Certificate hereby sells, assigns, and transfers unto the Assignee(s) named below (including the undersigned with respect to any Warrants constituting a part of the Warrants evidenced by the within Warrant Certificate not being assigned hereby) all of the right of the undersigned under the within Warrant Certificate, with respect to the number of Warrants set forth below:
Social Security or other identifying Names of number of Number of Assignees Address assignee(s) Warrants - --------- ------- --------------- ---------
and does hereby irrevocably constitute and appoint __________ the undersigned's attorney to make such transfer on the books of Glendale Federal Bank, Federal Savings Bank maintained for that purpose with full power of substitution in the premises. Date:_______________, 19__ (1) ------------------------------ (Signature of Owner) ------------------------------ (Street Address) ------------------------------ (City) (State) (Zip Code) Signature Guaranteed by: ------------------------------ - -------------------- (1) The signature must correspond with the name as written upon the face of the within Warrant Certificate in every particular, without alteration or enlargement or any change whatever, and must be guaranteed by an eligible guarantor institution under S.E.C. Rule 17Ad-15. AMENDMENT NO. 1 TO WARRANT AGREEMENT THIS AMENDMENT NO. 1 TO WARRANT AGREEMENT (this "Amendment No. 1") dated as of July 24, 1997 is entered into by and among Glendale Federal Bank, Federal Savings Bank (the "Bank"), ChaseMellon Shareholder Services, LLC (as successor to Chemical Trust Company of California ("Chemical"), the "Warrant Agent"), and Golden State Bancorp Inc. ("Golden State") on the basis of the following facts: WHEREAS, the Bank and Chemical entered into that certain Warrant Agreement (the "Warrant Agreement") dated as of February 23, 1993 with respect to warrants (the "Five-Year Warrants") to acquire common stock, par value $l.00 per share of the Bank (the "Bank Common Stock"); WHEREAS, pursuant to the terms of that certain Agreement and Plan of Reorganization (the "Reorganization Agreement") dated as of May 28, 1997 by and among the Bank, Golden State and Glendale Interim Federal Savings Bank, among other things, (i) Golden State will become the holding company for the Bank, and (ii) the Five-Year Warrants will become exercisable, in accordance with their terms and without the necessity of any exchange by the holders thereof, solely to receive the number of shares of common stock, par value $1.00 per share of Golden State (the "Golden State Common Stock") that equals the number of shares of Bank Common Stock for which the Five-Year Warrants were exercisable immediately prior to the effective time (the "Effective Time") of the reorganization transaction provided for in the Reorganization Agreement (the "Reorganization"); and WHEREAS, the parties hereto desire to amend the Warrant Agreement to reflect the transactions comprising the Reorganization and their effects. NOW THEREFORE, the parties hereto hereby agree as follows: 1. The term "Common Stock" as used in the Warrant Agreement shall mean Golden State Common Stock instead of Bank Common Stock. 2. All references to the "Bank" or the "Company" in Articles III and IV of the Warrant Agreement shall be deemed to refer to Golden State instead of the Bank. 3. All references to the "Bank" in Sections 6.01 and 6.05 shall be deemed to refer to both the Bank and Golden State. 4. Section 6.08 shall be amended in its entirety as follows: "Section 6.08 Notices. Any communication, notice or demand to be given ------- hereunder shall be duly given if in writing and delivered, or sent by first class mail, certified or registered, postage prepaid and addressed as follows: 1 (a) If to the Bank or Golden State: 414 N. Central Avenue Glendale, California 91203 Attn: Corporate Secretary If to the Warrant Agent: (b) ChaseMellon Shareholder Services, LLC 400 South Hope Street 4th Floor Los Angeles, California 90071 Attn: Office Manager (c) If to a Warrant Holder, at such person's last known address as such address shall appear on the registration books maintained by the Warrant Agent. Any party may change the address to which any communication, notice or demand shall be given by giving notice of such change in conformity with the provisions of this Section." 5. This Amendment No. 1 shall be deemed effective as of the Effective Time. 6. Except as otherwise specifically provided herein, the Warrant Agreement shall remain unchanged. 2 IN WITNESS WHEREOF, this Amendment No. 1 has been duly executed by the parties hereto as of the day and year first above written. GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK By: /s/ John E. Haynes ---------------------------- Title: EVP/CPO ------------------------- CHASEMELLON SHAREHOLDER SERVICES, LLC By: /s/ Michael E. Dzieciolowski ----------------------------- Michael E. Dzieciolowski Title: Assistant Vice President ------------------------- GOLDEN STATE BANCORP INC. By: /s/ John E. Haynes ----------------------------- Title: CFO ------------------------- 3 EX-4.4 7 WARRANT AGREEMENT DATED AS OF AUGUST 15, 1993 EXHIBIT 4.4 WARRANT AGREEMENT between GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK and CHEMICAL TRUST COMPANY OF CALIFORNIA, as Warrant Agent Warrants to Purchase Common Stock - -------------------------------------------------------------------------------- Dated as of August 15, 1993 WARRANT AGREEMENT AGREEMENT, dated as of August 15, 1993, between GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK, a federally chartered stock savings bank (the "Bank"), and ---- CHEMICAL TRUST COMPANY OF CALIFORNIA, as Warrant Agent (the "Warrant Agent"). ------------- WHEREAS, pursuant to the Plan of Reorganization entered into among the Bank, GLENFED, Inc. and Glendale Investment Corporation (the "Reorganization Plan"), ------------------- the Bank proposes to conduct several interdependent transactions for the purpose of increasing the regulatory capital of the Bank; and WHEREAS, in connection with the Reorganization Plan, the Bank proposes to issue and deliver its warrant certificates (the "Warrant Certificates") -------------------- evidencing warrants (the "Warrants") to acquire, under certain circumstances, an -------- aggregate of up to approximately 10.85 million shares, subject to adjustment, of its common stock, par value $1.00 per share (the "Bank Common Stock"), and ----------------- WHEREAS, each such Warrant will entitle the owner of record thereof to acquire one share of Bank Common Stock, subject to adjustment. NOW THEREFORE, in consideration of the foregoing, and for the purpose of defining the terms and provisions of the Warrants and the respective rights and obligations thereunder of the Bank and the record holders of the Warrants, the Bank and the Warrant Agent each hereby agrees as follows: ARTICLE I ISSUANCE AND EXECUTION OF WARRANTS SECTION 1.01 FORM OF WARRANT CERTIFICATES. The text of each Warrant ---------------------------- Certificate (and the related forms of exercise and assignment) shall be substantially in the form attached hereto as Exhibit A and may have such legends --------- and endorsements typed, stamped, printed, lithographed or engraved thereon as the Bank may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any law or with any rule or regulation pursuant thereto or with any rule or regulation of any securities exchange or over-the-counter market on which the Warrants may be listed or quoted, or to conform to customary usage. SECTION 1.02 EXECUTION AND COUNTERSIGNATURE OF WARRANT CERTIFICATES. Warrant ------------------------------------------------------ Certificates shall be executed on behalf of the Bank by its Chief Executive Officer, President or any Vice President and attested by its Secretary or an Assistant Secretary, and delivered to the Warrant Agent, and shall be countersigned and delivered by the Warrant Agent upon the written order of the Bank signed by any such officer of the Bank. Each Warrant Certificate shall be dated the date of its countersignature by the Warrant Agent either upon initial issuance or upon division, exchange, substitution or transfer. Warrant Certificates shall be executed on behalf of the Bank either manually or by facsimile signature printed thereon. The Warrant Agent shall countersign the Warrant Certificate manually, and no Warrant Certificate shall be valid for any purpose unless so countersigned. In case any officer whose signature has been placed upon any Warrant Certificate ceases to be such before such Warrant Certificate is issued, it may be issued with the same effect as if such officer had not ceased to be such at the date of issuance. ARTICLE II EXERCISE PRICE, TERM, REDEMPTION AND METHOD OF EXERCISE SECTION 2.01 EXERCISE PRICE. Each Warrant Certificate shall, when -------------- countersigned by the Warrant Agent, entitle the registered holder thereof (the "Warrant Holder"), subject to the provisions thereof and of this Agreement, to -------------- purchase one share of Bank Common Stock for each Warrant represented thereby at an exercise price of Twelve Dollars ($12.00) per share in lawful money of the United States of America (such exercise price per share, as adjusted from time to time as provided herein, is referred to herein as the "Exercise Price"). -------------- SECTION 2.02 WARRANT RIGHTS. Each Warrant shall entitle the Warrant Holder, -------------- upon exercise thereof and payment of the Exercise Price (and any taxes as contemplated in this Agreement) within the period described in Section 2.03, and ------------ subject to the provisions of the Warrant Certificate evidencing such Warrant and this Agreement, including provisions relating to adjustments upon the occurrence of certain events as set forth in Article III hereof, to receive one fully paid ----------- and nonassessable share of Bank Common Stock. SECTION 2.03 PERIOD OF EXERCISE; EXPIRATION. Each Warrant may be exercised ------------------------------ on any business day during the period commencing on the day following the first anniversary of the completion of the Recapitalization (as defined in the Reorganization Plan) and -2- ending at 5:00 pm., New York City time, on the seventh anniversary of the date of the initial issuance of the Warrants or, if such date is not a business day in the City of New York, then on the next succeeding business day (the "Expiration Date"). Each Warrant not exercised by 5:00 p.m., New York City time, --------------- on the Expiration Date shall become void, and all rights thereunder and all rights in respect thereof under this Agreement shall thereupon cease. SECTION 2.04 METHOD OF EXERCISE. Exercise of Warrants shall be effected by: ------------------ (a) surrender of the Warrant Certificate evidencing such Warrants to the Warrant Agent, with one of the forms on the reverse of or attached to the Warrant Certificate duly completed and executed by the Warrant Holder thereof or by a duly appointed legal representative thereof or by a duly authorized attorney (and with any signatures guaranteed as may be required pursuant to the Warrant Certificate); and (b) payment of the aggregate Exercise Price for the shares of Bank Common Stock to which such exercise relates. Warrant Certificates representing Warrants being exercised (accompanied by payment therefor) shall be surrendered at the office of the Warrant Agent. In the event that any Warrant Holder shall exercise less than all of the Warrants evidenced by a Warrant Certificate surrendered upon exercise of Warrants, a new Warrant Certificate for the balance of such Warrants shall be countersigned and delivered to, or in accordance with the instructions of, such Warrant Holder. Promptly upon surrender of a Warrant Certificate in conformity with the foregoing provisions, the Warrant Agent (after requisitioning any certificates for shares of Bank Common Stock from the Bank's transfer agent, if necessary) shall deliver to, or in accordance with the instructions of, the Warrant Holder certificates for the total number of whole shares of Bank Common Stock for which the Warrants evidenced by such Warrant Certificates are being exercised (subject to the provisions of Section 4.04) in such names and denominations as the ------------ Warrant Holder has directed; provided, however, that, if, on the date of -------- ------- surrender of such Warrant Certificate, the transfer books for the Bank Common Stock shall be closed, the certificates for the shares of Bank Common Stock shall be issuable as of the date on which such books shall next be open (whether before, on or after the Expiration Date) at the Exercise Price and upon the other conditions in effect on the date of such surrender. SECTION 2.05. DISPOSITION OF PROCEEDS ON EXERCISE OF WARRANTS. The Warrant ----------------------------------------------- Agent shall account promptly to the Bank with respect to Warrants exercised and concurrently pay to the Bank all moneys received by the Warrant Agent for the purchase of shares of Bank Common Stock through the exercise of such Warrants. -3- SECTION 2.06. CANCELLATION OF WARRANTS. In the event the Bank shall purchase ------------------------ or otherwise acquire Warrants, the same shall thereupon be delivered to the Warrant Agent and be cancelled by it and retired. The Warrant Agent shall cancel any Warrant surrendered for exchange, substitution, transfer or exercise in whole or in part. ARTICLE III ADJUSTMENTS TO WARRANTS UPON CERTAIN EVENTS SECTION 3.01 ADJUSTMENTS TO WARRANT SHARES OR EXERCISE PRICE. The number of ----------------------------------------------- shares of Bank Common Stock issuable upon the exercise of each Warrant (such shares being referred to in this Article III as the "Warrant Shares") and the ----------- -------------- Exercise Price, as applicable, shall be subject to adjustment solely as follows: (a) In case the Bank shall at any time after the date of this Agreement (i) declare a dividend on, or make a distribution with respect to, Bank Common Stock which is payable in shares of Bank Common Stock, (ii) subdivide the outstanding shares of Bank Common Stock, (iii) combine the outstanding shares of Bank Common Stock into a smaller number of shares, or (iv) issue any shares of capital stock of the Bank in a reclassification of the Bank Common Stock, the number of Warrant Shares shall be adjusted so that the holder of each Warrant shall be entitled to receive upon payment of the Exercise Price the aggregate number and kind of shares of Bank Common Stock or other capital stock of the Bank which, if such Warrant had been exercised immediately prior to the occurrence of such event, such holder would have owned or have been entitled to receive immediately after the occurrence of such event. The time of occurrence of an event giving rise to an adjustment made pursuant to this Section 3.01(a) shall, in the case --------------- of a subdivision, combination or reclassification, be the effective date thereof and shall, in case of a dividend or distribution, be the record date thereof. (b) If at any time after the date hereof, the Bank shall, to or for the account or benefit of all holders of the outstanding shares of Bank Common Stock, make, without any charge, any distribution of rights to subscribe or warrants to purchase Bank Common Stock at a price per share less than the Current Market Prime (as defined below) of such Bank Common Stock (not including, in any event, the rights to purchase Bank Common Stock to be issued pursuant to the Reorganization Plan) on the record date for such distribution or issuance, the Exercise Price shall be adjusted immediately thereafter so that it shall equal the price determined in accordance with the following formula: -4- WP' = WP x A + B(SP/CMP) ------------- A + B Where: WP' = Adjusted Exercise Price; WP = Exercise Price in effect immediately prior to adjustment; A = Number of shares of Bank Common Stock outstanding on the record date for such distribution or issuance; B = Number of shares of Bank Common Stock so offered for subscription or purchase; SP = Subscription or purchase price per share issuable upon exercise of such rights or warrants; and CMP = Current Market Price on the record date for such distribution or issuance. An adjustment made pursuant to this Section 3.01(b) shall become effective --------------- immediately after the record date for the determination of shareholders entitled to receive such distribution or issuance. (c) Upon each adjustment of the number or kind of shares of capital stock purchasable upon exercise of each Warrant pursuant to Section 3.01(a), the --------------- Exercise Price shall also be adjusted such that upon the exercise of a Warrant by a Warrant Holder thereafter, and payment of an amount equal to the Exercise Price immediately prior to such adjustment, such Warrant Holder shall be entitled to receive the number and kind of such shares of capital stock that such Warrant Holder would have owned or been entitled to receive immediately after the occurrence, and as a result, of the event giving rise to such adjustment had such Warrant been exercised immediately prior to the occurrence of such event. If, as a result of an adjustment made pursuant to Section ------- 3.01(a), a Warrant Holder shall become entitled to receive, upon exercise of its - ------- Warrants and payment therefor, shares of two or more classes of capital stock, the Board of Directors of the Bank (whose determination with respect to the matter shall be conclusive and shall be described in a resolution adopted with respect thereto) shall determine the allocation of the adjusted Exercise Price between or among shares of such classes of capital stock. After each adjustment of the Exercise Price pursuant to Section 3.01(b), the total number of Warrant --------------- -5- Shares or fractional part thereof purchasable upon the exercise of each Warrant shall not be proportionately adjusted. (d) Except for adjustments required by Section 3.01(e), no adjustment in the --------------- Exercise Price or in the number of Warrant Shares shall be required unless such adjustment would require an increase or decrease of at least one percent (1%) in such Exercise Price or in the number of Warrant Shares purchasable; provided, -------- however, that any adjustments which by reason of this Section 3.01(d) are not - ------- --------------- required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 3.01 shall be made to ------------ the nearest cent and to the nearest one-hundredth of a share, as the case may be. (e) In case of any consolidation of the Bank with, or merger of the Bank into, another corporation or in case of any sale or conveyance to another corporation or entity of the property of the Bank as an entirety or substantially as an entirety (such successor or purchaser corporation or entity being referred to for purposes of this Section 3.01(e) as the "Acquiring --------------- --------- Corporation"), the Bank or the Acquiring Corporation, as the case may be, shall - ----------- execute with the Warrant Agent an agreement that each Warrant Holder shall have the right, upon exercise of each of its Warrants and payment, prior to 5:00 p.m., New York City time, on the Expiration Date, of the Exercise Price in effect immediately prior to such consolidation, merger, sale or conveyance, to purchase upon exercise of such Warrant or Warrants the kind and amount of shares or other securities or property (including cash) that such holder would have owned or have been entitled to receive immediately after the happening of such action, had such Warrant been exercised immediately prior thereto. The Bank shall mail or cause to be mailed by first-class mail, postage prepaid, to each Warrant Holder, notice of the execution of any such agreement. Such agreement shall provide for adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for herein. The provisions of this Section 3.01(e) shall similarly apply to successive consolidations, mergers, - --------------- sales or conveyances. The Warrant Agent shall be under no responsibility to determine the correctness of any provisions contained in any such agreement relating either to the kind or amount of shares or other securities or property receivable upon exercise of Warrants or with respect to the method employed and provided therein for any adjustments and shall be entitled to rely upon the provisions contained in any such agreement. (f) Upon the expiration of any rights or warrants pursuant to which an adjustment in the Exercise Price has been made pursuant to Section 3.01(b) --------------- hereof, if any of such rights or warrants shall not have been exercised, the Exercise Price in -6- effect upon such expiration shall be readjusted in the following manner: (i) the adjusted Exercise Price determined in respect of the original distribution of the expired rights or warrants pursuant to Section 3.01(b) hereof (the "Original --------------- -------- Adjusted Exercise Price") shall be replaced with a revised Exercise Price (the - ----------------------- "Revised Exercise Price") determined by applying the formula set forth in ---------------------- Section 3.01(b) hereof, using the same values for each of the variables in such - --------------- formula as were used in calculating the Original Adjusted Exercise Price, except that the value for variable "B" shall equal the number of shares of Bank Common Stock, if any, actually issued or sold upon the exercise of such rights or warrants, rather than the number of shares of Bank Common Stock offered for subscription or purchase; and (ii) if any further adjustments shall have been made to the Original Adjusted Exercise Price pursuant to either Section 3.01(b) --------------- or (c) subsequent to the original distribution of the expired rights or --- warrants, then each such subsequent adjustment shall be recalculated in the same manner as originally determined, using as a starting point for such subsequent adjustments the Revised Exercise Price in place of the Original Adjusted Exercise Price. (g) Whenever the Exercise Price or the number of Warrant Shares shall be adjusted as provided in this Section 3.01, the Bank shall forthwith file with ------------ the Warrant Agent a certificate, signed by the chief financial officer of the Bank, showing in detail the facts requiring such adjustment and the Exercise Price and number of Warrant Shares that will be effective after such adjustment. The Warrant Agent shall have no duty with respect to any certificate filed with it except to keep the same on file and available for inspection by Warrant Holders during reasonable business hours. The Warrant Agent shall not at any time be under any duty or responsibility to any Warrant Holder to determine whether any facts exist which may require any adjustment of the Exercise Price or in the number of Warrant Shares, or with respect to the nature of any adjustment of the Exercise Price or in the number of Warrant Shares purchasable upon the exercise of each Warrant when made, or with respect to the method employed in making such adjustment, and shall not be deemed to have knowledge of any such adjustment unless and until it shall receive such certificate. (h) In case the Bank after the date hereof shall propose to take any action of the type described in this Section 3.01 (except for actions which, pursuant ------------ to Section 3.01(d), would not require an adjustment of the Exercise Price or the --------------- number of Warrant Shares), the Bank shall give notice thereof to the Warrant Agent by filing with the Warrant Agent a certificate, signed by the Chairman or Vice Chairman of the Board of Directors, the President or any Vice President of the Bank and the Bank's Treasurer or any Assistant Treasurer or Secretary or any Assistant Secretary, specifying the date on which such action -7- shall take place, and shall also set forth such facts with respect thereto as shall be reasonably necessary to indicate the effect of such action (to the extent such facts may be known on the date of such notice) on the Exercise Price and the number, kind or class of shares or other securities or property which shall be purchasable upon exercise of Warrants. The Bank also shall cause a notice setting forth any such proposed adjustments to be sent by mailing first class, postage prepaid, to each Warrant Holder as of a date within ten (10) days of the date of such notice at its address appearing on the Warrant register. Failure to give such notice or any defect therein shall not affect the legality or validity of such action. Such notices shall be given, in the case of any action of the type specified in Sections 3.01(a) and (b), at least ten (10) days ---------------- --- prior to the effective date or the record date, as applicable, with respect thereto and in the case of any action of the type specified in Sections 3.01(e) ---------------- and (f), at least ten (10) days prior to the taking of such proposed action. --- (i) Irrespective of any of the adjustments in the Exercise Price or the number of Warrant Shares, Warrant Certificates shall continue to express on the face thereof the same price and number of Warrant Shares as stated in a similar Warrant Certificate issuable initially pursuant to this Agreement and such number of Warrant Shares and price specified therein shall be deemed to have been so adjusted. (j) For purposes of this Section 3.01, the "Current Market Price" per share ------------ -------------------- of Bank Common Stock on any date shall be deemed to be the arithmetic average of the Market Price per share of Bank Common Stock (as defined below) for the ten (10) consecutive Trading Days (as defined below) ending on the Trading Day immediately preceding the day in question. "Market Price" for each Trading Day ------------ shall be the closing sale price for the Bank Common Stock on the New York Stock Exchange, or if no such sale has taken place on such day, then the average of the closing bid and ask prices for the Bank Common Stock on the New York Stock Exchange. If the Bank Common Stock hereafter ceases to be listed or admitted for trading on the New York Stock Exchange, but is listed or admitted for trading on a national securities exchange, the Market Price shall be the closing price (or if no such sale has taken place on such day, then the average of the closing bid and ask prices) on the principal national securities exchange on which the Bank Common Stock is listed or admitted for trading. If the Bank Common Stock is not, or hereafter ceases to be, listed or admitted for trading on any national securities exchange, the Market Price shall be the closing sale price quoted (or, if no such price is quoted for such day, then the average of the closing bid and ask prices quoted) for the Bank Common Stock on the NASDAQ National Market System, or, if the Bank Common Stock is not quoted on such National Market System, the average -8- of the closing bid and ask prices as furnished by any New York Stock Exchange member firm selected from time to time by the Board of Directors of the Bank for such purposes (other than the Bank or any affiliate thereof). In the event that it is impracticable for the Board of Directors of the Bank to establish the Market Price of the Bank Common Stock as contemplated herein, Market Price shall mean the fair market value of the Bank Common Stock as determined in good faith by the Board of Directors of the Bank. "Trading Day" shall be each Monday ----------- through Friday, other than any day on which securities are not traded in the system or on the exchange that is the principal market for the Bank Common Stock, as determined by the Board of Directors of the Bank. (k) For the purposes of this Section 3.01, the term "Bank Common Stock" ------------ ----------------- shall mean (i) the class of capital stock designated as the Common Stock, par value $1.00 per share, of the Bank, at the date of this Agreement or (ii) any other class of stock resulting from successive changes or reclassifications of such capital stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. In the event that at any time, as a result of an adjustment made pursuant to Section 3.01(a) or (e), --------------- --- shares of the Bank other than shares of Bank Common Stock are issuable upon exercise of the Warrants, thereafter the number and Exercise Price of such other shares so issuable shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Bank Common Stock contained in this Section 3.01, as may be determined in ------------ good faith by the Board of Directors of the Bank, and all other provisions of this Agreement with respect to Bank Common Stock shall apply on like terms to any such other shares. Subject to the foregoing, and unless the context requires otherwise, all references to Bank Common Stock and Warrant Shares in this Agreement and in the Warrant Certificates shall, in the event of an adjustment pursuant to this Section 3.01, be deemed to refer also to any other securities ------------ or property then issuable upon exercise of the Warrants as a result of such adjustment. SECTION 3.02 NO ADJUSTMENT FOR CASH DIVIDENDS. No adjustment shall be made in -------------------------------- the Exercise Price or in the number of Warrant Shares purchasable upon exercise of the Warrants in respect of any cash dividends paid or payable on shares of Bank Common Stock or other securities of the Bank. ARTICLE IV RIGHTS OF WARRANT HOLDERS -9- SECTION 4.01 NO RIGHTS AS STOCKHOLDERS. No Warrant Holder, as such, shall be ------------------------- entitled to vote or to receive dividends or shall otherwise be deemed to be the holder of shares of Bank Common Stock for any purpose, nor shall anything contained herein or in any Warrant Certificate be construed to confer upon any Warrant Holder, as such, any of the rights of a stockholder of the Bank or any right to vote upon or give or withhold consent to any action of the Bank (whether upon any reorganization, issuance of securities, reclassification or conversion of Bank Common Stock, consolidation, merger, sale, lease, conveyance or otherwise), receive notice of meetings or other action affecting stockholders (except for notices expressly provided for in this Agreement) or receive dividends or subscription rights, unless and until such Warrant Certificate shall have been surrendered for exercise as provided in this Agreement, payment in respect of such exercise shall have been received by the Warrant Agent, and shares of Bank Common Stock thereunder shall have become issuable and such person shall have been deemed to have become a holder of record of such shares. If, at the date of surrender of such Warrant Certificate, the transfer books for the Bank Common Stock shall be closed, certificates for the shares of Bank Common Stock shall be issuable on the date on which such books shall next be open (whether before, on or after the Expiration Date) and, until such date, the Bank shall be under no duty to deliver any certificate for such shares of Bank Common Stock. No Warrant Holder shall, upon the exercise of Warrants, be entitled to any dividends if the record date with respect to payment of such dividends shall be a date prior to the date such shares of Bank Common Stock became issuable upon the exercise of such Warrants. SECTION 4.02 LOST WARRANTS. If any Warrant Certificate is lost, stolen, ------------- mutilated or destroyed, the Warrant Agent may, upon receipt of evidence satisfactory to the Bank and the Warrant Agent of such loss, theft, mutilation or destruction and on such terms as to indemnity or otherwise as the Bank and the Warrant Agent may in their discretion require (which shall, in the case of a mutilated Warrant Certificate, include the surrender thereof), issue a new Warrant Certificate of like denomination and tenor as the lost, stolen, mutilated or destroyed Certificate, and the Warrant Agent shall countersign and deliver such new Certificate. Applicants for such substitute Warrant Certificates shall also comply with such other reasonable regulations and pay any such reasonable charges as the Bank or the Warrant Agent may prescribe. In the event any Warrant Certificate is lost, stolen, mutilated or destroyed, and the owner thereof desires to exercise the Warrants evidenced thereby, the Bank may, in lieu of issuing a substitute Warrant Certificate, authorize the exercise thereof upon receipt of the above evidence and on such terms of indemnity as it may require. -10- SECTION 4.03 MAINTENANCE OF SUFFICIENT AND PROPER SHARES OF BANK COMMON ---------------------------------------------------------- STOCK; LISTING; CONTINUING REGISTRATION. - --------------------------------------- (a) The Bank shall at all times reserve and keep available a number of authorized shares of Bank Common Stock (and any other securities that may become issuable upon the exercise of Warrants) sufficient to permit the exercise in full of all outstanding Warrants and will cause to be available to the Warrant Agent a sufficient number of certificates therefor. The transfer agent for the Bank Common Stock is hereby irrevocably authorized and directed at all times to reserve such number of authorized shares of Bank Common Stock (or other securities) for such purpose. The Warrant Agent is hereby irrevocably authorized to requisition from time to time from such transfer agent certificates for shares of Bank Common Stock issuable upon exercise of outstanding Warrants and the Bank shall supply such transfer agent with duly executed certificates for such purpose. (b) The Bank covenants and agrees that it will use its best efforts to secure the listing of shares of Bank Common Stock issuable upon the exercise of the Warrants upon any and all securities exchanges on which the Bank Common Stock shall be listed at the dates of exercise of such Warrants. (c) So long as any unexpired Warrants remain outstanding and to the extent required in order to comply with the applicable regulations of the Office of Thrift Supervision (the "OTS Rules"), the Bank covenants and agrees to file such --------- post-effective amendments to the offering circular filed with respect to the Warrants under cover of Form OC pursuant to the OTS Rules (OTS No. 3088), or such other offering circulars, post-effective amendments or supplements, as may be necessary to permit the Bank to offer and sell in accordance with the OTS Rules shares of Bank Common Stock upon the exercise of Warrants pursuant to this Agreement. The Bank further covenants and agrees that, so long as any unexpired Warrants remain outstanding, it shall exercise its reasonable diligence to obtain and keep effective any other permits, consents and approvals of other governmental authorities, and to qualify the shares of Bank Common Stock issuable upon the exercise of Warrants, and maintain such qualification, under the securities laws of such of the States of the United States, as may be necessary to permit the offer and sale of shares of Bank Common Stock upon the exercise of Warrants pursuant to this Agreement. The Bank shall not be required to issue any shares of Bank Common Stock pursuant to the exercise of Warrants for any period during which the Bank is endeavoring to obtain such continuing registration, permits, consents, approvals or qualifications. SECTION 4.04 FRACTIONAL SHARES AND WARRANTS. ------------------------------ -11- (a) Anything contained herein to the contrary notwithstanding, the Bank shall not be required to issue any fraction of a share of Bank Common Stock in connection with the exercise of Warrants. Warrants may not be exercised in such number as would result (except for the provisions of this Section) in the issuance of a fraction of a share of Bank Common Stock unless the Warrant Holder is presenting