-----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, T+Gheh6bJ7Jk4u6HgM8eXEitOSfrLBLs4liJcbpcvklVWhEnbwpRs3QNb5rx2xMp 0PZx/6gEvKZH+Livf6x1uw== 0000950136-99-000387.txt : 19990330 0000950136-99-000387.hdr.sgml : 19990330 ACCESSION NUMBER: 0000950136-99-000387 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 31 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 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-K SEC ACT: SEC FILE NUMBER: 000-29654 FILM NUMBER: 99576410 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-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-K ---------------------- (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_____to_____ Commission file number 333-28037 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.) 135 MAIN STREET, SAN FRANCISCO, CALIFORNIA 94105 (Address of principal executive offices) (Zip code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 415-904-1100 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: New York Stock and Pacific Exchanges: Common Stock, Par Value $1.00 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. X Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of the close of business on February 28, 1999: $1,281,219,299 The number of shares outstanding of the registrant's $1.00 par value common stock, as of the close of business on February 28, 1999: 134,287,092 shares of common stock. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement for the May 17, 1999 Annual Meeting of Shareholders Part III Exhibit index on page 92 GOLDEN STATE BANCORP INC. 1998 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
PART I Page ITEM 1. Business......................................................................................3 General..............................................................................4 Lending Activities...................................................................9 Non-performing Assets...............................................................19 Investment Activities...............................................................23 Sources of Funds....................................................................27 Other Activities....................................................................38 Dividend Policy of the Bank.........................................................42 Employees...........................................................................42 Competition.........................................................................42 Regulation..........................................................................43 Regulation of Golden State..........................................................43 Regulation of the Bank..............................................................44 Taxation............................................................................50 ITEM 2. Properties...................................................................................51 ITEM 3. Legal Proceedings............................................................................52 ITEM 4. Submission of Matters to a Vote of Security Holders..........................................52 PART II ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters....................53 ITEM 6. Selected Financial Data......................................................................54 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.........................................57 General.............................................................................57 Results of Operations...............................................................60 Provision for Federal and State Income Taxes........................................70 Tax Effects of Dividend Payments by the Bank........................................72 Provision for Loan Losses...........................................................72 Asset and Liability Management......................................................73 Liquidity...........................................................................75 Impact of Inflation and Changing Prices.............................................78 Problem and Potential Problem Assets................................................78 Mortgage Banking Operations.........................................................82 Capital Resources................................................................. 83 Year 2000...........................................................................85 ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk...................................87 ITEM 8. Financial Statements and Supplementary Data..................................................88 ITEM 9. Changes in and Disagreements with Accountant on Accounting and Financial Disclosure...................................................88 PART III ITEM 10. Directors and Executive Officers of the Registrant...........................................89 ITEM 11. Executive Compensation.......................................................................91 ITEM 12. Security Ownership of Certain Beneficial Owners and Management...............................91 ITEM 13. Certain Relationships and Related Transactions...............................................91 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..............................92 Signatures. . . . . . . . . . . . . . . ......................................................................101 Audited Financial Statements..................................................................................F-1
Page 2 The statements contained in this Report on Form 10-K that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding the Company's expectations, intentions, beliefs or strategies regarding the future. Forward-looking statements include the Company's statements regarding liquidity, provision for loan losses, capital resources and anticipated expense levels in "Management's Discussion and Analysis of Financial Condition and Results of Operations." In addition, in those and other portions of this document, the words "anticipate," "believe," "estimate," "expect," "intend," and other similar expressions, as they relate to the Company or the Company's management, are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions. It is important to note that the Company's actual results could differ materially from those described herein as anticipated, believed, estimated or expected. Among the factors that could cause results to differ materially are the risks discussed in the "Risk Factors" section included in the Registration Statement on Form S-1 filed by Golden State Holdings Inc. on September 29, 1998 (File No. 333-64597) and declared effective on November 12, 1998. The Company assumes no obligation to update any such forward-looking statement. PART I ITEM 1. BUSINESS Golden State Bancorp Inc. ("Golden State" or the "Company") is a holding company with no business operations of its own. Golden State's only significant asset is its indirect ownership of Golden State Holdings Inc. ("GS Holdings"), formerly First Nationwide Holdings Inc. ("FN Holdings"), which owns all of the common stock of California Federal Bank, A Federal Savings Bank ("California Federal" or "Bank"). On September 11, 1998, First Nationwide (Parent) Holdings Inc. ("Parent Holdings"), which then owned all of the common stock of FN Holdings as a result of the extinguishment of the Hunter's Glen (as defined herein) minority interest, merged with and into Golden State. As such, the principal business operations of Parent Holdings were, and the principal business operations of Golden State are, conducted by the Bank and its subsidiaries. Unless the context otherwise indicates, "California Federal" or "Bank" refers to California Federal Bank, A Federal Savings Bank, as the surviving entity after the consummation of the Golden State Merger (as defined herein). Pursuant to the Golden State Merger agreement, First Gibraltar Holdings Inc. ("First Gibraltar"), parent company of Parent Holdings, and Hunter's Glen/Ford Ltd. ("Hunter's Glen"), a limited partnership controlled by Gerald J. Ford, Chairman of the Board, Chief Executive Officer and a Director of the Company and a 20% minority shareholder of FN Holdings, received at the closing of the Golden State Acquisition (as defined herein), in consideration of their interests as stockholders of Parent Holdings and FN Holdings, 56,722,988 shares of common stock, par value $1.00 (the "Golden State Common Stock"), that constituted, in the aggregate, 47.9% of the common stock outstanding, immediately after giving effect to the Golden State Acquisition. In connection with the Golden State Merger, the Hunter's Glen minority interest in FN Holdings was extinguished. California Federal, formerly First Nationwide Bank, A Federal Savings Bank ("First Nationwide"), formerly First Madison Bank, FSB ("First Madison"), was organized and chartered as a federal stock savings bank in December 1988 under the Home Owners' Loan Act ("HOLA") to acquire substantially all of the assets and to assume deposits, secured and certain other liabilities of five insolvent Texas savings and loan associations ("Texas Closed Banks") from the FSLIC Resolution Fund ("FSLIC/RF"), as successor to the Federal Savings and Loan Insurance Corporation ("FSLIC"). On January 3, 1997, First Nationwide merged with and into California Federal, pursuant to the Cal Fed Acquisition (as defined herein). Unless the context otherwise indicates, (i) "Cal Fed" and "Old California Federal" refer to Cal Fed Bancorp Inc. and the Bank, respectively, prior to the consummation of the Cal Fed Acquisition and (ii) the "Bank" refers to California Federal Bank, A Federal Savings Bank, as the surviving entity after the consummation of the Cal Fed Acquisition, and to First Nationwide and its predecessors for periods prior to the Cal Fed Acquisition. Page 3 GENERAL The Company's operations are significantly influenced by general economic conditions in the markets and geographic areas in which the Company conducts its business, the monetary and fiscal policies of the federal government and the regulatory policies of certain governmental agencies. Deposit balances and the cost of borrowings are influenced by interest rates on competing investments and general market interest rates. The Company's loan volume and yields are also impacted by market interest rates on loans, the supply of and demand for housing, and the availability of funds. The Company, which is headquartered in San Francisco, California, is a diversified financial services company that primarily serves consumers in California and to a lesser extent, in Nevada. The Company's principal business consists of (i) operating retail deposit branches that provide retail consumers and small businesses with deposit products such as demand, transaction and savings accounts; investment products such as mutual funds, annuities and insurance; and (ii) mortgage banking activities, including originating and purchasing 1-4 unit residential loans for sale to various investors in the secondary market or for retention in its own portfolio, and servicing loans for itself and others. To a lesser extent, the Company originates and/or purchases certain commercial real estate, commercial and consumer loans for investment. These operating activities are financed principally with customer deposits, secured short-term and long-term borrowings, including FHLB advances, collections on loans, asset sales and retained earnings. Refer to note 25 of the Company's consolidated financial statements for additional information about the Company's business segments. The Bank is chartered as a federal stock savings bank under the HOLA and regulated by the Office of Thrift Supervision ("OTS") and the Federal Deposit Insurance Corporation ("FDIC"), which, through the Savings Association Insurance Fund ("SAIF"), insures the deposit accounts of the Bank, up to applicable limits. The Bank is also a member of the Federal Home Loan Bank System ("FHLBS"). The Company's revenues are derived from interest earned on loans, interest and dividends received on securities and mortgage-backed securities, gains on sales of loans and other investments, fees received in connection with loan servicing and securities brokerage and other customer service transactions. Expenses primarily consist of interest on customer deposit accounts, interest on short-term and long-term borrowings, general and administrative expenses consisting of compensation and benefits, data processing, occupancy and equipment, communications, deposit insurance assessments, advertising and marketing, professional fees and other general and administrative expenses. As of December 31, 1998, the Company had assets totalling $54.9 billion, deposits totalling $24.6 billion and operated retail branch offices at 358 locations in two states. On April 14, 1994, First Madison entered into the Asset Purchase Agreement (the "Asset Purchase Agreement") with First Nationwide Bank, A Federal Savings Bank ("Old FNB"), an indirect subsidiary of Ford Motor Company ("Ford Motor"). On October 3, 1994, effective immediately after the close of business on September 30, 1994, First Madison acquired substantially all of the assets and certain of the liabilities (the "FN Acquired Business") of Old FNB (the "FN Acquisition"). Effective on October 1, 1994, First Madison changed its name to First Nationwide Bank, A Federal Savings Bank. Business Strategy Since the FN Acquisition and through the consummation of the Golden State Merger, the Company's business strategy was executed through three types of transactions, as the information set forth below illustrates: o Acquisitions which complemented the Company's geographic and business line strategies, such as the Golden State Acquisition; o Divestitures of branches outside the Company's primary geographic region; and o Expansion of the Company's mortgage servicing operations. Page 4 In December 1994, the Bank's wholly-owned mortgage bank operating subsidiary, First Nationwide Mortgage Corporation ("FNMC"), entered into a series of agreements with Standard Federal Savings Association ("StanFed"), to acquire certain of StanFed's mortgage servicing assets and assume certain of StanFed's mortgage servicing liabilities for approximately $178 million (the "Maryland Acquisition"). As a result of the Maryland Acquisition, FNMC acquired a 1-4 unit residential loan servicing portfolio of approximately $11.4 billion (including $1.8 billion of mortgage servicing rights that are owned by third parties who have subcontracted the servicing function to FNMC (a "sub-servicing portfolio")) and certain other assets and liabilities. The transaction was consummated on February 28, 1995. In connection with the Maryland Acquisition, FNMC moved its mortgage servicing operations to Maryland from its former location in Sacramento, California. On October 2, 1995, FNMC purchased from Lomas Mortgage USA, Inc. ("LMUSA") a 1-4 unit residential loan servicing portfolio of approximately $11.1 billion (including a sub-servicing portfolio of $3.1 billion), a $2.9 billion master servicing portfolio in which FNMC monitors the performance and consolidates the reporting and remittances of multiple servicers for various investors (a "master servicing portfolio") and other assets, for $100.9 million and the assumption of certain indebtedness secured by the acquired loan portfolio (the "1995 LMUSA Purchase"). On January 31, 1996, FNMC purchased LMUSA's remaining $14.1 billion loan servicing portfolio (including a sub-servicing portfolio of $2.4 billion), a master servicing portfolio of $2.7 billion, $5.9 million in foreclosed real estate, $46.8 million in net other servicing receivables, $2.6 million in mortgage loans, and $6.2 million in net other assets (including $1.4 million in cash and cash equivalents) for a purchase price of approximately $160.9 million (the "1996 LMUSA Purchase" and, together with the 1995 LMUSA Purchase, the "LMUSA Purchases"). During the first six months of 1996, the Company consummated the sale of its retail branches in Ohio, New York, New Jersey and Michigan, (the "Branch Sales") at gross prices which represented an average premium of 7.96% of the approximately $4.6 billion of deposits sold. The Company recorded a pre-tax gain of $363.3 million in connection with the Branch Sales. On February 1, 1996, the Company acquired SFFed Corp. ("SFFed"), a savings and loan holding company, and its wholly owned federal savings association, San Francisco Federal Savings and Loan Association ("San Francisco Federal"), (the "SFFed Acquisition"), for approximately $264.2 million. San Francisco Federal operated 35 branches in the Northern California area and, at February 1, 1996, had approximately $4.0 billion in assets and approximately $2.7 billion in deposits. On June 1, 1996, the Company acquired Home Federal Financial Corporation ("HFFC") and its wholly owned federally chartered savings association subsidiary, Home Federal Savings and Loan Association of San Francisco ("Home Federal") (the "Home Federal Acquisition," and together with the SFFed Acquisition, the "1996 Acquisitions"). The aggregate consideration paid in connection with the Home Federal Acquisition was approximately $67.8 million. At June 1, 1996, HFFC had approximately $717 million in assets and $632 million in deposits. In November 1996, the Bank formed California Federal Preferred Capital Corporation ("Preferred Capital Corp."), a real estate investment trust ("REIT"), for the purpose of acquiring, holding and managing real estate mortgage assets. All of Preferred Capital Corp.'s common stock is owned by the Bank. Pursuant to a subservicing agreement with FNMC, FNMC services Preferred Capital Corp.'s mortgage assets. On January 31, 1997, Preferred Capital Corp. issued to the public $500 million of its 9 1/8% Noncumulative Exchangeable Preferred Stock (the "REIT Preferred Stock"), which is reflected in the Company's consolidated balance sheet as minority interest. Preferred Capital Corp. used the proceeds from such offering to acquire mortgage assets from the Bank. On January 3, 1997, pursuant to an Agreement and Plan of Merger among FN Holdings, Cal Fed and Old California Federal, First Nationwide merged with and into Old California Federal and Cal Fed was liquidated. The aggregate consideration paid under the merger agreement consisted of approximately $1.2 billion in cash and the issuance of litigation interests. Old California Federal, at December 31, 1996, had total assets of approximately $14.1 billion and deposits of $8.9 billion, and operated 119 branches in California and Nevada. Effective with the merger, First Nationwide's name changed to California Federal Bank, A Federal Savings Bank. In connection with the Cal Fed Acquisition, FN Holdings made a capital contribution to the Bank on January 3, 1997 of approximately $685 million. Page 5 On January 3, 1997 and prior to the consummation of the Cal Fed Acquisition, First Nationwide Escrow Corp. ("FN Escrow"), an affiliate of FN Holdings, was merged with and into FN Holdings, pursuant to a merger agreement by and between FN Holdings and FN Escrow (the "FN Escrow Merger"). In connection therewith, FN Holdings acquired the net proceeds from the issuance of FN Escrow's $575 million of Senior Subordinated Notes due 2003 (the "FN Holdings 10 5/8% Notes") and assumed FN Escrow's obligations under such notes and indenture. FN Holdings financed the Cal Fed Acquisition with (i) the net proceeds of approximately $555 million from the issuance of the FN Holdings 10 5/8% Notes, (ii) net proceeds of $145 million from a newly formed Delaware corporation ("Special Purpose Corp."), all the common stock of which is owned by Gerald J. Ford, the Chairman of the Board, Chief Executive Officer and a Director of the Bank, in exchange for $150 million aggregate liquidation value of FN Holdings' Cumulative Perpetual Preferred Stock ("FN Holdings Preferred Stock") and (iii) existing cash. Effective May 31, 1997, FNMC acquired a residential mortgage loan servicing portfolio of approximately $3.2 billion from WMC Mortgage Corporation (the "Weyerhaeuser Purchase") for $37.1 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Mortgage Banking Operations." On September 1, 1997, the Company acquired Auto One Acceptance Corporation ("Auto One") in a purchase transaction (the "Auto One Acquisition"). Auto One primarily engages in indirect sub-prime auto financing activities, providing loan processing, funding and loan servicing for over 800 franchised automobile dealers. Auto One is a licensed lender in 47 states. Auto One is headquartered in Dallas, Texas and operates as a subsidiary of the Bank. On September 30, 1997, FNMC sold servicing rights for approximately 52,000 loans with an unpaid principal balance of approximately $2.3 billion, recognizing a pre-tax gain of $14.0 million (the "Servicing Sale"). On December 12, 1997, the Company sold its retail deposits and all related retail banking facilities in the state of Texas (consisting of three branches) totalling $57.6 million at a gross price representing a deposit premium of 4.1% (the "Texas Branch Sale"). The Company recorded a pre-tax gain of $2.5 million in connection with the Texas Branch Sale. On February 4, 1998, Auto One acquired 100% of the partnership interest of Gulf States Acceptance Company, a Delaware limited partnership ("GSAC") and its general partner, Gulf States Financial Services, Inc., a Texas corporation. GSAC was liquidated and its assets and liabilities were transferred to Auto One (the "GSAC Acquisition"). The aggregate consideration paid by Auto One in connection with the GSAC Acquisition was approximately $13.6 million plus a 20% interest in the common stock of Auto One. This interest is reflected in the Company's consolidated balance sheet as minority interest. On September 11, 1998, Parent Holdings and Hunter's Glen completed the merger with Golden State, the publicly traded parent company of Glendale Federal Bank, Federal Savings Bank ("Glendale Federal"), pursuant to which Parent Holdings, Hunter's Glen and Golden State agreed to a tax-free exchange of shares in a merger transaction (the "Golden State Merger"), accounted for under the purchase method of accounting. Pursuant to the Golden State Merger agreement, (i) FN Holdings contributed all of its assets (including all of the common stock of the Bank) to GS Holdings (the "FN Holdings Asset Transfer"), (ii) Parent Holdings, which then owned all of the common stock of FN Holdings as a result of the extinguishment of the Hunter's Glen minority interest, merged with and into Golden State, which indirectly owned 100% of the common stock of Glendale Federal, (iii) FN Holdings merged with and into Golden State Financial Corporation ("GS Financial"), which owned all of the common stock of Glendale Federal (the "FN Holdings Merger" and together with the Golden State Merger, "the Holding Company Mergers") and (iv) Glendale Federal merged with and into the Bank (the "Glen Fed Merger"). The FN Holdings Asset Transfer, the Holding Company Mergers and the Glen Fed Merger are referred to collectively as the "Golden State Acquisition." At September 11, 1998, Glendale Federal