for exercise Warrant Certificates representing all Warrants then owned of record by such Warrant Holder. In such event, the Bank shall, upon the exercise of all of such Warrants, issue to such Warrant Holder the aggregate number of shares of Bank Common Stock called for thereby, rounded to the nearest whole number of shares. (b) Anything herein to the contrary notwithstanding, the Bank shall not be required to issue fractions of Warrants on any distribution of Warrants to Warrant Holders or to distribute Warrant Certificates that evidence fractional Warrants. In such event, the Bank shall issue to such Warrant Holders the aggregate number of Warrants to which such Warrant Holders are entitled, in each case rounded to the nearest whole Warrant. SECTION 4.05 TRANSFER AND EXCHANGE OF WARRANTS. The Warrant Certificates --------------------------------- shall be issued in registered form only. The Bank shall cause to be kept at the office of the Warrant Agent a register in which, subject to such reasonable regulations as the Warrant Agent may prescribe, the Bank shall provide for the registration of Warrant Certificates and of transfers or exchanges of Warrant Certificates as herein provided. At the option of the Warrant Holder, Warrant Certificates may be exchanged at such office, and upon payment of the charges hereinafter provided. Whenever any Warrant Certificates are so surrendered for exchange, the Bank shall execute, and the Warrant Agent shall countersign and deliver, the Warrant Certificates that the Warrant Holder making the exchange is entitled to receive. All Warrant Certificates issued upon any registration of transfer or exchange of Warrant Certificates shall be the valid obligations of the Bank, evidencing the same obligations, and entitled to the same benefits under this Agreement, as the Warrant Certificates surrendered for such registration of transfer or exchange. Every Warrant Certificate surrendered for registration of transfer or exchange shall (if so required by the Bank or the Warrant Agent) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Bank and the Warrant Agent, duly executed by the Warrant Holder thereof by a duly appointed legal representative or by a duly authorized -12- attorney (and with any signatures guaranteed as may be required pursuant to the Warrant Certificate). No service charge shall be made by the Warrant Agent for any registration of transfer or exchange of Warrant Certificates. The Bank may require payment of a sum sufficient to cover certain taxes or other governmental charges as provided in Section 6.03. ------------ Any Warrant Certificate when duly endorsed in blank shall be deemed negotiable and when a Warrant Certificate shall have been so endorsed, the holder thereof may be treated by the Bank, the Warrant Agent and all other persons dealing therewith as the absolute owner thereof for any purpose and as the person entitled to exercise the rights represented thereby, or to the transfer thereof on the register of the Bank maintained by the Warrant Agent, any notice to the contrary notwithstanding; but until such transfer on such register, the Bank and the Warrant Agent may treat the Warrant Holder thereof as the owner for all purposes. ARTICLE V WARRANT AGENT SECTION 5.01 NATURE OF DUTIES AND RESPONSIBILITIES ASSUMED. The Bank hereby --------------------------------------------- appoints the Warrant Agent to act as agent of the Bank as set forth in this Agreement. The Warrant Agent hereby accepts the appointment as agent of the Bank and agrees to perform that agency upon the terms and conditions herein set forth, by all of which the Bank and the Warrant Holders, by their acceptance of the Warrants, shall be bound. Whenever in the performance of its duties under this Agreement, the Warrant Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Bank prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by the Chief Executive Officer, the President, any Vice President or the Secretary of the Bank and delivered to the Warrant Agent; and such certificate shall be full authorization to the Warrant Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. The Warrant Agent shall be liable hereunder only for its own negligence, bad faith or willful misconduct. The Warrant Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Warrant Certificates (except its countersignature on the Warrant -13- Certificates and such statements or recitals as describe the Warrant Agent or action taken or to be taken by it) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Bank only. The Warrant Agent shall not have any liability or responsibility in respect of the legality, validity or enforceability of this Agreement or the execution and delivery hereof (except the due execution hereof by the Warrant Agent) or in respect of the validity or execution of any Warrant Certificate (except its countersignature thereof); nor shall it be responsible or liable for any breach by the Bank of any covenant or condition contained in this Agreement or in any Warrant Certificate; nor shall it be responsible or liable for the making of any change in the number of shares of Bank Common Stock required under the provisions of Article III or responsible for the manner, method or amount of ----------- any such change or the ascertaining of the existence of any facts that would require any such adjustment or change; nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any shares of Bank Common Stock to be issued pursuant to this Agreement or any Warrant Certificate or as to whether any shares of Bank Common Stock will, when issued, be validly issued, fully paid and nonassessable. The Warrant Agent shall be under no obligation to institute any action, suit or legal proceeding or take any other action likely to involve expense unless the Bank or one or more Warrant Holders shall furnish the Warrant Agent with reasonable security and indemnity for any costs and expenses which may be incurred. All rights of action under this Agreement or under any of the Warrants may be enforced by the Warrant Agent without the possession of any of the Warrants or the production thereof at any trial or other proceeding relative thereto, and any such action, suit or proceeding instituted by the Warrant Agent shall be brought in its name as Warrant Agent, and any recovery of judgment shall be for the ratable benefit of the Warrant Holders, as their respective rights or interests may appear. The Warrant Agent shall promptly notify the Bank in writing of any claim made or action, suit or proceeding instituted against it arising out of or in connection with this Agreement. The Warrant Agent is hereby authorized and directed to accept written instructions with respect to the performance of its duties hereunder from the Chief Executive Officer, the President, any Vice President or the Secretary of the Bank, and to apply to any such officer for advice or instructions in connection with the Warrant Agent's duties, and it shall not be liable for any action taken or suffered to be taken or omitted by it in good faith in accordance with the instructions of any such officer. -14- The Warrant Agent will not be responsible or liable for any failure of the Bank to comply with any of the covenants contained in this Agreement or in the Warrant Certificates to be complied with by the Bank. The Warrant Agent will not incur any liability or responsibility to the Bank or to any Warrant Holder for any action taken, or any failure to take action, in reliance on any notice, resolution, waiver, consent, order, certificate, or other paper, document or instrument reasonably believed by the Warrant Agent to be genuine and to have been signed, sent or presented by the proper party or parties. The Warrant Agent may execute and exercise any of the rights and powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys, agents or employees, provided reasonable care has been exercised in the selection and in the continued employment of any such attorney, agent or employee. The Bank will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further acts, instruments and assurances as may reasonably be required by the Warrant Agent in order to enable it to carry out or perform its duties under this Agreement. The Warrant Agent will act hereunder solely as agent of the Bank in a ministerial capacity, and its duties will be determined solely by the provisions hereof. The Warrant Agent will not be liable for anything which it may do or refrain from doing in connection with this Agreement except for its own negligence, bad faith or willful misconduct. Anything in this Agreement to the contrary notwithstanding, in no event shall the Warrant Agent be liable for special, indirect or consequential loss or damage of any kind whatsoever (including but not limited to lost profits), even if the Warrant Agent has been advised of the likelihood of such loss or damage and regardless of the form of action. SECTION 5.02 RIGHT TO CONSULT COUNSEL. The Warrant Agent may at any time ------------------------ consult with legal counsel satisfactory to it (who may be legal counsel for the Bank), and the opinion of such counsel shall be full and complete authorization and protection to the Warrant Agent as to any action taken, suffered or omitted by it in good faith in accordance with such opinion; provided, however, that the -------- ------- Warrant Agent shall have exercised reasonable care in the selection of such counsel. SECTION 5.03 COMPENSATION AND REIMBURSEMENT. The Bank agrees to pay to the ------------------------------ Warrant Agent from time to time compensation for all services rendered by it hereunder as the Bank and the Warrant Agent may agree from time to time, and to reimburse the -15- Warrant Agent for reasonable expenses and disbursements incurred in connection with the execution and administration of this Agreement (including the reasonable compensation and the expenses of its counsel), and further agrees to indemnify the Warrant Agent for, and to hold it harmless against, any loss, liability or expense incurred without negligence, bad faith or willful misconduct on its part, arising out of or in connection with the acceptance and administration of this Agreement, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. SECTION 5.04 WARRANT AGENT MAY HOLD BANK SECURITIES. The Warrant Agent and -------------------------------------- any stockholder, director, officer or employee of the Warrant Agent may buy, sell or deal in any of the Warrants or other securities of the Bank or its affiliates or have a pecuniary interest in any transaction in which the Bank or its affiliates may be interested, or contract with or lend money to the Bank or its affiliates or otherwise act as fully and freely as though it were not the Warrant Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Bank or for any other legal entity. SECTION 5.05 CHANGE OF WARRANT AGENT. The Warrant Agent may resign and be ----------------------- discharged from its duties under this Agreement upon 60 days' prior notice in writing mailed, by registered or certified mail, to the Bank. The Bank may remove the Warrant Agent upon 60 days' prior notice in writing, mailed to the Warrant Agent by registered or certified mail. If the Warrant Agent shall resign or be removed or shall otherwise become incapable of acting, the Bank shall appoint a successor to the Warrant Agent (the "Successor Warrant Agent") and ----------------------- shall, within 30 days following such appointment, give notice thereof in writing to each Warrant Holder. If the Bank shall fail to make such appointment within a period of 30 days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Warrant Agent, then the Bank agrees to perform the duties of the Warrant Agent hereunder until the Successor Warrant Agent is appointed. After appointment, the Successor Warrant Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Warrant Agent without further act or deed; but the Warrant Agent shall deliver and transfer to the Successor Warrant Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Failure to give any notice provided for in this Section, however, or any defect therein shall not affect the legality or validity of the resignation or removal of the Warrant Agent or the appointment of the Successor Warrant Agent, as the case may be. -16- ARTICLE VI GENERAL SECTION 6.01 PURCHASE OF WARRANTS BY THE BANK. The Bank shall have the -------------------------------- right, except as limited by law or other agreement, to purchase or otherwise acquire Warrants at such times, in such manner and for such consideration as it may deem appropriate. SECTION 6.02 CANCELLED WARRANTS. The Warrant Agent shall cancel any Warrant ------------------ Certificate delivered to it for exercise, in whole or in part, or delivered to it for transfer, or for splitup, combination, exchange or substitution and shall deliver to the Bank, in a manner satisfactory to the Bank, such cancelled Warrant Certificates. SECTION 6.03 TAXES ON ISSUANCE OF SHARES OF BANK COMMON STOCK. The Bank shall ------------------------------------------------ from time to time promptly pay all documentary stamp taxes, if any, that may be imposed upon the Bank or the Warrant Agent with respect to the initial issuance of Warrants and of shares of Bank Common Stock upon the exercise of Warrants, provided, however, that the Bank shall not be required to pay any tax or taxes - -------- ------- that may be payable in respect of any transfer involved in the issue of any Warrant Certificates or any certificates for shares of Bank Common Stock in a name other than that of the Warrant Holder of the Warrant Certificate surrendered upon the exercise of Warrants, and the Bank shall not be required to issue or deliver such certificates unless and until the person or persons requesting issuance thereof shall have paid to the Bank the amount of such tax or shall have established to the satisfaction of the Bank that such tax has been paid. SECTION 6.04 DATES AND TIMES. If any date set forth in this Warrant Agreement --------------- shall fall on a day other than a full business day in New York City, said date shall be deemed to be the next full business day succeeding that date. All times shall be the legal time then in effect in New York City. SECTION 6.05 AMENDMENTS TO WARRANT AGREEMENT. The Bank and the Warrant Agent ------------------------------- may, jointly, without the consent or concurrence of the Warrant Holders, by supplemental agreement or otherwise, make any amendments, alterations, deletions or corrections in this Agreement that they deem necessary or desirable: (a) to cure any ambiguity or correct any defect, inconsistency, clerical omission or mistake, or manifest error contained herein; (b) to confer additional rights upon the Warrant Holders; or (c) in any other respect that is not -17- inconsistent with the provisions of the Warrants and which does not adversely affect the interests of the Warrant Holders hereunder. The Bank and the Warrant Agent also may supplement or amend the Warrant Agreement in any other respect without notice to any Warrant Holder but with the written consent of the holders of more than 50% in number of the Warrants then outstanding; provided, however, -------- ------- that no such supplement or amendment may (i) make any modification of the terms upon which the Warrants are exercisable or (ii) change the percentage of the holders of the Warrants who must consent to such amendment or supplement, without the consent of each Warrant Holder affected thereby. SECTION 6.06 BINDING AGREEMENTS. All of the covenants and provisions of this ------------------ Agreement by or for the benefit of the Bank or the Warrant Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. Nothing expressed in this Agreement and nothing that may be implied from any of the provisions hereof is intended, or shall be construed, to confer upon or give to any person or corporation, other than the Bank, the Warrant Agent and the Warrant Holders, any legal or equitable right, remedy or claim under or by reason of this Agreement or of any covenant, condition, stipulation, promise or agreement herein, and all covenants, conditions, stipulations, promises and agreements contained in this Agreement shall be for the sole and exclusive benefit of the Bank, the Warrant Agent, the Warrant Holders, and their respective successors and assigns. SECTION 6.07 COPIES OF AGREEMENT WITH WARRANT AGENT. A copy of this -------------------------------------- Agreement, as such may be amended from time to time, shall be available for inspection by any Warrant Holder at the office of the Warrant Agent, as designated in Section 6.08, during normal business hours. As a condition of such ------------ inspection, the Warrant Agent may require any such Warrant Holder to submit his or her Warrant Certificate for inspection. SECTION 6.08 NOTICES. Any communication, notice or demand to be given ------- hereunder shall be duly given if in writing and delivered, or sent by first class mail, certified or registered, postage prepaid and addressed as follows: (a) If to the Bank: Glendale Federal Bank, FSB 700 N. Brand Boulevard Glendale, California 91203 Attention: Secretary -18- (b) If to the Warrant Agent: Chemical Trust Company of California 300 South Grand Avenue, 2nd Floor Los Angeles, California 90071 Attention: Office Manager (c) If to a Warrant Holder, at such person's last known address as such shall appear on the registration books maintained by the Warrant Agent. Any party may change the address to which any communications, notice or demand shall be given by giving notice of such change in conformity with the provisions of this Section. SECTION 6.09 GOVERNING LAW. This Agreement and each Warrant issued hereunder ------------- shall be governed by and construed in accordance with the laws of the State of California, without giving effect to conflict of laws. SECTION 6.10 HEADINGS. The Article and Section headings herein are for -------- convenience only and are not part of this Agreement and shall not affect the interpretation thereof. SECTION 6.11 COUNTERPARTS. This Agreement may be executed in any number of ------------ counterparts, each of which so executed shall be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. -19- IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto as of the day and year first above written. GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK By: /s/ Richard A. Fink -------------------------------------------- Name: Richard A. Fink Title: Senior Executive Vice President and Chief Legal Officer Attest: /s/ James R. Eller, Jr. - ----------------------- Secretary CHEMICAL TRUST COMPANY OF CALIFORNIA As Warrant Agent By: /s/ Sharon Magidson -------------------------------------------- Name: Sharon Magidson Title: Vice President Attest: /s/ Michael Dzieciclowski - ------------------------- Assistant Vice President -20- EXHIBIT A [FORM OF FACE OF WARRANT CERTIFICATE] VOID AFTER 5:00 P.M., NEW YORK CITY TIME, ON AUGUST 21, 2000 NO. ____________ WARRANT(S) TO PURCHASE SHARES OF BANK COMMON STOCK GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK WARRANT TO PURCHASE BANK COMMON STOCK THIS WARRANT CERTIFICATE CERTIFIES that _____________________________________ ____________________________________, or registered assigns, is the registered holder of the number of warrants (the "Warrants") of Glendale Federal Bank, Federal Savings Bank (the "Bank") set forth above. Each Warrant entitles the registered holder thereof to purchase one fully paid and nonassessable share of the Common Stock, par value $1.00 per share (the "Bank Common Stock"), of the Bank at the exercise price (as may be adjusted as provided in the Warrant Agreement referred to on the reverse hereof, the "Exercise Price") of $12.00 per share, in lawful money of the United States of America. The Warrants expire at 5:00 p.m., New York City time, on August 21, 2000 (the "Expiration Date"). Subject to the terms and conditions set forth herein and in the Warrant Agreement, the Warrants evidenced hereby may be exercised upon surrender of this Warrant Certificate and payment of the aggregate Exercise Price at the office or agency of the Warrant Agent in Los Angeles, San Francisco or in the city of New York (each such office, a "Warrant Agent Office"), on any business day during the period commencing on the first day following the first anniversary of the completion of the Recapitalization referred to in the Warrant Agreement and ending at 5:00 p.m., New York City time, on the Expiration Date. The Exercise Price and the number of shares of Bank Common Stock purchasable upon exercise of the Warrants are subject to adjustment upon the occurrence of certain events as set forth in the Warrant Agreement. NO WARRANT MAY BE EXERCISED AFTER 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. AFTER SUCH TIME, THE WARRANTS WILL BECOME WHOLLY VOID AND OF NO VALUE. A - 2 REFERENCE HEREBY IS MADE TO THE FURTHER PROVISIONS OF THIS WARRANT CERTIFICATE SET FORTH ON THE REVERSE HEREOF. SUCH FURTHER PROVISIONS SHALL FOR ALL PURPOSES HAVE THE SAME EFFECT AS THOUGH FULLY SET FORTH AT THIS PLACE. This Warrant Certificate shall not be valid unless countersigned by the Warrant Agent. IN WITNESS WHEREOF, the Bank has caused this Warrant Certificate to be executed by its duly authorized officers, and the corporate seal hereunto affixed. Dated: GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK [Corporate Seal] By: __________________________ Attest: By: _________________________________ Countersigned: CHEMICAL TRUST COMPANY OF CALIFORNIA, as Warrant Agent By: _________________________________ A - 3 [FORM OF REVERSE OF WARRANT CERTIFICATE] GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK The Warrants evidenced by this Warrant Certificate is a part of a duly authorized issue of Warrants to purchase a maximum of up to approximately 10.85 million shares of Bank Common Stock issued pursuant to a Warrant Agreement, dated as of August 15, 1993 (the "Warrant Agreement"), duly executed and delivered by the Bank to Chemical Trust Company of California, as Warrant Agent (the "Warrant Agent"). The Warrant Agreement hereby is incorporated by reference in and made a part of this instrument and is hereby referred to for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Warrant Agent, the Bank and the holders (the words "holders" or "holder" meaning the registered holders or registered holder) of the Warrants. A copy of the Warrant Agreement may be inspected at the Warrant Agent Office in Los Angeles and is available upon written request addressed to the Bank. All terms used herein that are defined in the Warrant Agreement have the meanings assigned to them therein. Warrants may be exercised to purchase shares of Bank Common Stock on any business day during the period commencing on the first day following the first anniversary of the completion of the Recapitalization referred to in the Warrant Agreement and ending at 5:00 p.m., New York City time, on the Expiration Date, at the Exercise Price set forth on the face hereof, subject to adjustment as described in the Warrant Agreement. The holder of the Warrants evidenced by this Warrant Certificate may exercise such Warrants by surrendering the Warrant Certificate, with the form of election to purchase set forth hereon properly completed and executed, together with payment of the aggregate Exercise Price, in lawful money of the United States of America, and any applicable transfer taxes, at the Warrant Agent Office. In the event that less than all of the Warrants evidenced hereby are exercised, there shall be issued to the holder hereof, or such holder's assignee, a new Warrant Certificate evidencing Warrants not so exercised. No adjustment shall be made for any cash dividends on any shares of Bank Common Stock issuable upon exercise of the Warrants. After 5:00 p.m., New York City time, on the Expiration Date, unexercised Warrants shall become wholly void and of no value. The Bank shall not be required to issue fractions of shares of Bank Common Stock or any certificates that evidence fractional shares of Bank Common Stock. Except as provided in the Warrant Agreement, Warrants may not be exercised in such number as would A - 4 result in the issuance of a fraction of a share of Bank Common Stock. Warrant Certificates, when surrendered at the Warrant Agent Office by the registered holder thereof in person or by a legal representative or attorney duly authorized in writing, may be exchanged, in the manner and subject to the limitations provided in the Warrant Agreement, but without payment of any service charge, for another Warrant Certificate or Warrant Certificates of like tenor evidencing in the aggregate a like number of Warrants. Upon due presentment for registration of transfer of this Warrant Certificate at the Warrant Agent Office, a new Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like number of Warrants shall be issued to the transferee in exchange for this Warrant Certificate, subject to the limitations provided in the Warrant Agreement, without charge, except for any tax or other governmental charge imposed in connection therewith. The Bank and Warrant Agent may deem and treat the registered holder hereof as the absolute owner of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone) for the purpose of any exercise hereof and for all other purposes, and neither the Bank nor the Warrant Agent shall be affected by any notice to the contrary. A - 5 ELECTION TO EXERCISE (To be executed upon exercise of Warrants) The undersigned hereby irrevocably elects to exercise _________ Warrants to purchase shares of Bank Common Stock and herewith tenders in payment for such shares of Bank Common Stock $_________ in lawful money of the United States of America, in accordance with the terms hereof. The undersigned requests that a certificate representing the shares of Bank Common Stock be registered and delivered as follows: Name: ________________________________________ Address: ________________________________________ ________________________________________ Delivery Address: ________________________________________ (if different) ________________________________________ If such number of Warrants is less than the aggregate number of Warrants represented by this Warrant Certificate, the undersigned requests that a new Warrant Certificate representing the balance of such shares of Bank Common Stock be registered and delivered as follows: Name: ________________________________________ Address: ________________________________________ ________________________________________ Delivery Address: ________________________________________ (if different) ________________________________________ - -------------------------------- (Insert social security or other Signature: _____________________________ identifying number of holder) NOTE: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatsoever. If the certificate representing the shares of Bank Common Stock or any Warrant A - 6 Certificate representing Warrants not exercised is to be registered in a name other than that in which this Warrant Certificate is registered, the signature of the holder hereof must be guaranteed by an eligible guarantor institution pursuant to SEC Rule 17Ad-15. SIGNATURE GUARANTEED: _____________________________ A - 7 ASSIGNMENT (TO BE EXECUTED BY THE REGISTERED HOLDER IF SUCH HOLDER DESIRES TO TRANSFER THE WARRANT CERTIFICATE) FOR VALUE RECEIVED, the undersigned registered holder hereby sells, assigns and transfers unto ________________________________________________________________________________ ________________________________________________________________________________ (Please print name and address of assignee) this Warrant Certificate, together with all right, title and interest therein, and does irrevocably constitute and appoint ____________________________________ _________________________ attorney, to transfer the within Warrant Certificate on the books of the Warrant Agent, with full power of substitution. Dated: ___________________________ Signature: _________________________________ __________________________________ (Insert social security or other identifying number of assignee) NOTE: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatsoever and must be guaranteed by an eligible guarantor institution pursuant to SEC Rule 17Ad-15. SIGNATURE GUARANTEED: __________________________________ AMENDMENT NO. 1 TO WARRANT AGREEMENT THIS AMENDMENT NO. 1 TO WARRANT AGREEMENT (this "Amendment No. 1") dated as of July 24, 1997 is entered into by and among Glendale Federal Bank, Federal Savings Bank (the "Bank"), ChaseMellon Shareholder Services, LLC (as successor to Chemical Trust Company of California ("Chemical"), the "Warrant Agent"), and Golden State Bancorp Inc. ("Golden State") on the basis of the following facts: WHEREAS, the Bank and Chemical entered into that certain Warrant Agreement (the "Warrant Agreement") dated as of August 15, 1993 with respect to warrants (the "Seven-Year Warrants") to acquire common stock, par value $1.00 per share of the Bank (the "Bank Common Stock"); WHEREAS, pursuant to the terms of that certain Agreement and Plan of Reorganization (the "Reorganization Agreement") dated as of May 28, 1997 by and among the Bank, Golden State and Glendale Interim Federal Savings Bank, among other things, (i) Golden State will become the holding company for the Bank, and (ii) the Seven-Year Warrants will become exercisable, in accordance with their terms and without the necessity of any exchange by the holders thereof, solely to receive the number of shares of common stock, par value $1.00 per share of Golden State (the "Golden State Common Stock") that equals the number of shares of Bank Common Stock for which the Seven-Year Warrants were exercisable immediately prior to the effective time (the "Effective Time") of the reorganization transaction provided for in the Reorganization Agreement (the "Reorganization"); and WHEREAS, the parties hereto desire to amend the Warrant Agreement to reflect the transactions comprising the Reorganization and their effects. NOW THEREFORE, the parties hereto hereby agree as follows: 1. The term "Bank Common Stock" as used in the Warrant Agreement shall mean Golden State Common Stock instead of Bank Common Stock. 2. All references to the "Bank" or the "Company" in Articles III and IV of the Warrant Agreement shall be deemed to refer to Golden State instead of the Bank. 3. All references to the "Bank" in Sections 6.01 and 6.05 shall be deemed to refer to both the Bank and Golden State. 4. As provided in the Reorganization Agreement and pursuant to Section 3.01(e) of the Warrant Agreement, the Warrant Holders shall have the right to exercise their Warrants for the number of shares of Golden State Common Stock that such Warrant Holder would have been entitled to receive at the Effective Time if such Warrant Holder had exercised their Warrants immediately prior thereto. 1 5. Golden State shall cause the Warrant Agent to deliver the notice required by Section 3.01(e) regarding this Amendment No. 1 to each Warrant Holder. 6. Section 6.08 shall be amended in its entirety as follows: "Section 6.08 Notices. Any communication, notice or demand to be given ------- hereunder shall be duly given if in writing and delivered, or sent by first class mail, certified or registered, postage prepaid and addressed as follows: (a) If to the Bank or Golden State: 414 N. Central Avenue Glendale, California 91203 Attn: Corporate Secretary If to the Warrant Agent: (b) ChaseMellon Shareholder Services, LLC 400 South Hope Street 4th Floor Los Angeles, California 90071 Attn: Office Manager (c) If to a Warrant Holder, at such person's last known address as such address shall appear on the registration books maintained by the Warrant Agent. Any party may change the address to which any communication, notice or demand shall be given by giving notice of such change in conformity with the provisions of this Section." 7. This Amendment No. 1 shall be deemed effective as of the Effective Time. 8. Except as otherwise specifically provided herein, the Warrant Agreement shall remain unchanged. 2 IN WITNESS WHEREOF, this Amendment No. 1 has been duly executed by the parties hereto as of the day and year first above written. GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK By: /s/ John E. Haynes ---------------------------- Title: EVP/CFO ------------------------- CHASEMELLON SHAREHOLDER SERVICES, LLC By: /s/ Michael E. Dzieciolowski ---------------------------- Michael E. Dzieciolowski Title: Assistant Vice President ------------------------- GOLDEN STATE BANCORP INC. By: /s/ John E. Haynes ---------------------------- Title: CFO ------------------------- 3 EX-4.5 8 WARRANT AGREEMENT DATED AS OF MAY 4, 1998 EXHIBIT 4.5 ================================================================================ WARRANT AGREEMENT Dated as of May 4, 1998 between GOLDEN STATE BANCORP INC. and CHASEMELLON SHAREHOLDER SERVICES L.L.C. as the Warrant Agent --------------------------------------- Warrants for Common Stock of Golden State Bancorp Inc. --------------------------------------- ================================================================================ TABLE OF CONTENTS
Page ARTICLE 1. Defined Terms ............................. 1 SECTION 1.1 Definitions .................................................. 1 SECTION 1.2 Other Definitions ............................................ 4 SECTION 1.3 Rules of Construction ........................................ 5 ARTICLE 2. Warrant Certificates ......................... 5 SECTION 2.1 Issuance of Warrant Certificates ............................. 5 SECTION 2.2 Form and Dating .............................................. 6 SECTION 2.3 Execution and Countersignature ............................... 7 SECTION 2.4 Certificate Register ......................................... 7 SECTION 2.5 Transfer and Exchange ........................................ 7 SECTION 2.6 Replacement Certificates ..................................... 9 SECTION 2.7 Temporary Certificates ....................................... 10 SECTION 2.8 Cancellation ................................................. 10 SECTION 2.9 Purchase of Warrants by the Company .......................... 10 ARTICLE 3. Exercise Terms ........................... 10 SECTION 3.1 Number of Warrant Shares; Exercise Price ..................... 10 SECTION 3.2 Exercise Period .............................................. 10 SECTION 3.3 Expiration ................................................... 11 SECTION 3.4 Manner of Exercise ........................................... 12 SECTION 3.5 Issuance of Warrant Shares ................................... 12 SECTION 3.6 Fractional Warrant Shares .................................... 12 SECTION 3.7 Reservation of Warrant Shares ................................ 12 SECTION 3.8 Compliance with Law .......................................... 13 ARTICLE 4. Adjustments ............................. 14 SECTION 4.1 Reclassifications, Redesignations or Reorganizations of Common Stock ................................................. 14 SECTION 4.2 Combination .................................................. 14 SECTION 4.3 Exercise Price Adjustment .................................... 15 SECTION 4.4 Examples ..................................................... 15 SECTION 4.5 Other Events ................................................. 16
-i-
Page ---- SECTION 4.6 Notice of Certain Transactions ............................... 16 SECTION 4.7 Adjustment to Warrant Certificate ............................ 16 ARTICLE 5. Warrant Agent ............................ 17 Section 5.1 Nature of Duties and Responsibilities Assumed ................ 17 Section 5.2 Right to Consult Counsel ..................................... 18 Section 5.3 Compensation and Reimbursement ............................... 19 Section 5.4 Warrant Agent May Hold Company Securities .................... 19 Section 5.5 Change of Warrant Agent ...................................... 19 ARTICLE 6. Miscellaneous ............................ 20 SECTION 6.1 Information .................................................. 20 SECTION 6.2 Persons Benefitting........................................... 20 SECTION 6.3 Rights of Holders............................................. 20 SECTION 6.4 Amendment..................................................... 21 SECTION 6.5 Notices....................................................... 21 SECTION 6.6 Governing Law ................................................ 22 SECTION 6.7 Successors ................................................... 22 SECTION 6.8 Counterparts ................................................. 22 SECTION 6.9 Table of Contents ............................................ 22 SECTION 6.10 Severability ................................................ 22
EXHIBIT A - Form of Warrant Certificate EXHIBIT B - Form of Election to Purchase Warrant Shares EXHIBIT C - Certificate for Exchange of Global Warrant Certificate -ii- WARRANT AGREEMENT, dated as of May 4, 1998 (this "Agreement"), between GOLDEN STATE BANCORP INC., a Delaware corporation (the "Company"), and CHASEMELLON SHAREHOLDER SERVICES L.L.C., a New York limited liability Company, as Warrant Agent (in such capacity, the "Warrant Agent"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Board of Directors of the Company has authorized a distribution (the "Distribution") of one Litigation Tracking Warrant(TM) (a "Warrant") for each share of the Company's common stock, par value $1.00 per share ("Common Stock"), outstanding as of the Close of Business (as defined below) on May 7, 1998 (the "Record Date"), each Warrant representing the right to purchase shares or a portion of a share of Common Stock (subject to adjustment as provided herein), upon the terms and subject to the conditions herein set forth; and WHEREAS, in order to issue Warrants in the Distribution and to issue Warrants to holders of outstanding Convertible Securities (as defined herein) who exercise or convert such Convertible Securities at any time and from time to time prior to the occurrence of the Triggering Event (as defined herein), the Company has determined to enter into this Agreement with the Warrant Agent. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties hereto hereby agree as follows: ARTICLE 1. Defined Terms ------------- SECTION 1.1 Definitions. As used in this Agreement, the following terms ----------- shall have the following meanings: "Adjusted Litigation Recovery" means an amount equal to 85% of the amount obtained from the following equation: (a) the Payment, minus (b) the sum of the following: (i) the aggregate of all expenses incurred by or on behalf of the Bank in prosecuting the Litigation and obtaining the Payment (whether incurred prior to or after the date hereof), including, without limitation, that portion of fees and expenses incurred pursuant to the Management Agreement attributable to the Litigation, (ii) the aggregate of all expenses incurred by the Company in connection with the creation, issuance and trading of the Warrants, including, without limitation, legal, financial advisory and accounting fees and the fees and expenses of the Warrant Agent (whether incurred prior to or after the date hereof) and (iii) an amount equal to the Payment, less the expenses described in the preceding clauses (i) and (ii), multiplied by the highest, combined statutory rate of federal, state and local 2 income taxes applicable to the Company during the tax year in which the full Payment is received. "Adjusted Market Value" means the average of the daily Closing Prices of a share of Common Stock for the thirty consecutive Trading Days ending on and including the Determination Date, minus $1.00; provided, that if the context in -------- which this defined term is used is with respect to securities other than shares of Common Stock, then "Adjusted Market Value" means the average of the daily Closing Prices of a unit of such securities for the thirty consecutive Trading Days ending on and including the Determination Date, minus $1.00, and provided, -------- further that if the context in which this defined term is used is with respect - ------- to property other than securities, then "Adjusted Market Value" means the Fair Market Value of the amount of such property distributable in respect of one share of Common Stock. "Bank" means Glendale Federal Bank, Federal Savings Bank, a federally chartered stock savings bank or any successor thereto. "Board" means the Board of Directors of the Company or any committee thereof duly authorized to act on behalf of such Board of Directors. "Business Day" a day other than a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to close. "Close of Business" on any given date shall mean 5:00 P.M., New York City time, on such date; provided, however, that if such date is not a Business Day -------- ------- it shall mean 5:00 P.M., New York City time, on the next succeeding Business Day. "Closing Price" on any day shall mean the closing sale price regular way (with any relevant due bills attached) of a share of Common Stock on such day, or in case no such sale takes place on such day, the average of the reported closing bid and asked prices regular way (with any relevant due bills attached) of a share of Common Stock, in each case on the New York Stock Exchange Consolidated Tape (or any successor composite tape reporting transactions on national securities exchanges), or, if the Common Stock is not listed or admitted to trading on the NYSE, on the principal national securities exchange on which the Common Stock is listed or admitted to trading (which shall be the national securities exchange on which the greatest number of shares of Common Stock has been traded during the five consecutive Trading Dates ending on and including the Determination Date), or, if not listed or admitted to trading on any national securities exchange, the average of the closing bid and asked prices regular way (with any relevant due bills attached) of a share of Common Stock on the over-the-counter market on the day in question as reported by Nasdaq, or a similar generally accepted reporting service, or if not so available as determined in good faith by the Board of Directors of the Company, on the basis of such relevant factors as it in good faith considers appropriate. "Combination" means an event in which the Company consolidates with, merges with or into, or sells all or substantially all its property and assets to another Person. 3 "Determination Date" means the 30th calendar day prior to the date on which the Bank receives the total amount of the Payment. If the Payment is payable by the United States Government in installments, the Determination Date will be the 30th calendar day prior to the date on which the Bank receives the last installment of the Payment. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Fair Market Value" means the fair market value of the relevant property on the Determination Date as determined in good faith by the Board of Directors of the Company, on the basis of such factors as it in good faith considers appropriate. "Holder" means the duly registered holder of a Warrant under the terms of this Agreement. "Litigation" means the Bank's case against the United States Government in the United States Court of Federal Claims entitled Glendale Federal Bank F.S.B.v. United States, No. 90-772C, filed on August 15, 1990. "Management Agreement" means the Litigation Management Agreement, dated as of February 4, 1998, by and among the Company, the Bank and the other persons signatories thereto. "Maximum Number of Warrants" has the meaning ascribed to it in Section 2.1(c). "Nasdaq" means the stock market operated by the National Association of Securities Dealers, Inc. "NYSE" means the stock exchange operated by New York Stock Exchange, Inc. "Officer" means the Chairman, the Vice Chairman, the Chief Executive Officer, the President, the Chief Financial Officer, the Secretary or any Vice President of the Company. "Payment" means the aggregate amount of any cash payment and the Fair Market Value of any property or assets actually received by the Bank pursuant to a final, nonappealable judgment in or final settlement of the Litigation (including any post-judgment interest actually received by the Bank on any payment). "Person" means any individual, corporation, partnership, joint venture, limited liability company, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "SEC" means the Securities and Exchange Commission. 4 "Securities Act" means the Securities Act of 1933. "Trading Date" means a date on which the NYSE or Nasdaq (or any successor thereto) is open for the transaction of business. "Triggering Event" means the occurrence of all of the following events: (a) receipt by the Bank of the Payment in full, (b) determination by the Bank of the amount of the Adjusted Litigation Recovery and (c) receipt of all regulatory approvals necessary to issue the shares of Common Stock to be issued upon the exercise of the Warrants, including without limitation, the effectiveness of a registration statement relating to the issuance of the Warrant Shares under the Securities Act. "Warrant Shares" means the shares of Common Stock of the Company issued and received upon exercise of the Warrants. SECTION 1.2 Other Definitions. -----------------
Defined in Term Section ---- ---------- "Agent Members".................................... 2.2(c) "Certificate Register"............................. 2.4 "Certificated Warrants"............................ 2.2(a) "Convertible Securities"........................... 2.1(b) "Common Stock"..................................... Recitals "Company".......................................... Recitals "Distribution"..................................... Recitals "DTC".............................................. 2.2(b) "Exercise Notice: ................................. 3.2 "Exercise Price"................................... 3.1 "Five-Year Warrants"............................... 2.1(b) "Global Warrant"................................... 2.2(b) "Number of Shortfall Shares"....................... 3.7(b) "Preferred Stock".................................. 2.1(b) "Record Date"...................................... Recitals "Registrar"........................................ 3.7(a) "Seven-Year Warrants".............................. 2.1(b) "Stock Options".................................... 2.1(b) "Successor Company"................................ 4.2(d) "Termination Date"................................. 3.3(a) "Termination Notice"............................... 3.3(a) "Transfer Agent"................................... 3.5 "Warrant".......................................... Recitals "Warrant Agent".................................... Recitals "Warrant Certificate".............................. 2.1 "Warrant Exercise Period".......................... 3.2(b)
5 SECTION 1.3 Rules of Construction. Unless the text otherwise requires --------------------- (i) a term has the meaning assigned to it herein; (ii) an accounting term not otherwise defined has the meaning assigned to it in accordance with U.S. generally accepted accounting principles as in effect from time to time; (iii) "or" is not exclusive; (iv) "including" means including, without limitation; and (v) words in the singular include the plural and words in the plural include the singular. ARTICLE 2. Warrant Certificates -------------------- SECTION 2.1 Issuance of Warrant Certificates. (a) As soon as practicable -------------------------------- after the Record Date, the Company will prepare and execute, the Warrant Agent will countersign, and the Company will send or cause to be sent (and the Warrant Agent will, if requested, send) by first-class, insured, postage-prepaid mail, to each record holder of Common Stock as of the Close of Business on the Record Date, at the address of such holder shown on the records of the Company, one or more Warrant Certificates, in substantially the form of Exhibit A hereto (a "Warrant Certificate"), evidencing one Warrant (subject to adjustment as provided herein) for each share of Common Stock so held. (b ) At any time and from time to time prior to the occurrence of the Triggering Event, the Company may cause the Warrant Agent to issue, in accordance with the provisions of this Article 2, Warrants to holders of (i) shares of the Company's Noncumulative Convertible Preferred Stock, Series A (the "Preferred Stock"); (ii) common stock purchase warrants (the "Five-Year Warrants") issued under the Warrant Agreement, dated February 23, 1993 (as amended, supplemented or otherwise modified from time to time), by and between the Company and ChaseMellon Shareholder Services L.L.C. (as successor to Chemical Trust Company of California), as Warrant Agent; (iii) common stock purchase warrants (the "Seven-Year Warrants") issued under the Warrant Agreement, dated August 15, 1993 (as amended, supplemented or otherwise modified from time to time), by and between the Company and ChaseMellon Shareholder Services L.L.C. (as successor to Chemical Trust Company of California), as Warrant Agent; and (iv) stock options of the Company and its subsidiaries (the "Stock Options", and together with the Preferred Stock, the Five-Year Warrants, the Seven-Year Warrants and the Stock Options, the "Convertible Securities") that were outstanding on the Record Date, who exercise or convert such Convertible Securities into shares of Common Stock and Warrants in accordance with the terms and conditions of such Convertible Securities. 6 (c) The maximum number of Warrants (the "Maximum Number of Warrants") that may be issued hereunder is equal to (i) the number of shares of Common Stock outstanding on the Record Date plus (ii) the number of Warrants that holders of Convertible Securities would be entitled to receive upon the conversion or exercise of such Convertible Securities on the Record Date in accordance with the terms and conditions thereof. On the date of this Agreement, the maximum number of Warrants that may be issued hereunder is approximately 85,759,465. The Company will not issue any Warrants or securities substantially similar to the Warrants other than in accordance with this Section 2.1. SECTION 2.2 Form and Dating. The Warrant Certificates shall be --------------- substantially in the form of Exhibit A, which is hereby incorporated in and expressly made a part of this Agreement. The Warrants may have such notations, legends or endorsements as the Company may deem appropriate and as are not inconsistent with the provisions hereof, or as may be required by law, stock exchange or stock market rule, agreements to which the Company is subject, if any, or usage (provided that any such notation, legend or endorsement is in a form acceptable to the Company). Each Warrant shall be dated the date of its countersignature. (a) Certificated Warrants. The Warrants may be issued in definitive form --------------------- represented by a physical Warrant Certificate (such certificate and all other certificates representing physical delivery of Warrants in definitive form being called "Certificated Warrants"). (b) Global Warrant. The Warrants may be issued in the form of one or more -------------- fully registered global certificates with the global securities legend set forth in Exhibit A hereto (the "Global Warrant"), which shall be deposited on behalf of beneficial owners of Warrants with the Warrant Agent, as custodian for the Depository Trust Corporation ("DTC") (or with such other custodian as DTC may direct), and registered in the name of DTC or a nominee of DTC, duly executed by the Company and countersigned by the Warrant Agent as hereinafter provided. The number of Warrants represented by Global Warrants may from time to time be increased or decreased by adjustments made on the records of the Warrant Agent and DTC or its nominee as hereinafter provided. Except as provided in Section 2.5, owners of beneficial interests in a Global Warrant will not be entitled to receive physical delivery of Certificated Warrants. (c) Book-Entry Provisions. Members of, or participants in, DTC ("Agent --------------------- Members") shall have no rights under this Agreement with respect to any Global Warrant held on their behalf by DTC or by the Warrant Agent as the custodian of DTC or under such Global Warrant, and DTC may be treated by the Company, the Warrant Agent and any agent of the Company or the Warrant Agent as the absolute owner of such Global Warrant for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Warrant Agent or any agent of the Company or the Warrant Agent from giving effect to any written certification, proxy or other authorization furnished by DTC or impair, as between DTC and its Agent Members, the operation of customary practices of DTC governing the exercise of the rights of a holder of a beneficial interest in any Global Warrant. 7 SECTION 2.3 Execution and Countersignature. (a) With respect to any ------------------------------ Global Warrant to be issued hereunder, one Officer shall sign, and the Company's Secretary or any of its Assistant Secretaries shall attest, such Global Warrant. The Warrant Agent, upon the written order of the Company signed by an Officer, shall countersign any Global Warrant certificate by manual or facsimile signature, and such Global Warrant shall be deposited in accordance with Section 2.2(b) hereof. (b) With respect to all other Warrants, an Officer shall sign, and the Company's Secretary or any of its Assistant Secretaries shall attest, the Warrant Certificates for the Company by manual or facsimile signature. The Warrant Agent shall countersign and deliver the Warrant Certificates for original issue, in each case upon a written order of the Company signed by an Officer of the Company. Such order shall specify (in addition to the number of Warrants) the date on which the original issue of Warrants is to be countersigned. (c) If an Officer whose signature is on a Warrant Certificate no longer holds that office at the time the Warrant Agent countersigns the Warrant Certificate, the Warrant shall be valid nevertheless. A Warrant shall not be valid until an authorized signatory of the Warrant Agent manually countersigns the Warrant Certificate. The signature shall be conclusive evidence that the Warrant Certificate has been countersigned under this Agreement. (d) The Warrant Agent may appoint an agent reasonably acceptable to the Company to countersign the Warrant Certificates. Unless limited by the terms of such appointment, such agent may countersign Warrant Certificates whenever the Warrant Agent may do so. Each reference in this Agreement to countersignature by the Warrant Agent includes by such agent. Such agent will have the same rights as the Warrant Agent for service of notices and demands. SECTION 2.4 Certificate Register. The Warrant Agent shall keep a register -------------------- (the "Certificate Register") of the Warrant Certificates and of their transfer and exchange. The Certificate Register shall show the names and addresses of the respective Holders and the date and number of Warrants evidenced on the face of each of the Warrant Certificates. The Company and the Warrant Agent may deem and treat the Person in whose name a Warrant Certificate is registered as the absolute owner of such Warrant Certificate for all purposes whatsoever and neither the Company nor the Warrant Agent shall be affected by notice to the contrary. SECTION 2.5 Transfer and Exchange. (a) Transfer and Exchange of --------------------- Certificated Warrants. When Certificated Warrants are presented to the Warrant Agent with a request to register the transfer of such Certificated Warrants or to exchange such Certificated Warrants for an equal number of Certificated Warrants of other authorized denominations, the Warrant Agent shall register the transfer or make the exchange as requested if its reasonable requirements for such transaction are met; provided, however, that -------- ------- 8 the Certificated Warrants surrendered for transfer or exchange shall be duly endorsed or accompanied by a written instrument of transfer in form reasonably satisfactory to the Company and the Warrant Agent, duly executed by the Holder thereof or its attorney duly authorized in writing. (b) Restrictions on Transfer of Certificated Warrants for a Beneficial Interest in a Global Warrant. Certificated Warrants may not be exchanged for a beneficial interest in a Global Warrant except upon satisfaction of the requirements set forth below. Upon receipt by the Warrant Agent of Certificated Warrants, duly endorsed or accompanied by appropriate instruments of transfer, in form satisfactory to the Warrant Agent, together with written instructions directing the Warrant Agent to make, or to direct DTC to make, an adjustment on its books and records with respect to such Global Warrants to reflect an increase in the number of Warrants represented by the Global Warrant, then the Warrant Agent shall cancel such Certificated Warrants and cause, or direct DTC to cause, in accordance with the standing instructions and procedures existing between DTC and the Warrant Agent, the number of Warrants represented by the Global Warrant to be increased accordingly. (c) Transfer and Exchange of Global Warrants. The transfer and exchange of beneficial interests in a Global Warrant shall be effected through DTC, in accordance with this Agreement and the procedures of DTC therefor. (d) Restrictions on Transfer and Exchange of the Global Warrant. Notwithstanding any other provisions of this Agreement, Global Warrants may not be transferred as a whole except by DTC to a nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC or by DTC or any such nominee to a successor depositary or a nominee of such successor depositary. (e) Authentication and Distribution of Certificated Warrants. If at any time: (i) DTC notifies the Company that DTC is unwilling or unable to continue as depositary for Global Warrants and a successor depositary for Global Warrants is not appointed by the Company within 90 calendar days after delivery of such notice; (ii) DTC ceases to be a clearing agency registered under the Exchange Act; or (iii) the Company, in its sole discretion, notifies the Warrant Agent in writing that it elects to cause the issuance of Certificated Warrants under this Agreement; then, the Company will execute, and the Warrant Agent, upon receipt of a written order of the Company signed by an Officer requesting the delivery of Certificated Warrants to the holders of beneficial interests in the Global Warrant, will countersign and deliver Certificated Warrants equal to the number of Warrants represented by Global Warrants, in exchange for such Global Warrants. Certificated Warrants issued in exchange for a beneficial interest in a Global Warrant shall be registered in such names and in such authorized denominations as 9 DTC, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Warrant Agent. The Warrant Agent shall deliver such Certificated Warrants to the Persons in whose names such Warrants are so registered in accordance with the instructions of DTC. (f) Cancellation or Adjustment of Global Warrants. At such time as all beneficial interests in Global Warrants have either been exchanged for Certificated Warrants, redeemed, repurchased or canceled, such Global Warrant shall be returned to DTC for cancellation or retained and canceled by the Warrant Agent. At any time prior to such cancellation, if any beneficial interest in a Global Warrant is exchanged for Certificated Warrants, redeemed, repurchased or canceled, the number of Warrants represented by such Global Warrant shall be reduced and an adjustment shall be made on the books and records of the Warrant Agent with respect to such Global Warrant, by the Warrant Agent or DTC, to reflect such reduction. (g) Obligations with Respect to Transfers and Exchanges of Warrants. (i) To permit registrations of transfers and exchanges, the Company shall execute and the Warrant Agent shall countersign Certificated Warrants and Global Warrants as required pursuant to the provisions of this Section 2.5. (ii) All Certificated Warrants and Global Warrants issued upon any registration of transfer or exchange of Certificated Warrants shall be the valid obligations of the Company, entitled to the same benefits under this Agreement as the Certificated Warrants or Global Warrants surrendered upon such registration of transfer or exchange. (iii) Prior to due presentment for registration of transfer of any Warrant, the Warrant Agent and the Company may deem and treat the Person in whose name any Warrant is registered as the absolute owner of such Warrant and neither the Warrant Agent nor the Company shall be affected by notice to the contrary. (iv) No service charge shall be made to a Holder for any registration of transfer or exchange upon surrender of any Warrant Certificate at the office of the Warrant Agent maintained for that purpose. The Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Warrant Certificates. SECTION 2.6 Replacement Certificates. If a mutilated Warrant Certificate ------------------------ is surrendered to the Warrant Agent or if the Holder of a Warrant Certificate claims that the Warrant Certificate has been lost, destroyed or wrongfully taken, the Company shall issue and the Warrant Agent shall countersign a replacement Warrant Certificate if the reasonable requirements of the Warrant Agent and of Section 8-405 of the Uniform Commercial Code as in effect in the State of California are met. If required by the Warrant Agent or the Company, such Holder shall furnish an indemnity bond or other instrument sufficient in the judgment of the Company and the Warrant Agent to protect the Company and the Warrant Agent from any loss which either of them may suffer if a Warrant Certificate is replaced. The Company and the Warrant Agent may charge the Holder for their expenses in replacing a 10 Warrant Certificate. Every replacement Warrant Certificate is an additional obligation of the Company. SECTION 2.7 Temporary Certificates. Until definitive Warrant Certificates ---------------------- are ready for delivery, the Company may prepare and the Warrant Agent shall countersign temporary Warrant Certificates. Temporary Warrant Certificates shall be substantially in the form of definitive Warrant Certificates but may have variations that the Company considers appropriate for temporary Warrant Certificates. Without unreasonable delay, the Company shall prepare and the Warrant Agent shall countersign definitive Warrant Certificates and deliver them in exchange for temporary Warrant Certificates. SECTION 2.8 Cancellation. (a) In the event the Company shall purchase or ------------ otherwise acquire Certificated Warrants, the same shall thereupon be delivered to the Warrant Agent for cancellation. (b) The Warrant Agent and no one else shall cancel and destroy all Warrant Certificates surrendered for transfer, exchange, replacement, exercise or cancellation and deliver a certificate of such destruction to the Company unless the Company directs the Warrant Agent to deliver canceled Warrant Certificates to the Company. The Company may not issue new Warrant Certificates to replace Warrant Certificates to the extent they evidence Warrants which have been exercised or Warrants which the Company has purchased or otherwise acquired. SECTION 2.9 Purchase of Warrants by the Company. The Company shall have ----------------------------------- the right, except as limited by law or other agreement, to purchase or otherwise acquire Warrants at such times, in such manner and for such consideration as it may deem appropriate. ARTICLE 3. Exercise Terms -------------- SECTION 3.1 Number of Warrant Shares; Exercise Price. Each Warrant shall, ---------------------------------------- upon exercise thereof as provided herein, initially entitle the registered Holder thereof to purchase the number of shares of Common Stock having an Adjusted Market Value equal to the Adjusted Litigation Recovery divided by the Maximum Number of Warrants at an exercise price per Warrant equal to the number of shares of Common Stock for which the Warrant is exercisable multiplied by $1.00 (the "Exercise Price"). SECTION 3.2 Exercise Period. (a) The Company will provide notice, as --------------- described below (the "Exercise Notice"), of the occurrence of the Triggering Event not more than 15 calendar days after the occurrence thereof. If the Payment is payable by the United States Government in installments, the Triggering Event will not be deemed to have occurred until the Bank receives the last installment of the Payment. The Exercise Notice shall be dated the date it is first sent to Holders and shall be provided by means of a press release to 11 one or more national news services and by mailing such notice first class, postage prepaid, to each Holder at such Holder's address as it appears on the Certificate Register; provided, however, that neither the failure to give such -------- ------- notice by mail to any particular Holder nor any defect therein shall affect the validity of the Exercise Notice or the expiration of all Warrants on the Close of Business on the last day of the Warrant Exercise Period with respect to the other Holders: (i) that the Triggering Event has occurred, (ii) the aggregate number of shares for which the Warrants are exercisable, (iii) the number of shares of Common Stock for which one Warrant is exercisable, (iv) the Exercise Price per Warrant, (v) the manner in which the Warrants are exercisable, and (vi) the date on which the Warrants will no longer be exercisable. (b) Subject to the terms and conditions set forth herein, each Warrant shall be exercisable at any time or from time to time during the 60-day period commencing on the date on which the Exercise Notice is first sent to Holders pursuant to Section 3.2(a) (the "Warrant Exercise Period"). (c) No Warrant shall be exercisable after the Close of Business on the last day of the Warrant Exercise Period. SECTION 3.3 Expiration. (a) A Warrant shall terminate and become void as ---------- of the earlier of (i) the Close of Business on the last day of the Warrant Exercise Period, (ii) the Close of Business on the date the Litigation has been disposed of in a manner such that no shares of Common Stock or other securities or property will be issuable under the terms of the Warrants (the "Termination Date") or (iii) the time and date such Warrant is exercised. The Company will provide notice, as described below (the "Termination Notice"), of the occurrence of the Termination Date or the expiration of the Warrant Exercise Period not more than 60 calendar days after the occurrence thereof. The Termination Notice shall be dated the date it is first sent to Holders and shall be provided by means of a press release to one or more national news services and by mailing such notice first class, postage prepaid, to each Holder at such Holder's address as it appears on the Certificate Register. The Termination Notice shall state the following: (i) that the Termination Date has occurred or the Warrant Exercise Period has expired, as the case may be, and (ii) that all outstanding Warrants have terminated and become void. 12 The Warrants shall terminate and become void as provided herein notwithstanding the Company's failure to give the Termination Notice. SECTION 3.4 Manner of Exercise. Warrants may be exercised upon (i) ------------------ surrender to the Warrant Agent of the Warrant Certificates, together with the form of election to purchase Common Stock on the reverse thereof properly completed and validly executed by the Holder thereof and (ii) payment to the Warrant Agent, for the account of the Company, of the Exercise Price. Such payment shall be made by certified or official bank check or personal check payable to the order of the Company. Subject to Section 3.2, the Warrants shall be exercisable at the election of the Holders thereof either in full at any time or from time to time in part and in the event that a Warrant Certificate is surrendered for exercise in respect of less than all the Warrant Shares purchasable on such exercise at any time prior to the Expiration Date a new Warrant Certificate exercisable for the remaining Warrant Shares will be issued. The Warrant Agent shall countersign and deliver the required new Warrant Certificates, and the Company, at the Warrant Agent's request, shall supply the Warrant Agent with Warrant Certificates duly signed on behalf of the Company for such purpose. The Warrant Agent shall account promptly to the Company with respect to all Warrants exercised and concurrently pay to the Company all moneys received by the Warrant Agent for the purchase of shares of Common Stock through the exercise of such Warrants. SECTION 3.5 Issuance of Warrant Shares. Subject to Section 3.6, upon the -------------------------- surrender of Warrant Certificates and payment of the Exercise Price, as set forth in Section 3.4, the Company shall issue and cause the Warrant Agent or, if appointed, a transfer agent for the Common Stock ("Transfer Agent") to countersign and deliver to or upon the written order of the Holder and in such name or names as the Holder may designate, a certificate or certificates for the number of full Warrant Shares so purchased upon the exercise of such Warrants or such other securities or property to which it is entitled, to the Person or Persons entitled to receive the same, together with cash as provided in Section 3.6 in respect of any fractional Warrant Shares otherwise issuable upon such exercise. Such certificate or certificates shall be deemed to have been issued and any Person so designated to be named therein shall be deemed to have become a holder of record of such Warrant Shares as of the date of the surrender of such Warrant Certificates and payment of the Exercise Price. SECTION 3.6 Fractional Warrant Shares. The Company shall not be required ------------------------- to issue fractional Warrant Shares on the exercise of Warrants. If more than one Warrant shall be exercised in full at the same time by the same Holder, the number of full Warrant Shares which shall be issuable upon such exercise shall be computed on the basis of the aggregate number of Warrant Shares purchasable pursuant thereto. If any fraction of a Warrant Share would, except for the provisions of this Section 3.6, be issuable on the exercise of any Warrant (or specified portion thereof), the Company shall pay an amount in cash equal to the sum of (i) the Adjusted Market Value for one Warrant Share and (ii) $1.00, multiplied by such fraction, rounded upwards or downwards, as the case may be, to the nearest whole cent. SECTION 3.7 Reservation of Warrant Shares. (a) The Company shall use its ----------------------------- best efforts to at all times keep reserved out of its authorized and unissued shares of Common 13 Stock or shares of Common Stock held in its treasury a number of shares of Common Stock sufficient to provide for the exercise in full of all Warrants then outstanding or reserved for issuance pursuant to Section 2.1. The registrar for the Common Stock (the "Registrar") shall at all times until the Termination Date, or the time at which all Warrants have been exercised or cancelled, reserve such number of authorized shares as shall be required for such purpose. The Company will keep a copy of this Agreement on file with the Registrar. The Company will supply such Registrar with duly executed stock certificates for such purpose and will itself provide or otherwise make available any cash which may be payable as provided in Section 3.6. The Company will furnish to such Registrar a copy of all notices of adjustments and certificates related thereto transmitted to each Holder. (b) If, upon the Triggering Event, the number of shares of Common Stock authorized but not issued plus the number of shares of Common Stock held in the Company's treasury is less than the number of shares of Common Stock necessary to permit the exercise in full of the Warrants then outstanding or reserved for issuance pursuant to Section 2.1 (the number of shares of Common Stock comprising such deficiency being the "Number of Shortfall Shares"), then the Company shall either (i) to the extent permitted by applicable law and any material agreements then in effect to which the Company is a party, commence a tender offer for the aggregate number of shares of Common Stock at least equal to the Number of Shortfall Shares or (ii) call a special meeting of the holders of Common Stock for the purpose of increasing the number of authorized shares of Common Stock in an amount at least equal to the Number of Shortfall Shares. In such an event, the Warrant Exercise Period shall be automatically extended to 60 calendar days after (a) the date on which the tender offer referred to in clause (i) above is successfully completed or (b) the effective date of the increase in the number of authorized shares of Common Stock referred to in clause (ii) above. (c) The Company covenants that all shares of Common Stock which may be issued upon exercise of Warrants will, upon issue, be fully paid, nonassessable, free of preemptive rights, free from all taxes and free from all liens, charges and security interests, created by or through the Company, with respect to the issue thereof. SECTION 3.8 Compliance with Law. (a) Notwithstanding anything in this ------------------- Agreement to the contrary, in no event shall a Holder be entitled to exercise a Warrant unless (i) a registration statement filed under the Securities Act in respect of the issuance of the Warrant Shares is then effective or (ii) an exemption from such registration requirements is available to all Holders under the Securities Act at the time of such exercise. (b) If any shares of Common Stock required to be reserved for purposes of exercise of Warrants require, under any other Federal or state law or applicable governing rule or regulation of any national securities exchange or stock market, registration with or approval of any governmental authority, or listing on any such national securities exchange or stock market before such shares may be issued upon exercise, the Company will cause such shares to be duly registered or approved by such governmental authority or listed on the relevant national securities exchange or stock market. 