had total assets of approximately $18.9 billion and deposits of $11.3 billion, and operated 181 branches and 26 loan offices in California. On August 6, 1998, GS Escrow Corp. ("GS Escrow"), an affiliate of GS Holdings, issued $2 billion in debt securities consisting of (i) $250 million aggregate principal amount of its Floating Rate Notes Due 2003 (the "Floating Rate Notes"), (ii) $350 million aggregate principal amount of its 6 3/4% Senior Notes due 2001 (the "2001 Notes"), (iii) $600 million aggregate principal amount of its 7% Senior Notes Due 2003 (the "2003 Notes") and (iv) $800 million aggregate principal amount of its 7 1/8% Senior Notes Due 2005 (the "2005 Notes" and, together with the 2001 Notes Page 6 and the 2003 Notes, the "Fixed Rate Notes" and, together with the Floating Rate Notes, the "GS Escrow Notes"). The GS Escrow Notes were issued to fund, in part, the Refinancing Transactions (as defined herein) that occurred following the Golden State Acquisition. On August 17, 1998, FN Holdings commenced cash tender offers (the "Bank Preferred Stock Tender Offers") for each of the Bank's two outstanding series of Bank Preferred Stock (as defined herein), which together had a total aggregate liquidation preference of $473.2 million. On September 14, 1998, GS Holdings commenced cash tender offers (the "Debt Tender Offers" and together with the Bank Preferred Stock Tender Offers and the Parent Holdings Defeasance (as defined herein), and the issuance of the GS Escrow Notes, the "Refinancing Transactions") for the FN Holdings 12 1/4% Senior Notes Due 2001 (the "FN Holdings 12 1/4% Senior Notes"), the FN Holdings 9 1/8% Senior Subordinated Notes Due 2003 (the "FN Holdings 9 1/8% Senior Sub Notes") and the FN Holdings 10 5/8% Notes (collectively, the "FN Holdings Notes"), which together had a total aggregate principal amount of $915.0 million. Concurrent with the closings of the Debt Tender Offers, GS Financial, as the successor obligor, gave a 30-day notice of redemption for all of the outstanding 12 1/2% Parent Holdings Notes (as defined herein), and irrevocably deposited money or government obligations in trust in an amount sufficient to pay the redemption price therefor, together with any accrued and unpaid interest to the date of redemption, for the purpose of defeasing the 12 1/2% Parent Holdings Notes (the "Parent Holdings Defeasance"). During 1998, all of the 12 1/2% Parent Holdings Notes were redeemed in connection with the Parent Holdings Defeasance for an aggregate redemption price, including accrued interest payable, of $553.7 million. In total, $1.4 billion of long-term notes with an average cost of 11.33% and $380.7 million of Bank Preferred Stock with an average dividend rate of 11.24% were purchased or redeemed in the Refinancing Transactions. The purchases and redemptions were funded through the issuance of $2.0 billion in debt securities with an average cost of 7.04%. The Company estimates the annual after-tax savings as a result of the Refinancing Transaction approximates $61.2 million. On September 14, 1998, GS Escrow was merged with and into GS Holdings, pursuant to a merger agreement by and between GS Escrow and GS Holdings (the "GS Escrow Merger"). In connection therewith, GS Holdings acquired the net proceeds from the Refinancing Transactions and became successor obligor on the GS Escrow Notes. GS Escrow was a newly formed subsidiary of First Gibraltar Holdings Inc., an indirect parent company of FN Holdings, and had no significant assets. GS Escrow had not engaged in any business operations, acquired any assets nor incurred any liabilities, other than in connection with the issuance of the GS Escrow Notes. On September 11, 1998, the Company consummated the sale of its 24 branch banking offices in Florida to Union Planters Bank of Florida, with deposits totalling $1.4 billion (the "Florida Branch Sale"). The Company recorded a pre-tax gain of $108.9 million in connection with the Florida Branch Sale, representing a deposit premium of approximately 7.92%. On November 2, 1998, the Company signed definitive agreements to acquire twelve retail branches located in Nevada (with deposits of approximately $637 million as of September 30, 1998) from Norwest Bank, Nevada, a subsidiary of Norwest Corporation, and Wells Fargo Bank, N.A. This transaction is expected to close in April 1999. These transactions have expanded and strengthened the Company's presence in the West Coast, providing additional economies of scale and diversity of operations within its target markets. The Company believes that its strategic acquisition and divestiture activity has enhanced the value of its franchise and improved its operating efficiency through the consolidation or elimination of duplicative back office operations and administrative and management functions. This is evidenced, in part, by the significant improvement in the Bank's efficiency ratio over the past four year period of acquisitions, divestitures and consolidations. The Bank's efficiency ratio, which represents the ratio of noninterest expense to net interest income and noninterest income (excluding certain non-recurring items and goodwill amortization) for the year ended December 31, 1995 was 63.47%, improving to 50.32% for the year ended December 31, 1998. Further, because the Company had excess servicing capacity and existing servicing expertise, it was able to accommodate the loan servicing portfolios acquired in these transactions without the need for significant additional investment. Since the FN Acquisition, the Company's mortgage servicing portfolio (including loans serviced by the Bank and its subsidiaries, excluding loans serviced for the Bank by FNMC) increased from $6.7 billion to $68.8 billion at December 31, 1998. Page 7 The Company's strategic plan aims at achieving increased profitability, revenue diversity and growth while preserving credit quality. Key elements of the business plan include: o California Federal will continue its transition toward a more "bank-like" institution. In particular, the traditional savings bank activities of the Bank will be supplemented and expanded by the following initiatives: -- Continue to market demand deposit and transaction accounts as the primary account relationship. The corollary reduction in emphasis on certificates of deposits will contribute to a lower overall cost of funds. Transaction account relationships also tend to generate greater fee income. -- Offer a broader range of retail products. Mutual funds, insurance and annuity products, mortgage and home equity loans are currently available to Bank customers. The Bank has only recently begun a concentrated marketing effort to realize the opportunity to sell more products and services to its customers through a convenient array of distribution channels. The successful marketing of products and services and increased functionality of distribution channels will enhance customer fulfillment, retention, and profitability. -- Expand small business and middle market lending. The Bank generally ranks as one of the top four depository institutions in most of the markets it serves. This high profile provides the Bank with the opportunity to compete very effectively to provide services to small businesses. Local, small business lending generates wider margins than most of the Bank's current earning assets and will help increase the Bank's demand deposits. o Enhance operating efficiency by, among other things, further expanding its customer base, increasing transaction volumes and reducing costs through optimization of its distribution channels and consolidation of administrative and managerial functions. o FNMC will continue to increase noninterest income, provide a loan production platform to generate Bank assets and augment portfolio run-off, and obtain incremental efficiencies in its mortgage banking operations. In particular, FNMC will seek to maintain servicing at a level between 900,000 and 1.1 million mortgage loans in its Frederick, Maryland facility. o Focus on risk management by seeking to protect the credit quality of its assets through, among other things, continuing to originate residential loans and increase origination of small business and commercial loans, while ensuring compliance with the Bank's carefully developed underwriting standards, which have resulted in non-performing assets of 0.57% of the Bank's total assets at December 31, 1998. Non-performing assets as a percentage of total assets of the Bank was 0.87% and 1.36% at December 31, 1997 and 1996, respectively. o Retain the best practices of the most recent merger partners. California Federal contributes an efficient back office operation, a large-scale mortgage banking business, and proven merger integration skills. The merger with Glendale Federal offers complementary attributes including consumer marketing skills, a growing small business lending practice, and an attractive retail mortgage origination network. o Mitigate interest rate risk by adding primarily adjustable rate loans, shorter duration loans and securities and floating rate consumer and business loans to its earning assets portfolio, through growth in demand deposit account balances. MSR (as defined herein) valuation risk will be mitigated through an actively managed hedge program. o Continue to support underserved communities located near its branch network through lending initiatives, investment, and personal involvement. o Continue to evaluate external growth and revenue diversification through selective acquisitions which are consistent with its business strategy. The Company's primary focus will be the effective integration of its recent acquisitions and continued migration of its products, services, and balance sheet toward a community bank structure. This growth may include acquisitions of businesses that management believes offer the potential for higher growth and margin expansion. Page 8 The implementation of the proceeding strategies is subject to numerous contingencies beyond management's control. These contingencies include general and regional economic conditions, competition and changes in regulation and interest rates. Accordingly, no assurance can be given that any of the Company's strategies will prove to be effective or that the Company's goals will be achieved. Ownership Structure Prior to the Golden State Acquisition, FN Holdings was owned 80% by Parent Holdings and 20% by Hunter's Glen. Pursuant to the Golden State Merger agreement, Mafco Holdings Inc. ("Mafco Holdings"), a corporation which wholly owns MacAndrews and Forbes Holdings Inc. ("MacAndrews Holdings," and together with Mafco Holdings, "MacAndrews and Forbes"), which is controlled by Ronald O. Perelman, and Hunter's Glen received 41,067,270 and 15,655,718 shares, respectively, of Golden State common stock in consideration of their ownership interests in Parent Holdings and FN Holdings. Immediately after the Golden State Acquisition, Golden State's pre-merger stockholders owned approximately 52.1% of the combined entity on a fully diluted basis. In addition, the Golden State Merger agreement provided that Mafco Holdings and Hunter's Glen, or their successors, were entitled to receive contingent additional shares of common stock under certain circumstances, which contingent consideration could cause the actual ownership percentages of Mafco Holdings and Hunter's Glen to change. See "--Other Activities - Contingent Shares." Immediately prior to the consummation of the Golden State Acquisition, the charter of the Bank was amended to provide that each share of Bank Preferred Stock is entitled to one vote and each CALGZ (as defined herein) and each CALGL (as defined herein) has 1/5 of one vote with the holders of the common stock of the Bank, the Bank Preferred Stock, the CALGZs and the CALGLs voting together as a single class. In addition, after giving effect to a stock split of the common stock of the Bank, GS Holdings' ownership of 100% of the common stock represents approximately 90% of the total voting power of voting securities of the Bank. In addition to its common stock ownership of the Bank, GS Holdings owns $380.7 million liquidation value of the Bank Preferred Stock purchased in the Bank Preferred Stock Tender Offers. LENDING ACTIVITIES The Company's principal lending activity has been the origination of adjustable and fixed-rate mortgage loans secured by residential real estate. To a lesser extent, the Company also originates certain commercial real estate loans as well as consumer loans, which principally consist of adjustable-rate home equity lines of credit. In connection with the Glen Fed Merger, the Company acquired a portfolio of business banking loans, which primarily have adjustable rates. Prior to 1997, the commercial real estate lending activity of the Company had been limited to restructuring and refinancing existing portfolio loans, and multi-family loans originated under its affordable housing program. The Company commenced the origination of multi-family (5+ units) and commercial loans on a limited basis during 1997. The Company also participates in a number of other affordable housing programs and initiatives. The Company's 1-4 unit residential loans are originated by FNMC. Throughout this document, references to the Company and its 1-4 unit residential loan production or servicing activities relate to functions performed by FNMC. The Company originates 1-4 unit residential loans through three channels: (i) retail, (ii) wholesale and (iii) correspondent. Since the Glen Fed Merger in September 1998, the Company has a significant retail origination presence in California. Wholesale originations (wherein loans are acquired from independent loan brokers) are conducted through regional wholesale offices throughout the United States. The Company also purchases newly originated loans from correspondents throughout the United States and through contracts to administer various housing bond and other private mortgage lending programs. The Company originates adjustable rate mortgage ("ARM") loans on 1-4 unit residential real estate which, in the case of ARMs originated after December 31, 1996, have generally been held for investment, and fixed rate 1-4 unit residential loans, which are generally held for sale to the secondary mortgage market. The Company originates multifamily and commercial real estate loans through its Commercial Real Estate Group which has loan production and asset management offices located in San Francisco, Los Angeles, Dallas and Phoenix. New loan originations are produced through several sources including (i) direct borrower solicitation , (ii) mortgage brokerage referrals, (iii) real estate sales agent referrals, and, to a lesser extent, (iv) loan purchases from other investors or originators. Page 9 Loans are originated which meet stated underwriting guidelines and pricing guidelines established by the Commercial Real Estate Subcommittee and approved by the Credit Policy Committee of the Bank. Generally multifamily secured loans have loan-to-value ratios ("LTVs") of 75% or below and debt coverage ratios ("DCRs") of 1.20 or above. Loans secured by commercial properties (shopping centers, office buildings, warehouses, etc.) generally have LTVs of 70% or below and DCRs of 1.25 and above. Loans are typically offered at either (i) adjustable rates based on a negotiated margin over U.S. Treasury Bill or 11th District Cost of Funds indices with terms of ten to 30 years with rates adjusted semi-annually, or (ii) fixed rates or fixed/adjustable rates based on a negotiated margin over the matching term U.S. Treasury Bond for terms of three to ten years. Amortization periods are generally 20 to 25 years on commercial loans and 25 to 30 years on multifamily loans. The Company also offers lending and deposit products to its customer base, focusing on small businesses located in the markets served by the Company's retail banking offices. The Company offers revolving lines of credit, accounts receivable and inventory financing, business checking accounts and cash management services. In addition, the Company also originates variable-rate agricultural and secured term loans with maturities of up to ten years. Through its SBA (as defined herein) lending program, the Company provides long-term financing to expanding small businesses. The Company generates consumer loan applications at its retail branches. In addition, the Company conducts direct-mail solicitations, principally of its existing customers, for secured loans. All consumer loan processing, servicing and collection operations were moved from a facility in Oak Brook, Illinois to Sacramento, California, during the second quarter of 1997. With its entry into the sub-prime automobile lending business, the Company purchases loans in bulk from third parties and independent automobile dealers. These loans typically have fixed interest rates with terms to maturity of up to 60 months. The following table reflects activity related to loans receivable, excluding loans held for sale: Year Ended December 31, ------------------------ 1998 1997 ---- ---- (in millions) Balance at beginning of period $19,921 $10,584 Originations 4,103 1,024 Purchases: Cal Fed Acquisition -- 10,060 Glen Fed Merger 14,562 -- Auto One 317 221 GSAC Acquisition 112 -- Sales (11) (21) Foreclosures (119) (178) Payments, payoffs and other (8,122) (1,769) ------- -------- Balance at end of period $30,763 $19,921 ======= ======== Interest Rates, Terms and Fees The Company offers a variety of ARM products, generally with the objectives of (i) matching, as closely as possible, the interest rate sensitivity of its interest-earning assets with the interest rate sensitivity of its interest-bearing liabilities and (ii) maintaining a relatively stable net interest margin in varied interest rate environments. In response to consumer demand, and in order to diversify its loan portfolio and help to control its future interest rate risk, the Company's loan portfolio includes several ARM products which vary as to (i) the frequency and amount of periodic interest rate changes and (ii) the minimum and maximum rates applied to a particular loan. ARMs have the advantage of reducing the lending institution's sensitivity to interest rate fluctuations. However, they also present certain risks not associated with traditional fixed rate mortgages, such as adjustments in interest rates which could cause payment increases that some borrowers might be unable to service. Page 10 The Company also offers a variety of fixed rate products on 1-4 residential, multi-family and commercial loans. Such loans are generally fixed/adjustable rate hybrid loan products which initially have a fixed rate period ranging from three to ten years followed by an adjustable rate period through the final maturity of the loan. Prepayment penalties vary depending on the loan type and the length of the fixed rate period. The Company attempts to mitigate the credit risks associated with mortgage lending activities by the use of carefully developed underwriting standards. Substantially all 1-4 unit residential loans originated are underwritten to conform with standards adopted by Fannie Mae ("FNMA"), Freddie Mac ("FHLMC"), the Government National Mortgage Association ("GNMA"), or other secondary market investors. Accordingly, the Company's underwriting standards include LTV ratios and maximum loan amounts for both fixed rate loans and ARMs that closely mirror secondary market requirements. Generally, when a loan is originated with an exception to these standards, specific strong compensating factors are required. With respect to ARMs, the Company underwrites the borrower's ability to pay at the maximum second year payment rate, consistent with secondary market requirements. In addition to the interest earned on its loans, the Company charges fees for loan originations, prepayments, modifications, late payments, changes of property ownership and other similar services. The amount of this fee income varies with the volume of loan originations, prepayments, the general economic conditions affecting the portfolio and other competitive factors affecting the mortgage market. Generally, late charges are assessed when payments are delinquent. On loans secured by real estate, these charges are generally limited to 4% to 6% of the overdue payment of principal and interest and cannot be imposed until the payment is more than 15 days late, in accordance with the contractual terms of the loans and regulatory requirements in effect when the loans were made. Composition of Loan Portfolio The composition of the Company's loan portfolio, excluding loans held for sale and Covered Assets (as defined herein), is set forth in the following table, at the dates indicated:
At December 31, -------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (in millions) Real estate loans: 1-4 unit residential $23,493 $14,071 $6,118 $5,423 $5,612 5+ unit residential 2,641 3,035 2,164 1,854 2,178 Commercial real estate 2,940 2,146 1,978 1,716 2,015 Land 33 5 11 9 15 Construction 22 1 6 -- 8 -------- ------- ------- ------- ------- Total real estate loans 29,129 19,258 10,277 9,002 9,828 -------- ------- ------- ------- ------- Equity-line loans 385 355 243 111 407 Other consumer loans 242 107 55 59 85 Purchased auto loans 465 171 -- -- -- Business banking loans 529 22 -- -- -- Commercial loans 13 8 30 2 1 -------- ------- ------- ------- ------- Total loans receivable 30,763 19,921 10,605 9,174 10,321 -------- ------- ------- ------- ------- Less: Deferred loan fees, costs, discounts and premiums, net (103) (47) (5) (19) -- Allowance for loan losses 589 419 247 210 203 Purchase accounting adjustments, net (4) 125 150 153 151 -------- ------- ------- ------- ------- Loans receivable, net $30,281 $19,424 $10,213 $8,830 $9,967 ======= ======= ======= ======= =======
Page 11 The following table presents the Company's real estate loan portfolio (excluding loans held for sale), by collateral type, interest rate type and state concentration at December 31, 1998:
1-4 unit 5+ unit Commercial Residential Residential and Other Total Real ------------------ ------------------ ----------------- Estate % of State Variable Fixed Variable Fixed Variable Fixed Loans Total -------- ----- -------- ----- -------- ----- ----- ----- (dollars in millions) California $13,550 $4,192 $2,237 $197 $2,330 $311 $22,817 78.33% New York 344 228 25 14 23 22 656 2.25 Florida 687 321 66 11 78 29 1,192 4.09 Nevada 177 63 7 6 14 3 270 0.93 Illinois 196 126 8 1 25 17 373 1.28 Texas 181 170 3 7 3 3 367 1.26 Other states (1) 1,700 1,558 30 29 120 17 3,454 11.86 ------- ------ ------ ---- ------ ---- ------- ------ Total $16,835 $6,658 $2,376 $265 $2,593 $402 $29,129 100.00% ======= ====== ====== ==== ====== ==== ======= ======
------------------ (1) Real estate loans involving property located in 44 states, Puerto Rico and the District of Columbia; not more than 1.0% of the total amount of such loans are located in any one state. The following table summarizes the Company's loan portfolio, excluding loans held for sale, at December 31, 1998, based upon various contractually scheduled principal payments allocated to the indicated maturity categories. This table does not reflect expected prepayments.