14 ARTICLE 4. Adjustments ----------- SECTION 4.1 Reclassifications, Redesignations or Reorganizations of Common -------------------------------------------------------------- Stock. (a) In the event that at any time or from time to time after the date - ----- hereof the Company shall issue by reclassification, redesignation or reorganization of the shares of Common Stock any shares of capital stock of the Company then, in any such event, the Holders shall have the right to receive upon exercise of each Warrant the number of shares of such capital stock of the Company equal to the Adjusted Litigation Recovery divided by the Maximum Number of Warrants divided by the aggregate Adjusted Market Value of the capital stock of the Company that one share of Common Stock was exchanged for or converted into as a result of such reclassification, redesignation or reorganization. (b) The proportion and type of capital stock of the Company that the Holders shall have the right to receive in the circumstance set forth in Section 4.2(a) shall be in the same proportion and type as one share of Common Stock was exchanged for or converted into as a result of such reclassification, redesignation or reorganization. Such adjustment shall become effective immediately after the effective date of such reclassification, redesignation or reorganization. In the event of the occurrence of more than one of the foregoing, such adjustments shall be made successively. SECTION 4.2 Combination. (a) Except as provided in Section 4.2(c), in the ----------- event of a Combination, the Holders shall have the right to receive upon exercise of each Warrant the number of shares of capital stock or other securities or an amount of property equal to the Adjusted Litigation Recovery divided by the Maximum Number of Warrants divided by the aggregate Adjusted Market Value of the capital stock, other securities or property that one share of Common Stock was exchanged for or converted into as a result of such Combination. (b) The proportion and type of capital stock, other securities or property that the Holders shall have the right to receive in the circumstance set forth in Section 4.2(a) will be in the same proportion and type as one share of Common Stock was exchanged for or converted into as a result of such Combination. The provisions of this Section 4.2 shall similarly apply to successive Combinations involving any Successor Company. (c) In the event of a Combination where consideration is payable to holders of Common Stock in exchange for their shares solely in cash, the Holders shall have the right to receive upon exercise of each Warrant cash in an amount equal to the Adjusted Litigation Recovery divided by the Maximum Number of Warrants, less the Exercise Price. In case of any Combination described in this Section 4.2(c), the surviving or acquiring Person shall promptly after the occurrence of the Triggering Event deposit with the Warrant Agent the funds necessary to pay to the Holders of the Warrants the amounts to which they are entitled as described above. After such funds and the surrendered Warrant Certificates are received, the Warrant Agent shall make payment to the Holders by delivering a check in such 15 amount as is appropriate to such Person or Persons as it may be directed in writing by the Holders surrendering such Warrants. (d) The Company shall provide that the surviving or acquiring Person (the "Successor Company") in any Combination shall enter into an agreement with the Warrant Agent confirming the Holders' rights pursuant to this Section 4.2 and providing for adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 4. SECTION 4.3 Exercise Price Adjustment. In case of any reclassification, ------------------------- redesignation or reorganization described in Section 4.1 or any Combination described in Section 4.2, the Exercise Price of one Warrant after such reclassification, redesignation, reorganization or Combination will equal (i) if the Warrants are exercisable into stock only, the per share par value of such stock multiplied by the number of shares of stock into which one Warrant is exercisable, (ii) if the Warrants are exercisable for cash or property only, an amount equal to a fraction the numerator of which is the amount of cash or Fair Market Value of property into which one Warrant is exercisable and the denominator of which is the amount of cash or Fair Market Value of property one share of Common Stock was exchanged for in such Combination and (iii) if the Warrants are exercisable for cash or property and stock, an amount equal to the Exercise Price determined by clause (i) above with respect to the stock portion and the Exercise Price determined by clause (ii) with respect to the cash or property portion. SECTION 4.4 Examples. (a) If the Company were to effect a -------- reclassification, redesignation or reorganization in which one share of its Common Stock was converted into a one share of class A common stock and two shares of class B common stock, then, after giving effect to such event, the Holders shall have the right to receive upon exercise of one Warrant shares of class A common stock and class B common stock equal to the Adjusted Litigation Recovery divided by the Maximum Number of Warrants divided by the aggregate Adjusted Market Value of one share of class A common stock and two shares of class B common stock. Accordingly, pursuant to Section 4.1(b), if the Adjusted Litigation Recovery were $500 million, the Maximum Number of Warrants was 85,759,465 and the Adjusted Market Value of one share of class A common stock and two shares of class B common stock were $30, then one Warrant would be exercisable for 0.0648 of a share of class A common stock and 0.1296 of a share of class B common stock. The Exercise Price of one Warrant would be the par value of the class A common stock multiplied by 0.0648, plus the par value of the class B common stock multiplied by 0.1296. (b) In the case of a Combination described in Section 4.2(a), if as a result of such Combination one share of Common Stock is exchanged for one share of Surviving Company common stock and $15, then, after giving effect to such event, the Holders shall have the right to receive upon exercise of one Warrant shares of Surviving Company common stock and cash equal to the Adjusted Litigation Recovery divided by the Maximum Number of Warrants divided by the sum of the Adjusted Market Value of one share of Surviving Company common stock plus $15. Accordingly, pursuant to Section 4.2(b), if the Adjusted Litigation Recovery were $500 million and the Adjusted Market Value of one share of 16 Surviving Company common stock were $15, then one Warrant would be exercisable for 0.1943 of a share of Class A Common Stock and $2.915 ($15 multiplied by 0.1943). The Exercise Price of one Warrant would be the par value of the Surviving Company Common Stock multiplied by .1943, plus $.1943. (c) In the case of a Combination described in Section 4.2(c), if as a result of such Combination one share of Common Stock is exchanged for $30, then, after giving effect to such event, the Holders shall have the right to receive upon exercise of one Warrant cash equal to the Adjusted Litigation Recovery divided by the Maximum Number of Warrants, less the Exercise Price of the Warrant. Accordingly, if the Adjusted Litigation Recovery were $500 million, then one Warrant would be exercisable for $5.636. The Exercise Price of one Warrant would be $.1943. SECTION 4.5 Other Events. If any event occurs as to which the foregoing ------------ provisions of this Article 4 are not strictly applicable or, if strictly applicable, would not, in the good faith judgment of the Board, fairly and adequately protect the purchase rights of the Holders of the Warrants in accordance with the essential intent and principles of such provisions, then the Board may make, without the consent of the Holders, such adjustments to the terms of this Article 4, in accordance with such essential intent and principles, as shall be reasonably necessary, in the good faith opinion of such Board, to protect such purchase rights as aforesaid. SECTION 4.6 Notice of Certain Transactions. In the event that the Company ------------------------------ shall publicly announce a plan (a) to effect any reclassification, redesignation or reorganization of its shares of Common Stock, (b) to effect any capital reorganization, consolidation or merger or (c) to effect the voluntary or involuntary dissolution, liquidation or winding-up of the Company, the Company shall within 5 calendar days after such public announcement send to the Warrant Agent and the Warrant Agent shall within 5 calendar days after receipt thereof send the Holders a notice (in such form as shall be furnished to the Warrant Agent by the Company) of such proposed action, such notice to be mailed by the Warrant Agent to the Holders at their addresses as they appear in the Certificate Register, which notice shall specify the expected date that such issuance or event is to take place and the expected date of participation therein by the holders of Common Stock and shall briefly indicate the effect of such action on the Common Stock and on the number and kind of any other shares of stock and on other securities or property, if any, and the number of shares of Common Stock and other securities or property, if any, purchasable upon exercise of each Warrant and the Exercise Price after giving effect to any adjustment which will be required as a result of such action. SECTION 4.7 Adjustment to Warrant Certificate. The form of Warrant --------------------------------- Certificate need not be changed because of any adjustment made pursuant to this Article 4, and Warrant Certificates issued after such adjustment may have the same terms and conditions as are stated in any Warrant Certificates issued prior to the adjustment. The Company, however, may at any time in its sole discretion make any change in the form of Warrant Certificate that it may deem appropriate to give effect to such adjustments and that does not affect the substance of the Warrant Certificate, and any Warrant Certificate thereafter 17 issued or countersigned, whether in exchange or substitution for an outstanding Warrant Certificate or otherwise, may be in the form as so changed. ARTICLE 5. Warrant Agent ------------- Section 5.1 Nature of Duties and Responsibilities Assumed. The Company --------------------------------------------- hereby appoints the Warrant Agent to act as agent of the Company as set forth in this Agreement. The Warrant Agent hereby accepts the appointment as agent of the Company and agrees to perform that agency upon the terms and conditions herein set forth, by all of which the Company and the Warrant Holders, by their acceptance thereof, shall be bound. Whenever in the performance of its duties under this Agreement, the Warrant Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by an Officer and delivered to the Warrant Agent; and such certificate shall be full authorization to the Warrant Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. The Warrant Agent shall be liable hereunder only for its own negligence, bad faith or willful misconduct. The Warrant Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Warrant Certificates (except its countersignature on the Warrant Certificates and such statements or recitals as described the Warrant Agent or action taken or to be taken by it) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only. The Warrant Agent shall not have any liability or responsibility in respect of the legality, validity or enforceability of this Agreement or the execution and delivery hereof (except the due execution hereof by the Warrant Agent) or in respect of the validity or execution of any Warrant Certificate (except its countersignature thereof); nor shall it be responsible or liable for any breach by the Company of any covenant or condition contained in this Agreement or in any Warrant Certificate; nor shall it be responsible or liable for the making of any change in the number of shares of Common Stock required under the provisions of Article 4 or responsible for the manner, method or amount of any such change or the ascertaining of the existence of any facts that would require any such adjustment or change; nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any shares of Common Stock to be issued pursuant to this Agreement or any Warrant Certificate or as to whether any shares of Common Stock will, when issued, by validly issued, fully paid and nonassessable. The Warrant Agent shall be under no obligation to institute any action, suit or legal proceeding or take any other action likely to involve expense unless the Company or one or more Holders of Warrants shall furnish the Warrant Agent with reasonable security and indemnity for any costs and expenses which may be incurred. All rights of action under 18 this Agreement or under any of the Warrants may be enforced by the Warrant Agent without the possession of any of the Warrants or the production thereof at any trial or other proceeding relative thereto, and any such action, suit or proceeding instituted by the Warrant Agent shall be brought in its name as Warrant Agent and any recovery of judgment shall be for the ratable benefit of the Holders of the Warrants, as their respective rights or interests may appear. The Warrant Agent shall promptly notify the Company in writing of any claim made or action, suit or proceeding instituted against it arising out of or in connection with this Agreement. The Warrant Agent is hereby authorized and directed to accept written instructions with respect to the performance of its duties hereunder from an Officer, and to apply to any such Officer for advice or instructions in connection with the Warrant Agent's duties, and it shall not be liable for any action taken or suffered to be taken or omitted by it in good faith in accordance with the instructions of any such Officer. The Warrant Agent will not be responsible or liable for any failure of the Company to comply with any of the covenants contained in this Agreement or in the Warrant Certificates to be complied with by the Company. The Warrant Agent will not incur any liability or responsibility to the Company or to any Warrant Holder for any action taken, or any failure to take action, in reliance on any notice, resolution, waiver, consent, order, certificate, or other paper, document or instrument reasonably believed by the Warrant Agent to be genuine and to have been signed, sent or presented by the proper party or parties. The Warrant Agent may execute and exercise any of the rights and powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys, agents or employees, provided reasonable care has been exercised in the selection and in the continued employment of any such attorney, agent or employee. The Company will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further acts, instruments and assurances as may reasonably be required by the Warrant Agent in order to enable it to carry out or perform its duties under this Agreement. The Warrant Agent will act hereunder solely as agent of the Company in a ministerial capacity, and its duties will be determined solely by the provisions hereof. The Warrant Agent will not be liable for anything which it may do or refrain from so doing in connection with this Agreement except for its own negligence, bad faith or willful conduct. Section 5.2 Right to Consult Counsel. The Warrant Agent may at any time ------------------------ consult with legal counsel satisfactory to it (who may be legal counsel for the Company) and the opinion of such counsel shall be full and complete authorization and protection to the Warrant Agent as to any action taken, suffered or omitted by it in good faith in accordance with such opinion; provided, however, that the Warrant Agent shall have exercised reasonable care - -------- ------- in the selection of such counsel. 19 Section 5.3 Compensation and Reimbursement. The Company agrees to pay to ------------------------------ the Warrant Agent from time to time compensation for all services rendered by it hereunder as the Company and the Warrant Agent may agree from time to time, and to reimburse the Warrant Agent for reasonable expenses and disbursements incurred in connection with the execution and administration of this Agreement (including the reasonable compensation and the expenses of its counsel), and further agrees to indemnify the Warrant Agent for, and to hold it harmless against, any loss, liability or expenses incurred without negligence, bad faith or willful misconduct on its part, arising out of or in connection with the acceptance and administration of this Agreement, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. In no case will the Warrant Agent be liable for special, indirect, incidental or consequential loss or damages of any kind whatsoever (including, but not limited to, lost profits), even if the Warrant Agent has been advised of the possibility of such damages. Any liability of the Warrant Agent will be limited to the amount of fees paid by the Company hereunder. Section 5.4 Warrant Agent May Hold Company Securities. The Warrant Agent ----------------------------------------- and any stockholder, director, officer or employee of the Warrant Agent may buy, sell or deal in any of the Warrants or other securities of the Company or its affiliates or have a pecuniary interest in any transaction in which the Company or its affiliates may be interested, or contract with or lend money to the Company or its affiliates or otherwise act as fully and freely as though it were not the Warrant Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. Section 5.5 Change of Warrant Agent. The Warrant Agent may resign and be ----------------------- discharged from its duties under this Agreement upon 90 calendar days' prior notice in writing mailed, by registered or certified mail, to the Company. The Company may remove the Warrant Agent or any successor warrant agent upon 60 calendar days' prior notice in writing, mailed to the Warrant Agent or successor warrant agent, as the case may be, by registered or certified mail. If the Warrant Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Warrant Agent and shall, within 30 calendar days following such appointment, give notice thereof in writing to each registered holder of the Warrant Certificates. If the Company shall fail to make such appointment within a period of 30 calendar days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Warrant Agent, then the Company agrees to perform the duties of the Warrant Agent hereunder until a successor warrant agent is appointed. After appointment the successor warrant agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Warrant Agent without further act or deed; but the former Warrant Agent shall deliver and transfer to the successor Warrant Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for this purpose. Failure to give any notice provided for in this Section, however, or any defect therein shall not affect the legality or validity of the resignation or removal of the Warrant Agent or the appointment of the successor warrant agent, as the case may be. 20 ARTICLE 6. Miscellaneous ------------- SECTION 6.1 Information. As soon as any Warrant becomes outstanding, the ----------- Company shall promptly deliver to the Warrant Agent and the Holders its annual report to stockholders and such other information as is provided to any holders of equity securities of the Company in their capacity as holders of such securities. SECTION 6.2 Persons Benefitting. Nothing in this Agreement is intended or ------------------- shall be construed to confer upon any Person other than the Company, the Warrant Agent and the Holders any right, remedy or claim under or by reason of this agreement or any part hereof. SECTION 6.3 Rights of Holders. (a) No Holder, as such, shall be entitled ----------------- to vote or to receive dividends or shall otherwise be deemed to be the holder of shares of Common Stock for any purpose, nor shall anything contained herein or in any Warrant Certificate be construed to confer upon any Holder, as such, any of the rights of a shareholder of the Company or any right to vote upon or give or withhold consent to any action of the Company (whether upon any reorganization, issuance of securities, reclassification or conversion of Common Stock, consolidation, merger, sale, lease, conveyance or otherwise), receive notice of meetings or other action affecting stockholders (except for notices expressly provided for in this Agreement) or receive dividends or subscription rights, unless and until such Warrant Certificate shall have been surrendered for exercise as provided in this Agreement, payment in respect of such exercise shall have been received by the Warrant Agent, and shares of Common Stock shall have become issuable thereunder and such person shall have been deemed to have become a holder of record of such shares. No Holder shall, upon the exercise of Warrants, be entitled to any dividends if the record date with respect to payment of such dividends shall be a date prior to the date such shares of Common Stock became issuable upon the exercise of such Warrants. (b) All rights of action in respect of the Warrants will be vested in the respective Holders; provided, however, that no Holder will have the right to -------- ------- enforce, institute or maintain any suit, action or proceeding against the Company to enforce, or otherwise act in respect of, the Warrants, unless (i) such Holder has previously given written notice to the Company of the substance of such dispute, and the Holders of at least 25% of the issued and outstanding Warrants have given written notice to the Company of their support for the institution of such proceeding to resolve such dispute, (ii) written notice of the substance of such dispute and of the support for the institution of such proceeding by such Holders has been provided by the Company to the Warrant Agent and (iii) the Warrant Agent has not instituted appropriate proceedings with respect to such dispute within 30 days following the date of such written notice to the Warrant Agent, it being understood and intended that no one or more Holders will have the right in any manner whatsoever to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any rights of the Holders, except in the 21 manner described in this Section 6.3(b) for the equal and ratable benefit of all Holders. Except as described above, no Holder will have the right to enforce, institute or maintain any suit, action or proceeding to enforce, or otherwise act in respect of, the Warrants. (c) The Bank will retain sole and exclusive control of the Litigation and will retain 100% of any recovery from the Litigation. The Holders will not have any right to control or manage the course or disposition of the Litigation or the proceeds of any recovery therefrom. (d) The determination of the Board of the Adjusted Litigation Recovery, the number of shares of Common Stock issuable upon exercise of a Warrant and the Exercise Price shall be final, conclusive and binding upon the Holders. SECTION 6.4 Amendment. This Agreement may be amended by the parties --------- hereto without the consent of any Holder for the purpose of curing any ambiguity, or of curing, correcting or supplementing any defective provision contained herein or making any other provisions with respect to matters or questions arising under this Agreement as the Company and the Warrant Agent may deem necessary or desirable; provided, however, that such action shall not -------- ------- affect adversely the rights of the Holders. Any amendment or supplement to this Agreement that has an adverse effect on the interests of the Holders shall require the written consent of the Holders of a majority of the then outstanding Warrants. The consent of each Holder affected shall be required for any amendment pursuant to which the Exercise Price would be increased or the number of Warrant Shares purchasable upon exercise of Warrants would be decreased (other than pursuant to adjustments provided for herein). In determining whether the Holders of the required number of Warrants have concurred in any direction, waiver or consent, Warrants owned by the Company or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company shall be disregarded and deemed not to be outstanding, except that, for the purpose of determining whether the Warrant Agent shall be protected in relying on any such direction, waiver or consent, only Warrants which the Warrant Agent knows are so owned shall be so disregarded. Also, subject to the foregoing, only Warrants outstanding at the time shall be considered in any such determination. SECTION 6.5 Notices. Any notice or communication shall be in writing and ------- delivered in Person or mailed by first-class mail addressed as follows: if to the Company: Golden State Bancorp Inc. 414 North Central Avenue Glendale, CA 91203 Attention: Chief Financial Officer 22 Telecopy: (818) 409-3151 if to the Warrant Agent: ChaseMellon Shareholder Services L.L.C. Reorganization Department 450 West 33rd Street, 15th Floor New York, New York 10001 Attention: Telecopy: The Company or the Warrant Agent by notice to the other may designate additional or different addresses for subsequent notices or communications. Any notice or communication mailed to a Holder shall be mailed to the Holder at the Holder's address as it appears on the Certificate Register and shall be sufficiently given if so mailed within the time prescribed. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. SECTION 6.6 Governing Law. This Agreement and the Warrant Certificates ------------- shall be governed by, and construed and interpreted in accordance with, the laws of the State of California. SECTION 6.7 Successors. All agreements of the Company in this Agreement ---------- and the Warrant Certificates shall bind its successors. All agreements of the Warrant Agent in this Agreement shall bind its successors. SECTION 6.8 Counterparts. The parties may sign any number of copies of ------------ this Agreement. Each signed copy shall be an original, but all of them together represent the same agreement. One signed copy is enough to prove this Agreement. SECTION 6.9 Table of Contents. The table of contents and headings of the ----------------- Articles and Sections of this Agreement have been inserted for convenience of reference only, are not intended to be considered a part hereof and shall not modify or restrict any of the terms or provisions hereof. SECTION 6.10 Severability. The provisions of this Agreement are severable, ------------ and if any clause or provision shall be held invalid, illegal or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect in that jurisdiction only such clause or provision, or part thereof, and shall not in any manner affect such clause or provision in any other jurisdiction or any other clause or provision of this Agreement in any jurisdiction. 23 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the date first written above. GOLDEN STATE BANCORP INC. By: /s/ John Haynes ------------------------------------ Name: John Haynes Title: Chief Financial Officer CHASEMELLON SHAREHOLDER SERVICES L.L.C., as Warrant Agent, By: /s/ Michael Dzieciolowski ------------------------------------ Name: Michael Dzieciolowski Title: Assistant Vice President EXHIBIT A TO WARRANT AGREEMENT ----------------- [FORM OF FACE OF WARRANT CERTIFICATE] [Unless and until it is exchanged in whole or in part for Warrants in definitive form, this Warrant may not be transferred except as a whole by the depositary to a nominee of the depositary or by a nominee of the depositary to the depositary or another nominee of the depositary or by the depositary or any such nominee to a successor depositary or a nominee of such successor depositary. The Depository Trust Company ("DTC") (55 Water Street, New York, New York) shall act as the depositary until a successor shall be appointed by the Company and the Warrant Agent. Unless this certificate is presented by an authorized representative of DTC to the issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or such other name as requested by an authorized representative of DTC (and any payment is made to Cede & Co. or such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein.]/1/ - No. ___ Certificate for __ Warrants WARRANTS TO PURCHASE COMMON STOCK OF GOLDEN STATE BANCORP INC. THIS CERTIFIES THAT, _________, or registered assigns, is the registered holder of the number of Warrants set forth above (the "Warrants"). Each Warrant entitles the holder thereof (the "Holder"), at its option and subject to the provisions contained herein and in the Warrant Agreement referred to below, to purchase from GOLDEN STATE BANCORP INC., a Delaware corporation ("the Company"), the number of shares of Common Stock, par value of $1.00 per share, of the Company (the "Common Stock") having an Adjusted Market Value equal to the Adjusted Litigation Recovery divided by the Maximum Number of Warrants at an exercise price per Warrant equal to the number of shares of Common Stock for which one Warrant is exercisable multiplied by $1.00 (the "Exercise Price"). This Warrant Certificate shall terminate and become void on the earliest of (i) the Close of Business on the last day of the Warrant Exercise Period, (ii) the Close of Business on the date the Litigation has been disposed of in a manner such that no shares of Common Stock or other securities or property will be issuable under the terms of the Warrants and (iii) the time and date such Warrant is exercised. This Warrant Certificate is issued under and in accordance with a Warrant Agreement dated as of May 4, 1998 (the "Warrant Agreement"), between the Company and ChaseMellon Shareholder Services L.L.C. (the "Warrant Agent", which term includes any successor Warrant Agent under the Warrant Agreement), and is subject to the terms and provisions contained in the Warrant Agreement, to all of which terms and provisions the Holder of this Warrant Certificate consents by acceptance hereof. The Warrant Agreement is - -------------- /1/ To be included only if the Warrant is in global form. - 2 hereby incorporated herein by reference and made a part hereof. Reference is hereby made to the Warrant Agreement for a full statement of the respective rights, limitations of rights, duties and obligations of the Company, the Warrant Agent and the Holders of the Warrants. Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Warrant Agreement. A copy of the Warrant Agreement may be obtained for inspection by the Holder hereof upon written request to the Warrant Agent at [______________________]. Subject to the terms of the Warrant Agreement, the Warrants may be exercised in whole or in part by surrender of this Warrant Certificate with the form of election to purchase Warrant Shares attached hereto duly executed and with the simultaneous payment of the Exercise Price in cash (subject to adjustment) to the Warrant Agent for the account of the Company at the office of the Warrant Agent. Payment of the Exercise Price shall be made by certified or official bank check or personal check payable to the order of the Company or by wire transfer of funds to an account designated by the Company for such purpose. As provided in the Warrant Agreement and subject to the terms and conditions therein set forth, each Warrant shall be exercisable at any time from and from time to time during the Warrant Exercise Period only and shall not be exercisable after the expiration of the Warrant Exercise Period. In the event the Company enters into a Combination, the Holder hereof will be entitled to receive upon exercise of the Warrants shares of capital stock or other securities or other property such that each Warrant shall be exercisable for a number of shares of capital stock or other securities or an amount of property equal to the Adjusted Litigation Recovery divided by the Maximum Number of Warrants divided by the aggregate Adjusted Market Value of the capital stock, other securities or property that one share of Common Stock was exchanged for or converted into as a result of such Combination; provided, -------- however, that in the event that, in connection with such Combination, - ------- consideration to holders of Common Stock in exchange for their shares is payable solely in cash, the Holder hereof will be entitled to receive cash in an amount equal to the Adjusted Litigation Recovery divided by the Maximum Number of Warrants, less the Exercise Price. The amount and type of capital stock, other securities or property that the Holders shall have the right to receive in the circumstance set forth in the preceding sentence shall be the same amount and type as one share of Common Stock was exchanged for or converted into as a result of such Combination. The Company may require payment of a sum sufficient to pay all taxes, assessments and other governmental charges in connection with the transfer or exchange of the Warrant Certificates pursuant to Section 2.5 of the Warrant Agreement but not for any exchange or original issuance (not involving a transfer) with respect to temporary Warrant Certificates, the exercise of the Warrants or the Warrant Shares. Upon any partial exercise of the Warrants, there shall be countersigned and issued to the Holder hereof a new Warrant Certificate in respect of the shares of Common Stock as to which the Warrants shall not have been exercised. This Warrant Certificate may be exchanged at the office of the Warrant Agent by presenting this Warrant Certificate 3 properly endorsed with a request to exchange this Warrant Certificate for other Warrant Certificates evidencing an equal number of Warrants. No fractional Warrant Shares will be issued upon the exercise of the Warrants, but the Company shall pay an amount in cash equal to the Adjusted Market Value for one Warrant Share on the Determination Date, multiplied by such fraction, computed to the nearest whole cent. All shares of Common Stock issuable by the Company upon the exercise of the Warrants shall, upon such issue, be duly and validly issued and fully paid and non-assessable. The holder in whose name the Warrant Certificate is registered may be deemed and treated by the Company and the Warrant Agent as the absolute owner of the Warrant Certificate for all purposes whatsoever and neither the Company nor the Warrant Agent shall be affected by notice to the contrary. THE WARRANTS REPRESENT A CONTINGENT RIGHT TO PURCHASE SHARES OF COMMON STOCK WITH AN AGGREGATE VALUE BASED ON A PORTION OF ANY PROCEEDS THAT MAY BE RECEIVED BY THE BANK FROM THE LITIGATION. THE WARRANTS DO NOT PROVIDE TO THE HOLDERS THEREOF ANY RIGHTS IN THE LITIGATION INCLUDING ANY RIGHTS TO RECEIVE ANY CASH OR PROPERTY RECEIVED BY THE BANK IN CONNECTION THEREWITH, OR TO CONTROL THE LITIGATION. THERE CAN BE NO ASSURANCE AS TO WHEN THE LITIGATION WILL BE RESOLVED OR THE AMOUNT OF PROCEEDS, IF ANY, THE BANK WILL RECEIVE THEREFROM. THE BANK WILL RETAIN SOLE AND EXCLUSIVE CONTROL OF THE LITIGATION AND WILL RETAIN 100% OF ANY RECOVERY FROM THE LITIGATION. THE HOLDERS WILL NOT HAVE ANY RIGHT TO CONTROL OR MANAGE THE COURSE OR DISPOSITION OF THE LITIGATION OR THE PROCEEDS OF ANY RECOVERY THEREFROM. The Warrants do not entitle any holder hereof to any of the rights of a shareholder of the Company. This Warrant Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Warrant Agent. GOLDEN STATE BANCORP INC. By ______________________ [SEAL] Attest: __________________________ Secretary 4 DATED: Countersigned: CHASEMELLON SHAREHOLDER SERVICES L.L.C. as Warrant Agent, ____________________________ by _________________________ Authorized Signatory EXHIBIT B TO WARRANT AGREEMENT ----------------- FORM OF ELECTION TO PURCHASE WARRANT SHARES (to be executed only upon exercise of Warrants) GOLDEN STATE BANCORP INC. The undersigned hereby irrevocably elects to exercise [ ] Warrants at an exercise price per Warrant of $[ ] to acquire [ ] shares of Common Stock, par value $1.00 per share, of Golden State Bancorp Inc. (the "Company"), on the terms and conditions specified in the within Warrant Certificate and the Warrant Agreement therein referred to, surrenders this Warrant Certificate and all right, title and interest therein to the Company, and directs that the shares of Common Stock deliverable upon the exercise of such Warrants be registered and delivered in the name and at the address specified below and delivered thereto. Date: ________________, __ /1/ - --------------------------- (Signature of Owner) --------------------------- (Street Address) --------------------------- (City) (State) (Zip Code) Signature Guaranteed by: --------------------------- - --------------- /1/ The signature must correspond with the name as written upon the face of - the within Warrant Certificate in every particular, without alteration or enlargement or any change whatever, and must be guaranteed by a national bank or trust company or by a member firm of any national securities exchange. 2 Securities and/or check to be issued to: Name: Social security or Federal tax identification number: Street Address: City, State and Zip Code: Any unexercised Warrants evidenced by the within Warrant Certificate to be issued to: Name: Social security or Federal tax identification number: Street Address: City, State and Zip Code: EXHIBIT C TO WARRANT AGREEMENT The following exchanges of a part of this Global Warrant for definitive Warrants have been made: CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR REGISTRATION OF TRANSFER OF WARRANTS Re: Warrants to Purchase Common Stock (the "Warrants") of Golden State Bancorp Inc. (the "Company") This Certificate relates to ____________ Warrants held in definitive form by ____________ (the "Transferor"). The Transferor has requested the Warrant Agent by written order to exchange or register the transfer of a Warrant or Warrants. The Warrant Agent and the Company are entitled to rely upon this Certificate and are irrevocably authorized to produce this Certificate or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. [INSERT NAME OF TRANSFEROR] by ________________________ Date: _____________________ EX-10.1 9 BOARD OF DIRECTORS RETIREMENT PLAN, AS AMENDED EXHIBIT 10.1 GLENDALE FEDERAL BANK DIRECTORS' RETIREMENT PLAN -------------------------- As Amended September 27, 1994 GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK hereby adopts the Glendale Federal Bank Directors' Retirement Plan for certain members of the Board of Directors of the Bank and for certain former members of the Board of Directors of GLENFED who are not employees of the Bank, GLENFED or any of their respective subsidiaries. The purpose of the Plan is to recognize and reward the service devoted to the Bank and GLENFED by Directors, to revise and confirm in plan form the benefits the Bank is obligated to provide to Directors pursuant to resolutions of the Board of Directors of the Bank adopted on August 19, 1980 and August 21, 1984, and to assume the obligations outstanding under the GLENFED Amended and Restated Directors' Retirement Plan. ARTICLE 1 - --------- Definitions - ----------- 1.01 "Bank" means Glendale Federal Bank, Federal Savings Bank, and its predecessor Glendale Federal Savings and Loan Association. 1.02 "Board" means the Board of Directors of the Bank and the Board of Directors of GLENFED. 1.03 "Board Service" means the number of months of combined service on the Board and on the board of directors of any institution merged with or acquired by the Bank. 1.04 "Change of Control" means the occurrence of any of the following events: (i) any "person" (as such term as used in Sections 1 3(d) and 1 4(d) of the Securities and Exchange Act of 1934 (the "Exchange Act") and the regulations of the Securities and Exchange Commission (the "SEC") thereunder, each as in effect on December 21, 1993, and including any such persons that may be deemed to be acting in concert with respect to the Bank or the acquisition, ownership or voting of Bank securities) becomes, directly or indirectly, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act and the regulations of the SEC thereunder, each as in effect on December 21, 1993) of outstanding securities of the Bank representing 20% or more of the combined voting power of the Bank's then outstanding securities; 1 (ii) at any time during the three-year period after December 21, 1993, the composition of the Board of Directors of the Bank is changed such that persons who were directors of the Bank, or of GLENFED, at the beginning of such three-year period, or persons nominated or elected by a majority of such persons, do not continue to comprise a majority of the members of such Board of Directors of the Bank; (iii) the stockholders of the Bank approve a merger or consolidation of the Bank with, or a reorganization transaction involving the Bank and, any other entity, other than a merger, consolidation or reorganization which would result in the voting securities of the Bank outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the combined voting power of the voting securities of the Bank or such surviving entity outstanding immediately after such merger or consolidation; (iv) the stockholders of the Bank approve a plan of complete liquidation of the Bank or an agreement for the sale or disposition by the Bank of more than 50% of its consolidated assets; or (v) any other event, transaction or series of events or transactions occurs as a result of which any person may be deemed to "acquire control" of the Bank (as such terms are defined in the regulations of the Office of Thrift Supervision set forth at 12 C.F.R. Part 574 as in effect on December 21, 1993. 1.05 "Director" means a member of the Board. 1.06 "Fee" means the monthly base retainer fee received by a Director for service on the Board plus the fee paid for attending one Board meeting per month, excluding any additional payments for service on, or chairing meetings of Committees of the Board. 1.07 "GLENFED" means GLENFED, Inc., which was the parent holding company of the Bank from January 1986 until August 26, 1993. 1.08 "GLENFED Plan" means the Directors' Retirement Plan as adopted by Resolution of the Board of Directors of the Bank dated December 17, 1985, amended by resolutions of the Board of Directors of GLENFED dated July 22, 1986 and September 23, 1986, put in plan format by Resolution of the Board of Directors of GLENFED dated April 26, 1988, amended by Resolutions of the Board of Directors of GLENFED dated January 24, 1989, June 26, 1990, September 25, 1990, November 27, 1990, June 23, 1992, and as amended and restated on March 25, 1993. 2 1.09 "Grantor" means the Bank. 1.10 "Monthly Retirement Benefit" means: (i) in the case of a Retired Director, the monthly. Retirement Benefit payable in the amount and for the period specified on Schedule A attached hereto, and (ii) in the case of a Director whose Retirement occurs on or after March 25, 1993, a monthly benefit equal to the Fee received by such Director immediately prior to Retirement, payable for a period following such Director's Retirement equal to the Director's Board Service, up to a maximum of 180 months. 1.11 "Plan" means this Directors' Retirement Plan, as it may be amended from time to time by the Board. 1.12 "Retired Director" means the members or the Board listed as retired directors on Schedule A attached. 1.13 "Retirement" means the resignation, decision not to run for re- election or failure of a Director to be re-elected, or death while a Director, after five (5) years of Board Service, but shall not include the removal of a Director for cause; provided, however, that if a Change of Control shall have occurred, Retirement shall mean any termination of Board Service within 2 years thereafter, other than removal for cause, without regard to the length of Board Service. For purposes of this Plan, removal "for cause" shall mean removal on the grounds of the Director's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform the Director's duties of office, or willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease and desist order, provided that a Director shall not be deemed to have been removed for cause unless and until a Director has been notified in writing that such Director has been found guilty of misconduct of the type described in this Section 1.13 and specifying the particulars thereof in detail, and in the case of misconduct that can be cured, the Director shall have failed to cure the same within a reasonable period of time thereafter. 1.14 "Trust Agreement" means the document through which the Grantor and Trustee have agreed upon the terms under which the Trustee will hold funds to secure payments under the Plan. 1.15 "Trustee" means the entity which has entered into a Trust Agreement with the Bank to, inter alia, receive, safeguard, invest, administer and ----- ---- distribute assets transmitted by the Grantor to secure payments under the Plan. 1.16 "Vested Benefit" means the amount and duration of payment of the Monthly Retirement Benefit which any Retired Director or any Director whose Retirement has occurred is entitled to receive under this Plan as in effect on the date of December 21, 1993 or the date of such Director's Retirement. 3 ARTICLE II - ---------- Plan Participation - ------------------ 2.01 All Directors who are not employees of the Bank, GLENFED or any of their respective subsidiaries are participants in the Plan. 2.02 A Director who is or has been an employee of the Bank, GLENFED or any of their respective subsidiaries shall accrue Board Service under the Plan during any year during which such Director is not then an employee of the Bank, GLENFED or any of their respective subsidiaries. ARTICLE III - ----------- Retirement Payments - ------------------- 3.01 A Director, other than a Director removed for cause as defined in Section 1.13 above, shall be entitled to receive a Monthly Retirement Benefit payable in accordance with Article IV. The Monthly Retirement Benefit shall be payable by the Trustee or, in the event the Trustee fails to make any payment required hereunder within 180 days after notice and demand therefor, by the Bank. 3.02 There shall be no adjustment to the amount of the Monthly Retirement Benefit resulting from changes in the amount of monthly Board remuneration subsequent to Retirement. 3.03 Payments will be made by the Trustee, or by the Bank, if applicable, to the Director or, in the event of such Director's death prior to the full distribution of benefits hereunder, to the beneficiary designated by the Director, and, in the event of the death of such beneficiary prior to the full distribution of benefits hereunder, to the estate of the survivor of the Director or such beneficiary, provided that in the case of a Retired Director entitled to receive a Monthly Retirement Benefit for life, as specified on Schedule A attached, no Monthly Retirement Benefit shall be payable to any beneficiary of such Retired Director following such Retired Director's death. 3.04 If a Change of Control shall have occurred, any Director shall have the right to elect upon Retirement thereafter, and any Director or Retired Director whose Retirement occurred prior to the occurrence of such Change of Control shall receive the retirement benefits due under this Plan in a lump sum without discount for early payment of the benefit due. 4 ARTICLE IV - ---------- Commencement of Payments - ------------------------ 4.01 If a Director retires upon reaching the normal retirement age of 65, or any time thereafter, the Monthly Retirement Benefit will commence on the first day of the month following the effective date of such retirement. 4.02 If a Director retires or dies before reaching the age of 65, the Monthly Retirement Benefit will commence, in the case of retirement, to the Director on the first day of the month following attainment of age 65, or in the case of death, to the Director's beneficiary on the sixty-fifth anniversary of the Director's birth. The Board may approve the earlier commencement of the distribution of the Monthly Retirement Benefit if the Director dies or if the Director's retirement is for reason of serious illness. 4.03 If a Change of Control shall have occurred the lump sum payment to the retiring or Retired Director shall be payable within 30 days after such Change of Control on subsequent retirement, whichever shall last occur. ARTICLE V - --------- Trust - ----- 5.01 An irrevocable Grantor's Trust (I.e., "Rabbi Trust") has been or will be established under which the Trustee will hold, invest and manage assets of the Bank transmitted to the Trustee to secure the payment of benefits hereunder, and will distribute Monthly Retirement Benefits to Directors or their designated beneficiaries, if applicable, under the Plan. 5.02 Assets of the Bank have been or will be transferred to the Trustee from time-to-time in an amount or amounts sufficient to satisfy all estimated payment obligations accrued under the Plan. 5.03 A Trust Management Committee of the Grantor, consisting of the Chief Executive Officer, Chief Financial Officer and such other corporate officer as shall be designated by the Board or a duly designated committee thereof, shall be responsible to direct investment actions of the Trustee, monitor reporting by the Trustee and resolve any problems arising under the Trust or the Plan. 5 ARTICLE VI - ---------- Plan Amendment/Termination - -------------------------- 6.01 The Plan may be amended or terminated at any time by the Board so long as Vested Benefits under the Plan are not decreased for any participant. ARTICLE VII - ----------- Resumption of Benefits/Assumption of GLENFED Plan - ------------------------------------------------- 7.01 As originally adopted in plan form on March 25, 1993, the Plan provided a fixed schedule of benefits earned by service on the Board of Directors of the Bank through and including June 30, 1992. As amended hereby, it is intended that Board Service from and after June 30, 1992 shall be included in determining the Monthly Retirement Benefit of any Director under the Plan. 7.02 On August 26, 1993 GLENFED was merged with and into a whollyowned subsidiary of the Bank, which subsidiary became by operation of law the obligor for each and all of the obligations of GLENFED under the GLENFED Plan. As amended hereby, it is intended that the obligation to pay the "Retirement Benefit" provided under the GLENFED Plan shall be and is hereby assumed by the Bank with the effect that service on the Board of Directors of GLENFED shall be deemed to have been Board Service under this Plan. By accepting Monthly Retirement Benefits hereunder, any Director or Retired Director shall waive and relinquish any right to receive any separate or additional payment from any person under the GLENFED Plan. 6 DIRECTORS' RETIREMENT PLAN SCHEDULE A
Retired Director Monthly Benefit Last Payment - --------------- --------------- ------------ Dean R. Bailey 3,483.33 10/01/11 Charles T. Blair 3,083.33 06/03/09 Robert Breitbard 2,333.33 03/31/99 Douglas A. Clarke 3,083.33 09/30/05 Morris K. Daley 3,083.33 07/31/07 Milo D'Anjou 1,833.34 5/31/97* Cecil Dunn 1,083.33 Life Richard O. Kearns 3,083.33 09/30/02 Walter Ketcham 3,083.33 11/30/04 Gordon Klett 583.45 Life Robert E. Langdon 1,833.33 04/30/98 Richard G. Ray 2,333.33 06/30/99 Jean C. Roeschlaub 3,083.33 01/31/07 Robert J. Springer 733.33 7/1/96* Jack D. Steele 3,083.33 09/30/09 E. Gex Williams, Jr. 3,483.33 10/01/11
* payments suspended; deceased 9-6-97 ** payments suspended; deceased 7-1-96 GLENDALE FEDERAL BANK, FSB Secretary's Certificate ----------------------- The undersigned, being the duly elected Secretary of Glendale Federal Bank, Federal Savings Bank (the "Bank"), hereby certifies that attached hereto as Exhibit A and Exhibit B are true and correct copies of resolutions duly adopted by the Board of Directors of the Bank at a meeting held on June 23, 1997, during which a quorum was present and acting throughout, which resolutions have not been amended and are in full force and effect. Witness my hand and seal this 26th day of June, 1997. /s/ James R. Eller, Jr. ----------------------------- James R. Eller, Jr. Secretary [SEAL] EXHIBIT B RESOLVED, that the Director's Retirement Plan is hereby amended as follows: ARTICLE I - --------- Definitions - ----------- Section 1.10 is deleted in its entirety. 1.10 "Monthly Retirement Benefit" means (i) in the case of a Retired Director, the monthly Retirement Benefit payable in the amount and for the period specified on Schedule A attached hereto, and (ii) in the case of a Director whose Retirement occurs on or after March 25, 1993, a monthly benefit equal to the Fee received by such Director immediately prior to Retirement, payable for a period following such Director's Retirement equal to the Director's Board Service, up to a maximum of 180 months. Section 1.10 is deleted in its entirety and the following is inserted in lieu thereof: 1.10 "Monthly Retirement Benefit" means (i) in the case of a Retired Director, the monthly Retirement Benefit payable in the amount and for the period specified on Schedule A attached hereto, and (ii) in the case of a Director whose Retirement occurs on or after June 23, 1997, a monthly benefit equal to the Fee received by such Director immediately prior to Retirement, payable for a period following such Director's Retirement equal to the Director's Board Service up to a maximum of 240 months. EXHIBIT A RESOLVED, that the Director's Retirement Plan is hereby amended as follows: ARTICLE I - --------- Definitions - ----------- Section 1.13 is deleted in its entirety. "Retirement" means the resignation, decision not to run for re-election or failure of a Director to be re-elected, or death while a Director, after (5) years of Board Service, but shall not include the removal of a Director for cause; provided, however, that if a Change of Control shall have occurred, Retirement shall mean any termination of Board Service within 2 years thereafter, other than removal for cause, without regard to the length of Board Service. For purposes of this Plan, removal "for cause" shall mean removal on the grounds of the Director's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform the Director's duties of office, or willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease and desist order, provided that a Director shall not be deemed to have been removed for cause unless and until a Director has been notified in writing that such Director has been found guilty of misconduct of the type described in this Section 1.13 and specifying the particulars thereof in detail, and in the case of misconduct that can be cured, the Director shall have failed to cure the same within a reasonable period time thereafter." Section 1.13. is deleted in its entirety and the following is inserted in lieu thereof: 1.13 "Retirement" means the resignation, decision not to run for re- election or failure of a Director to be re-elected, or death while a Director, after (5) years of Board Service, or termination of Board Service without regard to length of Board Service at the annual meeting of the Bank immediately following attainment of age 70, but shall not include the removal of a Director for cause; provided, however, that if a Change of Control shall have occurred, Retirement shall mean any termination of Board Service within 2 years thereafter, other than removal for cause, without regard to the length of Board Service. For purposes of this Plan, removal "for cause" shall mean removal on the grounds of the Director's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform the Director's duties of office, or willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease and desist order, provided that a Director shall not be deemed to have been removed for cause unless and until a Director has been notified in writing that such Director has been found guilty of misconduct of the type described in this Section 1.13 and specifying the particulars thereof in detail, and in the case of misconduct that can be cured, the Director shall have failed to cure the same within a reasonable period time thereafter. SECRETARY'S CERTIFICATE The undersigned, being the duly elected Secretary of Glendale Federal Bank, Federal Savings Bank (the "Bank"), hereby certifies that attached hereto as Exhibit A is a true and correct copy of a resolution duly adopted by the Board of Directors of the Bank at a meeting held on December 17, 1996 during which a quorum was acting throughout, which resolution has not been amended and is in full force and effect. Witness my hand and seal this 22nd day of January, 1997. [seal] /s/ James R. Eller, Jr. ----------------------- James R. Eller, Jr. Secretary Exhibit A RESOLVED, that the Directors' Retirement Plan is hereby amended as follows: ARTICLE I - --------- Definitions - ----------- Section 1.03 is deleted in its entirety and the following is inserted in lieu thereof: "1.03 "Board Service" means the number of months of service on the Board." ARTICLE II - ---------- Plan Participation - ------------------ Section 2.01 is deleted in its entirety and the following is inserted in lieu thereof: "2.01 All Directors who are not participants in the Glendale Federal Retirement Plan are participants in the Plan." Section 2.02 is deleted in its entirety and the following is inserted in lieu thereof: "2.02 A Director who is or has been a participant in the Glendale Federal Retirement Plan shall accrue Board Service under the Plan during any period during which such Director is not a participant in the Glendale Federal Retirement Plan." GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK CERTIFIED COPY OF EXCERPT FROM MINUTES The undersigned, Dorothy F. Page, hereby certifies that she is and at all times herein mentioned was the duly elected and acting Assistant Corporate Secretary of Glendale Federal Bank, Federal Savings Bank, a federally chartered savings bank, and that the following is a true excerpt from the Minutes of the Meeting of the Board of Directors of Glendale Federal Bank held on November 28, 1995, at which meeting a quorum was present and acting throughout and the following resolution was adopted: RESOLVED, that the Directors' Retirement Plan is hereby amended as follows: Section 4.01 is deleted in its entirety and the following is inserted in lieu thereof: "4.01 The Monthly Retirement Benefit will commence on the first day of the month following the effective date of Retirement." Section 4.02 is deleted in its entirety and the following is inserted in lieu thereof: "4.02 If a Director dies prior to Retirement, but after five years of service, payment of the Monthly Retirement Benefit to Director's Beneficiary will commence the first day of the month following such Director's death." IN WITNESS WHEREOF, I have executed this Certificate as Assistant Corporate Secretary of Glendale Federal Bank, Federal Savings Bank, and have affixed the corporate seal hereto this 2nd day of January, 1996. /s/ Dorothy F. Page ------------------------------- Dorothy F. Page Assistant Corporate Secretary GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK [SEAL] SECRETARY' S CERTIFICATE The undersigned, being the duly elected Secretary of Glendale Federal Bank, Federal Savings Bank (the "Bank"), hereby certifies that attached hereto as Exhibit A is a true and correct copy of resolutions duly adopted by the Board of Directors of the Bank at a meeting held on July 26, 1994 during which a quorum was acting throughout, which resolutions have not been amended and are in full force and effect. Witness my hand and seal this 23rd day of August, 1994. [seal] /s/ James R. Eller, Jr. ----------------------------- James R. Eller, Jr. Secretary SECRETARY' S CERTIFICATE The undersigned, being the duly elected Secretary of Glendale Federal Bank, Federal Savings Bank (the "Bank"), hereby certifies that attached hereto as Exhibit A is a true and correct copy of the Glendale Federal Bank Directors' Retirement Plan in the form duly adopted by the Board of Directors of the Bank at a meeting held on December 21, 1993 during which a quorum was acting throughout. Witness my hand and seal this 11th day of January 1994. [seal] /s/ James R. Eller, Jr. -------------------------- James R. Eller, Jr. Secretary EXHIBIT A RESOLVED, that the Bank's Directors' Retirement Plan is hereby amended to provide that in the event that a Director elects to receive a lump sum payment following a change in control of the Bank, such payment shall not be discounted. DIRECTORS' RETIREMENT PLAN SCHEDULE A
Retired Director DOB Date of Retirement Monthly Benefit Benefit Form Duration* - ------------------------------------------------------------------------------------------------------------- Bailey, Dean 8/19/26 10/22/96 $3,483.33 15 year Certain 10/01/2011 - ------------------------------------------------------------------------------------------------------------- Blair, Charles T. 6/15/25 7/26/94 $3,038.33 15 Year Certain 07/01/2009 - ------------------------------------------------------------------------------------------------------------- Breitbard, Robert 4/28/19 5/1/89 $2,333.33 10 Year Certain 04/01/1999 - ------------------------------------------------------------------------------------------------------------- Clarke, Douglas 1/22/19 3/1/94 $3,083.33 12 Year Certain 02/01/2006 - ------------------------------------------------------------------------------------------------------------- Daley, Morris 3/10/26 7/1/92 $3,083.33 15 Year Certain 08/01/2007 - ------------------------------------------------------------------------------------------------------------- D'Anjou, Milo 5/27/17 6/1/87 $1,833.34 10 Year Certain 06/01/1997 - ------------------------------------------------------------------------------------------------------------- Dunn, Cecil 10/7/08 1/31/81 $1,083.33 Straight Life Annuity Life - ------------------------------------------------------------------------------------------------------------- Kearns, Richard O. 3/3/26 10/1/91 $3,083.33 11 Year Certain 10/01/2002 - ------------------------------------------------------------------------------------------------------------- Ketcham, Walter A. 1/5/22 12/1/90 $3,083.33 14 Year Certain 12/01/2004 - ------------------------------------------------------------------------------------------------------------- Klett, Gordon A. 4/29/25 5/4/84 $ 583.45 Straight Life Annuity Life - ------------------------------------------------------------------------------------------------------------- Langdon, Robert E. 5/31/18 5/17/88 $1,833.33 10 Year Certain 05/01/1998 - ------------------------------------------------------------------------------------------------------------- Ray, Richard G. 7/6/19 7/25/89 $2,333.33 10 Year Certain 07/01/1999 - ------------------------------------------------------------------------------------------------------------- Roeschlaub, Jean C. 6/12/23 12/1/93 $3,083.33 13 Year Certain 11/01/2006 - ------------------------------------------------------------------------------------------------------------- Springer, J. Robert 4/25/14 4/17/84 $ 733.33 Straight Life Annuity Life - ------------------------------------------------------------------------------------------------------------- Steele, Jack D. 12/7/23 10/25/94 $3,083.33 15 Year Certain 10/01/2009 - ------------------------------------------------------------------------------------------------------------- Williams, Gex E. 6/10/27 10/22/96 $3,483.33 15 Year Certain 10/01/2011 - -------------------------------------------------------------------------------------------------------------