Due Due Over One Due Within But Within Over One Year Five Years Five Years Total -------- ---------- ---------- ----- (in millions) Real estate loans: 1-4 unit residential Fixed rate $ 2 $ 65 $ 6,591 $ 6,658 Variable rate 1 20 16,814 16,835 5+ unit residential Fixed rate 57 54 154 265 Variable rate 95 462 1,819 2,376 Commercial real estate and other Fixed rate 70 132 200 402 Variable rate 244 1,283 1,066 2,593 ---- ------ ------- ------- Total 469 2,016 26,644 29,129 ---- ------ ------- ------- Commercial and consumer loans: Fixed rate 63 511 122 696 Variable rate 359 120 459 938 ---- ------ ------- ------- Total 422 631 581 1,634 ---- ------ ------- ------- Total loans receivable $891 $2,647 $27,225 $30,763 ==== ====== ======= =======
1-4 Unit Residential Lending The Company currently offers four primary 1-4 unit residential ARM programs, and a variety of 1-4 unit fixed rate programs with maturities ranging from 15 to 30 years. Adjustable rate programs include loans which: (i) provide for monthly interest rate adjustments after the third month or semi-annually from inception of the loan, based on the Federal Home Loan Bank ("FHLB") 11th District Cost of Funds index, (ii) provide for annual rate adjustments based upon the weekly average yield on U.S. Treasury Securities adjusted to a constant maturity of one year, (iii) provide for annual rate adjustments based upon the weekly average yield on United States Treasury securities adjusted to a constant maturity of one year after an initial fixed rate period of three, five, seven or ten years, or (iv) provide for semi-annual Page 12 rate adjustments based on the weekly average of the secondary market rates on six-month negotiable certificates of deposit. Some ARMs offer an option to convert to a fixed rate after the first year through the fifth year of the loan term. A variety of features are incorporated into ARM loans to protect borrowers from unlimited adjustments in interest rates and payments. All ARMs have lifetime caps which limit the amount of rate increases over the life of the loan. ARMs whose rates adjust annually have rate caps which limit the amount that rates can change to two percentage points per year. ARMs whose rates adjust semi-annually have rate caps which limit the amount that rates can change to one percentage point per rate change. Loans which adjust monthly based upon the FHLB 11th District Cost of Funds limit payment changes to no more than 7.5% of the payment amount per year. This may lead to monthly payments which are less than the amount necessary to amortize the loan to maturity at the interest rate in effect for any particular month. In the event that the monthly payment is not sufficient to pay interest accruing on the loan during the month, this deficiency is added to the loan's principal balance (i.e., negative amortization). The total outstanding principal balance for a particular loan is generally not allowed to exceed 125% of the original loan amount as a result of negative amortization. If the loan reaches its maximum amount, the loan payment is recalculated to the payment sufficient to repay the unpaid principal balance in full at the maturity date. As of December 31, 1998, the Company's capitalized interest relative to such 1-4 unit residential loans was approximately $49.7 million. This amount represents approximately .50% of the approximately $9.9 billion of 1-4 unit residential ARMs that have the potential to experience negative amortization. The Company also originates 15- and 30-year fully amortizing 1-4 unit fixed rate residential loans under a variety of fixed rate programs, primarily for resale in the secondary mortgage market. When 1-4 unit residential loans are sold, FNMC normally retains the servicing of the loan. On all ARM products except those with interest rates based on the FHLB 11th District Cost of Funds index, the Company offers a three-year prepayment penalty pricing option, wherein the borrower receives favorable pricing in exchange for agreeing to pay a fee in the event that the borrower prepays more than 20% of the original principal balance in any rolling twelve-month period during the first three years after the inception of the loan. On all fixed rate products except for 15-year conforming loans, the Company offers a similar prepayment penalty pricing option that applies during the first five years after inception of the loan. The penalty does not apply if the prepayment occurs in connection with the sale of the property securing the loan. FNMC originated $2.6 billion of loans with prepayment penalty options for the Company during 1998. See "--Mortgage Banking Operations" for a further discussion of these activities. Multi-family, Commercial and Other Real Estate Lending While the Company has always originated multi-family, commercial and other real estate loans as part of affordable housing programs, it began to originate other commercial real estate loans during 1997 and 1998 on a limited basis. The Company's loan portfolio includes loans principally acquired through acquisitions which are secured by multi-family residential, commercial, industrial, office and retail real estate properties. The Company's variable rate multi-family and commercial real estate loans have a maximum amortized loan term of 30 years with loans having balloon payments due in one to 15 years. ARMs primarily adjust with the FHLB 11th District Cost of Funds or the six-month Treasury Bill indices with a monthly or semi-annual rate adjustment. The terms and characteristics of the ARMs originated for multi-family and commercial real estate lending purposes are similar to those for residential lending. As such, many of the same risks and protections related to residential borrowers are present in the multi-family and commercial real estate portfolios, including the potential for negative amortization. Negative amortization for multi-family and commercial real estate loans is allowed to increase the outstanding principal balance to 110% of the original loan amount. If the loan reaches 110% of the original loan amount, all future interest rate increases will increase the monthly payment to amortize the loan over the remaining life of the loan. At December 31, 1998, the Company's capitalized interest relative to such loans was approximately $1.0 million, which represents approximately .03% of the $3.5 billion of multi-family and commercial real estate loans that have the potential to experience negative amortization. Real estate loans secured by multi-family and commercial property represent a significant portion of the Company's portfolio. Management periodically reviews the multi-family and commercial real estate loan portfolio. At December 31, 1998 and 1997, the multi-family and commercial real estate loan portfolio totalled $5.6 billion and $5.2 billion, respectively. At December 31, 1997, there were $28.9 million of multi-family or commercial real estate loans with credit enhancements wherein the lead participant subordinated its minority interest in a pool of loans to the Company's interest in the corresponding pool of loans. There were no such loan at December 31, 1998. Page 13 The Company's potential for loss on the multi-family and commercial loan portfolio acquired from Old FNB and, to a lesser extent, the 1-4 unit residential loan portfolio acquired from Old FNB, was mitigated by the terms of the NonPerforming Asset Sale Agreement (the "Put Agreement") entered into by the Company with Granite Management and Disposition, Inc. ("Granite"), an affiliate of Old FNB, in connection with the FN Acquisition. The Put Agreement expired on November 30, 1996, at which time it had been fully utilized by the Company. The aggregate purchase price of assets which were put to Granite, representing the outstanding principal balance, accrued interest and certain other expenses, was $500 million, including assets put to Granite by Old FNB from January 1 through October 1, 1994. A portion of the Company's mortgage servicing rights ("MSRs"), which are rights to service mortgages held by others, were acquired from Old FNB, Old California Federal and Glendale Federal which had sold multi-family and commercial real estate loans subject to certain recourse provisions. These recourse liabilities were assumed by the Company in the FN Acquisition, the Cal Fed Acquisition and the Glen Fed Merger. At December 31, 1998, the principal balance of loans sold with recourse totalled $2.6 billion, of which $770.2 million related to the acquisitions noted above. Consumer Lending The Company's consumer loan originations are primarily concentrated in home equity lending. The portfolio is geographically dispersed and correlates closely to retail deposit branch distribution. At December 31, 1998, the home equity portfolio totalled $385 million, or 61.40%, of the total consumer loan portfolio of $627 million. At December 31, 1997, the home equity portfolio totalled $355 million, or 76.84%, of the total consumer loan portfolio of $462 million. The Company offers a prime-based interest rate home equity line of credit on owner-occupied residential and nonowner occupied properties. In determining the amount of credit to be extended, all loans secured by the collateral properties are aggregated and compared to the appraised value of the properties. The Company's policy is to extend credit up to a maximum combined LTV ratio of 100%. Other consumer loan products include: fixed rate home equity installment loans which, while secured, are based on repayment ability and credit history; second trust deed residential loans; credit card and retail consumer loans; mobile home loans and unsecured lines of credit. It is the Company's strategic objective to increase the size of the home equity loan portfolio over the next twelve months. Sub-prime Auto Lending The Company commenced purchases of sub-prime auto loans in connection with the Auto One Acquisition. Auto One has been involved in the sub-prime auto lending business for over ten years, and has an established servicing platform for such loans. At December 31, 1998 and 1997, the Company's sub-prime auto loan portfolio totalled $465 million and $171 million, respectively. Such loans were purchased in bulk from a third party or from independent automobile dealers after the consummation of the Auto One Acquisition. These purchased loans have fixed interest rates, with terms to maturity based upon the mileage on the collateral vehicle, up to a maximum of 60 months. Approximately 70% of Auto One's current purchases are collateralized with vehicles two years old or newer. Underwriting on loans purchased from dealers is performed by Auto One personnel prior to the purchase. Purchased sub-prime loans are grouped and accounted for in homogeneous pools based upon certain common risk characteristics, including interest coupon rate, credit quality, and period of origination. At acquisition, the Company estimates the amount and timing of undiscounted expected future principal and interest cash flows ("Expected Cash Flows") for each pool. For certain purchased pools of loans, the amount paid reflects the Company's determination that it is probable the Company will be unable to collect all amounts due according to the contractual terms of the underlying loans in the pool. Accordingly, at acquisition, the Company recognizes the excess of the pool's scheduled contractual principal and contractual interest payments over its Expected Cash Flows as an amount that should not be accreted ("Nonaccretable Difference"). The remaining amount - representing the excess of the pool's Expected Cash Flows over the amount paid - is accreted into interest income over the remaining life of each pool ("Accretable Yield"). Page 14 Over the life of each pool of loans, the Company continues to estimate Expected Cash Flows. In the event a pool's actual cash flows plus the expected future cash payments are less than the Expected Cash Flows estimated at the time of purchase, the amount by which the current carrying value of the pool exceeds the present value of the future expected cash flows discounted at the originally estimated internal rate of return is considered an impairment and requires an allocation of the allowance for loan losses established by provisions for loan losses. If the present value of a pool's expected remaining cash flows discounted at the originally estimated internal rate of return exceeds the current carrying value of the pool, the amount of the Accretable Yield is increased and the amount of the Nonaccretable Difference is decreased by the amount the sum of a pool's expected remaining cash flows exceeds the sum of the remaining payments less the Nonaccretable Difference. The adjusted Accretable Yield is accreted into interest income over the pool's remaining life using the interest method. Activity related to purchased sub-prime loans for the years ended December 31, 1998 and 1997 is summarized as follows (in millions):
Allocated Contractual Allowance Purchased Payments Nonaccretable Accretable for Loan Sub-Loans, Receivable Difference Yield Losses net ---------- ---------- ----- ------ --- Purchases and acquisitions $ 272 $ (54) $(38) $-- $180 Repossessions & charge-offs (9) 6 -- -- (3) Payments, payoffs & accretion (10) 1 3 -- (6) Provision for loan losses -- -- -- -- -- Reclassifications -- -- -- -- -- ------ ------ ---- --- ---- Balance, December 31, 1997 253 (47) (35) -- 171 Purchases and acquisitions 690 (136) (99) (5) 450 Repossessions & charge-offs (63) 43 -- -- (20) Payments, payoffs & accretion (206) 17 48 -- (141) Provision for loan losses -- -- -- (3) (3) Reclassifications -- 2 (2) -- -- ------ ------ ---- --- ---- Balance, December 31, 1998 $ 674 $ (121) $(88) $(8) $457 ====== ====== ==== === ====
Business Banking The Company's business banking program has four components: community business banking, commercial markets banking, agribusiness lending and Small Business Administration ("SBA") lending. The Company's community business banking product line includes, but is not limited to, business checking and savings products of various types, cash management products and services, account analysis, payroll services, electronic banking services, and merchant draft services. Community business banking focuses primarily on businesses with annual sales of less than $10 million located in the markets served by the Company's retail banking offices. To meet the credit needs of these business customers, the Company offers a wide variety of secured and unsecured prime-based lines of credit and term loans. The Company offers credit-scored lines of credit and term loans, as well as traditional lines of credit and term loans with maturities up to ten years. The maximum credit commitment offered by community business banking is $1 million. At December 31, 1998, total funded and unfunded credit commitments under the community business banking group totalled $267 million. The Company, through its commercial markets group, 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 products including business checking accounts, various cash management services, revolving lines of credit, accounts receivable, inventory financing and term loans. 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 December 31, 1998, funded and unfunded credit commitments under the commercial markets group totalled $131 million. Page 15 The Company's agribusiness lending program serves the southern half of the Central Valley region of California from Bakersfield to Modesto and specializes in production loans for crops such as cotton, grapes, nuts, stone fruit and dairy operations, together with agricultural related businesses such as processors and packers. At December 31, 1998, funded and unfunded credit commitments under the agribusiness lending program totalled $230 million. The SBA is a federal government agency created to assist small businesses by providing guarantees of loans made to eligible small businesses. Through its SBA lending program, the Company focuses on the long-term needs of small businesses and provides long-term, variable and fixed-rate financing to expanding small businesses. The Company has been 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 accelerating 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%. At December 31, 1998, funded and unfunded credit commitments under the SBA lending program totalled $185 million. Additionally, the servicing portfolio totalled $173 million. At December 31, 1998, deposit relationships under the various business banking product lines totalled $1.1 billion. 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. Loans Held for Sale Activity related to loans held for sale for the years ended December 31, 1998 and 1997 is summarized as follows: 1998 1997 ---- ---- (in millions) Balance at beginning of period $1,483 $ 825 Purchases and originations 9,136 7,871 Sales (7,892) (5,511) Payments, payoffs and other (360) (1,702) ------ ------ Balance at end of period $2,367 $1,483 ====== ====== Loans held for sale are carried at the lower of aggregate amortized cost or market value. The majority of ARMs originated are held by the Company for investment. Origination of 1-4 Unit Residential Loans The Company originates 1-4 unit residential loans principally through the efforts of wholesale origination offices through which loans are acquired from independent loan brokers and, to a lesser degree, staff loan agents. To promote continuity of customer service, help meet credit needs and to increase opportunities to sell customer deposit and other financial services offered by the Company and its subsidiaries, loan inquiries from retail branch customers and "walk-in" applicants are encouraged. These inquiries are initially processed by retail branch office personnel, with support provided by regional lending offices. The 1-4 unit residential loan agents are compensated principally on a commission basis. Closed 1-4 unit residential loans are also acquired by FNMC through a correspondent lending operation. The majority of 1-4 unit residential loans originated by the Company have LTV ratios of 80% or less at the time of origination. The Company has originated such loans with LTV ratios of up to 95%, with the portion of the loan exceeding 80% guaranteed by private mortgage insurance, the premiums of which are paid monthly by the borrower. Certain exceptions to this guideline have been made for low and moderate income borrowers. However, the amount of 1-4 unit residential loans subject to such exceptions is not significant in terms of the Company's total loan originations. The value of the property offered as security for a 1-4 unit residential loan is determined by a professionally qualified appraiser approved by the Company, who may or may not be an employee of the Company. As further security for its loan, the Company requires title insurance and fire and casualty insurance on all loans secured by liens on real property. The Company also requires flood insurance on any loan secured by real property if the property lies within a U.S. Housing and Urban Development Department ("HUD") designated flood hazard area. Page 16 The following table summarizes 1-4 unit residential loan originations for the years ended December 31, 1998 and 1997 (in millions):
1998 1997 --------------------------------------------------------------------- Production Channel ARM Fixed Total ARM Fixed Total --- ----- ----- --- ----- ----- Retail and portfolio retention $ 315.1 $1,434.5 $ 1,749.6 $ 74.4 $ 580.3 $ 654.7 Wholesale 2,325.5 4,166.3 6,491.8 635.3 3,438.8 4,074.1 Correspondent lending 680.7 1,776.3 2,457.0 1,420.0 1,321.0 2,741.0 Other 0.2 1,727.8 1,728.0 -- 1,040.3 1,040.3 -------- -------- --------- -------- -------- -------- $3,321.5 $9,104.9 $12,426.4 $2,129.7 $6,380.4 $8,510.1 ======== ======== ========= ======== ======== ========
Mortgage Banking Operations Mortgage banking activities allow the generation of fee income without the associated capital retention requirements attributable to traditional real estate lending activities. Generally, the Company originates fixed rate 1-4 unit residential loans for sale in the secondary mortgage market. ARMs originated prior to September 30, 1995 and after December 31, 1996 have generally been held by the Company for investment. During the last quarter of 1995 and in 1996, however, substantially all of the fixed and variable rate 1-4 unit residential loans originated were sold in the secondary market to provide funds for the acquisition and divestiture activity occurring during the period. The Company employs forward sale hedging techniques to minimize the interest rate and pricing risks associated with the origination and sale of fixed rate 1-4 unit residential loans. The Company has also entered into one-year flow agreements with third party lenders whereby the Company has committed to purchase newly originated mortgage loan servicing rights for quarterly deliveries up to an agreed upon total principal amount. At the time of origination, management identifies 1-4 unit residential loans that are expected to be sold in the foreseeable future. At December 31, 1998, management had identified $2.4 billion of 1-4 unit residential loans as held for sale. These loans have been classified as assets held for sale in the consolidated balance sheet at December 31, 1998 and are recorded at the lower of aggregate amortized cost or market value. At December 31, 1998, the Company had forward and whole loan sale commitments to sell loans totalling $2.7 billion. In addition, the Company had entered into commitments to originate and purchase fixed and variable rate loans (mortgage loan pipeline) of $3.9 billion. At December 31, 1998, the Company had $943.6 million in mortgage servicing rights, an increase of $406.9 million from December 31, 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Mortgage Banking Operations." The servicing portfolio of FNMC (excluding loans serviced for the Bank) approximates $65.4 billion and 783,000 loans as of December 31, 1998. The servicing portfolio of FNMC, including loans serviced for the Bank, approximates $87.7 billion and 954,000 loans as of December 31, 1998. Substantially all of FNMC's loans are serviced in a 230,000 square-foot facility in Frederick, Maryland. Mortgage loan sales, primarily fixed-rate loans sold to FNMA, FHLMC, GNMA and private investors, totalled $7.9 billion and $5.5 billion in 1998 and 1997, respectively. Old FNB, Old California Federal and Glendale Federal occasionally sold 1-4 unit residential loans under recourse provisions; such liabilities were assumed by the Company in the FN and Cal Fed Acquisitions, and in the Glen Fed Merger. As of December 31, 1998, the balance of 1-4 unit residential loans sold with certain recourse provisions totalled $778.0 million. On September 30, 1997, the Company, through FNMC, sold servicing rights on approximately 52,000 GNMA mortgage loans with unpaid principal balances of approximately $2.3 billion, recognizing a pre-tax gain on sale of $14.0 million. Additionally, during 1998, the Company sold servicing rights on approximately 3,527 loans serviced for private investors with unpaid principal balances of approximately $144.2 million, recognizing a pre-tax gain on sale of $.3 million. This portfolio was comprised of multiple private investor portfolios with small loan counts. These sales were part of management's strategy to enhance the profitability of the servicing portfolio and sell less profitable servicing. Management expects to continue to execute similar sales in the future. Page 17 The Company, through FNMC, has generally retained the right to service the loans it has sold. FNMC collects payments of principal and interest from the borrower and, after retaining a servicing fee, remits the balance to the investors. When a loan is sold and MSRs are retained, a portion of the cost of originating the mortgage loan is allocated to the MSR based on its fair market value. The servicing asset is amortized in proportion to, and over the period of, estimated net servicing income. The Company monitors the prepayments on the loans