* Date of last Payment EX-10.2 10 AMENDED & RESTATED STOCK OPTION EXHIBIT 10.2 AMENDED AND RESTATED GOLDEN STATE BANCORP INC. STOCK OPTION AND LONG-TERM PERFORMANCE INCENTIVE PLAN 1. History and Purpose. The Stock Option and Long-Term Performance Incentive Plan (the "Plan") is designed to promote the long-term financial interests of the Company (as defined below) by (i) rewarding key executives, other selected employees, and Eligible Directors of the Company for their contributions to the success of the Company, (ii) attracting and encouraging long service by key employees and Eligible Directors possessing outstanding abilities, (iii) providing key employees with additional incentives in the form of Incentive Stock Options, Non-Qualified Stock Options and Stock Appreciation Rights as determined from time to time by the Board or the Committee (as defined below), (iv) providing Eligible Directors with additional incentives in the form of Non-Qualified Stock Options, and (v) furthering the identity of interests of key employees, other selected employees, and Eligible Directors with those of the Company's stockholders through opportunities for increased stock ownership and awards based on corporate performance. The Plan has been amended and restated in 1996 in the form set forth herein, provided that such amendment and restatement is subject to the approval of the stockholders of the Company at the first annual stockholders meeting which occurs after July 22, 1996. 2. Definitions. (a) "Award" means the grant of any form of stock option, stock appreciation right, stock or cash award, whether granted alone, in combination or in tandem, under the Plan. (b) "Award Agreement" means an agreement between the Company and a Participant, setting forth the terms, conditions and limitations applicable to an Award granted to the Participant. (c) "Board" means the Board of Directors of the company. (d) "Common Stock" means authorized and issued or unissued Common Stock of the Company, having a par value of $1.00 per share. (e) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (f) "Committee" means the Stock Option Committee of the Board or such other committee, comprised of directors who are not employees of the Company, designated by the Board. (g) "Company" means Golden State Bancorp Inc, a Delaware corporation, including any successor thereto by merger, operation of law or otherwise, its subsidiaries and their respective subsidiaries. (h) "Eligible Director" means each member of the Board who is not an employee of the Company. (i) "Fair Market Value", unless determined otherwise by the Committee in good faith, means with respect to a share of Common Stock as of any given date (i) the closing market composite price for such Common Stock as reported for the New York Stock Exchange - Composite Transactions on that date or, if Stock is not traded on that date, on the next preceding date on which Common Stock was traded; (ii) if the Common Stock is not traded on the New York Stock Exchange, the closing sale price of a share of Common Stock as reported on the national securities exchange or transaction reporting system on or through which actual sales prices are regularly reported for such Common Stock on the date the determination is made; or (iii) if the Common Stock is not traded on an exchange or transaction reporting system on or through which actual sales prices are available, the mean of the average of the closing bid and asked prices of a share of Common Stock as reported on the date the determination is made. (j) "Immediate Family" means, with respect to a particular Participant, the Participant's parents, spouse, children, stepchildren, adoptive relationships, sisters, brothers and grandchildren. (k) "Participant" means an employee or Eligible Director of the Company to whom an Award has been made under the Plan. (l) "Performance-Based Compensation" shall have the meaning ascribed to it in Section 162 (m)(4)(C) of the Code. 3. Participation. Subject to the terms and conditions of the Plan, the Committee shall determine and designate, from time to time, the key employees to whom Awards are to be granted under Sections 8, 9, 10, and 11, and who thereby become "Participants" in the Plan. Subject to the terms and conditions of the Plan, Eligible Directors shall receive Stock Options in accordance with the provisions of Supplement A, and thereby become "Participants" in the Plan. Individuals shall not be eligible for Awards under Sections 8, 9, 10 and 11 during the period in which they are Eligible Directors. 4. Common Stock Available for Awards. At the time of establishment of the Plan in 1993, and subject to Section 17, the 2 aggregate number of shares of Common Stock with respect to which Awards could be granted under the Plan was limited to 1,700,000, which amount was increased in 1994 to 4,700,000. Effective as of the amendment and restatement of the Plan in 1996, and subject to Section 17, the aggregate number of shares of Common Stock with respect to which Awards may be granted under the Plan was increased from 4,700,000 to 7,200,000. To the extent that any Award terminates by expiration, cancellation, forfeiture, surrender or otherwise (other than by reason of the exercise of an Award granted in tandem therewith) without the issuance of shares or without payment therefor or, in the case of restricted stock, without vesting, any shares subject to such Award or on the basis of which such Award would have been calculated shall again be available for future Awards. Common Stock which may be issued under the Plan may be either authorized and unissued shares or issued shares which have been reacquired by the Company. No fractional shares of Common Stock shall be issued under the Plan. Notwithstanding any other provision of the Plan to the contrary, no Participant shall receive any Award of a Stock Option or an SAR under the Plan to the extent that the sum of: (a) the number of shares of Common Stock subject to such Award; (b) the number of shares of Common Stock subject to all other prior Awards of Stock Options and SARs under the plan during the calendar year in which the Award is made; and (c) the number of shares of Common Stock subject to all other prior stock options and stock appreciation rights granted to the Participant under other plans or arrangements of the Company during the calendar year in which the Award is made; would exceed the Participant's Individual Limit under the Plan. The determination made under this paragraph shall be based on the shares subject to the awards at the time of grant, regardless of when the awards become exercisable. A Participant's "Individual Limit" shall be 1,000,000 shares (subject to adjustment under Section 17). 5. Administration. The Plan shall be administered by the Committee which shall have full and exclusive power to interpret the Plan, to grant waivers of Plan restrictions and to adopt such rules, regulations and guidelines for carrying out the Plan as it may deem necessary or proper, all of which powers shall be executed in the best interests of the Company and in 3 keeping with the objectives of the Plan. Any interpretation of the Plan by the Committee and any decision made by it under the Plan is final and binding on all persons. The Committee shall determine the type of or types of Awards to be made to each Participant. Awards may be granted alone, in combination or in tandem. In the case of Awards granted in tandem, the exercise of one award will effect the cancellation of a corresponding portion of the Award or Awards granted in tandem therewith. Awards may also be made in combination or in tandem with, in replacement of, or as alternatives to, grants or rights under any other employee plan of the Company, including the plan of any acquired entity. To the extent that the provisions of this Section 5 are inconsistent with the terms of Supplement A, Awards made under Supplement A shall be governed by the terms of Supplement A rather than the terms of this Section 5. 6. Delegation of Authority. The Committee may delegate to the Chief Executive Officer and to other senior officers of the Company its duties under the Plan pursuant to such terms, conditions or limitations as the Committee may establish; provided, however, that no such authority may be vested in an officer who does not also serve as a member of the Board of Directors of the Company; further provided that only the Committee may grant and administer Awards made to or held by Participants who, at the time such authority is exercised, are subject to Section 16(a) or Section 16(b) of the Securities Exchange Act of 1934, or any successor rule. 7. Award Agreement. At the time of a grant, the Committee may require as a condition to such grant that a Participant enter into an agreement with the Company in a form specified by the Committee agreeing to the terms and conditions of the Plan and to such additional terms and conditions, not inconsistent with the Plan, as the Committee, in its sole discretion, may prescribe. To the extent that the provisions of this Section 7 are inconsistent with the terms of Supplement A, Awards made under Supplement A shall be governed by the terms of Supplement A rather than the terms of this Section 7. 8. Stock Options. Each Stock Option shall entitle the Participant to whom it is granted to purchase a specified number of shares of Common Stock at a fixed price. Any Stock Option granted under the Plan that satisfies all of the requirements of Section 422 of the Code may be designated by the Committee as an "Incentive Stock Option." Stock Options not so designated, or that do not satisfy the requirements of Section 422 of the Code shall not constitute Incentive Stock Options and shall be "Non-Qualified Stock Options." (a) Option Price. The option price of a Non-Qualified 4 Stock Option shall not be less than 100 percent of the Fair Market Value of a share of Common Stock on the date of grant, or such other amount required to comply with applicable law. The option price of an Incentive Stock Option shall not be less than 100% of the Fair Market Value of a share of Common Stock and, with respect to an employee who owns on the date of the grant more than 10% of the Company's Common Stock, shall not be less than 110% of its Fair Market Value on such date. (b) Option Expiration Date. The "Expiration Date" with respect to a Stock Option or any portion thereof means the expiration date thereof established by the Committee at the time of the grant. The Expiration Date of an Incentive Stock Option shall be no later than the date which is ten years after the date it was granted and, with respect to an employee who owns on the date of grant more than 10% of the Company's Common Stock, shall not be later than the date which is five years after the date of grant. (c) Exercise of Options. Each Stock Option granted under the Plan shall be exercisable, either in whole or in part, at such time or times as shall be determined by the Committee at the time the option is granted or at such earlier times as the Committee shall subsequently determine (provided that the Fair Market Value at date of grant of shares of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by a Participant during any calendar year may not exceed $100,000) but in no event later than that Stock Option's Expiration Date. A Participant may exercise a Stock Option by giving written notice thereof prior to the Option's Expiration Date to the Secretary of the Company at the principal executive offices of the Company. Contemporaneously with the delivery of such notice, the full purchase price of the shares of Common Stock purchased pursuant to the exercise of the Option, together with any required state or federal withholding taxes, shall be paid in cash, by tender of stock certificates in proper form for transfer to the Company valued at the Fair Market Value of the shares of Common Stock on the date of exercise, by a combination of the foregoing or 5 with any other consideration which the Committee determines to be consistent with the purposes of the Plan and applicable law. A Participant may elect to pay the purchase price upon the exercise of a Stock Option through a cashless exercise arrangement to the extent provided by the Committee. In the case of a cashless exercise arrangement approved by the Committee, payment may be made as soon as practicable after the exercise. To the extent that the provisions of this Section 8 are inconsistent with the terms of Supplement A, Awards made under Supplement A shall be governed by the terms of Supplement A rather than the terms of this Section 8. 9. Stock Appreciation Rights. Each Stock Appreciation Right ("SAR") shall entitle the Participant to whom it is granted to receive from the Company, at the time the SAR is exercised, that number of shares of Common Stock having a Fair Market Value equal to the product of: (a) the number of shares of Common Stock as to which the SAR is exercised; and (b) the excess of the Fair Market Value (at the date of exercise) of a share of Common Stock over the exercise price specified by the Committee at the time of the award; provided, however, that the Committee, in its sole discretion, may elect to settle all or a portion of the Company's obligation arising out of the exercise of an SAR in cash equal to the Fair Market Value on the exercise date of any or all of the shares of Common Stock that would otherwise be issuable on exercise. SARs that are granted in tandem with Stock Options shall be exercisable only to the extent that the related Stock Option is exercisable and at the exercise price of that Stock Option. An SAR may be exercised, in whole or in part, by giving written notice to the Secretary of the Company prior to the date on which the SAR expires. Such notice shall specify the number of shares with respect to which the SAR is being exercised. As soon as practicable after the receipt of such notice, the Company shall deliver to the Participant certificates for the shares of Common Stock or cash or both to which the Participant is entitled pursuant to the Plan. 10. Stock Awards. Subject to the terms and conditions of the Plan, the Committee may designate Participants to receive Awards made in Common Stock or denominated in units of Common 6 Stock. All or any part of such Award may be subject to such terms, conditions, restrictions and limitations as may be established by the Committee, and set forth in the Award Agreement, which may include, but are not limited to, continuous service with the Company, achievement of specific business objectives, peer company comparisons, increases in specified indices, attaining specified growth rates and other comparable measurements of Company performance. Such Awards may be based on Fair Market Value or other specified valuation criteria. Awards of restricted stock shall have a vesting period of at least three years or, in the alternative, vesting based upon satisfaction of performance criteria specified by the Committee. To the extent that the Committee determines that it is necessary or desirable to conform any Awards under the Plan with the requirements applicable to "Performance-Based Compensation," it may, at the time an Award is granted, take such steps and impose such restrictions as it determines to be necessary to satisfy such requirements with respect to such Award, including, without limitation: (a) The establishment of performance goals that must be satisfied prior to the payment or distribution of benefits under such Awards; (b) The submission of such Awards and performance goals to the Company's shareholders for approval and making the receipt of benefits under such Awards contingent on receipt of such approval; and (c) Providing that no payment or distribution be made under such Awards unless the Committee certifies that the goals and the applicable terms of the Plan and Agreement reflecting the Awards have been satisfied. To the extent that the Committee determines that the foregoing requirements relating to Performance-Based Compensation do not apply to Awards under the Plan because the Awards constitute Stock Options or SARs, the Committee may, at the time the Award is granted, take such steps and impose such restrictions as it determines to be necessary to conform the Award to alternative methods of satisfying the requirements applicable to Performance-Based Compensation. 11. Other Awards. In addition to the Awards specifically provided above, the Committee may make such other equity, incentive or performance awards payable in cash or in kind under the Plan as it determines to be in the best interest of the Company. 7 12. Payment of Awards. The Company's obligation to pay cash or deliver stock pursuant to Awards granted under the Plan is subject to all applicable laws, rules and regulations and the obtaining of all permits and approvals deemed necessary or appropriate by the Committee. Payment of Awards may be made in the form of cash, stock or combinations thereof and may include such restrictions as the Committee shall determine, including in the case of stock, restrictions on transfer and forfeiture provisions. When transfer of stock is so restricted or subject to forfeiture provisions it shall be referred to as "Restricted Stock." 13. Tax Withholding. The Company shall have the right to deduct or otherwise effect a withholding of any amount required by federal or state tax laws to be withheld with respect to the grant, exercise or surrender of an Award, or the sale of stock acquired upon the exercise of an Incentive Stock Option, including any withholding required in order for the Company to obtain a tax deduction otherwise available as a consequence of such grant, exercise, surrender or sale. Such amounts may be deducted or withheld, at the Company's discretion, from Award payments or from any other payments, including regular compensation, to be made by the Company to the Participant. If Common Stock is used to satisfy tax withholding, such Common Stock shall be valued based on Fair Market Value on the date it is withheld. 14. Amendment, Modification, Suspension or Discontinuance of this Plan. The Board at any time, and from time to time, may amend the Plan, subject to the applicable requirements of the New York Stock Exchange. The Committee may, at any time, amend the terms of any outstanding Award Agreement; provided, however, that such amendment may not provide terms which are inconsistent with the terms of the Plan; and further provided that no amendment of any outstanding Award Agreement may adversely affect a Participant's rights under the Award Agreement in the absence of the Participant's written consent. The Board at any time may suspend or discontinue the Plan. The Plan, unless sooner terminated, shall terminate on the fifth anniversary of its adoption by the Board in 1993. Any such amendment, suspension or termination shall not affect any Award previously granted. No Award may be granted under the Plan while the Plan is suspended or after it is terminated. 15. Termination of Employment. In the event that a Participant ceases to be an employee of the Company for any reason, including death, any Awards then outstanding may be exercised or shall expire in accordance with the terms of the 8 applicable Award Agreement. 16. Nonassignability. No award under the Plan, and no rights or interests therein, shall be assignable or transferable by a Participant except by will or by the laws of descent and distribution. During a Participant's lifetime, Awards under the Plan are exercisable only by the Participant, his guardian or legal representative, and after the Participant's death Awards are only exercisable by the person who acquired the right to exercise such Award by bequest or inheritance, and only in accordance with the terms of such Award as determined by the Committee at the time of grant. Notwithstanding the foregoing provisions of this Section 16, the Committee may permit Awards under the Plan to be transferred by a Participant for no consideration to or for the benefit of the Participant's Immediate Family (including, without limitation, to a trust for the benefit of a Participant's Immediate Family or to a partnership for members of a Participant's Immediate Family), subject to such limits as the Committee may establish, and the transferee shall remain subject to all the terms and conditions applicable to such Award prior to such transfer. In the discretion of the Committee, the foregoing right to transfer Awards shall also apply to the right to transfer ancillary rights associated with an Award. However, in no event shall an Incentive Stock Option be transferable to the extent that such transferability would violate the requirements applicable to such option under Code section 422. Transfer to a Participant's Immediate Family may be permitted by the Committee with respect to Awards granted on or after November 1, 1996; provided that on and after that date, the Committee may, in its discretion, also amend previously granted outstanding Award Agreements to permit such transferability. 17. Adjustment. In the event of any change in the outstanding Common Stock of the Company by reason of any stock split, stock dividend, combination or reclassification of shares, recapitalization, merger, or other corporate transaction, including but not limited to the payment of a dividend or the making of a distribution to shareholders of the Company in property or in cash in an amount in excess of the Company's normal dividend or distribution policy in effect at the time, the Committee shall, where applicable, equitably adjust the number of shares of stock reserved under the Plan and the exercise or purchase price and the number or class of shares covered by outstanding Awards denominated in stock or units of stock to preserve the benefit of such Awards for the Company and the Participant. Upon the effective date of the dissolution or liquidation of the Company, or of a reorganization, merger or consolidation of 9 the Company with one or more other corporations in which the Company is not the surviving corporation, or of the transfer of substantially all of the assets or shares of the Company to another corporation (any such transaction being referred to herein as a "Terminating Event"), the Plan and any Award granted hereunder shall terminate unless provision is made in writing in connection with such Terminating Event for the continuance of the Plan and for the assumption of Awards theretofore granted hereunder, or the substitution for such Awards of new awards issued by the successor corporation, or a parent or subsidiary thereof, with such appropriate adjustments as may be determined or approved by the Committee or its successor, in which event the Plan and the Awards theretofore granted or substituted therefor, shall continue in the manner and under the terms so provided. Upon the occurrence of a Terminating Event in which provision is not made for the continuance of the Plan and for the assumption of Awards theretofore granted or the substitution for such Awards of new awards issued by the successor corporation, each Participant to whom an Award has been granted under the Plan shall be entitled to receive payment, as applicable, or to exercise, in whole or in part, such Participant's rights under any Award granted without regard to any restrictions on exercise that would otherwise apply, and any restrictions on outstanding Stock Awards shall lapse, in each case effective as of the effective date of the Terminating Event. In the event a Participant shall not, prior to the effective date of a Terminating Event fully exercise a stock appreciation right granted under the Plan, such stock appreciation right to the extent not previously exercised, shall be deemed exercised by the Participant as of the effective date of the Terminating Event. In the event a Participant shall not, prior to the effective date of a Terminating Event fully exercise an option granted under the Plan, such option, to the extent not previously exercised, shall be deemed surrendered by the Participant as of the effective date of the Terminating Event and such Participant shall receive in exchange therefor a cash payment equal to the difference, if a positive amount, between the Fair Market Value as of the effective date of the Terminating Event of the shares of stock then subject to the option minus the aggregate option price therefor. To the extent that a Participant, pursuant to this Section 17 has a right to exercise, surrender or receive payment under any Award, or restrictions on any Stock Award lapse, solely on account of a Terminating Event, such exercise, surrender, payment or lapse shall be contingent upon the consummation of such Terminating Event. Upon a "change in control" of the Company, as defined in rules or regulations promulgated by the Committee from time to time or in Award Agreements executed pursuant to this Plan, Participants shall, unless the Committee otherwise determines at the time of grant, have the right, notwithstanding any 10 restrictions that would otherwise apply, to exercise any stock option or stock appreciation right, any restrictions on outstanding Stock Awards granted under the Plan shall lapse, and Participants who have been granted Cash Awards under the Plan shall immediately be entitled to receive full payment of such Awards. In addition, Participants shall have the right to elect to receive a cash payment equal to the Fair Market Value of any stock otherwise distributable in connection with an Award under the Plan. To the extent a Participant has the right to exercise or receive payment under an Award, or restrictions on a Stock Award lapse, solely on account of a change in control, such right to exercise on surrender or the lapse of such restrictions shall be contingent upon the consummation of such change in control. 18. Employment and Stockholder Status. Neither the adoption of the Plan nor the granting of any Award shall confer upon any Participant any right to continue as an employee or director of the Company, nor shall it interfere in any way with the right of the Company to terminate the employment of any of its employees at any time. No Award shall create any rights in a Participant as a stockholder of the Company until shares of Common Stock are registered in the name of the Participant. 19. Governing Law. The Plan and all determinations made and actions taken pursuant hereto, to the extent not otherwise governed by the Code, the securities laws of the United States or other federal law, shall be governed by the law of the State of California and construed accordingly. 20. Effective Date. The Plan shall become effective on the date in 1993 it is adopted by the Board subject to the approval of a majority of the shares eligible to be voted at the next annual meeting of stockholders and subject to any required regulatory approval. All Awards granted prior to stockholder approval are subject to such approval and, notwithstanding any other provision of the Plan, if such approval is not obtained, all such Awards as well as dividends paid or payable with respect to such Awards shall be forfeited. Except as otherwise set forth in this amended and restated Plan, the changes reflected in the amended and restated plan shall be effective July 22, 1996, provided that the changes to Supplement A and Exhibit I shall be effective November 1, 1996. 21. Dispute Resolution. All disputes arising as to the interpretation or application of the Plan shall be decided by the Committee. The Committee shall provide the Participant with a written determination within 60 days of its decision with respect to such dispute. 11 SUPPLEMENT A ELIGIBLE DIRECTORS AUTOMATIC OPTION GRANT A-1. General. The grant of a Stock Option under this Supplement A entitles the Participant to purchase shares of Common Stock at a price fixed at the time the Stock Option is granted. A Stock Option granted under this Supplement A is not intended to satisfy the requirements applicable to an "incentive stock option" as described in Section 422(b) of the Code. A-2. Participation. As of August 23, 1994 and as of the first business day after each annual meeting of the Company's shareholders thereafter, each member of the Board who is then an Eligible Director shall be granted a "Stock Option", which shall be an option to purchase 5,000 shares of Common Stock (as adjusted pursuant to Section 17.) A-3. Price. The determination and payment of the purchase price of a share of Common Stock under each Stock Option granted pursuant to this Supplement A shall be subject to the following: (a) The purchase price shall be the greater of (i) 100% of the Fair Market Value of a share of Common Stock as of the date on which such Stock Option is granted, or (ii) the par value of a share of such Common Stock on such date. For purposes of this Supplement A, in determining the Fair Market Value of a share of Common Stock, the phrase "unless determined otherwise by the Committee in good faith" appearing in Section 3(h) of the Plan shall be disregarded. The purchase price shall be subject to the adjustment described in Section 17 of the Plan relating to Extraordinary Dividends. (b) The full purchase price of each share of Common Stock purchased upon the exercise of any Stock Option shall be paid at the time of such exercise and, as soon as practicable thereafter, a certificate representing the shares so purchased shal1 be delivered to the person entitled thereto. (c) The purchase price shall be payable in cash or in shares of Common Stock (valued at Fair Market Value as of the day of exercise), or in any combination thereof. A-4. Exercise. A Stock Option granted under this Supplement A as of any date shall first be exercisable on the date of the first annual meeting of the Company's shareholders that occurs after the date as of which the Stock Option is granted, but only if the Participant continues to serve as a member of the Board 12 from the date of grant until such annual meeting (or becomes employed by the Company, and remains employed or a director until such annual meeting.) However, upon approval of this 1996 amendment and restatement of the Plan by the Company's stockholders, and notwithstanding the foregoing provisions of this Supplement A, if the Participant's Date of Termination occurs on account of the Participant's death, the Stock Options shall be deemed to have become exercisable as of the date immediately prior to the date of death; provided that the revision set forth in this sentence shall apply to Stock Options granted under this Supplement A which were outstanding on or at any time after November 27, 1995 (regardless of whether such Stock Options were previously granted or are granted in the future). A Stock Option granted under this Supplement A will not be exercisable after the Expiration Date applicable to that Stock Option, and all rights to purchase shares of Common Stock pursuant to the Stock Option shall cease as of the Stock Option's Expiration Date. A-5. Expiration Date. The "Expiration Date" with respect to a Stock Option granted under this Supplement A means the earliest to occur of: (a) the ten-year anniversary of the date on which the Stock Option is granted; (b) if the Participant's Date of Termination occurs by reason of Retirement, the thirty-six-month anniversary of such Date of Termination; (c) if the Participant's Date of Termination occurs by reason of death, the twelve-month anniversary of such Date of Termination; and (d) if the Participant's Date of Termination occurs for reason other than Retirement or death, the three-month anniversary of such Date of Termination. A Participant shall not be permitted to exercise a Stock Option granted under this Supplement A after the Participant's Date of Termination except to the extent that the Stock Option is exercisable immediately prior to such Date of Termination. For purposes of this Supplement A: (a) a Participant's "Date of Termination" shall be the date the Participant ceases to be a member of the Board, or, if the Participant becomes employed by the Company, the date the Participant both ceases to be so employed and ceases to be a director; and (b) a Participant's Date of Termination shall be deemed to be by reason of "Retirement" if such Date of Termination occurs on or after the date on which the Participant has attained age 65. However, upon 13 approval of this 1996 amendment and restatement of the Plan by the Company's stockholders, clause (b) of the preceding sentence shall be revised to read: "a Participant's Date of Termination shall be deemed to be by reason of "Retirement" if such Date of Termination occurs after five (5) years of Board Service as an Eligible Director"; provided that the revision set forth in this sentence shall apply to Stock Options granted under this Supplement A which were outstanding on or at any time after November 27, 1995 (regardless of whether such Stock Options were previously granted or are granted in the future). A-6. Agreement With Company. Each Stock Option granted under this Supplement A shall be evidenced by an Agreement (an "Agreement") duly executed on behalf of the Company and by the Participant to whom such option is granted and dated as of the applicable date of grant. Each Agreement shall be substantially in the form attached hereto as Exhibit I. A-7. Limitation on Amendment. Notwithstanding the provisions of Section 14 of the Plan, in no event shall the provisions of the Plan relating to Awards under this Supplement A be amended more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act, or the rules thereunder; provided, however, that the limitation set forth in this Section A-7 shall be applied only to the extent required under SEC Rule 16b-3(c)(2)(ii)(B), or any successor provision thereto. 14 EXHIBIT I ELIGIBLE DIRECTORS STOCK OPTION AGREEMENT 1. Grant of Option. Glendale Federal Bank, Federal Savings Bank (the "Company"), which term shall also include any direct or indirect subsidiary of the Company hereby grants as of ________ (the "Grant Date") to the person whose name appears below (the "Participant" an option (the "Option") to purchase 5,000 shares of the common stock, par value $1.00 per share, of the Company (the "Shares") at a purchase price of $__ per Share, which Option shall be exercisable as set forth in and subject to the terms and conditions of this Stock Option Agreement (the "Agreement") and the Company's Amended and Restated 1993 Stock Option and Long-Term Performance Incentive Plan (the "Plan"). The Option granted herein is intended to be a nonqualified stock option. Name of Participant: ______________________________________ 2. Vesting. The Option shall first become exercisable on the date of the first annual meeting of the Company's stockholders that occurs after the Grant Date, but only if the Participant continues to serve as a member of the Board from the Grant Date until such annual meeting (or becomes employed by the Company and remains employed or a director until such annual meeting). Notwithstanding the foregoing provisions of this Section 2, if the Participant's Date of Termination occurs on account of the Participant's death, the Stock Options shall be deemed to have become exercisable as of the date immediately prior to the date of death. 3. Exercise of Option. (a) Subject to the terms and conditions set forth in this Agreement, the Option may be exercised by the Participant by giving written notice of exercise to the Secretary of the Company, specifying the number of Shares to be purchased and the purchase price to be paid therefor. Such notice shall be accompanied by payment of the required purchased price for the Shares to be purchased and such exercise shall be effective upon receipt by the Company of the written notice together with such payment. The purchase price may be paid (i) in immediately available funds, (ii) by certified check payable to the order of the Company, (iii) by tender of stock certificates, duly endorsed, 15 accompanied by appropriate stock powers separate from the certificates presented or otherwise in proper form for transfer to the Company, representing Shares having a Fair Market Value (as determined in accordance with the terms of the Plan) at least equal to the relevant purchase price, (iv) by any combination of the foregoing, or (v) with any other form of consideration (including payment with a cashless exercise program under which, if so instructed by the Participant, Shares may be issued directly to the Participant's broker or dealer upon receipt of the purchase price in cash from the broker or dealer), if such form of consideration shall have been approved by the Committee (as defined in the Plan). (b) If upon any exercise of the Option any federal, state or local tax withholding is required under applicable law, the Participant shall make satisfactory withholding arrangements with the Company, which may include any method described in (a) above. 4. Expiration Date. The "Expiration Date" of the Option shall be the earliest to occur of: (a) the ten-year anniversary of the Grant Date; (b) if the Participant's Date of Termination occurs by reason of Retirement, the thirty-six-month anniversary of such Date of Termination; (c) if the Participant's Date of Termination occurs by reason of death, the twelve-month anniversary of such Date of Termination; and (d) if the Participant's Date of Termination occurs for a reason other than Retirement or death, the three-month anniversary of such Date of Termination. For purposes of this Agreement: (A) A Participant's "Date of Termination" shall be the date the Participant ceases to be a member of the Board, or, if the Participant becomes employed by the Company, the date the Participant both ceases to be so employed and ceases to be a director. (B) A Participant's Date of Termination shall be deemed to be by reason of "Retirement" if such Date of Termination occurs after five (5) years of Board Service as an Eligible Director. 16 5. Delivery of Shares. The Company shall, upon payment of the full purchase price for the number of Shares to be purchased, promptly deliver a certificate or certificates evidencing such Shares to the Participant; provided, that if any law or regulation requires the Company to take any action with respect to such issuance of Shares, then the date of such issuance and of delivery of such certificate or certificates shall be extended for the period necessary to complete such action. No Shares shall be issued and delivered upon exercise of the Option unless and until, in the opinion of counsel for the Company, any applicable registration, qualification or other securities law requirements, any applicable listing requirements of any national securities exchange on which stock of the same class is then listed, and any other requirements of law or of any regulatory authority having jurisdiction over such issuance and delivery, shall have been complied with. The Company shall use commercially reasonable efforts to take all required action to achieve such compliance as promptly as practicable. 6. Nontransferability of Option. Except as provided in the following sentence, the Option is personal and no rights granted hereunder may be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) nor shall any such rights be subject to execution, attachment or similar process. In the event of the death of a Participant, if the Option had become exercisable prior to the date of death, the Option may be exercised within a period of up to twelve months after the date of death by the person to whom the Option shall be transferred by will or the laws of descent and distribution, provided, that the Option may not in any event be exercised after the Expiration Date. The Option shall be exercisable, during the lifetime of the Participant, only by the Participant. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of the Option or of any such rights contrary to the provisions hereof, or upon the levy of any attachment or similar process upon the Option or such rights, the Option and such rights shall, at the election of the Company, become null and void. Neither the Participant nor his executors, administrators, heirs or legatees shall be or have any rights or privileges of a stockholder with respect to any Shares issuable upon exercise of the Option granted hereunder unless and until certificates representing such Shares shall have been duly issued and delivered. 