serviced for investors and reduces the balance of the asset if the actual prepayments are in excess of the estimated prepayment trends used to record the original asset. The Company's assumptions relative to the prepayment speed, discount and servicing fee rates are reviewed periodically to reflect current market conditions and regulatory requirements. At December 31, 1998, the Company, through FNMC, owned rights to service approximately $65.4 billion of whole loans, participation interests and mortgage-backed securities for others. These loans had an average balance of $82,129, a weighted average coupon rate of 7.74%, a weighted average maturity of 274 months and a service fee spread of .39%. The greater than 30 day delinquency rate on these loans (including delinquent bankruptcies, foreclosed loans and loans in foreclosure) at December 31, 1998 was 1.24%. For the year ended December 31, 1998, gross revenue for servicing activities (residential loan servicing and ancillary fees) totalled $264.2 million. A decline in long-term interest rates generally results in an acceleration of mortgage loan prepayments. Higher than anticipated levels of prepayments generally cause the accelerated amortization of MSRs and generally will result in a reduction of the market value of MSRs and in the Company's servicing fee income. To reduce the sensitivity of its earnings to interest rate and market value fluctuations, the Company is engaged in an active hedge program to mitigate the impact of interest rate fluctuations on the value of its MSRs. At December 31, 1998, the Company, through FNMC, was a party to several interest rate floor contracts maturing through October 1, 2003. The Company paid counterparties a premium in exchange for cash payments in the event that the 10-year Constant Maturity Swaps rate falls below the strike prices. At December 31, 1998, the notional amount of the interest rate floors was $2.1 billion and the strike prices were between 5.2% and 5.6%. In addition, the Company, through FNMC, entered into principal only swap agreements with a notional amount of $.2 billion and prepaymentlinked swap agreements with a notional amount of $1.9 billion. Further, at December 31, 1998, the Company, through FNMC, was a party to swaption contracts in which the Company paid to the counterparties premiums in exchange for the right, but not the obligation, to purchase an interest rate swap. At December 31, 1998, the notional amount of the interest rate swap agreement underlying the swaptions was $2.3 billion. Prior to January 1, 1998, FNMC owned FNMC Mortgage Services, Inc. which was a 33% owner of First Nationwide Mortgage Partnership LP ("FNMP") and its managing general partner. FNMP owned the MSRs on approximately $2.3 billion of loans serviced for FNMA, GNMA, FHLMC and private investors. FNMP's investment in such MSRs and its other assets were partially funded by independent bank lines of credit totalling approximately $24.8 million and its servicing duties were performed by FNMC under a subservicing contract. As of January 1, 1998, FNMC purchased the remaining 67% of FNMP. The outstanding balances of the line of credit were repaid in full and the lines of credit were terminated during 1998. Page 18 NON-PERFORMING ASSETS Non-performing assets consist of non-performing loans, foreclosed real estate and repossessed assets. Total nonperforming assets as a percentage of total assets declined to 0.57% at December 31, 1998 from 0.87% at December 31, 1997. Classification of Assets Savings associations are required to classify their assets on a regular basis, establish prudent allowances for loan losses and make quarterly reports of troubled asset classifications to the OTS. Assets must be classified as "pass," "special mention," "substandard," "doubtful" or "loss." An asset is generally designated as "special mention" if potential weaknesses are identified that, if left uncorrected, would result in deterioration of the repayment prospects for the asset. 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. Thus, these assets are characterized by the possibility that the association will sustain some loss if the deficiencies are not corrected. An asset, or portion thereof, is classified as "doubtful" if identified weaknesses make collectibility or liquidation in full highly questionable and improbable. An asset, or a portion thereof, that is considered to be uncollectible is classified "loss." It should be noted that the Company does not maintain assets in a loss classification category; rather, the carrying value of all troubled assets is reduced by any amount considered to be uncollectible. The OTS has the authority to approve, disapprove or modify any asset classification or any amount established as an allowance pursuant to such classification. Savings associations must maintain adequate general valuation allowances in accordance with generally accepted accounting principles and federal regulations for assets classified as "substandard" or "doubtful" and either immediately write off assets classified as "loss" or establish specific valuation allowances equal to the amounts classified as "loss." The Company has a comprehensive process for classifying assets, and asset reviews are performed on a periodic basis. Such reviews are prioritized according to an asset's risk characteristics, such as loan size, collateral type and/or location, and potential loan performance problems. The objective of the review process is to identify significant trends and determine the levels of loss exposure to the Company that would require adjustments to specific and general valuation allowances. If the quality of the Company's loans deteriorates or if the allowance for loan losses is inadequate to absorb actual losses, a material adverse effect on the Company's results of operations and financial condition would be likely to result. Loan Portfolio Risk Elements When a borrower fails to make a contractually required payment on a loan, the loan is characterized as delinquent. In most cases delinquencies are cured promptly; however, foreclosure proceedings, and in some cases workout proceedings, are generally commenced if the delinquency is not cured. The procedures for foreclosure actions vary from state to state, but generally if the loan is not reinstated within certain periods specified by statute, the property securing the loan can be acquired through foreclosure by the lender. While deficiency judgments against the borrower are available in some of the states in which the Company originates loans, the value of the underlying collateral property is usually the principal source of recovery available to satisfy the loan balance. In general, loans are placed on nonaccrual status after being contractually delinquent for more than 90 days. When a loan is placed on nonaccrual status, all interest previously accrued but not received is reversed and the loan is considered non-performing. The Company may modify or restructure a loan as a result of a borrower's inability to service the obligation under the original terms of the loan agreement. Page 19 The following table indicates the carrying value of the Company's loans, excluding Covered Assets, which have been placed on nonaccrual status, as well as the carrying value of foreclosed real estate and repossessed assets, at the dates indicated:
December 31 ----------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (dollars in millions) Non-performing loans: Real estate: 1-4 unit residential $190 $165 $146 $136 $133 5+ unit residential 16 12 13 23 24 Commercial and other 10 6 9 9 11 Land -- -- -- -- 7 Construction 1 2 1 -- 2 ---- ---- ---- ---- ---- Total real estate 217 185 169 168 177 Equity-line and consumer 9 7 3 3 4 ---- ---- ---- ---- ---- Total non-performing loans 226 192 172 171 181 Foreclosed real estate, net 80 77 52 49 37 Repossessed assets 4 3 -- -- -- ---- ---- ---- ---- ---- Total non-performing assets $310 (a) $272 (b) $224 (c) $220 $218 ==== ==== ==== ==== ==== Non-performing loans as a percentage of loans receivable 0.75% 0.99% 1.69% 1.94% 1.81% ==== ==== ==== ==== ==== Non-performing assets as a percentage of total assets 0.57% 0.87% 1.36% 1.50% 1.49% ==== ==== ==== ==== ====
- ------------------ (a) Includes $111.7 million of assets acquired in the Glen Fed Merger. (b) Includes $70.2 million of assets acquired in the Cal Fed Acquisition. (c) Includes $74.5 million of assets acquired in the 1996 Acquisitions and in the 1996 LMUSA Purchase. Interest income of $9.7 million, $6.8 million and $4.9 million was received and recognized by the Company for nonaccrual loans during the years ended December 31, 1998, 1997 and 1996. Had the loans performed in accordance with their original terms, $18.2 million, $15.9 million and $13.7 million would have been recognized during December 31, 1998, 1997 and 1996, respectively. The Company has had no loans contractually past due 90 days or more on accrual status in the past five years. The following table indicates loans classified by the Company as troubled debt restructurings, net of purchase accounting adjustments, and excluding Covered Assets, at the dates indicated:
At December 31, --------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (in millions) Real estate: 1-4 unit residential $ 4 $ 2 $ 3 $ 8 $ 19 5+ unit residential 9 7 55 147 204 Commercial and other 19 24 29 79 110 --- --- ---- ---- ---- Total restructured loans $32 $33 $ 87 $234 $333 === === ==== ==== ====
For the year ended December 31, 1998, interest income of $3.0 million, $3.5 million and $13.0 million was recognized on restructured loans during the years ended December 31, 1998, 1997 and 1996. Had the loans performed in accordance with their original terms, $3.0 million, $3.6 million and $13.4 million would have been recognized during December 31, 1998, 1997 and 1996, respectively. There were no non-real estate restructured loans in any of the past five years. Page 20 Allowance for Loan Losses The Company charges current earnings with a provision for estimated credit losses on loan receivable to bring the total allowance to a level deemed appropriate by management. The provision considers both specifically identified problem loans and credit risks not specifically identified in the loan portfolio. The allowance for loan losses is based on such factors as the financial condition of the borrowers, the fair value of the loan collateral, recourse to guarantors, analysis of delinquency trends, geographic and collateral-type concentrations, past loss experience, regulatory policies, and other factors related to the collectibility of the Company's loan portfolio. The following table summarizes activity in the Company's allowance for loan losses during the periods indicated:
Year ended December 31, -------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (in millions) Balance at beginning of period $419 $247 $210 $203 $ 2 Purchases - Glen Fed Merger 170 -- -- -- -- Purchases - Cal Fed Acquisition -- 144 -- -- -- Purchases - SFFed Acquisition -- -- 40 -- -- Purchases - Home Federal Acquisition -- -- 5 -- -- Purchases - FN Acquisition -- -- -- -- 202 Provision for loan losses 40 80 40 37 6 Charge-offs: 1-4 unit residential (28) (38) (35) (28) (4) 5+ unit residential and commercial real estate (a) (10) (8) (4) -- (4) Consumer and other (8) (10) (6) (5) (1) ---- ---- ---- ---- ---- Total charge-offs (46) (56) (45) (33) (9) Recoveries 6 4 3 3 2 ---- ---- ---- ---- ---- Net charge-offs (40) (52) (42) (30) (7) Allowance for losses assigned to loans sold -- -- (6) -- -- ---- ---- ---- ---- ---- Balance at end of period $589 $419 $247 $210 $203 ==== ==== ==== ==== ====
- ------------ (a) Reduced level of activity during 1996, 1995 and 1994 reflects the utilization of the Put Agreement, which expired in November 1996. The Company has increased its allowance for loan losses over the past five years both through periodic provisions (and charges to income) of $203 million and through balances of $561 million acquired in connection with the various acquisitions which occurred during that time. Charge-offs during the five year period totalled $189 million; however, it should be noted that the charge-off activity related to predecessor institutions is not reflected in this table for periods prior to acquisition by the Company. Losses charged by predecessor institutions during the five years presented totalled $771 million. On a pro forma basis, average annual chargeoffs for the five years ended December 31, 1998 were $192 million, which represents approximately three years of losses based on the allowance for loan losses at December 31, 1998. Although the general loan loss allowance has been allocated by type of loan for internal valuation purposes, all such allowance is available to support any losses which may occur, regardless of type, in the Company's loan portfolio. Page 21 The following table sets forth the allocation of the Company's allowance for loan losses at the dates indicated:
Year ended December 31, ----------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (in millions) Specific allowance: Real estate loans: 1-4 unit residential $ -- $ -- $ -- $ 1 $ 4 5+ unit residential and commercial real estate 17 8 6 -- -- ---- ---- ---- ---- ---- Total specific allowance 17 8 6 1 4 ---- ---- ---- ---- ---- General allowance: Real estate loans: 1-4 unit residential 250 202 123 115 105 5+ unit residential and commercial real estate 260 190 109 85 85 ---- ---- ---- ---- ---- Total real estate loans 510 392 232 200 190 Equity-line and consumer loans 62 19 9 9 9 ---- ---- ---- ---- ---- Total general allowance 572 411 241 209 199 ---- ---- ---- ---- ---- Total allowance for loan losses $589 $419 $247 $210 $203 ==== ==== ==== ==== ====
The table below provides the Company's ratios of net charge-offs on loans during the period indicated to average outstanding loan balances for the years indicated:
Year ended December 31, ------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Real estate: 1-4 unit residential 0.11% 0.25% 0.55% 0.47% 0.06% 5+ unit residential and commercial real estate 0.18 0.15 0.09 -- 0.10 Consumer and other 0.50 1.72 1.86 1.00 0.23
Impaired Loans See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Problem and Potential Problem Assets" for a discussion of the Company's impaired loans as of December 31, 1998 and 1997. Page 22 INVESTMENT ACTIVITIES The Bank is required by OTS regulations to maintain a specified minimum amount of liquid assets which may be invested in specified securities. The Bank is also permitted to invest in certain other types of securities. Securities balances (including cash equivalent securities) exceeding minimum federal requirements are subject to change over time based on the Bank's asset/liability funding needs and interest rate risk management objectives. The Bank's liquidity levels take into consideration anticipated future cash flows and all available sources of credit. Liquidity is maintained at levels management believes are appropriate to assure future flexibility in meeting anticipated funding needs including deposit withdrawal requests, loan funding commitments, and other investment or restructuring requirements. See "Regulation of the Bank--Liquid Assets." Cash Equivalents The Company sells federal funds, purchases securities under agreements to resell, and invests in interest-bearing deposits in other banks from time to time to help meet the Bank's regulatory liquidity requirements and as temporary holdings until the funds can be otherwise deployed or invested. Securities Available for Sale The following summarizes the amortized cost and estimated fair value of the Company's securities available for sale at the dates indicated (in millions):
December 31, 1998 Gross Gross Net Amortized Unrealized Unrealized Unrealized Carrying Cost Gains Losses Gain Value ---- ----- ------ ---- ----- Marketable equity securities $ -- $ 2 $ -- $ 2 $ 2 U.S. government and agency obligations 768 1 -- 1 769 ---- ---- ----- --- ---- Total $768 $ 3 $ -- 3 $771 ==== ==== ===== ==== Estimated tax effect (1) --- Net unrealized holding gain in stockholders' equity $ 2 === December 31, 1997 Gross Gross Net Amortized Unrealized Unrealized Unrealized Carrying Cost Gains Losses Gain Value ---- ----- ------ ---- ----- Marketable equity securities $ -- $ -- $ -- $ -- $ -- U.S. government and agency obligations 813 1 (1) -- 813 ---- ---- ---- ---- ---- Total $813 $ 1 $ (1) -- $813 ==== ==== ==== ==== Estimated tax effect -- ---- Net unrealized holding gain in stockholders' equity $ -- ==== December 31, 1996 Gross Gross Net Amortized Unrealized Unrealized Unrealized Carrying Cost Gains Losses Gain Value ---- ----- ------ ---- ----- Marketable equity securities $ 27 $35 $ -- $35 $ 62 U.S. government and agency obligations 480 1 (1) -- 480 ---- --- ---- --- ---- Total $507 $36 $ (1) 35 $542 ==== === ==== ==== Estimated tax effect (4) --- Net unrealized holding gain in stockholders' equity $31 ===
Page 23 Marketable equity securities available for sale at December 31, 1998 represent Golden State's investment in Precept Business Services, Inc. acquired by the Bank in a distribution from Affiliated Computer Services ("ACS") and distributed by the Bank to GS Holdings as a dividend in kind during the second quarter of 1998. Marketable equity securities available for sale at December 31, 1996 represented approximately 5.93% of the outstanding stock of ACS, with a cost basis of $27 million. The ACS stock represents the only marketable equity security classified as available for sale at December 31, 1996. Pursuant to the terms of a settlement agreement dated June 17, 1991, between the Bank, ACS, and the Federal Deposit Insurance Corporation ("FDIC"), the FDIC was entitled to share in a defined portion of the proceeds from the sale of the ACS common stock owned by the Bank. On June 28, 1996, the Bank sold 2,000,000 shares of its investment in common stock of ACS for gross proceeds totalling $92.3 million from which it satisfied its full obligation to the FDIC and recognized a pre-tax gain of $40.4 million. The Bank's remaining shares of ACS stock were sold in October 1997, resulting in a pre-tax gain of approximately $25.0 million. Securities Held to Maturity The following summarizes the amortized cost and estimated fair value of the Company's securities held to maturity at the dates indicated (in millions):
December 31, ---------------------------------------------------------------------------- 1998 1997 1996 ----------------------- ---------------------- ----------------------- Estimated Estimated Estimated Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value ---- ----- ---- ----- ---- ----- Municipal securities $ 84 $ 85 $-- $-- $ -- $ -- U. S. government and agency obligations -- -- -- -- 4 4 Commercial paper 167 167 58 58 -- -- ---- ---- --- --- ---- ---- Total $251 $252 $58 $58 $ 4 $ 4 ==== ==== === === ==== ====
The weighted average stated interest rate on the Company's securities held to maturity was 4.77%, 5.32% and 6.85% at December 31, 1998, 1997 and 1996, respectively. Mortgage-Backed Securities Available for Sale The following summarizes the amortized cost and estimated fair value of the Company's mortgage-backed securities ("MBS") available for sale at the dates indicated (in millions):
December 31, 1998 --------------------------------------------------------------- Gross Gross Net Amortized Unrealized Unrealized Unrealized Carrying Cost Gains Losses Gain (Loss) Value ---- ----- ------ ----------- ----- GNMA $ 762 $ 1 $ (5) $(4) $ 758 FNMA 2,897 12 (14) (2) 2,895 FHLMC 1,354 7 (5) 2 1,356 Other mortgage-backed securities 706 4 (5) (1) 705 Collateralized mortgage obligations 7,222 26 (14) 12 7,234 ------- --- ---- ---- ------- Total $12,941 $50 $(43) 7 $12,948 ======= === ==== ======= Estimated tax effect (3) Net unrealized holding gain ---- in stockholders' equity $ 4 ====
Page 24
December 31, 1997 ------------------------------------------------------------ Gross Gross Net Amortized Unrealized Unrealized Unrealized Carrying Cost Gains Losses Gain (Loss) Value ---- ----- ------ ---------- ----- GNMA $ 249 $ 3 $ -- $ 3 $ 252 FNMA 2,408 17 (6) 11 2,419 FHLMC 1,198 20 -- 20 1,218 Other mortgage-backed securities 575 5 -- 5 580 Collateralized mortgage obligations 607 3 (2) 1 608 ------ --- ---- --- ------ Total $5,037 $48 $(8) 40 $5,077 ====== === ==== ====== Estimated tax effect (5) --- Net unrealized holding gain in stockholders' equity $35 ===
December 31, 1997 ------------------------------------------------------------ Gross Gross Net Amortized Unrealized Unrealized Unrealized Carrying Cost Gains Losses Gain (Loss) Value ---- ----- ------ ---------- ----- GNMA $ 67 $ 1 $ -- $ 1 $ 68 FNMA 524 5 (5) -- 524 FHLMC 626 17 -- 17 643 Collateralized mortgage obligations 365 -- (1) (1) 364 ------ --- --- --- ------ Total $1,582 $23 $(6) 17 $1,599 ====== === === ====== Estimated tax effect (2) --- Net unrealized holding gain in stockholders' equity $15 ===
At December 31, 1998, 1997 and 1996, mortgage-backed securities available for sale included securities totalling $1.1 billion, $1.4 billion and $53.0 million, respectively, which resulted from the securitization of certain qualifying mortgage loans from the Bank's portfolio. Mortgage-backed securities available for sale included $5.6 billion, $4.6 billion and $1.1 billion of variable-rate securities as of December 31, 1998, 1997 and 1996, respectively. Golden State maintains a significant portfolio of mortgage-backed securities as a means of investing in housing-related mortgage instruments without the costs associated with originating mortgage loans for portfolio retention and the credit risk of default which arises in holding a portfolio of loans to maturity. By investing in mortgage-backed securities, management seeks to achieve a positive spread over the cost of funds used to purchase these securities. Mortgage-backed securities available for sale are carried at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders' equity. Premiums and discounts on the purchase of mortgage-backed securities are amortized or accreted as a yield adjustment over the life of the securities using the interest method, with the amortization or accretion effect of prepayments being adjusted based on revised estimates of future repayments. Mortgage-backed securities generally yield less than the loans which underlie such securities because of their payment guarantees or credit enhancements which reduce credit risk. In addition, mortgage-backed securities are more liquid than individual mortgage loans and may be used to collateralize borrowings. Mortgage-backed securities issued or guaranteed by GNMA are generally weighted at 0% for risk-based capital purposes. Mortgage-backed securities issued or guaranteed by FNMA or FHLMC (except interest-only securities or the residual interests in collateralized mortgage obligations ("CMOs")) are generally weighted at 20% for risk-based capital purposes, compared to a weight of 50% to 100% for residential loans. See "--Regulation of the Bank." Page 25 The Company held privately issued CMOs with an aggregate carrying value of $7.2 billion at December 31, 1998. The following represents all such investments with a carrying value in excess of ten percent of stockholders' equity (in millions): Aggregate Aggregate Issuer Carrying Value Market Value - ------ -------------- ------------ Residential Funding Mortgage $879 $882 Countrywide Home Loans 476 479 GE Capital Mortgage 446 446 Norwest Asset Securities Corp. 403 404 At December 31, 1998, all of the mortgage-backed securities held by the Company had one of the two highest credit ratings from one or more of the national securities rating agencies except for $179.0 million, of which $175.2 million are non-rated CMO residual class securities formed by Old California Federal's and Glendale Federal's originations of residential mortgages. Such credit rating, however, may be subject to revision or withdrawal at any time by such rating agencies. The mortgage-backed securities which Golden State purchases and maintains in its portfolio include certain CMOs. A CMO is a special type of pay-through debt obligation in which the stream of principal and interest payments on the underlying mortgages or mortgage-backed securities is used to create classes with different maturities and, in some cases, amortization schedules and a residual class of the CMO security being sold, with each such class possessing different risk characteristics. The residual interest sold represents any residual cash flows which result from the excess of the monthly receipts generated by principal and interest payments on the underlying mortgage collateral and any reinvestment earnings thereon, less the cash payments to the CMO holders and any administrative expenses. As a matter of policy, due to the risk associated with residual interests, the Company does not invest in the residual interests of CMOs. Mortgage-backed Securities Held to Maturity A summary of the Company's mortgage-backed securities held to maturity at the dates indicated is as follows:
December 31, ---------------------------------------------------------------- 1998 1997 1996 --------------------- -------------------- --------------------- Estimated Estimated Estimated Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value ---- ----- ---- ----- ---- ----- (in millions) FNMA $2,546 $2,595 $1,018 $1,038 $1,214 $1,232 FHLMC 223 228 318 333 406 420 Other mortgage-backed securities 2 2 2 2 2 2 ------ ------ ------ ------ ------ ------ Total $2,771 $2,825 $1,338 $1,373 $1,622 $1,654 ====== ====== ====== ====== ====== ======
The weighted average stated interest rate on the Company's mortgage-backed securities held to maturity was 7.22%, 7.33% and 7.27% at December 31, 1998, 1997 and 1996, respectively. At December 31, 1998, 1997 and 1996, mortgage-backed securities held to maturity included variable rate securities totalling $2.7 billion, $1.3 billion and $1.6 billion, respectively, which resulted from the securitization with FNMA and FHLMC of certain qualifying mortgage loans from the Company's loan portfolios with full recourse to the Company. During the years ended December 31, 1998, 1997 and 1996, the Company did not sell any of its mortgage-backed securities held to maturity. Mortgage-backed securities held to maturity are carried at amortized cost unless there is evidence of a decline in value that is other than temporary. Permanent declines in value are charged to income in the periods in which the declines are determined. Premiums and discounts on the purchase of mortgage-backed securities are amortized or accreted as a yield adjustment over the life of the securities using the interest method, with the amortization or accretion effect of prepayments being adjusted based on revised estimates of future repayments. Page 26 SOURCES OF FUNDS General Deposits, sales of securities under agreements to repurchase, advances from the FHLB of San Francisco, sales, maturities and principal repayments on loans and mortgage-backed securities and issuances of debentures and preferred stock have been the major sources of funds for use in the Company's lending and investment activities and other general business purposes. Management closely monitors rates and terms of competing sources of funds on a daily basis and utilizes the source which is most cost-effective. The availability of funds from sales of loans and securities is influenced by the levels of general interest rates and other market conditions. For additional information regarding the Company's sources of funds, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity" and the Company's Consolidated Statements of Cash Flows set forth in the Consolidated Financial Statements. Loan principal and interest payments are a relatively stable source of funds, while customer deposit inflows and outflows and loan repayments and prepayments are influenced significantly by the levels of general interest rates and money market conditions, and may fluctuate widely. Borrowings may be used to compensate for reductions in normal sources of funds such as customer deposits. Deposits The Company offers a variety of deposit accounts designed to attract both short-term and long-term deposits. There are no rate limitations on any type of deposit account presently offered by the Company. The ability of the Company to retain and attract new deposits is dependent upon the variety and effectiveness of its customer account products, customer service and convenience, and prevailing market conditions. The following table shows the distribution of deposits by type of account at the dates indicated:
December 31, ---------------------------------------------------------------------- 1998 1997 1996 ---------------------- ---------------------- ------------------------ Percent Percent Percent Amount of Deposits Amount of Deposits Amount of Deposits ------ ----------- ------ ----------- ------ ----------- (dollars in millions) Transaction accounts: Passbook accounts $ 3,372 13.7% $ 2,162 13.4% $ 841 10.0% Demand deposits: Interest-bearing 1,865 7.6 1,149 7.1 510 6.0 Noninterest-bearing 3,002 12.2 1,179 7.3 729 8.6 Money market deposit accounts 3,255 13.3 1,270 7.9 881 10.4 ------- ----- ------- ----- ------ ----- Total transaction accounts 11,494 46.8 5,760 35.7 2,961 35.0 Term accounts 13,080 53.2 10,390 64.3 5,503 65.0 ------- ----- ------- ----- ------ ----- 24,574 100.0% 16,150 100.0% 8,464 100.0% ===== ===== ===== Accrued interest payable 39 52 32 Purchase accounting adjustments 7 1 6 ------- ------- ------ Total $24,620 $16,203 $8,502 ======= ======= ======
Total deposits at December 31, 1998, 1997 and 1996 include escrow balances for loans serviced for others of $1.5 billion, $702 million and $550 million, respectively. Deposit balances, excluding purchase accounting adjustments, averaged $18.8 billion, $16.7 billion and $9.2 billion during 1998, 1997 and 1996, respectively, with average interest rates of 4.17%, 4.55% and 4.66%, respectively. The weighted average stated interest rates on deposits at December 31, 1998, 1997 and 1996 were 4.20%, 4.52% and 4.53%, respectively. Page 27 The following table presents the average balance and weighted average rate paid on each deposit type of the Company for the periods indicated, excluding the impact of purchase accounting adjustments:
Years Ended December 31, -------------------------------------------------------------------------- 1998 1997 1996 ---------------------- --------------------- -------------------------- Average Average Average Average Average Average Balance Rate Paid Balance Rate Paid Balance Rate Paid ------- --------- ------- --------- ------- --------- (dollars in millions) Transaction accounts: Passbook accounts $ 2,685 3.68% $ 1,874 3.65% $1,154 2.72% Demand deposits: Interest-bearing 1,352 1.00 1,150 1.07 289 1.87 Noninterest-bearing 1,899 -- 1,280 -- 825 -- Money market deposit accounts 1,680 3.61 1,408 3.56 946 3.39 Term accounts 11,151 5.46 11,008 5.73 6,032 6.00 ------- ------- ------ Total $18,767 4.17% $16,720 4.55% $9,246 4.66% ======= ======= ======
The following table sets forth the scheduled maturities of the Company's term accounts by stated interest rate at December 31, 1998:
2002 and 1999 2000 2001 thereafter Total ---- ---- ---- ---------- ----- (in millions) 3.00% or less $ 1 $ -- $ -- $ -- $ 1 3.01 - 4.00% 390 26 12 1 429 4.01 - 5.00% 4,326 720 13 18 5,077 5.01 - 6.00% 5,972 438 131 142 6,683 6.01 - 7.00% 374 149 38 137 698 7.01 - 8.00% 54 76 38 11 179 8.01 - 9.00% 5 6 -- -- 11 9.01 - 10.00% 1 -- -- -- 1 Over 10.00% 1 -- -- -- 1 ------- ------ ---- ---- ------- Total term accounts $11,124 $1,415 $232 $309 $13,080 ======= ====== ==== ==== =======
The following table sets forth remaining maturities for the Company's term deposits in amounts of $100,000 or more at December 31, 1998 (in millions): 3 months or less $ 818 Over 3 months but within 6 months 577 Over 6 months but within 12 months 979 Over 12 months 492 ------ $2,866 ====== At December 31, 1998, the aggregate amount outstanding of certificates of deposit of $100,000 or larger at the Company was $2.9 billion, compared with $2.0 billion and $871 million at December 31, 1997 and 1996, respectively. Deposits held by foreign investors at the Bank totalled $101 million, $93 million and $58 million at December 31, 1998, 1997 and 1996, respectively. The Bank's deposit accounts are held primarily by individuals residing in the vicinity of its retail branch offices located in California and Nevada. The Bank has emphasized, and will continue to emphasize, a retail branch network for attracting deposits. Key market areas, particularly the West Coast region, will continue to be targeted for expansion of retail deposits and the cross-selling of additional consumer products. Page 28 When cost-effective relative to other sources of funding, the Bank issues certificates of deposit through direct placement programs and national investment banking firms ("Brokered Deposits"). These deposits are usually in amounts less than $100,000 and are obtained from a diverse customer base. While these funds are generally more costly than traditional passbook and money market deposits and more volatile as a source of funds because of their sensitivity to the rates offered, they supplement retail customer deposits in raising funds for financing and liquidity purposes. At December 31, 1998, California Federal had $369 million of Brokered Deposits outstanding, representing 1.5% of total deposits. Borrowings The Company and the Bank utilize various borrowings as alternative sources of funds for its business needs. These sources have included securities sold under agreements to repurchase, FHLB advances, senior and subordinated debentures and the purchase of federal funds. Short-term Borrowings Short-term borrowings consist of (i) securities sold under agreements to repurchase, (ii) federal funds purchased and (iii) short-term FHLB advances. These instruments are discussed more fully in the subsequent sections. The following table sets forth for the Company each category of borrowings due within one year: (i) for the periods presented, the average amount outstanding, the maximum amount outstanding at any month end and the average interest rate paid, and (ii) at period end, the amount outstanding and average interest rate paid. Amounts and rates reflected in the table exclude accrued interest payable and purchase accounting adjustments.
At or for the year ended December 31, ------------------------------------- 1998 1997 1996 ---- ---- ---- (dollars in millions) Securities sold under agreements to repurchase: Average balance outstanding $2,766 $2,275 $1,931 Maximum amount outstanding at any month end during the period 4,264 2,870 2,424 Balance outstanding at end of period 4,222 1,829 1,510 Average interest rate during the period 5.56% 5.68% 5.70% Average interest rate at end of period 5.05 5.78 5.88 Federal funds purchased: Average balance outstanding $ 76 $ 95 $ 65 Maximum amount outstanding at any month end during the period 220 153 135 Balance outstanding at end of period 138 130 25 Average interest rate during the period 5.26% 5.59% 5.41% Average interest rate at end of period 5.00 6.50 7.50 Short-term FHLB advances: Average balance outstanding $5,577 $5,561 $2,455 Maximum amount outstanding at any month end during the period 7,880 6,606 3,141 Balance outstanding at end of period 7,880 5,263 2,741 Average interest rate during the period 5.68% 5.76% 5.83% Average interest rate at end of period 5.34 5.88 5.78
At December 31, 1998, the Company had an estimated additional secured borrowing capacity of $5.5 billion with the FHLB and other sources. Page 29 Securities Sold Under Agreements to Repurchase The Company enters into reverse repurchase agreements whereby it sells marketable U.S. government and mortgage-backed securities and CMOs with a commitment to repurchase the securities at a specified price and on a specified date. These agreements are recorded as financings, and the obligation to repurchase assets sold is reflected as a liability on the consolidated balance sheet. The dollar amount of assets underlying the agreements remains in the asset accounts. The securities underlying the agreements are delivered to the dealers who arranged the transactions. The counterparty to the repurchase agreement may have loaned the securities to other parties in the normal course of their operations; however, all agreements require that the identical securities be resold to the Company at the maturity of the agreements. In order to reduce possible risks associated with these borrowing transactions, the reverse repurchase agreements are generally entered into with national investment banking firms and major commercial banks which are primary dealers in these securities. Federal Funds Purchased California Federal must meet legal reserve requirements on a daily basis by (i) maintaining a specified total amount of deposits at the Federal Reserve Bank and (ii) vault cash. Occasionally, the Bank may borrow funds from another bank with excess reserves to meet its requirements for the day. These borrowings are repaid with interest at maturity based on the federal funds rate. FHLB Advances The FHLB functions in a credit capacity for savings institutions and certain other home financing institutions. A savings association may generally borrow from its district FHLB through advances secured by its home mortgages and other assets (principally securities which are obligations of, or guaranteed by, the U.S. government). A savings association is required to hold a minimum amount of capital stock of the FHLB based upon a percentage of its outstanding home mortgage loans and similar obligations, a percentage of its outstanding advances from the FHLB, or a certain percentage of total assets. Such advances may be made pursuant to several different credit programs made available from time to time by the FHLB to meet seasonal activity and other withdrawals of deposit accounts and to expand lending, each of which has its own interest rate and range of maturities. The FHLB prescribes the acceptable uses, as well as limitations on the size of such advances. Depending on the program, such limitations are based either on a fixed percentage of the institution's net worth or on the FHLB's assessment of the institution's creditworthiness. The following table presents the carrying value and weighted average rate paid on FHLB advances for the periods indicated, excluding accrued interest payable and the impact of purchase accounting adjustments (dollars in millions):
1998 1997 1996 -------------------- ------------------ ------------------ Carrying Average Carrying Average Carrying Average Value Rate Value Rate Value Rate ----- ---- ----- ---- ----- ---- Fixed-rate borrowings $15,427 5.38% $5,447 5.88%% $3,565 5.93% Variable-rate borrowings 4,571 5.53 4,074 5.95 854 5.67 ------- ------ ------ Total FHLB advances $19,998 5.41% $9,521 5.91% $4,419 5.88% ======= ====== ======
Page 30 The following table sets forth remaining maturities and weighted average stated interest rates of the Company's FHLB advances at December 31, 1998, not including accrued interest payable or purchase accounting adjustments (dollars in millions): Balance Weighted Maturing Average Rate -------- ------------ 1999 $ 7,880 5.34% 2000 4,820 5.50 2001 1,211 5.56 2002 685 5.69 2003 5,400 5.38 2004 and thereafter 2 7.83 ------- $19,998 5.41% ======= Interest Rate Swap Agreements The Company has used interest rate swap agreements to adjust its interest rate risk exposure on fixed rate FHLB advances. There were no interest rate swap agreements outstanding at December 31, 1998. The Company had interest rate swap agreements with a notional principal amount of $400 million outstanding at December 31, 1997. The notional amount does not represent amounts exchanged by the parties and thus, is not a measure of the Company's exposure at that time. The Company paid a variable rate based on LIBOR and received a fixed rate under these agreements. In order to reduce possible counterparty nonperformance risk, the Company has entered into interest rate swap agreements only with primary dealers and the FHLB of San Francisco. GS Escrow Notes On August 6, 1998, GS Escrow, which subsequently merged into GS Holdings, issued $2 billion principal amount of fixed and floating rate notes, as described below. The GS Escrow Notes are unsecured and unsubordinated obligations of GS Holdings and rank in right of payment with all other unsubordinated and unsecured indebtedness of GS Holdings. The terms and conditions of the respective notes indentures impose restrictions that affect, among other things, the ability of GS Holdings to incur debt, pay dividends or make distributions, engage in a business other than holding the common stock of the Bank and similar banking institutions, make acquisitions, create liens, sell assets and make certain investments. Floating Rate Notes Due 2003 ---------------------------- On August 6, 1998, GS Escrow issued $250 million principal amount of the Floating Rate Notes. The notes will mature on August 1, 2003 with interest payable quarterly on February 1, May 1, August 1 and November 1. Interest on the Floating Rate Notes is equal to three-month LIBOR plus 100 basis points per annum, except that the initial rate was 6 3/4%, based on six-month LIBOR until the first interest payment date on February 1, 1999. The interest rate on the Floating Rate Notes reset on February 1, 1999 to 5.97%. Deferred costs associated with the issuance of the Floating Rate Notes totaling $3.1 million were recorded in other assets and are being amortized over the term of the Floating Rate Notes. The Floating Rate Notes are redeemable at the option of GS Holdings, in whole or in part, after August 1, 2000, at a price of 101.5% of the outstanding principal amount during the twelve-month period beginning August 1, 2000; at a price of 101% of the outstanding principal amount during the twelve-month period beginning August 1, 2001; and at a price of 100.5% of the outstanding principal amount during the twelve-month period beginning August 1, 2002, including accrued and unpaid interest, if any, to the date of redemption. In the event of a change in control, the Floating Rate Notes are redeemable in whole at the option of GS Holdings. The redemption price includes principal plus accrued and unpaid interest, if any, to the date of redemption, plus the excess, if any, of (i) the sum of the present value of the redemption price for the Floating Rate Notes and the remaining scheduled interest payments over (ii) the outstanding principal amount of the Floating Rate Notes to be redeemed. Page 31 Fixed Rate Notes ---------------- On August 6, 1998, GS Escrow issued $350 million principal amount of the 2001 Notes, $600 million principal amount of the 2003 Notes, and $800 million principal amount of the 2005 Notes. The Fixed Rate Notes will mature on August 1 of the respective year, and interest is payable semiannually on February 1 and August 1. Deferred costs associated with the issuance of the Fixed Rate Notes totaling $3.5 million, $12.5 million and $19.5 million for the 2001 Notes, the 2003 Notes and the 2005 Notes, respectively, were recorded in other assets and are being amortized over the term of the notes. The Fixed Rate Notes are redeemable at the option of the Company, in whole or in part, at a redemption price equal to principal plus accrued and unpaid interest, if any, to the date of redemption, plus the excess, if any of (i) the sum of the present values of the redemption price for the respective notes and the remaining scheduled interest payments over (ii) the outstanding principal amount of the notes to be redeemed. 12 1/2% Senior Notes Due 2003 On April 17, 1996, Parent Holdings issued $455 million of its 12 1/2% Senior Notes due 2003 (the "12 1/2% Parent Holdings Notes"). Concurrent with the closings of the Debt Tender Offers, GS Financial, as the successor obligor, gave a 30-day notice of redemption for all of the outstanding 12 1/2% Parent Holdings Notes, and irrevocably deposited in trust money or government obligations in an amount sufficient to pay the redemption price therefor, together with any accrued and unpaid interest to the date of redemption, for the purpose of defeasing the 12 1/2% Parent Holdings Notes (the "Parent Holdings Defeasance"). During 1998, all of the 12 1/2% Parent Holdings Notes were redeemed in connection with the Parent Holdings Defeasance for an aggregate redemption price, including accrued interest payable, of $553.7 million. FN Holdings 12 1/4% Senior Notes Due 2001 In connection with the FN Acquisition, FN Holdings issued $200 million principal amount of the FN Holdings 12 1/4% Senior Notes, including $5.5 million principal amount of such notes to certain directors and officers of the Bank. During 1998, a total of $199.8 million aggregate principal amount of the FN Holdings 12 1/4% Senior Notes were repurchased in connection with the Debt Tender Offers for an aggregate purchase price, including accrued interest payable, of $228.3 million. At December 31, 1998, $.2 million of the FN Holdings 12 1/4% Senior Notes remained outstanding. The notes mature on May 15, 2001 with interest payable semiannually on May 15 and November 15. The notes are redeemable at the option of FN Holdings, in whole or in part, during the 12-month period beginning May 15, 1999, at a redemption price of 106.125% plus accrued interest to the date of redemption, and thereafter at 100% plus accrued interest. The notes are subordinated to all existing and future liabilities, including deposits and other borrowings of the Bank, and the Bank Preferred Stock (as defined herein). FN Holdings 9 1/8% Senior Subordinated Notes Due 2003 On January 31, 1996, FN Holdings issued $140 million principal amount of the FN Holdings 9 1/8% Senior Sub Notes. During 1998, all of the FN Holdings 9 1/8% Senior Sub Notes were repurchased in connection with the Debt Tender Offers for an aggregate purchase price, including accrued interest payable, of $159.9 million. FN Holdings 10 5/8% Senior Subordinated Notes Due 2003 In connection with the Cal Fed Acquisition, GS Holdings acquired the net proceeds from the issuance of $575 million principal amount of FN Escrow's 10 5/8% Notes and assumed FN Escrow's obligations under such notes and indenture. During 1998, a total of $574.8 million aggregate principal amount of the FN Holdings 10 5/8% Notes were Page 32 repurchased in connection with the Debt Tender Offers for an aggregate purchase price, including accrued interest payable, of $692.7 million. At December 31, 1998, $.3 million of the FN Holdings 10 5/8% Notes remain outstanding. The FN Holdings 10 5/8% Notes are redeemable at the option of the Company, in whole or in part, during the 12- month period beginning January 1, 2001, at a redemption price of 105.313% plus accrued and unpaid interest to the date of redemption, during the 12-month period beginning January 1, 2002 at a redemption price of 102.656% plus accrued and unpaid interest to the date of redemption, and thereafter at 100% plus accrued and unpaid interest to the date of redemption. The FN Holdings 10 5/8% Notes are subordinate in right of payment to all existing and future subordinated debt, if any is issued, of GS Holdings. The FN Holdings 10 5/8% Notes are subordinated to all existing and future liabilities, including deposits, indebtedness and trade payables, of the subsidiaries of GS Holdings, including the Bank Preferred Stock. 