7. No Special Rights. Nothing contained in this Agreement shall confer upon the Participant any right to continued service as a director of the Company or interfere in any way with the right of the Company or its stockholders to remove Participant from the Board in accordance with applicable law and the Bylaws 17 of the Company. In the event the Participant shall become employed by the Company, nothing contained in this Agreement shall confer upon the Participant any right to continued employment or interfere in any way with the right of the Company to terminate the employment of the Participant at any time. 8. Adjustments Upon Changes in Stock. The number and type of Shares covered by the Option, and the exercise price and permitted time of exercise thereof, are subject to adjustment in accordance with the provisions of paragraph 17 of the Plan or any successor provision thereof in the event of any change in the outstanding Common Stock of the Company or the occurrence of any Terminating Event or the payment of any Extraordinary Dividend as referred to therein. Any such adjustments shall be final, binding and conclusive upon the Participant and any other party purporting to have any interest in or right with respect to the Option. In no event shall the purchase price for a Share be adjusted below the par value thereof, nor shall any fractions of a Share be issued upon exercise of the Option. 9. Effect of Change in Control. Upon the occurrence of a Change in Control with respect to the Company, the Option shall immediately become exercisable in full notwithstanding the provisions of paragraph 2 hereof and shall continue to be so exercisable for the remaining term of the Option. For the purposes hereof, a "Change in Control" shall be deemed to have occurred if: (i) any "Person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act and the regulations of the SEC thereunder, each as in effect on the effective date of the Plan, and including any such persons that may be deemed to be acting in concert with respect to the Company or the acquisition, ownership or voting of Company securities) becomes, directly or indirectly, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act and the regulations of the SEC thereunder, each as in effect on the effective date of the Plan), of outstanding securities of the Company representing 20% or more of the combined voting power of the Company's outstanding securities; (ii) at any time during the three-year period after the date hereof, the composition of the board of directors of the Company is changed such that persons who were directors of the Company at the beginning of such three-year period, or persons nominated or elected by a majority of such persons, do not continue to comprise a majority of the members of such board of directors of the Company; (iii) the stockholders of the Company approve a merger or consolidation of the Company with, or a reorganization transaction involving the Company and, any other entity, other than a merger, consolidation or reorganization which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into 18 voting securities of the surviving entity) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of more than 50% of its consolidated assets; or (v) any other event, transaction or series of events or transactions occurs as a result of which any person may be deemed to "acquire control" of the Company (as such terms are defined in the regulations of the Office of Thrift Supervision set forth at 12 C.F.R. Part 574 as in effect on the effective date of the Plan). 10. Other Employee Benefits. In the event Participant becomes employed by the Company, the amount of any compensation received by a Participant as a result of the exercise of this Option shall not constitute "earnings" with respect to which any other employee benefits of the Participant are determined, including, without limitation, benefits under any qualified or nonqualified savings, pension or life insurance plan, except to such extent, if any, as may specifically be provided in any particular plan or agreement relating to any such benefits. 11. Notice. Any notice required to be given under the terms of this Option shall be properly addressed if addressed to the Secretary of the Company at the principal executive office of the Company or to the Participant at the address indicated below, or at such other address as either party to this Agreement may hereafter designate in writing to the other. GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK By: -------------------------- [Name] [Title] 19 The Option set forth above is hereby accepted and the terms and provisions thereof agreed to by the undersigned. - ------------------------------- (Participant's Name) Address: ----------------------- - ------------------------------- 20 Minutes of the Joint Meeting of the Boards of Directors Golden State Bancorp Inc. and Glendale Federal Bank, F.S.B. December 15, 1997 The Stock Option Committee approved, and recommended that the Board of Directors approve, an amendment to the Amended and Restated Stock Option and Long-Term Performance Incentive Plan to add limited liability corporations organized for the benefit of members of the immediate family of option holders to the list of permissible transferees of stock awards. Upon motion duly made and seconded, the Board of Directors of the Corporation unanimously approved the following resolution: RESOLVED, that the third sentence of Section 16 of the Amended and Restated Stock Option and Long-Term Performance Incentive Plan is hereby amended to read as follows: "Notwithstanding the foregoing provisions of this Section 16, the Committee may permit Awards under the Plan to be transferred by a Participant for no consideration to or for the benefit of the Participant's Immediate Family (including, without limitation, to a trust for the benefit of one or more members of the Participant's Immediate Family or to a partnership or limited liability corporation organized for the benefit of one or more members of a Participant's Immediate 12 Minutes of the Joint Meeting of the Boards of Directors Golden State Bancorp Inc. and Glendale Federal Bank, F.S.B. December 15, 1997 Family) subject to such limits as the Committee may establish, and the transferee shall remain subject to all the terms and conditions applicable to such Award prior to such transfer." Upon motion duly made and seconded, the Boards of Directors of the Corporation and the Bank unanimously approved the reports of, respectively, the Stock Option Committee and the Officer Compensation and Personnel Committee. 13 EX-10.3 11 AMENDED & RESTATED EMPLOYMENT AGREEMENT EXHIBIT 10.3 AMENDED AND RESTATED -------------------- EMPLOYMENT AGREEMENT -------------------- BETWEEN ------- GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK ------------------------------------------- AND --- STEPHEN J. TRAFTON ------------------ 1 TABLE OF CONTENTS
Page ---- 1. Position and Duties.................................. 3 2. Executive's Acceptance of Employment................. 4 3. Term................................................. 4 4. Confidentiality...................................... 4 5. Compensation......................................... 4 6. Termination of Employment............................ 6 7. Compensation Upon Termination, Etc. ................. 10 8. Arbitration.......................................... 16 9. Notices.............................................. 16 10. Miscellaneous........................................ 17
2 THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement") dated as of the 1st day of January, 1998, is made by and between GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK, a federally-chartered stock form savings bank, with its principal executive offices at 414 North Central Avenue, Glendale, California (the "Bank"), and STEPHEN J. TRAFTON, resident of 5022 Hook Tree Road, La Canada, California (the "Executive"). WHEREAS, the Bank wishes to assure itself of the services of Executive for the period provided in this Agreement and the Executive is willing to serve in the employ of the Bank on a full-time basis for said period upon the terms and conditions hereinafter provided; and WHEREAS, the Board of Directors of the Bank (the "Board") has determined that the best interests of the Bank would be served by providing for the terms and conditions of Executive's employment as set forth herein. NOW, THEREFORE, in consideration of the mutual covenants herein contained and intending to be legally bound hereby, the Bank and the Executive hereby agree as follows: 1. Position and Duties. The Bank hereby agrees to, and hereby does, employ ------------------- the Executive, for the term of this Agreement, to render services to the Bank (and its subsidiaries or affiliates) as its President, Chief Executive Officer and Chairman of the Board ("President, CEO and COB") and in connection therewith to perform such duties, not inconsistent with the terms of this Agreement, as the Executive may reasonably be directed to perform by the Board. In addition to his duties as President, CEO and COB, the Executive is a member of the Board and he shall serve as a member of the Board until such time as the shareholders of the Bank may decline to re-elect him or he is ordered to be suspended as described in Subsection 6(f) hereof. The Executive shall have the right to devote a reasonable amount of time and effort to industry, community or charity organizations, and, subject to the provisions of Section 4 hereof, the Executive may serve as a director of other companies subject to the prior approval by the Board, except that Executive may not serve as a director of any financial institution (other than Golden State Bancorp, Inc. (the "Holding Company"), the Bank or a subsidiary thereof). 3 2. Executive's Acceptance of Employment. ------------------------------------ The Executive hereby accepts such employment and agrees faithfully to perform to the best of his ability the duties described in Section 1. 3. Term. Subject to Section 6 hereof, the term of the employment of the ---- Executive under this Agreement shall commence on January 1, 1998 (the "Effective Date") and shall terminate on the earlier of (i)the Effective Date under the Amended and Restated Second Employment Agreement of even date between the Bank and Executive (the "Second Agreement") and December 31, 2000 (the "Expiration Date"). The term of this Agreement may be extended for one (1) year by a vote of the Board prior to the end of each calendar year. This Agreement will be deemed amended by a certification attached to the contract of a resolution by the Board, extending the term. 4. Confidentiality. The Executive agrees: --------------- (a) To keep secret all confidential matters of the Bank, specifically indicated to be such by the Bank or established as such by written Bank policy, and not to disclose them to anyone outside the Bank, either during or after his employment with the Bank, except with the prior written consent of the Bank or as required by law; and (b) To deliver promptly to the Bank on termination of employment of the Executive all memoranda, notes, records, reports and other documents (and all copies thereof) with respect to any such confidential matters and other proprietary information (such as customer lists, supplier lists, etc.) which the Executive may then possess or have under his control. 5. Compensation. In consideration of the Executive's agreements contained ------------ herein and as compensation to the Executive for the performance of the services required hereunder, the Bank shall pay or grant to him the following salary and other compensation and benefits: (a) A base salary, not less than $735,000.00 per year, as is determined from time to time by the Board or an appropriate committee thereof, payable in equal installments not less frequently than monthly in accordance with the Bank's payroll practices; provided, however, that the Executive's base salary shall be reviewed by the Board no less frequently than annually on 4 the basis of the types of factors it generally takes into account in evaluating the salaries of executive officers of the Bank; (b) Participation in and the right to receive awards under the terms and conditions of the Holding Company's Amended and Restated Stock Option and Long- Term Performance Incentive Plan (the "Incentive Plan"); (c) Participation under any other compensation plan, program or arrangement, now existing or hereafter adopted by the Bank, as applicable to executive officers of the Bank, but only if and/or to the extent the Board, or an appropriate committee thereof administering such plan, program or arrangement, may determine is appropriate; (d) Participation on the same terms and conditions as all other employees in all employee benefit plans, programs or arrangements, pension plans (including any supplemental pension plan), whether or not qualified within the meaning of Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), or welfare plans, including, but not limited to, the defined benefit plan maintained for the benefit of employees of the Bank (the "Qualified Pension Plan"), the Sheltered Pay Plan (the "401(k) Plan"), and any Employee Stock Ownership Plan (the "ESOP"), and any health, life, disability or other welfare plans, as may be now or hereafter sponsored or maintained for all employees of the Bank; (e) Reimbursement for reasonable travel and other expenses incurred by the Executive in performing his obligations hereunder, pursuant to the terms and conditions of the applicable policy of the Bank in respect thereto; (f) Reasonable vacations, absences on account of temporary illness, corporate perquisites and fringe benefits customarily enjoyed by employees or officers of the Bank, each under the terms and conditions of the policy of the Bank in respect thereto; (g) Indemnification and protection from liability under 12 C.F.R. Section 545.121; and (h) An amount not to exceed Seven Thousand Five Hundred Dollars ($7,500.00) per annum for personal financial planning services. Nothing contained in this Agreement shall prevent the Board from amending or otherwise altering any plan, program or arrangement, so long as such amendment or alteration (i) is 5 accomplished pursuant to the terms thereof as in effect on the Effective Date or on the date such plan or arrangement is adopted, if adopted after the Effective Date, and (ii) equitably affects all employees, executive or otherwise, of the Bank previously covered thereunder. 6. Termination of Employment. This Agreement shall terminate upon the ------------------------- Expiration Date or upon the death of the Executive; provided, however, those -------- ------- obligations which are contemplated to be performed after the termination of this Agreement shall survive such termination. The Bank may terminate this Agreement and the Executive's employment hereunder prior to the Expiration Date for "Disability" or "Cause", as such terms are herein defined. The Executive may terminate this Agreement and his employment hereunder prior to the Expiration Date by his "Resignation for Good Reason", as such terms are hereinafter defined. Termination of this Agreement, for any reason not set forth above, shall not be deemed a permitted termination and shall be deemed a breach of this Agreement. In the event of any termination of this Agreement and/or the Executive's employment hereunder prior to the Expiration Date, whether a permitted termination or otherwise, the provisions of Section 7 of this Agreement shall determine the amount, if any, of any compensation thereafter due the Executive in respect to such termination. As used in this Agreement, the following terms shall have the meanings set forth: (a) Disability. The Executive shall be entitled to leaves of absence from ---------- the Bank in accordance with the policy of the Bank, for illness or other temporary disabilities for a period or periods not exceeding an aggregate of six (6) months in any calendar year, and his compensation and status as an employee hereunder shall continue during any such period or periods. If, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from his duties with the Bank on a full-time basis for six (6) consecutive months, and within thirty (30) days after written notice of termination is given by the Bank, the Executive shall not have returned to the full-time performance of his duties, the Executive shall be deemed to have experienced a Disability and the Bank may terminate the Executive's employment. (b) Cause. Termination by the Bank of Executive's employment for "Cause" ----- shall mean termination for reason of the Executive's personal dishonesty, incompetence, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, regulation (other than traffic 6 violations or similar offenses), final cease-and-desist order or material breach of any provision of this Agreement. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the total number of outside directors of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with his counsel, to be heard before the Board), finding that in the good-faith opinion of the Board the Executive was guilty of conduct set forth above and specifying the particulars thereof in detail, which resolution shall constitute, with respect to a termination for Cause by the Bank, a Notice of Termination for purposes of Subsections 6(h) and 6(i) of this Agreement. (c) Resignation for Good Reason. For purposes of this Agreement, --------------------------- "Resignation for Good Reason" shall mean the Executive's election to resign as a result of the occurrence of one of the events referred to in Subsection (d) below. (d) Good Reason. For purposes of this Agreement, "Good Reason", absent the ----------- Executive's express written consent to the contrary, means the occurrence of any one of the following events: (i) removal of the Executive as President and/or CEO and/or COB of the Bank or the Holding Company(by reason other than death, Disability or Cause), or any other material breach by the Bank of its obligations contained in this Agreement; (ii) without the prior written consent of the Executive, the assignment to the Executive of any duties inconsistent with his status as President, CEO and COB of the Bank or a substantial alteration in the nature or status of the Executive's duties and responsibilities which renders the Executive's position to be of less dignity, responsibility or scope, provided, however, it shall -------- ------- not be an event of Good Reason if the Executive is assigned additional duties for the Bank or any affiliate or subsidiary of the Bank which are not inconsistent with the duties described in Section 1 hereof, so long as the aggregate of all duties assigned to the Executive in connection with his service with the Bank, its affiliates or subsidiaries do not require the Executive to devote, on a consistent and sustained 7 basis, substantially more time than other senior level executives of the Bank are required to devote to their duties; (iii) the failure of the Holding Company or the Bank to continue in effect any compensation plan, program or arrangement in which the Executive then participates specifically set forth in Section 5 hereof or the failure by the Bank to continue the Executive's participation therein, except for across-the-board reductions or discontinuance similarly affecting all Executives of the Holding Company or the Bank, if applicable, unless an equitable arrangement reasonably acceptable to the Executive (embodied in an ongoing substitute or alternative plan, program or arrangement) has been made with respect to such plan; (iv) the failure of the Bank to obtain an agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 10(b)(ii) hereof; (v) the failure of the Holding Company or the Bank to nominate the Executive to stand for election as a director of the Holding Company or the Bank, respectively; (vi) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Subsection (h) below and, if applicable, Subsection (b) above, and for purposes of this Agreement, no such purported termination shall be effective; or (vii) [intentionally deleted] (e) Change in Control. [intentionally deleted] ----------------- (f) Suspension and Special Regulatory Rules. --------------------------------------- (i) If the Executive is suspended and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Sections 8(e)(3) or 8(g)(1) of the FDI Act (12 U.S.C. 1818(e)(3) or 1818(g)(1), the Bank's obligations under this Agreement shall be 8 suspended as of the date of service of such notice, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion (x) pay the Executive all or part of the compensation withheld while its contract obligations were suspended and (y) reinstate (in whole or in part) any of its obligations which were suspended. (ii) If the Executive is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Sections 8(e)(4) or 8(g)(1) of the FDI Act (12 U.S.C. 1818(e)(4) or 1818(g)(1), the Bank's obligations under this Agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. (iii) All obligations under this Agreement shall be terminated, except to the extent it is determined that continuation of such employment is necessary for the continued operation of the Bank, (x) by the Director of OTS (the "Director") or his or her designee at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the FDI Act, or (y) by the Director or his or her designee at any time the Director or his or her designee approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the Director to be in unsafe or unsound condition, but in any of the above-described events, the vested rights of the Executive shall not be affected. (iv) If the Bank is in default (as defined in Section 3(x)(1) of the FDI Act) or in the event of receipt of any notice or order of a default, an agreement to provide assistance or an approval of a supervisory merger, the suspension or termination of the Bank's obligations hereunder shall be (x) automatic and shall not be conditioned upon any further action by the Bank or delivery of any notice to the Executive and (y) deemed a suspension or termination of employment jointly and severally by the Bank and the regulatory body providing assistance or delivery 9 of such document; provided, however, that (i) such suspension or termination shall not prejudice the Executive's vested rights under this Agreement and (2) notwithstanding the foregoing, the Bank's obligations hereunder shall not be suspended or terminated to the extent deemed necessary by the Director or his or her designee for the continued operation of the Bank as provided in Subsection 6(g)(iii) and 12 C.F.R. Section 563.39(b)(4) and (5). (g) Notwithstanding other provisions in this Agreement, the Bank may terminate the Executive's employment at any time, but termination pursuant to this Subparagraph (g) shall not prejudice the Executive's right to compensation or benefits as provided in this Agreement. (h) Notice of Termination. Any purported termination by the Bank or --------------------- Resignation for Good Reason by the Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 9 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination, resignation or retirement provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for such termination, resignation or retirement under the provision so indicated. (i) Date of Termination, Etc. "Date of Termination" shall mean (i) if the ------------------------- Executive's employment is terminated for Cause, the date the Notice of Termination is given; (ii) if the Executive's employment is terminated for Disability, thirty days after Notice of Termination is given (provided that the Executive shall not have returned to the performance of the Executive's duties on a full-time daily basis during such thirty-day period); or (iii) if the Executive's employment is terminated for any reason other than Cause or Disability, the date specified in the Notice of Termination (which shall not be less than thirty days nor more than sixty days, from the date such Notice of Termination is given). 7. Compensation Upon Termination ----------------------------- (a) Death. If the Executive's employment hereunder terminates by ----- reason of his death, the Executive's surviving spouse and/or beneficiary or estate (as designated in accordance with any applicable plan) shall be entitled to receive 10 a payment, as determined below, in a lump sum in cash within 30 days of the date of death, and any benefits to which the Executive is entitled (i) under any insurance policies on the life of the Executive which by their respective terms are payable to the Executive's beneficiary, estate or personal representative, (ii) under the insurance programs and other employee benefit plans, programs and arrangements then in effect of the Bank, and (iii) under the 401(k)Plan. The payment referred to above in this Section 7(a) shall be equal to the sum of (i) the Executive's annual base salary in effect on the date of death and the Executive's target bonus for the Bank's fiscal year in which death occurs multiplied by the sum of the number of whole years remaining on the term of the Agreement and a fraction, the numerator of which is the number of days remaining from the date of death in the current year of the Agreement and the denominator of which is 365. The Bank shall have no further obligation under this Agreement with respect to the Executive. (b) Disability. If the Executive's employment hereunder terminates by reason ---------- of his Disability, the Executive shall be entitled to receive a payment, as determined below, in a lump sum in cash within 30 days of the date of death, and any benefits provided under such plans and programs then maintained for the benefit of the Executive or in which he then participates. The payment referred to above in this Section 7 (b) shall be equal to the sum of (i) the Executive's annual base salary in effect on the date of the Disability termination and the Executive's target bonus for the Bank's fiscal year in which the Disability termination occurs multiplied by the sum of the number of whole years remaining on the term of the Agreement and a fraction, the numerator of which is the number of days remaining from the date of the Disability Termination in the current year of the Agreement and the denominator of which is 365. The Bank shall have no further obligation under this Agreement with respect to the Executive. (c) Cause. If the Executive's employment hereunder is terminated by the Bank ----- for Cause, the Bank shall pay to the Executive his full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and the Bank shall have no further obligations to the Executive under this Agreement, and the Executive shall have no right to receive compensation or other benefits for any period after the Date of Termination, except as provided in Section 8 of this Agreement. (d) Voluntary Resignation. In the event the Executive resigns other than --------------------- pursuant to his Resignation for Good Reason, the Bank shall pay to the Executive his full base salary 11 through the Date of Termination at the rate in effect at the time Notice of Termination is given and the Bank shall have no further obligations to the Executive under this Agreement. (e) Suspension and Special Regulatory Rules. In the event the Bank's --------------------------------------- obligations hereunder are terminated by the Bank and/or a regulatory body pursuant to the Suspension and Special Regulatory Rules for reasons that do not constitute Cause, the Bank shall (i) pay to the Executive his full base salary through the Date of Termination at the rate then in effect, (ii) honor any other rights of the Executive that shall have vested through the Date of Termination, and (iii) have no further obligations to the Executive under this Agreement. (f) Other. If, prior to the Expiration Date and for reasons other than the ----- death of the Executive, the Executive's employment hereunder is terminated (A) by the Bank pursuant to Subsection 6(g), in breach of this Agreement or otherwise (other than for Cause or Disability), or (B) by the Executive pursuant to his Resignation for Good Reason, then the Executive shall be entitled to liquidated damages, and not as severance, in the amounts, property or rights determined as follows: (i) the Bank shall pay the Executive his full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given; (ii) with respect to regular base salary for the period specified herein, such regular base salary shall be determined at the rate in effect on the date a Notice of Termination is delivered (unless a reduction in compensation has preceded the Executive's Resignation for Good Reason in which case the rate of base salary shall be the rate in effect prior to such reduction). In the case of a termination by the Bank (other than for Cause or Disability) or a termination by the Executive pursuant to his Resignation for Good Reason under Subsections 6(d) (i), 6(d)(ii), 6(d)(iii), 6(d)(iv), 6(d)(v), or 6(d)(vi), the Executive shall be entitled to receive his regular base salary for a period of thirty-six (36) months if the termination occurs at a time when two (2) years or more remain on the term of the original or extended contract; twenty-four (24) months if the termination occurs at a time when two (2) years or less but more than one (1) year remains 12 on the original or extended term of the contract; and twelve (12) months if the termination occurs at a time when one (1) year or less remains on the original or extended term of the contract. By January 15th of each calendar year prior to a Change in Control, the Executive shall elect to receive his base salary as aforesaid either (A) at the times and in installments consistent with the Bank's payroll practices then in effect, or (B) in lieu of any further payments of regular base salary, a lump sum payment payable not later than the fifteenth day following the Date of Termination, equal to the amount due hereunder discounted to present value at a per annum discount rate equal to the weekly average auction rate for the sale of fifty-two (52) week notes of the United States Treasury as published in the Western Edition of the Wall Street Journal for the auction most recently held as of the Date of Termination applied to each future payment from the time it would have become payable ("Discount"). If Executive fails to exercise his election hereunder, then he shall be deemed to have elected payment by installments pursuant to the Bank's regular payroll practices. Regardless of the option exercised by Executive hereunder, the Bank may, at its option, pay a lump sum to Executive but at no greater Discount than that specified herein. In the case of a termination by the Executive pursuant to his Resignation for Good Reason under Subsection 6(d)(vii), the Executive shall be entitled to receive a lump sum payment payable not later than the fifteenth day following the Date of Termination and equal to his regular base salary for a period of thirty-six (36) months. This payment shall not be subject to the Discount specified above. (iii) upon entry of judgment favorable to the Executive in a court of competent jurisdiction or by an arbitration pursuant to Section 8 hereof or, if earlier, upon settlement of claims brought by the Executive in arbitration or a court of competent jurisdiction. (iv) the Executive shall be deemed to have elected continuation coverage within the meaning 13 of Section 4980B of the Internal Revenue Code of 1986 as amended ("Code") and the Bank shall bear the cost of such coverage until the earliest of (i) the date continuation coverage need no longer be provided under Section 4980B of the Code, (ii) the date which is eighteen (18) months from the Date of Termination, or (iii) the date the Executive is covered under the plan of another employer. In addition, the Bank shall pay for the continuation of life and long-term disability insurance in an amount equal to the coverage in force at the time of termination for the same period specified above. (v) a payment representing a pro rata portion of any incentive -------- compensation under Subsection 5(c) determined to be due for the portion of the incentive period then completed. (vi) the payments provided for in this Subsection (f) shall be made not later than the applicable date set forth above for such payment, provided, however, that if the amounts of such payments cannot be finally determined on or before such day, the Bank shall pay to the Executive on such day an estimated amount, as determined in good faith by the Bank, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth day after the date upon which such estimated amount shall have been paid. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Bank to the Executive payable on the fifth day after demand by the Bank (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). (vii) all options that have not yet vested at the time of termination under this provision shall immediately vest. This provision shall constitute an amendment to the Stock Option Agreements between the Executive and the Bank. Notwithstanding the foregoing provisions of this Subsection 7(f), and pursuant to RB 27a, the total amount of any payment to 14 Executive provided for in this Subsection 7(f) in connection with a termination, regardless of the reason, shall not exceed three times the Executive's average annual compensation. The term "compensation" as used in the preceding sentence means "compensation" as that term is defined in RB 27a, and the Executive's average annual compensation shall be based on the most recent five taxable years as of the Date of Termination, or the Executive's tenure with the Bank as of the Date of Termination in the event such tenure is less than five years. (g) The Executive shall not be required to mitigate the amount of any payment provided for in this Section 7 by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Section 7 be reduced by any compensation earned by the Executive as the result of employment by another employer, or otherwise. (h) In addition to all other amounts payable to the Executive under this Section 7, the Executive shall be entitled to receive all benefits vested and payable to him as of the Date of Termination under (1) the Qualified Pension Plan, the 401(k) Plan and any other plan, program or arrangement relating to retirement, profit sharing, or other benefits including, without limitation, any employee stock ownership plan, or any plan established as a supplement to any of the aforenamed plans; (2) the Incentive Plan; and (3) any health, life, disability or other welfare plan; provided, however, notwithstanding the -------- ------- foregoing, the Executive shall not be entitled to receive any benefit otherwise payable to him under any severance plan or policy of the Bank as of the Date of Termination. No amount payable to the Executive under Subsection 7(f) shall be considered for any benefit calculation or other purpose under the Qualified Pension Plan. (i) Notwithstanding the foregoing provisions of this Section 7, the amounts payable under this Agreement (i) are subject to and conditioned upon their compliance with 12 U.S.C. (S)1828(k) and any regulations promulgated thereunder, and (ii) shall be reduced to the extent necessary to cause the aggregate of all payments which must be taken into account for purposes of Section 280G of the Code and any regulations thereunder to be $100.00 less than the amount which would be deemed an excess parachute payment as defined in Section 280G(b)(1) of the Code. If, after a reduction to comply with Subsection (ii) above, the aggregate of payments will comply with Subsection (i), said condition shall then be deemed met and the payments may then be made, as reduced. 