10% Subordinated Debentures Due 2006 As part of the FN Acquisition, California Federal assumed subordinated debentures, which bear interest at 10% per annum and mature on October 1, 2006 (the "10% Subordinated Debentures Due 2006"). At December 31, 1998, the outstanding balance of the 10% Subordinated Debentures Due 2006 was $92.1 million. Events of Default under the indenture governing the 10% Subordinated Debentures Due 2006 (the "Old FNB Indenture") include, among other things: (i) a default in the payment of interest when due and such default continues for 30 days, (ii) a default in the payment of any principal when due, (iii) the failure to comply with covenants in the Old FNB Indenture, provided that the trustee or holders of at least 25% in principal amount of the outstanding 10% Subordinated Debentures Due 2006 notify the Bank of the default and the Bank does not cure the default within 60 days after receipt of such notice, (iv) certain events of bankruptcy, insolvency or reorganization of the Bank, (v) the FSLIC/RF (or a comparable entity) is appointed to act as conservator, liquidator, receiver or other legal custodian for the Bank and (vi) a default under other indebtedness of the Bank in excess of $10 million resulting in such indebtedness becoming due and payable, and such default or acceleration has not been rescinded or annulled within 60 days after the date on which written notice of such failure has been given by the trustee to the Bank or by holders of at least 25% in principal amount of the outstanding 10% Subordinated Debentures Due 2006 to the Bank and the trustee. 11.20% Senior Notes Due 2004 As part of the SFFed Acquisition, California Federal assumed $50 million principal amount of SFFed 11.20% Senior Notes due September 1, 2004 (the "11.20% Senior Notes"). In connection with the assumption of the 11.20% Senior Notes, the Bank and all of the holders of the 11.20% Senior Notes entered into an agreement amending certain provisions of the note purchase pursuant to which the 11.20% Senior Notes were sold (as amended, the "Note Purchase Agreement"). On September 12, 1996, the Bank repurchased $44.0 million aggregate principal amount of the 11.20% Senior Notes at a price of approximately 116.45% of the principal amount, plus the accrued interest thereon. The Bank recorded an extraordinary loss, net of tax, of $1.6 million in connection with such repurchase. Events of Default under the note purchase agreement include, among other things: (i) failure to make any payment of principal when due; (ii) any failure to make any payment of interest when due and such payment is not made within 15 days after the date such payment was due; (iii) failure to comply with certain covenants in the Note Purchase Agreement, provided that such failure continues for more than 60 days; (iv) failure to deliver to holders a notice of default, notice of event of default, or notice of claimed default as provided in the Note Purchase Agreement; (v) failure to comply with any provision of the Note Purchase Agreement, provided that such failure continues for more than 60 days after notice is delivered to the Bank; (vi) a default under other indebtedness provided that the aggregate amount of all obligations in respect of such indebtedness exceeds $15 million; (vii) one or more final, non-appealable judgments outstanding against the Bank or its subsidiaries for the payment of money aggregating in excess of $15 million, any one of which has been outstanding for 45 days and shall not have been discharged in full or stayed; (viii) any warranty, representation or other statement contained in the Note Purchase Agreement by the Bank or any of its subsidiaries being false or misleading in any material respect when made; or (ix) certain events of bankruptcy, insolvency or reorganization of the Bank or its subsidiaries. Page 33 As a result of the Cal Fed Acquisition, the Bank is obligated with respect to the following three debt securities of Old California Federal: 10.668% Subordinated Notes Due 1998 The Company assumed $50 million of 10.668% unsecured senior subordinated notes which matured and were repaid in full on December 22, 1998 (the "10.668% Subordinated Notes"). 6 1/2% Convertible Subordinated Debentures Due 2001 In 1986, Cal Fed Inc., Old California Federal's former parent company, issued $125 million of 6.5% convertible subordinated debentures due February 20, 2001 (the "6 1/2% Convertible Subordinated Debentures"). As a result of a corporate restructuring in December 1992, Cal Fed Inc. was merged with and into XCF Acceptance Corporation ("XCF"), a subsidiary of Old California Federal. The 6 1/2% Convertible Subordinated Debentures are redeemable at the option of the holders on February 20, 2000, at 123% of their principal amount. At December 31, 1998, $2.6 million of the 6 1/2% Convertible Subordinated Debentures were outstanding. Due to the purchase of all the Cal Fed Stock by FN Holdings in the Cal Fed Acquisition on January 3, 1997, the common stock conversion feature has been eliminated. Events of Default under the indenture governing the 6 1/2% Convertible Subordinated Debentures include, among other things: (i) any failure to make any payment of interest when due and such payment is not made within 30 days after the date such payment was due; (ii) failure to make any payment of principal when due; (iii) default in the performance, or breach, of any covenant or warranty in the indentures, provided that such default or breach continues for more than 60 days after notice is delivered to the Bank; or (iv) certain events of bankruptcy, insolvency or reorganization of the Bank or its subsidiaries. 10% Subordinated Debentures Due 2003 On December 16, 1992, Old California Federal issued $13.6 million of 10.0% unsecured subordinated debentures due 2003 (the "10% Subordinated Debentures Due 2003"). During 1996 and 1995, Old California Federal repurchased $0.6 million and $8.7 million, respectively, of the debentures, leaving $4.3 million outstanding at December 31, 1998. Events of Default under the indenture governing the 10% Subordinated Debentures Due 2003 include, among other things: (i) failure to make any payment of principal when due; (ii) any failure to make any payment of interest when due and such payment is not made within 30 days after the date such payment was due; (iii) failure to comply with certain covenants in the indenture; (iv) failure to comply with certain covenants in the indenture provided that such failure continues for more than 60 days after notice is delivered to the Bank; (v) certain events of bankruptcy, insolvency or reorganization of the Bank; or (vi) the default or any event which, with the giving of notice or lapse of time or both, would constitute a default under any indebtedness of the Bank and cause such indebtedness with an aggregate principal amount exceeding $15 million to accelerate. FN Holdings Preferred Stock -- Minority Interest On September 19, 1996, the Company issued 10,000 shares of preferred stock ("FN Holdings Preferred Stock") with a liquidation value of $150 million to Special Purpose Corp. Cash dividends on the FN Holdings Preferred Stock were cumulative and payable: (i) in cash at an annual rate of the cost of funds to an affiliate of FN Holdings under such affiliate's bank credit facility (the "Cost of Funds Rate") and (ii) in newly issued shares of another series of cumulative perpetual preferred stock of FN Holdings ("Additional FN Holdings Preferred Stock") at an annual rate of 2% of the stated liquidation value of the FN Holdings Preferred Stock, if, when, and as declared by the Board of Directors of FN Holdings. Dividends on the Additional FN Holdings Preferred Stock were cumulative and accrued and were payable in shares of Additional FN Holdings Preferred Stock at an annual rate equal to the Cost of Funds Rate plus 2% of the stated liquidation value of the Additional FN Holdings Preferred Stock if, when, and as declared by the Board of Directors of FN Holdings. Additional FN Holdings Preferred Stock had substantially the same relative rights, terms and preferences as the FN Holdings Preferred Stock, except as set forth above, with respect to the payment of dividends. Dividends on the FN Holdings Preferred Stock were payable quarterly each year, commencing January 1, 1997, out of funds legally available therefor. Page 34 In March 1998, the Company redeemed all remaining 1,666.7 outstanding shares of the FN Holdings Preferred Stock. The redemption price was equal to the liquidation value of $15,000 per share. Upon redemption of the FN Holdings Preferred Stock, all remaining 52.5 shares of the Additional FN Holdings Preferred Stock totalling $.8 million liquidation value were contributed to the capital of the Company, without any payment therefor. Such shares were retired and canceled. Dividends on the FN Holdings Preferred Stock totalled $.6 million, $12.8 million and $4.8 million during 1998, 1997 and 1996, respectively, including the issuance of Additional FN Holdings Preferred Stock of $.1 million, $2.2 million and $.8 million, respectively. 11 1/2% Preferred Stock -- Minority Interest In connection with the FN Acquisition, California Federal issued 3,007,300 shares of its 11 1/2% Noncumulative Perpetual Preferred Stock ("11 1/2% Preferred Stock") with par value of $.01 per share, having a liquidation preference of $300.7 million. The 11 1/2% Preferred Stock has a stated liquidation value of $100 per share, plus declared and unpaid dividends, if any. Cash dividends are noncumulative and are payable at an annual rate of 11 1/2% per share if, when and as declared by the Board of Directors of the Bank. The 11 1/2% Preferred Stock ranks prior to the common stock of the Bank and to all other classes and series of equity securities subsequently issued, other than any class or series expressly designated as being on a parity with or senior to the 11 1/2% Preferred Stock as to dividends and liquidating distributions. The 10 5/8% Preferred Stock (as defined herein) ranks on a parity with the 11 1/2% Preferred Stock as to dividends and liquidating distributions. The terms of the 11 1/2% Preferred Stock provide that the Bank may not declare or pay any dividends or other distributions (other than in shares of common stock of the Bank or other classes of equity securities of the Bank ranking junior to the 11 1/2% Preferred Stock (collectively, "Junior Stock")) with respect to any Junior Stock or redeem or otherwise acquire, or set apart funds for the repurchase, redemption or other acquisition of any Junior Stock (including the common stock held by GS Holdings), through a sinking fund or otherwise, unless and until: (i) the Bank has paid full dividends on the 11 1/2% Preferred Stock for the four most recent dividend periods, or funds have been paid over to the dividend disbursing agent of the Bank for payment of such dividends, and (ii) the Bank has declared a cash dividend on the 11 1/2% Preferred Stock at the annual dividend rate for the current dividend period, and sufficient funds have been paid over to the dividend disbursing agent of the Bank for the payment of a cash dividend for such current dividend period. The Bank is currently in compliance with both of such requirements. Holders of the 11 1/2% Preferred Stock have one vote per share, and holders thereof vote together as a single class with holders of the common stock of the Bank, the 10 5/8% Preferred Stock, the CALGZs and the CALGLs. In connection with the Bank Preferred Stock Tender Offers, 2,688,959 shares of the 11 1/2% Preferred Stock were purchased by GS Holdings during the year ended December 31, 1998. The stated liquidation value of the remaining 318,341 shares of 11 1/2% Preferred Stock not purchased by the Company at December 31, 1998 was $31.8 million. See note 5 to the Company's consolidated financial statements. At or after September 1, 1999, the remaining shares of 11 1/2% Preferred Stock are redeemable at the option of the Bank and/or GS Holdings, in whole or in part, at $105.75 per share prior to September 1, 2000, and at prices which will decrease annually thereafter to the stated liquidation value of $100 per share on or after September 1, 2004, plus declared but unpaid dividends. Cash dividends on the 11 1/2% Preferred Stock are noncumulative and are payable quarterly at an annual rate of 11.50% per share if, when and as declared by the Bank's Board of Directors. Dividends paid on the 11 1/2% Preferred Stock for each year ended December 31, 1998 and 1997 totalled $34.6 million, of which $26.8 million and $34.6 million was included in minority interest in 1998 and 1997, respectively. 10 5/8% Preferred Stock -- Minority Interest In connection with the Cal Fed Acquisition, California Federal assumed Old California Federal's 10 5/8% Noncumulative Perpetual Preferred Stock with a liquidation value of $172.5 million (the "10 5/8% Preferred Stock" and together with the 11 1/2% Preferred Stock, the "Bank Preferred Stock"). The 10 5/8% Preferred Stock has a stated liquidation value of $100 per share, plus declared and unpaid dividends, if any, without interest. Cash dividends are Page 35 noncumulative and are payable at an annual rate of 10 5/8% per share if, when and as declared by the Board of Directors of the Bank. The 10 5/8% Preferred Stock ranks prior to the common stock of the Bank and to all other classes and series of equity securities subsequently issued, other than any class or series expressly designated as being on a parity with or senior to the 10 5/8% Preferred Stock as to dividends and liquidating distributions. The 11 1/2% Preferred Stock ranks on a parity with the 10 5/8% Preferred Stock as to dividends and liquidating distributions. The terms of the 10 5/8% Preferred Stock provide that the Bank may not declare or pay any full dividends with respect to any parity stock, such as the 11 1/2% Preferred Stock, unless and until the Bank has paid full dividends on the 10 5/8% Preferred Stock for the most recent dividend period. The terms of the 10 5/8% Preferred Stock provide that the Bank may not declare or pay any dividends or other distributions (other than in shares of common stock of the Bank or other Junior Stock) with respect to any Junior Stock or repurchase, redeem or otherwise acquire, or set apart funds for the repurchase, redemption or other acquisition of, any Junior Stock through a sinking fund or otherwise, unless and until: (i) the Bank has paid full dividends on the 10 5/8% Preferred Stock for the four most recent dividend periods, or funds have been paid over to the dividend disbursing agent of the Bank for payment of such dividends, and (ii) the Bank has declared a cash dividend on the 10 5/8% Preferred Stock at the annual dividend rate for the current dividend period, and sufficient funds have been paid over to the dividend disbursing agent of the Bank for the payment of a cash dividend for such current period. The Bank is currently in compliance with both of such requirements. Holders of the 10 5/8% Preferred Stock have one vote per share, and holders thereof vote together as a single class with holders of the common stock of the Bank, the 11 1/2% Preferred Stock, the CALGZs and the CALGLs. In connection with the Bank Preferred Stock Tender Offers, 1,117,701 shares of the 10 5/8% Preferred Stock were purchased by GS Holdings during the year ended December 31, 1998. The stated value of the remaining 607,299 shares of 10 5/8% Preferred Stock not purchased by GS Holdings at December 31, 1998 was $60.7 million. See note 5 to the Company's consolidated financial statements. On February 5, 1999, the Board of Directors of the Bank resolved to redeem all outstanding shares of the 10 5/8% Preferred Stock on April 1, 1999 at $105.313 per share plus declared and unpaid dividends. Dividends paid on the 10 5/8% Preferred Stock for each year ended December 31, 1998 and 1997 totalled $18.3 million, of which $15.3 million and $18.3 million was included in minority interest in 1998 and 1997, respectively. REIT Preferred Stock -- Minority Interest On January 31, 1997, Preferred Capital Corp. issued 20,000,000 shares of REIT Preferred Stock. The REIT Preferred Stock has a stated liquidation value of $25 per share, plus declared and unpaid dividends, if any. Cash dividends are noncumulative and are payable at an annual rate of 91/8% per share if, when and as declared by the Board of Directors of Preferred Capital Corp. The REIT Preferred Stock ranks prior to the common stock of Preferred Capital Corp. and to all other classes and series of equity securities subsequently issued, other than any class or series expressly designated as being on a parity with or senior to the REIT Preferred Stock as to dividends and liquidating distributions. The terms of the REIT Preferred Stock provide that Preferred Capital Corp. may not declare or pay any dividends or other distributions (other than in shares of common stock of Preferred Capital Corp. or other classes of equity securities of Preferred Capital Corp. ranking junior to the REIT Preferred Stock) with respect to any Preferred Capital Corp. junior stock or repurchase, redeem or otherwise acquire, or set apart funds for the repurchase, redemption or other acquisition of any Preferred Capital Corp. junior stock (including the common stock held by the Bank) through a sinking fund or otherwise, unless and until: (i) Preferred Capital Corp. has paid in full dividends on the REIT Preferred Stock for the four most recent dividend periods, or funds have been paid over to the dividend disbursing agent of Preferred Capital Corp. for payment of such dividends, and (ii) Preferred Capital Corp. has declared a cash dividend on the REIT Preferred Stock at the annual dividend rate for the current dividend period, and sufficient funds have been paid over to the dividend disbursing agent of Preferred Capital Corp. for the payment of a cash dividend for such current dividend Page 36 period. The initial dividend payment date was March 31, 1997. Preferred Capital Corp. is currently in compliance with both such requirements. Holders of the REIT Preferred Stock have no voting rights, except as required by law or in certain limited circumstances. Except in the event of a change of control or upon certain tax events, the REIT Preferred Stock is not redeemable prior to January 31, 2002. The REIT Preferred Stock is redeemable solely at the option of Preferred Capital Corp. or its successor or any acquiring or resulting entity with respect to Preferred Capital Corp. (including by any parent or subsidiary of Preferred Capital Corp., any such successor or any such acquiring or resulting entity), as applicable, at any time on and after January 31, 2002 in whole or in part, at $26.14 per share on or after January 31, 2002 and prior to January 31, 2003, and at prices decreasing pro rata annually thereafter to the stated liquidation value of $25 per share on or after January 31, 2007, plus declared and unpaid dividends, if any, without interest. Upon a change of control, the REIT Preferred Stock is redeemable on or prior to January 31, 2002 at the option of Preferred Capital Corp. or its successor or any acquiring or resulting entity with respect to the Bank (including by any parent or subsidiary of Preferred Capital Corp., any such successor or any such acquiring or resulting entity), as applicable, in whole, but not in part, at a price per share equal to: (i) $25, plus (ii) an amount equal to declared and unpaid dividends, if any, to the date fixed for redemption; without interest and without duplication, an additional amount equal to the amount of dividends that would be payable on the REIT Preferred Stock in respect of the period from the first day of the dividend period in which the date fixed for redemption occurs to the date fixed for redemption (assuming all such dividends were to be declared), plus (iii) a specified make whole premium. Each share of REIT Preferred Stock will be exchanged automatically for one newly issued share of preferred stock of the Bank having substantially the same terms as the REIT Preferred Stock (the "9 1/8% Preferred Stock") if the appropriate federal regulatory agency directs in writing such exchange because (i) the Bank becomes "undercapitalized" under prompt corrective action regulations, (ii) the Bank is placed into conservatorship or receivership or (iii) the appropriate federal regulatory agency, in its sole discretion, anticipates the Bank becoming "undercapitalized" in the near term. If issued, the 9 1/8% Preferred Stock will rank on a parity with the Bank Preferred Stock. Page 37 OTHER ACTIVITIES Goodwill Litigation In July 1995, Old California Federal distributed to its common shareholders its Contingent Litigation Recovery Participation Interests (the "CALGZs" or "Litigation Interests"), each entitling the holder thereof to receive an amount (the aggregate of such payments being referred to as the "Recovery Payment") equal to five millionths of one percent (0.000005%) of the cash payment (the "Cash Payment"), if any, actually received by the Bank pursuant to a final, nonappealable judgment in or final settlement of its claim against the United States Government (the "Government") in the lawsuit, California Federal Bank v. United States, Civil Action No. 92-138C (the "California Federal Litigation"), after deduction of (i) the aggregate expenses incurred by the Bank in prosecuting the California Federal Litigation and obtaining such Cash Payment including, but not limited to, a portion of the annual salaries in the aggregate amount of $1,000,000, an incentive fee in the amount of 0.25% of the aggregate value of the pre-tax recovery from the California Federal Litigation, annual pension benefits aggregating $1,325,000, and certain medical benefits and expenses, for Messrs. Trafton and Fink under the Litigation Management Agreement (as defined herein), (ii) any income tax liability of the Bank, computed on a pro forma basis, as a result of the Bank's receipt of such Cash Payment (net of any income tax benefit to the Bank from making the Recovery Payment, and disregarding for purposes of this clause (iii) the effect of any net operating loss carryforwards or other tax attributes held by the Bank or any of its subsidiaries or affiliated entities) and (iv) the expenses incurred by the Bank in connection with the creation, issuance and trading of the Litigation Interests, including without limitation, legal and accounting fees and the fees and expenses of the interest agent. Pursuant to the merger agreement, Cal Fed distributed to common shareholders entitled to receive the merger consideration one-tenth of a Secondary Contingent Litigation Recovery Participation Interest (each a "CALGL" or "Secondary Litigation Interest") for each share of Cal Fed common stock held. Each Secondary Litigation Interest will entitle the holder thereof to receive an amount equal to twenty millionths of one percent (0.000020%) of the "Secondary Recovery Payment," if any, as defined below. "Secondary Recovery Payment" means sixty percent (60%) of the amount obtained from the following equation: (A) the Cash Payment, if any, actually received by the Bank in respect of a final, nonappealable judgment in or final settlement of the California Federal Litigation, minus (B) the sum of the following: (i) the aggregate expenses incurred by the Bank in prosecuting the California Federal Litigation and obtaining such Cash Payment including, but not limited to, a portion of the annual salaries in the aggregate amount of $1,000,000, an incentive fee in the amount of 0.25% of the aggregate value of the pre-tax recovery from the California Federal Litigation, annual pension benefits aggregating $1,325,000, and certain medical benefits and expenses, for Messrs. Trafton and Fink under the Litigation Management Agreement, (ii) any income tax liability of the Bank, computed on a pro forma basis, as a result of the Bank's receipt of such Cash Payment (net of any income tax benefit to the Bank, computed on a pro forma basis, from the payment of a portion of the Secondary Recovery Payment to the holders of Secondary Litigation Interests), (iii) the expenses incurred by the Bank in connection with the creation, issuance and trading of the Litigation Interests and the Secondary Litigation Interests, including without limitation, legal and accounting fees and the fees and expenses of the interest agent, (iv) the payment due to the holders of the Litigation Interests and (v) one hundred twenty-five million dollars ($125,000,000). "Income tax liability of the Bank computed on a pro forma basis" means the aggregate amount of any and all relevant items of income, gain, loss, or deduction associated with the receipt by the Bank of the Cash Payment multiplied by the highest, combined marginal rate of federal, state and local income taxes in the relevant year and disregarding for purposes of such computation the effect of any net operating loss carryforwards or other tax attributes of the Bank or any of its subsidiaries or affiliated entities. "Income tax benefit to the Bank computed on a pro forma basis" means the aggregate amount of any and all relevant items of income, gain, loss, or deduction associated with the payment by the Bank of the Secondary Recovery Payment multiplied by the highest, combined marginal rate of federal, state and local income taxes in the relevant year and disregarding for purposes of such computation the effect of any net operating loss carryforwards or other tax attributes of the Bank or any of its subsidiaries or affiliated entities. Any distribution with respect to the Litigation Interests will be subject to the OTS capital distribution regulations. Holders of the CALGZs and the CALGLs are entitled to vote together as a single class with the holders of the common stock of the Bank and the Bank Preferred Stock, with each CALGZ and CALGL entitling the holder thereof to 1/5 of one vote. Page 38 In the California Federal Litigation, the Bank alleges, among other things, that the Government breached certain contractual commitments regarding the computation of its regulatory capital for which the Bank seeks damages and restitution. The Bank's claims arose from changes, mandated by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), with respect to the rules for computing Old California Federal's regulatory capital. On July 1, 1996, the United States Supreme Court issued its opinion for United States v. Winstar Corporation, No. 95-865, which affirmed the decisions of the United States Court of Appeals for the Federal Circuit and the United States Court of Federal Claims in various consolidated cases (the "Winstar Cases") granting summary judgment to the plaintiff thrift institutions on the liability portion of their breach of contract claims against the Government. The Supreme Court held that the Government breached certain express contracts when Congress enacted FIRREA, and the Supreme Court remanded the proceedings for a determination of the appropriate measure and amount of damages, which to date have not been awarded. On October 30, 1996, Old California Federal filed a motion for partial summary judgment as to the Government's liability to the Bank for breach of contract, which has been opposed by the Government in briefs filed on December 30, 1996 and February 27, 1997. On December 22, 1997, a U.S. Claims Court Judge ruled in favor of this motion to establish the Government's liability, and a formal order in that regard was subsequently issued on July 16, 1998. On November 12, 1998, a U.S. Claims Court Judge ruled that California Federal cannot meet its burden for proving lost profits damages and ordered that the case proceed to trial beginning December 7, 1998 on the damages issue of restitution and reliance. The trial began January 11, 1999 and concluded March 3, 1999, and California Federal is currently awaiting the Claims Court's decision in the California Federal Litigation. In connection with the Glen Fed Merger, the Bank is a plaintiff in a claim against the United States in the lawsuit, Glendale Federal Bank, Federal Savings Bank v. United States, No. 90-772C (the "Glendale Goodwill Litigation"). In the Glendale Goodwill Litigation, Glendale Federal sued the Government contending that FIRREA's treatment of supervisory goodwill constituted a breach by the Government of its 1981 contract with the Bank, under which the Bank had merged with a Florida thrift and was permitted to include the goodwill resulting from the merger in its regulatory capital. In 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. 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. 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 arguments were held on September 11, 1998. The Claims Court decision is currently expected on April 9, 1999. In connection with the Cal Fed Acquisition, the Bank recorded as an asset part of the estimated after-tax cash recovery from the California Federal Litigation that will inure to the Bank, net of amounts payable to holders of the Litigation Interests and the Secondary Litigation Interests in any such recovery (the "Goodwill Litigation Asset"). In connection with the Glen Fed Merger, the Bank recorded a second Goodwill Litigation Asset related to the estimated after-tax cash recovery from the Glendale Goodwill Litigation that will inure to the Bank, net of amounts payable to the holders of the Litigation Tracking Warrants(TM). The Goodwill Litigation Asset related to the California Federal Litigation was recorded at its estimated fair value of $100 million, net of estimated tax liabilities, as of January 3, 1997. The Goodwill Litigation Asset related to the Glendale Goodwill Litigation was recorded at its estimated fair value of $60 million, net of estimated tax liabilities, as of September 11, 1998. Both Goodwill Litigation Assets are included in the consolidated balance sheet as of December 31, 1998. Litigation Tracking Warrants(TM) In connection with the Glendale Goodwill Litigation, Golden State distributed 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% of the net after-tax proceeds, if any, from the Glendale Goodwill Litigation. The Page 39 LTW(TM)s would be exercisable after notification by Golden State of its receipt of proceeds from a final judgement in or settlement of the litigation. The LTW(TM)s would expire 60 days after such notice is given. Golden State distributed LTW(TM)s on 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 million. The LTW(TM)s trade on the NASDAQ national market system under the ticker symbol "GSBNZ." Warrants The Company has a class of common stock purchase warrants outstanding (the "Warrants"), totalling 12,776 at December 31, 1998, that were issued by Golden State 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 and one LTW(TM) 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. No Warrants have been exercised since September 11, 1998. The Company has also issued transferable Standby Warrants, of which 10.77 million were outstanding at December 31, 1998. No Standby Warrants have been exercised since September 11, 1998. Each Standby Warrant entitles the holder thereof to purchase one share of common stock and one LTW(TM) for a purchase price of $12.00 per share. The Standby Warrants are exercisable at any time through August 21, 2000. Contingent Shares The Golden State Merger agreement provides that Mafco Holdings and Hunter's Glen will be entitled to receive contingent consideration, through the issuance by Golden State of additional shares of Golden State Common Stock ("Contingent Shares") to Mafco Holdings and Hunter's Glen, based on (i) the use by the combined company of certain potential tax benefits resulting from certain net operating loss carryforwards of the consolidated group of which Parent Holdings is a part, and the realization of certain other potential tax assets and liabilities of Golden State and Parent Holdings and (ii) California Federal's net after-tax recovery in certain specified litigation, including a percentage of the net after-tax recovery, if any, in the California Federal Litigation (following payment by California Federal of all amounts due, if any, to the holders of the CALGZs and the CALGLs and the retention of certain amounts of such recovery by the Bank). The Golden State Merger agreement provides generally that the amount of the net after-tax recovery, if any, resulting from the California Federal Litigation which will be excluded in determining the number of Contingent Shares issuable in respect of the California Federal Litigation will be based on 15% of the value of the net after-tax recovery in the Glendale Goodwill Litigation to be excluded for purposes of determining the number of shares of Golden State Common Stock issuable upon exercise of the LTW(TM)s, adjusted to reflect the pro forma ownership interest of Mafco Holdings and Hunter's Glen in Golden State at the time of the Golden State Merger. The number of Contingent Shares cannot be determined at the present time, as such number depends upon factors that are not subject to determination at this time. These factors include, among other things, the net value to the Company of certain contingent assets and liabilities of Golden State and Parent Holdings (including potential recoveries in the Glendale Goodwill Litigation, the California Federal Litigation and certain other litigation to which affiliates of Parent Holdings are parties, and potential tax benefits resulting from the use of certain net operating loss carryforwards of the consolidated group of which Parent Holdings is a part and the realization of certain other contingent tax assets and liabilities of Golden State and Parent Holdings) and the market price of the common stock of Golden State at such time as issuance of Contingent Shares is required under the Golden State Merger agreement. During 1998, net tax benefits totalling $102.7 million were realized by California Federal with respect to its gain from the Florida Branch Sale and the receipt of a federal income tax refund in excess of the amount reflected on the Company's consolidated balance sheets. Consistent with the terms of the Golden State Merger agreement, a total of Page 40 5,687,996 shares of Golden State Common Stock, valued at $102.7 million, are to be issued to Mafco Holdings and Hunter's Glen as a result of these benefits. On January 21, 1999, a total of 5,540,319 shares of common stock, valued at $100 million, were issued (4,432,255 shares to Mafco Holdings and 1,108,064 shares to Hunter's Glen). The remaining 147,677 common shares, valued at $2.7 million, are expected to be issued at a future date. Such contingent shares are included, to the extent appropriate, in the 1998 basic and diluted EPS calculations. The Put Agreement In connection with the FN Acquisition, Granite and the Bank entered into the Put Agreement. Pursuant to the Put Agreement, the Bank had the right, on a quarterly basis (the "Put Option"), to require Granite to purchase certain commercial real estate loans, commercial real estate loans serviced by others and 1-4 unit residential loans with an original principal balance greater than $250,000, and to take certain actions to protect the Bank from losses with respect to certain Letters of Credit ("LOC") transactions, in each case, only if such asset was purchased by the Bank from Old FNB pursuant to the Asset Purchase Agreement. The Put Option expired on November 30, 1996. The balance available under the Put Agreement ($500 million) was fully utilized by the Bank prior to the expiration of the Put Option. The Assistance Agreement The Texas Closed Banks were purchased effective December 28, 1988 pursuant to five acquisition agreements and an assistance agreement among the FSLIC/RF, the Bank, and certain affiliates of the Bank (the "Assistance Agreement"). The Assistance Agreement generally provided for guaranteed yield amounts to be paid on the book value of the assets subject to the Assistance Agreement ("Covered Assets"), and paid for 90% of the losses incurred upon disposition of the Covered Assets. The remaining 10% not reimbursed, net of 10% of all asset recoveries and certain agreed-upon Covered Asset disposition fees, was remitted quarterly to the FSLIC/RF. In 1995, the FDIC, acting as manager for the FSLIC/RF, exercised its right under the Assistance Agreement to purchase substantially all of the remaining Covered Assets at the fair market value of such assets (the "FDIC Purchase"). Under the terms of the Assistance Agreement, losses sustained by the Bank from the FDIC Purchase were reimbursed by the FSLIC/RF. There was no material impact on the consolidated financial statements of the Company as a result of the FDIC Purchase. On August 19, 1996, the Bank and the FSLIC/RF executed an agreement which resulted in the termination of the Assistance Agreement. As a result of the agreement, the FSLIC/RF paid the Bank the remaining Covered Asset balance of $39 million and, among other things, assumed the responsibility for the disposition of several litigation matters involving Covered Assets which had been retained by the Bank following the FDIC Purchase. The Company recorded a gain of $25.6 million as a result of this settlement. FNMA Letters of Credit On September 28, 1994, the Company entered into an agreement with FNMA pursuant to which FNMA provided credit enhancements for certain bond-financed real estate projects originated by Old FNB. The agreement requires that the Company pledge to FNMA collateral in the form of certain eligible securities which are held by a third party trustee. The collateral requirement varies based on the balance of the bonds outstanding, losses incurred (if any), as well as other factors. At December 31, 1998, the Company had pledged as collateral certain securities available for sale and short-term investment securities with a carrying value of $75.3 million, of which $71.4 million was pledged as collateral to guarantee credit enhancements on loans securitized by FNMA. Cal Fed Investments Cal Fed Investments ("CFI"), formerly FN Investment Center, a wholly owned subsidiary of the Company which was acquired as part of the FN Acquisition, offers securities and insurance products to both existing and prospective customers of the Company. CFI is subject to the guidelines established by the OTS for broker-dealer subsidiaries of savings associations, and is a member of the National Association of Securities Dealers. In addition, CFI is registered as a broker-dealer with the Securities and Exchange Commission and the Securities Investor Protection Insurance Corporation. CFI receives commission revenue for acting as a broker-dealer on behalf of its customers, but CFI does not maintain customer accounts or take possession of customer securities. Commission revenues of $34.4 million, $27.5 Page 41 million and $10.0 million for the years ended December 31, 1998, 1997 and 1996, respectively, are included in fees and service charges in the Company's consolidated statements of income for such years. DIVIDEND POLICY OF THE BANK The dividend policy of the Bank complies with applicable legal and regulatory restrictions. Before declaring any dividend, the directors of the Bank consider the following factors: (i) the quality and stability of the Bank's net income, (ii) the availability of liquid assets to make dividend payments, (iii) the level of earnings retention as it impacts the Bank's capital needs and projected growth and funding levels, both internal and external, and (iv) the adequacy of capital after the payment of a dividend. Under the Bank's dividend policy, a dividend will not be declared or paid which would: (i) cause the capital level of the Bank to be reduced below "adequately capitalized" levels, or (ii), together with any other dividends declared during the same calendar year, exceed 100% of the net income to date for that calendar year plus 50% of the Bank's surplus capital at the beginning of that calendar year, so long as the Bank is a Tier 1 association (as defined herein). EMPLOYEES At December 31, 1998, Golden State and its subsidiaries had 8,229 employees, compared to 5,235 employees at December 31, 1997. None of the Company's employees is represented by any collective bargaining group and management considers its relations with its employees to be good. The Company maintains a comprehensive employee benefits program providing, among other benefits, health and welfare benefits, long and short-term disability insurance, and life insurance. Additionally, the Company offers employees a defined contribution investment plan which is a qualified plan under Section 401(a) of the Internal Revenue Code. COMPETITION The Company experiences significant competition in both attracting and retaining deposits and in originating real estate and consumer loans. The Company, through the Bank, competes with other savings associations, commercial banks, mortgage banking companies, finance companies, insurance companies, credit unions, money market mutual funds and brokerage firms in attracting and retaining deposits. Competition for deposits from large commercial banks is particularly strong. Many of the nation's savings associations and commercial banks have a significant number of branch offices in the areas in which the Company operates. In addition, there is strong competition in originating and purchasing real estate and consumer loans, principally from other savings and loan associations, commercial banks, mortgage banking companies, insurance companies, consumer finance companies, pension funds and commercial finance companies. The primary factors in competing for loans are the quality and extent of service to borrowers and brokers, economic factors such as interest rates, interest rate caps, rate adjustment provisions, loan maturities, LTV ratios, loan fees, and the amount of time it takes to process a loan from receipt of the loan application to date of funding. The Company's future performance will depend on its ability to originate a sufficient volume of mortgage loans in its local market areas and through its wholesale network and, if it is unable to originate a sufficient volume of mortgage loans, to purchase a sufficient quantity of high-quality mortgage-backed securities or loans with adequate yields. There can be no assurance that the Company will be able to effect such actions on satisfactory terms. Page 42 REGULATION General Golden State is a savings and loan holding company within the meaning of the HOLA and, as such, is registered with the OTS and is subject to comprehensive OTS regulation. The Bank is a federally chartered and insured stock savings bank subject to extensive regulation and supervision by the OTS, as the primary federal regulator of savings associations, and the FDIC, as the administrator of the SAIF. The federal banking laws contain numerous provisions affecting various aspects of the business and operations of savings associations and savings and loan holding companies. The following description of statutory and regulatory provisions and proposals, which is not intended to be a complete description of these provisions or their effects on Golden State or the Bank, is qualified in its entirety by reference to the particular statutory or regulatory provisions or proposals. The primary purpose of the statutory and regulatory scheme is to protect depositors, the financial institutions and the financial system as a whole. REGULATION OF GOLDEN STATE Holding Company Acquisitions Golden State is a registered savings and loan holding company. The HOLA and OTS regulations thereunder generally prohibit a savings and loan holding company, without prior OTS approval, from acquiring, directly or indirectly, the ownership or control of any other savings association or savings and loan holding company, or all, or substantially all, of the assets or more than 5% of the voting shares thereof. These provisions also prohibit, among other things, any director or officer of a savings and loan holding company, or any individual who owns or controls more than 25% of the voting shares of such holding company, from acquiring control of any savings association not a subsidiary of such savings and loan holding company, unless the acquisition is approved by the OTS. Holding Company Activities Golden State currently operates as a unitary savings and loan holding company. Generally, there are limited restrictions on the activities of a unitary savings and loan holding company and its non-savings association subsidiaries. If Golden State ceases to be a unitary savings and loan holding company, by, for example, acquiring another savings association in a non-supervisory transaction, the activities of Golden State and its non-savings association subsidiaries would thereafter be subject to substantial restrictions. In addition, proposed legislation could remove protections from activity restrictions currently accorded a unitary savings and loan holding company in the absence of appropriate "grandfather" provisions. See "--Regulation of the Bank --Savings Association Charter." Dividends The HOLA requires every savings association subsidiary of a savings and loan holding company to give the OTS at least a 30 day advance notice of any proposed dividends to be made on its guarantee, permanent or other non-withdrawable stock. Dividends declared in violation of such notice requirement are invalid. See "--Regulation of the Bank--Capital Distribution Regulation." Affiliate Restrictions Transactions between a savings association and its "affiliates" are subject to quantitative and qualitative restrictions under Sections 23A and 23B of the Federal Reserve Act. Affiliates of a savings association include, among other entities, the savings association's holding company and non-banking companies that are under common control with the savings association. In general, the restrictions of Sections 23A and 23B do not apply to transactions between a savings association and its parent, subsidiary or sister organizations that themselves are banks or savings associations. In general, Sections 23A and 23B and OTS regulations issued in connection therewith limit the extent to which a savings association or its subsidiaries may engage in certain "covered transactions" with affiliates to an amount equal to 10% of the association's capital and surplus, in the case of covered transactions with any one affiliate, and to an Page 43 amount equal to 20% of such capital and surplus, in the case of covered transactions with all affiliates. In addition, a savings association and its subsidiaries may engage in covered transactions and certain other transactions only on terms and under circumstances that are substantially the same, or at least as favorable to the savings association or its subsidiary, as those prevailing at the time for comparable transactions with nonaffiliated companies. A "covered transaction" is defined to include a loan or extension of credit to an affiliate; a purchase of investment securities issued by an affiliate; with certain exceptions, a purchase of assets from an affiliate; the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any party; or the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. In addition, a savings association may not make a loan or extension of credit to an affiliate unless the affiliate is engaged only in activities permissible for bank holding companies; a savings association may not purchase or invest in securities of an affiliate other than shares of a subsidiary; a savings association and its subsidiaries may not purchase a low-quality asset from an affiliate; and covered transactions and certain other transactions between a savings association or its subsidiaries and an affiliate must be on terms and conditions that are consistent with safe and sound banking practices. With certain exceptions, each loan or extension of credit by a savings association to an affiliate must be secured by collateral with a market value ranging from 100% to 130% (depending on the type of collateral) of the amount of the loan or extension of credit. REGULATION OF THE BANK Regulatory System As a federal savings bank, lending activities and other investments of the Bank must comply with various statutory and regulatory requirements. California Federal is regularly examined by the OTS and must file periodic reports concerning its activities and financial condition. Although the OTS is the Bank's primary regulator, the FDIC has "backup enforcement authority" over the Bank. The Bank's eligible deposit accounts are insured by the FDIC under the SAIF, up to applicable limits. Federal Home Loan Banks California Federal is a member of the FHLBS. Among other benefits, FHLB membership provides the Bank with a central credit facility, from which it may borrow generally on a secured basis in amounts determined