15 8. Arbitration. Any disputes hereunder shall be settled by arbitration in ----------- Los Angeles, California, under the auspices of, and in accordance with the rules of, the American Arbitration Association, and the decision in such arbitration shall be final and conclusive on the parties and judgment upon such decision may be entered in any court having jurisdiction thereof. A party wishing to initiate an arbitration proceeding with respect to a dispute regarding a termination shall give the other party written notice to that effect within thirty (30) days from the Date of Termination. In any arbitration initiated hereunder, whether by the Bank or the Executive, in which the issue of whether a valid basis exists for a termination of the Executive by the Bank for Cause under Subsections 6(b) and 6(f) above is in dispute, the Bank shall continue to pay to the Executive his regular base salary for a period of nine (9) months from the date of the written notification from the party initiating the proceedings and during the pendency of such arbitration, or until such time as a final order has been entered in the arbitration proceeding to the effect that a valid termination for Cause by the Bank occurred, whichever occurs first; provided, however, that the Bank's obligation to continue making such payments - -------- ------- of regular base salary, as aforesaid, shall be conditioned on receipt from the Executive of a written undertaking to repay all such payments, together with interest thereon at a rate equal to the Bank's average cost of funds for the period during which such payments are made, in the event that the final judgment rendered in connection with such arbitration proceeding is that the Bank had a valid basis for termination of the Executive for Cause. 9. Notices. All notices and other communications which are required or may ------- be given under this Agreement shall be in writing and shall be delivered personally or by registered or certified mail addressed to the party concerned at the following addresses: If to the Bank: -------------- Chairman, Compensation Committee of the Board of Directors Glendale Federal Bank, Federal Savings Bank 414 North Central Avenue Glendale, California 91203 16 If to the Executive: ------------------- Stephen J. Trafton 5022 Hook Tree Road La Canada, California 91011 or to such other address as shall be designated by notice in writing to the other party in accordance herewith. Notices and other communications hereunder shall be deemed effectively given when personally delivered, or, if mailed, 72 hours after deposit in the United States mail. 10. Miscellaneous ------------- (a) The terms of this Agreement are intended by the parties as a final expression of its terms and may not be contradicted by evidence of any prior or contemporaneous agreement, and no extrinsic evidence whatsoever may be introduced in any judicial or arbitration proceedings involving this Agreement. This Agreement supersedes all prior agreements, arrangements (including, but not limited to, severance arrangements) and undertakings, written or oral, relating to the subject matter hereof and shall provide for the sole remedies of the Executive upon termination of employment (other than as provided in the Second Agreement). (b) (i) This Agreement shall inure to the benefit of and be binding upon the Executive, the Executive's heirs, representatives or estate. (ii) This Agreement shall be binding upon and inure to the benefit of the Bank and its successors and assigns. The Bank shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Bank, by written agreement, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Bank would be required to perform if no such succession had taken place. As used in this Agreement, "Bank" shall mean (A) the Bank as defined in the preamble to this Agreement, and (B) any successor to the business or any of the assets of the Bank which executes and delivers the agreement provided for in this Subsection 10(b)(ii) or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (c) Except as provided in Paragraph 3, this Agreement may be amended, modified, superseded, canceled, renewed or extended and the terms or covenants hereof may be waived, only 17 by a written instrument executed by both of the parties hereto, or in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provisions hereof shall in no manner affect the right at a later time to enforce such provisions thereafter. No waiver by either party of the breach of any term or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach or a waiver of the breach, preceding or succeeding, of any other term or covenant contained in this Agreement. (d) In the event any one or more of the covenants, terms or provisions contained in this Agreement shall be invalid, illegal or unenforceable in any respect, the validity of the remaining covenants, terms and provisions contained herein shall be in no way affected, prejudiced or disturbed thereby. (e) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign or transfer this Agreement or any rights or obligations hereunder, except as provided in Paragraph 10(b) above. Without limiting the foregoing, the Executive's right to receive payments hereunder shall not be assignable or transferable, whether by pledge, creation of a security interest or otherwise, other than a transfer by his will or by the laws of descent or distribution, and in the event of any attempted assignment or transfer contrary to this Subsection 10(e), the Bank shall have no liability to pay any amount so attempted to be assigned or transferred. (f) This Agreement shall be governed by and construed in accordance with the laws of the State of California regardless of its principles of conflict of laws, except as such laws of the State of California may be preempted by the laws of the United States. (g) All payments required hereunder shall be made from the general assets of the Bank and the Executive shall have no rights greater than the rights of a general creditor of the Bank. (h) The Bank may withhold from any payment required hereunder such amounts for federal, state and local income tax as the Bank, in good faith, determines to be required by applicable laws, provided, however, the Bank shall provide the Executive with notice of the amount so withheld and shall promptly pay over such amounts to the appropriate taxing body. 18 (i) All rights and duties of the parties with respect to a change of control of the Bank or the Holding Company shall be governed exclusively by the provisions of the Second Agreement. ///// ///// ///// ///// ///// ///// ///// ///// IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered as of the date first above written. ATTEST: GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK /s/ James R. Eller, Jr. By: /s/ Diane C. Creel _________________________ ____________________________ Secretary Diane C. Creel, Chairperson James R. Eller, Jr. Officer Compensation and Personnel Committee WITNESS: EXECUTIVE: /s/ James R. Eller, Jr. /s/ Stephen J. Trafton - ------------------------- ---------------------------- James R. Eller, Jr. Stephen J. Trafton 19 EX-10.4 12 EMPLOYMENT AGREEMENT DATED DECEMBER 16, 1997 EXHIBIT 10.4 AMENDED AND RESTATED SECOND EMPLOYMENT AGREEMENT ------------------------------------------------ AGREEMENT by and between GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK (the "Company"), and STEPHEN J. TRAFTON (the "Executive"), dated as of the 16th ---------- day of December 1997. ----------- The Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below). The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Certain Definitions. (a) The "Effective Date" shall mean the first ------------------- date during the Change of Control Period (as defined in Section l(b)) on which a Change of Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (b) The "Change of Control Period" shall mean the period commencing on the date hereof and ending on the third anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Change of Control Period shall be automatically extended so as to terminate three years from such Renewal Date, unless at least 60 days prior to the Renewal Date the Company shall give notice to the Executive that the Change of Control Period shall not be so extended. 2. Change of Control. For purposes of this Section 2, "Company" shall ----------------- include within its definition Glendale Federal Bank, Federal Savings Bank, and its holding company, Golden State Bancorp Inc. (the "Holding Company"). For the purpose of this Agreement, a "Change of Control" shall mean: 1 (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition of its shares directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or 2 (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 3. Employment Period. The Company hereby agrees to continue the Executive ----------------- in its employ, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the third anniversary of such date (the "Employment Period"). 4. Terms of Employment. ------------------- (a) Position and Duties. ------------ ------ (i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities with the Company and the Holding Company shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 35 miles from such location. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Compensation. ------------ (i) Base Salary. During the Employment Period, the Executive shall ----------- receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this 3 Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Annual Target Bonus. In addition to Annual Base Salary, the ------------------- Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the "Annual Target Bonus") in cash at least equal to the Executive's highest target bonus under the Company's Executive Incentive Plans, or any comparable bonus under any predecessor or successor plan, for the last three full fiscal years prior to the Effective Date (annualized in the event that the Executive was not employed by the Company for the whole of such fiscal year) (the "Recent Annual Target Bonus"). Each such Annual Target Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Target Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Target Bonus. (iii) Incentive, Savings and Retirement Plans. During the Employment --------------------------------------- Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (iv) Welfare Benefit Plans. During the Employment Period, the Executive --------------------- and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (v) Expenses. During the Employment Period, the Executive shall be -------- entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 4 (vi) Fringe Benefits. During the Employment Period, the Executive shall --------------- be entitled to fringe benefits, including, without limitation, tax and financial planning services, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) Office and Support Staff. During the Employment Period, the ------------------------ Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (viii) Vacation. During the Employment Period, the Executive shall be -------- entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 5. Termination of Employment. (a) Death or Disability. The Executive's ------------------------- ------------------- employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full- time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 continuous days because of injury or sickness during which Executive cannot perform each of the material duties of his regular occupation for which the Executive is reasonably fitted by training, education, or experience, as determined by the Company's provider of the long term disability insurance plan. (b) Cause. The Company may terminate the Executive's employment during the ----- Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the 5 manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. (c) Good Reason. The Executive's employment may be terminated by the ----------- Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company or the Holding Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than as provided in Section 4(a)(i)(B) hereof or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section ll(c) of this Agreement. 6 For purposes of this Section 5(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. Anything in this Agreement to the contrary notwithstanding, a termination by the Executive for any reason during the 30-day period immediately following the first anniversary of the Effective Date shall be deemed to be a termination for Good Reason for all purposes of this Agreement. (d) Notice of Termination. Any termination by the Company for Cause, or by --------------------- the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the Executive's ------------------- employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 6. Obligations of the Company upon Termination. (a) Good Reason; Other Than ------------------------------------------- ----------------------- for Cause, Death or Disability. If, during the Employment Period, the Company - ------------------------------ shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the Recent Annual Target Bonus and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 and (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the "Accrued Obligations"); and 7 B. the amount equal to the product of (1) three and (2) the sum of (x) the Executive's Annual Base Salary and (y) the Recent Annual Target Bonus; and C. an amount equal to the excess of (a) the actuarial equivalent of the benefit under the Company's qualified defined benefit retirement plan (the "Retirement Plan") (utilizing actuarial assumptions no less favorable to the Executive than those in effect under the Company's Retirement Plan immediately prior to the Effective Date), and any excess or supplemental retirement plan in which the Executive participates (together, the "SERP") which the Executive would receive if the Executive's employment continued for three years after the Date of Termination assuming for this purpose that all accrued benefits are fully vested, and, assuming that the Executive's compensation in each of the three years is that required by Section 4(b)(i) and Section 4(b)(ii), over (b) the actuarial equivalent of the Executive's actual benefit (paid or payable), if any, under the Retirement Plan and the SERP as of the Date of Termination; (ii) for three years after the Executive's Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until three years after the Date of Termination and to have retired on the last day of such period; (iii) the Company shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in his sole discretion; (iv) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"); and (v) all stock awards shall immediately vest. (b) Death. If the Executive's employment hereunder terminates by reason ------ of his death during the Employment Period, the Executive's surviving spouse and/or beneficiary or estate (as designated in accordance with any applicable plan) shall be entitled to receive a payment, as determined below, in a lump sum in cash, within 30 days of the date of death, and the timely payment or provision of Other 8 Benefits. The payment referred to above in this Section 7(b) shall be equal to the sum of (i) the Executive's Annual Base Salary in effect on the date of death and the Executive's Recent Annual Target Bonus multiplied by the sum of the number of whole years remaining on the term of the Agreement and a fraction, the numerator of which is the number of days remaining from the date of death in the current year of the Agreement and the denominator of which is 365. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6 (b) shall include, without limitation, and the Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and affiliated companies to the estates and beneficiaries of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive's estate and/or the Executive's beneficiaries, as in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries. The Company shall have no further obligation under this Agreement with respect to the Executive. (c) Disability. With respect to the provision of Other Benefits, the ----------- term Other Benefits as utilized in this Section 6 (c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families. The Company shall have no further obligation under this Agreement with respect to the Executive. (d) Cause; Other than for Good Reason. If the Executive's employment --------------------------------- shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) his Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. 7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or ------------------------- limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 12(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated 9 companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 8. Full Settlement. The Company's obligation to make the payments provided --------------- for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). 9. Certain Additional Payments by the Company. ------------------------------------------ (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company or its affiliates to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 9(a), if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the greatest amount (the "Reduced Amount") that could be paid to the Executive such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by or such other certified public accounting firm as may be designated by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the 10 Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30 day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an aftertax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial 11 jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. Confidential Information. The Executive shall hold in a fiduciary ------------------------ capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 11. Successors. (a) This Agreement is personal to the Executive and ---------- without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to 12 assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 12. Miscellaneous. (a) This Agreement shall be governed by and construed ------------- in accordance with the laws of the State of California, without reference to principles of conflict of laws and to the extent not preempted by the laws of the United States of America. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: To his last known address in the Company's records. All ------------------- such notices and communications shall be deemed to have been received on the earlier of the date of receipt or the third business day after the date of mailing thereof. If to the Company: To the Bank at: ----------------- Glendale Federal Bank, Federal Savings Bank 401 North Brand Boulevard Glendale, California 91203 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. 13 (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, subject to Section l(a) hereof, prior to the Effective Date, the Executive's employment and/or this Agreement may be terminated by either the Executive or the Company at any time with or without cause prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof. (g) All prior agreements between the parties relating to this Agreement are incorporated in this Agreement which constitutes the final expression of intent of the parties. The terms of this Agreement may not be contradicted by evidence of any prior agreement or contemporaneous oral agreement. No extrinsic evidence whatsoever may be introduced in any judicial or arbitration proceedings, if any, involving this Agreement. This Agreement may not be modified except in writing signed by an authorized officer of Glendale Federal and by the Executive. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. ATTEST: GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK /s/ James R. Eller, Jr. By: /s/ Diane C. Creel, Chairperson - -------------------------- ------------------------------- Secretary Diane C. Creel, Chairperson James R. Eller, Jr. Officer Compensation and Personnel Committee WITNESS: EXECUTIVE: /s/ James R. Eller, Jr. /s/ Stephen J. Trafton - -------------------------- ------------------------------- James R. Eller, Jr. Stephen J. Trafton 14 EX-10.5 13 FORM OF EMPLOYMENT AGREEMENT EXHIBIT 10.5 EMPLOYMENT AGREEMENT -------------------- AGREEMENT by and between GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK (the "Company"), and [FirstName] [LastName] (the "Executive"), dated as of the __________________ day of _______,1997. The Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below). The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Certain Definitions. (a) The "Effective Date" shall mean the first ------------------- date during the Change of Control Period (as defined in Section l(b)) on which a Change of Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (b) The "Change of Control Period" shall mean the period commencing on the date hereof and ending on the third anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Change of Control Period shall be automatically extended so as to terminate three years from such Renewal Date, unless at least 60 days prior to the Renewal Date the Company shall give notice to the Executive that the Change of Control Period shall not be so extended. 2. Change of Control. For purposes of this Section 2, "Company" shall ----------------- include within its definition Glendale Federal Bank, Federal Savings Bank, and its holding company, Golden State Bancorp Inc. (the "Holding Company"). For the purpose of this Agreement, a "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or 1 more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition of its shares directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acqui sition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 2 3. Employment Period. The Company hereby agrees to continue the Executive ----------------- in its employ, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and continuing for thirty (30) months following the Effective Date (the "Employment Period"). 4. Terms of Employment. ------------------- (a) Position and Duties. ------------ ------ (i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities with the Company and the Holding Company shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 35 miles from such location. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Compensation. ------------ (i) Base Salary. During the Employment Period, the Executive shall ----------- receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this 3 Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Annual Target Bonus. In addition to Annual Base Salary, the ------------------- Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the "Annual Target Bonus") in cash at least equal to the Executive's highest bonus under the Company's [Executive Incentive Plans], or any comparable bonus under any predecessor or successor plan, for the last three full fiscal years prior to the Effective Date (annualized in the event that the Executive was not employed by the Company for the whole of such fiscal year) (the "Recent Annual Target Bonus"). Each such Annual Target Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Target Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Target Bonus. (iii) Incentive, Savings and Retirement Plans. During the Employment --------------------------------------- Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (iv) Welfare Benefit Plans. During the Employment Period, the Executive --------------------- and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (v) Expenses. During the Employment Period, the Executive shall be -------- entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 4 (vi) Fringe Benefits. During the Employment Period, the Executive shall --------------- be entitled to fringe benefits, including, without limitation, tax and financial planning services, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) Office and Support Staff. During the Employment Period, the ------------------------ Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (viii) Vacation. During the Employment Period, the Executive shall be -------- entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 5. Termination of Employment. (a) Death or Disability. The Executive's ------------------------- ------------------- employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full- time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. (b) Cause. The Company may terminate the Executive's employment during the ----- Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties, or 5 (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. (c) Good Reason. The Executive's employment may be terminated by the ----------- Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company or the Holding Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than as provided in Section 4(a)(i)(B) hereof or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section ll(c) of this Agreement. For purposes of this Section 5(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. Anything in this Agreement to the contrary notwithstanding, a termination by the 6 Executive for any reason during the 30-day period immediately following the first anniversary of the Effective Date shall be deemed to be a termination for Good Reason for all purposes of this Agreement. (d) Notice of Termination. Any termination by the Company for Cause, or by --------------------- the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a "Notice of Termina tion" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The fail ure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the ------------------- Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 6. Obligations of the Company upon Termination. (a) Good Reason; Other ------------------------------------------- ------------------ Than for Cause, Death or Disability. If, during the Employment Period, the - ----------------------------------- Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the Recent Annual Target Bonus and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 and (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the "Accrued Obligations"); and B. the amount equal to the product of (1) two and one-half (2.5) and (2) the sum of (x) the Executive's Annual Base Salary and (y) the Recent Annual Target Bonus; and 7 C. an amount equal to the excess of (a) the actuarial equivalent of the benefit under the Company's qualified defined benefit retirement plan (the "Retirement Plan") (utilizing actuarial assumptions no less favorable to the Executive than those in effect under the Company's Retirement Plan immediately prior to the Effective Date), and any excess or supplemental retirement plan in which the Executive participates (together, the "SERP") which the Executive would receive if the Executive's employment continued for three years after the Date of Termination assuming for this purpose that all accrued benefits are fully vested, and, assuming that the Executive's compensation in each of the three years is that required by Section 4(b)(i) and Section 4(b)(ii), over (b) the actuarial equivalent of the Executive's actual benefit (paid or payable), if any, under the Retirement Plan and the SERP as of the Date of Termination; (ii) for 30 months after the Executive's Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until 30 months after the Date of Termination and to have retired on the last day of such period; (iii) the Company shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in his sole discretion; (iv) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"); and (v) all stock awards shall immediately vest. (b) Death. If the Executive's employment is terminated by reason of the ----- Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, without limitation, and the Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and 8 affiliated companies to the estates and beneficiaries of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive's estate and/or the Executive's beneficiaries, as in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries. (c) Disability. If the Executive's employment is terminated by reason of ---------- the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6 (c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families. (d) Cause; Other than for Good Reason. If the Executive's employment --------------------------------- shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) his Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. 7. Non-exclusivity of Rights. Nothing in this Agreement shall ------------------------- prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 12(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 8. Full Settlement. The Company's obligation to make the payments --------------- provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against 9 the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). 9. Confidential Information. The Executive shall hold in a fiduciary ------------------------ capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 10. Successors. (a) This Agreement is personal to the Executive and ---------- without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 11. Miscellaneous. (a) This Agreement shall be governed by and ------------- construed in accordance with the laws of the State of California, without reference to principles of conflict of laws and to the extent not preempted by the laws of the United States of America. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. 10 (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: To him or her at the last known address in the ------------------- Company's records. All such notices and communications shall be deemed to have been received on the earlier of the date of receipt or the third business day after the date of mailing thereof. If to the Company: To the Bank at: ----------------- Glendale Federal Bank, Federal Savings Bank 401 North Brand Boulevard Glendale, California 91203 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, subject to Section l(a) hereof, prior to the Effective Date, the Executive's employment and/or this Agreement may be terminated by either the Executive or the Company at any time with or without cause prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof. (g) All prior agreements between the parties relating to this Agreement are incorporated in this Agreement which constitutes the final expression of intent of the parties. The terms of this 11 Agreement may not be contradicted by evidence of any prior agreement or contemporaneous oral agreement. No extrinsic evidence whatsoever may be introduced in any judicial or arbitration proceedings, if any, involving this Agreement. This Agreement may not be modified except in writing signed by an authorized officer of Glendale Federal and by the Executive. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK By: ------------------------------------ Stephen J. Trafton President "Executive" ------------------------------------ Name: ------------------------------ Address: --------------------------- --------------------------- 12 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT --------------------------------------- This First Amendment to the Employment Agreement ("First Amendment"), dated as of the 4th day of February, 1998, is made and entered into by and between Glendale Federal Bank, Federal Savings Bank (the "Company") and [FIRSTNAME] [LASTNAME] (the "Executive") and amends the Employment Agreement, dated as of the [Date] day of December, 1997 (the "Employment Agreement"), by and between the Executive and the Company. WHEREAS, the Board of Directors of the Company has determined that it is in the best interest of the Company and its shareholders to amend the Employment Agreement. NOW, THEREFORE, the parties hereto agree as follows: 1. The following Section 9 is hereby added after Section 8 of the Employment Agreement: 9. Certain Additional Payments by the Company. ------------------------------------------- (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company or its affiliates to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 9 (a), if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the greatest amount (the "Reduced Amount") that could be paid to the Executive such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) Subject to the provisions of Section 9 (c), all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by KPMG Peat Marwick LLP or such other certified public accounting firm as may be designated by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9 (c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, 2 including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9 (c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9 (c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9 (c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9 (c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to 3 contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 2. Sections 9, 10 and 11 of the Employment Agreement (and all references to each Section contained therein) are hereby renumbered as 10, 11 and 12, respectively. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused this Amendment to be executed in its name on its behalf, all as of the day and year first above written. ____________________________________________________ (Executive) GLENDALE FEDERAL BANK, FEDERAL SAVINGS BANK By __________________________________________________ 4 EX-21 14 LIST OF SUBSIDIARIES EXHIBIT 21 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Golden State Bancorp Inc. Golden State Financial Corporation Glendale Federal Bank, Federal Savings Bank EFT Services, Inc. Glendale Investment Corporation GLENFED Capital Corp. GLENFED Financial Corporation GLENFED Reimbursement, Inc. GLENFED Mortgage Corporation GLENFED Insurance Services, Inc. Verdugo Trustee Services Corporation Glendale Brokerage Services, Inc. GLENFED Service Corporation Esandel, Inc. August Financial Corporation August Advisors, Inc. AGP, Inc. August Management, Inc. First Estate Corporation GLENFED Development Corp. GLENFED Development Ventures Corp. GLENFED Realty Investments GLENFED Investment Properties, Inc. GLENFED Properties, Inc. Oceanside Communities, Inc. Glenco Executive Center, Inc. California Outlook, Inc. Nassau Bay Properties, Inc. Crescent Bay Diversified PFS Corporation CenFed Investment Corporation United Resources Capital Corporation United Energy Finance Company United California Financial Company United California Funding Corporation RedFed Escrow, Inc. RedFed, Inc. Redlands Financial Services, Inc. EX-23.1 15 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23.1 [LETTERHEAD OF KPMG PEAT MARWICK LLP] CONSENT OF INDEPENDENT AUDITORS The Board of Directors Golden State Bancorp Inc. We consent to the incorporation by reference in the registration statements (No. 333-28037; 333-47309; 333-49477; 333-47607; 333-49423; 333-31713) on Form S-3 and Form S-8 of Golden State Bancorp Inc. of our report dated July 20, 1998, relating to the consolidated statements of financial condition of Golden State Bancorp Inc. as of June 30, 1998, and 1997, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the three-year period ended June 30, 1998, which report appears in the June 30, 1998 annual report on Form 10-K of Golden State Bancorp Inc. /s/ KPMG Peat Marwick LLP Los Angeles, California September 11, 1998 EX-27 16 FINANCIAL DATA SCHEDULE
9 YEAR JUN-30-1998 JUL-01-1997 JUN-30-1998 311,278 2,200 172,000 0 1,586,919 1,214,932 1,221,894 13,774,580 156,482 18,116,737 10,698,265 4,166,301 326,850 1,686,644 4,617 0 60,173 1,173,887 18,116,737 950,265 207,680 0 1,157,945 408,300 717,785 440,160 (1,727) 4,562 325,030 221,745 221,745 0 0 128,749 2.27 1.78 2.82 95,994 0 21,465 54,060 163,759 29,052 6,599 156,482 156,482 0 0
-----END PRIVACY-ENHANCED MESSAGE-----