by reference to available collateral. The Bank is required to own capital stock in the FHLB in an amount equal to the greater of: (i) 1% of its aggregate outstanding principal amount of its residential mortgage loans, home purchase contracts and similar obligations at the beginning of each calendar year, (ii) 0.3% of total assets, or (iii) 5% of its FHLB advances (borrowings). The Bank currently complies with FHLB stock ownership requirements. Liquid Assets Under OTS regulations, for each calendar quarter, a savings bank is required to maintain an average daily balance of liquid assets (including cash, certain time deposits and savings accounts, bankers' acceptances, certain government obligations and certain other investments) not less than a specified percentage of the average daily balance of its net withdrawable accounts plus short-term borrowings (its liquidity base) during the preceding calendar month. This liquidity requirement, which currently equals 4% (having been lowered from 5% on November 24, 1997), may be changed from time to time by the OTS to any amount between 4% and 10%, depending upon certain factors. The Bank has maintained liquid assets in compliance with the regulations in effect throughout 1998, 1997 and 1996. Regulatory Capital Requirements OTS capital regulations require savings banks to satisfy minimum capital standards: risk-based capital requirements, a leverage requirement and a tangible capital requirement. Savings banks must meet each of these standards in order to be deemed in compliance with OTS capital requirements. In addition, the OTS may require a savings association to maintain capital above the minimum capital levels. Page 44 All savings associations are required to meet a minimum risk-based capital requirement of total capital (core capital plus supplementary capital) equal to 8% of risk-weighted assets (which includes the credit risk equivalents of certain off-balance sheet items). In calculating total capital for purposes of the risk-based requirement, supplementary capital may not exceed 100% of core capital. Under the leverage requirement, a savings association is required to maintain core capital equal to a minimum of 4% of adjusted total assets. A savings association is also required to maintain tangible capital in an amount at least equal to 1.5% of its adjusted total assets. Under OTS regulations, a savings association with a greater than "normal" level of interest rate exposure must deduct an interest rate risk ("IRR") component in calculating its total capital for purposes of determining whether it meets its risk-based capital requirement. Interest rate exposure is measured, generally, as the decline in an institution's net portfolio value that would result from a 200 basis point increase or decrease in market interest rates (whichever would result in lower net portfolio value), divided by the estimated economic value of the savings association's assets. The interest rate risk component to be deducted from total capital is equal to one-half of the difference between an institution's measured exposure and "normal" IRR exposure (which is defined as 2%), multiplied by the estimated economic value of the institution's assets. In August 1995, the OTS indefinitely delayed implementation of its IRR regulation; however, based on internal measures of interest rate risk at December 31, 1998, the Bank would not have been required to deduct an IRR component in calculating total risk-based capital had the IRR component of the capital regulations been in effect. These capital requirements are viewed as minimum standards by the OTS, and most institutions are expected to maintain capital levels well above the minimum. In addition, the OTS regulations provide that minimum capital levels higher than those provided in the regulations may be established by the OTS for individual savings associations upon a determination that the savings association's capital is or may become inadequate in view of its circumstances. The OTS regulations provide that higher individual minimum regulatory capital requirements may be appropriate in circumstances where, among others: (i) a savings association has a high degree of exposure to interest rate risk, prepayment risk, credit risk, concentration of credit risk, certain risks arising from nontraditional activities, or similar risks or a high proportion of off-balance sheet risk; (ii) a savings association is growing, either internally or through acquisitions, at such a rate that supervisory problems are presented that are not dealt with adequately by OTS regulations; and (iii) a savings association may be adversely affected by activities or conditions of its holding company, affiliates, subsidiaries or other persons or savings associations with which it has significant business relationships. The Bank is not subject to any such individual minimum regulatory capital requirement. The Bank currently satisfies all applicable regulatory capital requirements. California Federal's total capital to riskbased assets ratio was 11.69%, its core capital to risk-based assets ratio was 10.27%, its leverage capital ratio was 5.29% and its tangible capital ratio was 5.29% at December 31, 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Capital Resources." Certain Consequences of Failure to Comply with Regulatory Capital Requirements A savings association's failure to maintain capital at or above the minimum capital requirements may be deemed an unsafe and unsound practice and may subject the savings association to enforcement actions and other proceedings. Any savings association not in compliance with all of its capital requirements is required to submit a capital plan that addresses the association's need for additional capital and meets certain additional requirements. While the capital plan is being reviewed by the OTS, the savings association must certify, among other things, that it will not, without the approval of its appropriate OTS Regional Director, grow beyond net interest credited or make capital distributions. If a savings association's capital plan is not approved, the association will become subject to additional growth and other restrictions. In addition, the OTS, through a capital directive or otherwise, may restrict the ability of a savings association not in compliance with the capital requirements to pay dividends and compensation, and may require such association to take one or more of certain corrective actions, including, without limitation: (i) increasing its capital to specified levels, (ii) reducing the rate of interest that may be paid on savings accounts, (iii) limiting receipt of deposits to those made to existing accounts, (iv) ceasing issuance of new accounts of any or all classes or categories except in exchange for existing accounts, (v) ceasing or limiting the purchase of loans or the making of other specified investments, and (vi) limiting operational expenditures to specified levels. The HOLA permits savings associations not in compliance with the OTS capital standards to seek an exemption from certain penalties or sanctions for noncompliance. Such an exemption will be granted only if certain strict Page 45 requirements are met, and must be denied under certain circumstances. If an exemption is granted by the OTS, the savings association still may be subject to enforcement actions for other violations of law or unsafe or unsound practices or conditions. The Bank is not presently subject to any enforcement action or other regulatory proceeding with respect to its compliance with regulatory capital requirements. The Bank is currently in compliance with all applicable regulatory capital requirements. Prompt Corrective Action The prompt corrective action regulation of the OTS, promulgated under FDICIA, requires certain mandatory actions and authorizes certain other discretionary actions to be taken by the OTS against a savings association that falls within certain undercapitalized capital categories specified in the regulation. The regulation establishes five categories of capital classification: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." Under the regulation, the ratio of total capital to risk-weighted assets, core capital to risk-weighted assets and the leverage capital ratio are used to determine an association's capital classification. The Bank met the capital requirements of a "well capitalized" institution under the FDICIA prompt corrective action standards as of December 31, 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Capital Resources." In general, the prompt corrective action regulation prohibits an insured depository institution from declaring any dividends, making any other capital distribution, or paying a management fee to a controlling person if, following the distribution or payment, the institution would be within any of the three undercapitalized categories. In addition, adequately capitalized institutions may accept Brokered Deposits only with a waiver from the FDIC and are subject to restrictions on the interest rates that can be paid on such deposits. Undercapitalized institutions may not accept, renew or roll-over Brokered Deposits. Savings associations that are classified as undercapitalized are subject to certain mandatory supervisory actions, including: (i) increased monitoring by the appropriate federal banking agency for the association and periodic review of the association's efforts to restore its capital, (ii) a requirement that the association submit a capital restoration plan acceptable to the appropriate federal banking agency and implement that plan, and that each company having control of the association guarantee compliance with the capital restoration plan in an amount not exceeding the lesser of 5% of the association's total assets at the time it received notice of being undercapitalized, or the amount necessary to bring the association into compliance with applicable capital standards at the time it fails to comply with the plan, and (iii) a limitation on the association's ability to make any acquisition, open any new branch offices, or engage in any new line of business without the prior approval of the appropriate federal banking agency for the institution or the FDIC. The regulation also provides that the OTS may take any of certain additional supervisory actions against an undercapitalized association if the agency determines that such actions are necessary to resolve the problems of the association at the least possible long-term cost to the deposit insurance fund. These supervisory actions include: (i) requiring the association to raise additional capital or be acquired by another association or holding company if certain grounds exist, (ii) restricting transactions between the association and its affiliates, (iii) restricting interest rates paid by the association on deposits, (iv) restricting the association's asset growth or requiring the association to reduce its assets, (v) requiring replacement of senior executive officers and directors, (vi) requiring the association to alter or terminate any activity deemed to pose excessive risk to the association, (vii) prohibiting capital distributions by bank holding companies without prior approval by the Board of Governors of the Federal Reserve Board (the "FRB"), (viii) requiring the association to divest certain subsidiaries, or requiring the association's holding company to divest the association or certain affiliates of the association, and (ix) taking any other supervisory action that the agency believes would better carry out the purposes of the prompt corrective action provisions of FDICIA. Savings associations classified as undercapitalized that fail to submit a timely, acceptable capital restoration plan or fail to implement such a plan are subject to the same supervisory actions as significantly undercapitalized associations. Significantly undercapitalized associations are subject to the mandatory provisions applicable to undercapitalized associations. The regulation also makes mandatory for significantly undercapitalized associations certain of the supervisory actions that are discretionary for associations classified as undercapitalized, creates a Page 46 presumption in favor of certain discretionary supervisory actions, and subjects significantly undercapitalized associations to additional restrictions, including a prohibition on paying bonuses or raises to senior executive officers without the prior written approval of the appropriate federal bank regulatory agency. In addition, significantly undercapitalized associations may be subjected to certain of the restrictions applicable to critically undercapitalized associations. The regulation requires that an association be placed into conservatorship or receivership within 90 days after it becomes critically undercapitalized, unless the OTS, with the concurrence of the FDIC, determines that other action would better achieve the purposes of the prompt corrective action provisions of FDICIA. Any such determination must be renewed every 90 days. A savings association also must be placed into receivership if the association continues to be critically undercapitalized, on average, during the fourth quarter after the association initially became critically undercapitalized, unless the association's federal bank regulatory agency, with the concurrence of the FDIC, makes certain positive determinations with respect to the association. Critically undercapitalized associations are also subject to the restrictions generally applicable to significantly undercapitalized associations and to a number of other severe restrictions. For example, beginning 60 days after becoming critically undercapitalized, such associations may not pay principal or interest on subordinated debt without the prior approval of the FDIC. (However, the regulation does not prevent unpaid interest from accruing on subordinated debt under the terms of the debt instrument, to the extent otherwise permitted by law.) In addition, critically undercapitalized associations may be prohibited from engaging in a number of activities, including entering into certain transactions or paying interest above a certain rate on new or renewed liabilities. If the OTS determines that an association is in an unsafe or unsound condition, or if the association is deemed to be engaging in an unsafe or unsound practice, the OTS may, if the association is well-capitalized, reclassify it as adequately capitalized; if the association is adequately capitalized, require it to comply with restrictions applicable to undercapitalized associations; and, if the association is undercapitalized, require it to comply with certain restrictions applicable to significantly undercapitalized associations. The Bank is not presently subject to any enforcement action or other regulatory proceeding with respect to the prompt corrective action regulation. The Bank is currently qualified as a "well capitalized" institution under prompt corrective action regulation. Conservatorship/Receivership In addition to the grounds discussed under "--Prompt Corrective Action," the OTS (and, under certain circumstances, the FDIC) may appoint a conservator or receiver for a savings association if any one or more of a number of circumstances exist, including, without limitation, the following: (i) the association's assets are less than its obligations to creditors and others, (ii) a substantial dissipation of assets or earnings due to any violation of law or any unsafe or unsound practice, (iii) an unsafe or unsound condition to transact business, (iv) a willful violation of a final cease-and-desist order, (v) the concealment of the association's books, papers, records or assets or refusal to submit such items for inspection to any examiner or lawful agent of the OTS or FDIC, (vi) the association is likely to be unable to pay its obligations or meet its depositors' demands in the normal course of business, (vii) the association has incurred, or is likely to incur, losses that will deplete all or substantially all of its capital, and there is no reasonable prospect for the association to become adequately capitalized without federal assistance, (viii) any violation of law or unsafe or unsound practice that is likely to cause insolvency or substantial dissipation of assets or earnings, weaken the association's condition, or otherwise seriously prejudice the interests of the association's depositors or the federal deposit insurance fund, (ix) the association consents to the appointment of the conservator or receiver, (x) the association ceases to be an insured association, (xi) the association is undercapitalized and the association has no reasonable prospect of becoming adequately capitalized, fails to become adequately capitalized when required to do so, fails to submit a timely and acceptable capital restoration plan, or materially fails to implement an accepted capital restoration plan, (xii) the association is critically undercapitalized or otherwise has substantially insufficient capital, or (xiii) the association is found guilty of certain criminal offenses related to money laundering. Neither the OTS nor the FDIC has taken or has threatened to take any action with respect to the appointment of a conservator or receiver for the Bank. Page 47 Enforcement Powers The OTS and, under certain circumstances, the FDIC, have substantial enforcement authority with respect to savings associations, including authority to bring various enforcement actions against a savings association and any of its "institution-affiliated parties" (a term defined to include, among other persons, directors, officers, employees, controlling stockholders, agents and shareholders who participate in the conduct of the affairs of the institution). This enforcement authority includes, without limitation: (i) the ability to terminate a savings association's deposit insurance, (ii) institute cease-and-desist proceedings, (iii) bring suspension, removal, prohibition and criminal proceedings against institution-affiliated parties, and (iv) assess substantial civil money penalties. As part of a cease-and-desist order, the agencies may require a savings association or an institution-affiliated party to take affirmative action to correct conditions resulting from that party's actions, including to make restitution or provide reimbursement, indemnification or guarantee against loss; restrict the growth of the institution; and rescind agreements and contracts. The Bank is not currently subject to any OTS or FDIC enforcement proceedings, actual or threatened. Capital Distribution Regulation In addition to the prompt corrective action restriction on paying dividends described above, OTS regulations limit certain "capital distributions" by savings associations. Capital distributions are defined to include, in part, dividends and payments for stock repurchases and cash-out mergers. Under the regulation, an association that meets its capital requirements both before and after a proposed distribution and has not been notified by the OTS that it is in need of more than normal supervision (a "Tier 1 association") may, after prior notice to but without the approval of the OTS, make capital distributions during a calendar year up to the higher of: (i) 100% of its net income to date during the calendar year plus the amount that would reduce by one-half its surplus capital ratio at the beginning of the calendar year, or (ii) 75% of its net income over the most recent four-quarter period. A Tier 1 association may make capital distributions in excess of the above amount if it gives notice to the OTS and the OTS does not object to the distribution. A savings association that meets its regulatory capital requirements both before and after a proposed distribution but does not meet its capital requirement (a "Tier 2 association") is authorized, after prior notice to the OTS but without OTS approval, to make capital distributions in an amount up to 75% of its net income over the most recent four-quarter period, taking into account all prior distributions during the same period. Any distribution in excess of this amount must be approved in advance by the OTS. A savings association that does not meet its current regulatory capital requirements (a "Tier 3 association") cannot make any capital distribution without prior approval from the OTS, unless the capital distribution is consistent with the terms of a capital plan approved by the OTS. The Bank's capital distributions have complied with the capital distribution rule. At December 31, 1998, the Bank qualified as a Tier 1 association for purposes of the capital distribution rule. The OTS may prohibit a proposed capital distribution that would otherwise be permitted if the OTS determines that the distribution would constitute an unsafe or unsound practice. The requirements of the capital distribution regulation supersede less stringent capital distribution restrictions in earlier agreements or conditions. In January 1999, the OTS issued revised capital distribution rules to conform its requirements to its prompt corrective action regulations. The new rules take effect on April 1, 1999. Under the revised capital distribution rules, a savings institution that is a subsidiary of a savings and loan holding company must notify the OTS of a capital distribution at least 30 days prior to the declaration of a capital distribution, provided the total of all capital distributions made during that calendar year (including the proposed distribution) does not exceed the sum of the institution's year-to-date net income and its retained income for the preceding two years. A dividend application to the OTS is required if: (a) the amount of the proposed dividend exceeds the amount described in the preceding paragraph, (b) the institution is not entitled to "expedited treatment" under OTS regulations, (c) the institution would not be at least "adequately capitalized" following the proposed capital distribution, or (d) the distribution would violate an applicable statute, regulation, agreement, or condition imposed on the institution by the OTS. As of December 31, 1998, the Bank qualified for "expedited treatment" under OTS regulations. The OTS may disapprove a capital distribution notice or application if it determines that: (a) the institution would not be at least "adequately capitalized" following the capital distribution, (b) the distribution raises safety or soundness Page 48 concerns, or (c) the distribution would violate an applicable statute, regulation, agreement, or condition imposed on the institution by the OTS. Qualified Thrift Lender Test In general, savings associations are required to maintain at least 65% of their portfolio assets in certain qualified thrift investments (which consist primarily of loans and other investments related to residential real estate and certain other assets). A savings association that fails the qualified thrift lender test is subject to substantial restrictions on activities and to other significant penalties. Legislation permits a savings association to qualify as a qualified thrift lender ("QTL") not only by maintaining 65% of portfolio assets in qualified thrift investments (the "QTL test") but also, in the alternative, by meeting the asset composition test under the Internal Revenue Code for a "domestic building and loan association." The Bank currently is a domestic building and loan association as defined in the Internal Revenue Code and, consequently is a QTL for purposes of HOLA. Legislation enacted in 1996 also expands the QTL test to provide savings associations with greater authority to lend and diversify their portfolios. In particular, credit card and educational loans may now be made by savings associations without regard to any percentage-of-assets limit, and commercial loans may be made in an amount up to 10 percent of total assets, plus an additional 10 percent for small business loans. Loans for personal, family, and household purposes (other than credit card, small business, and educational loans) are now included without limit with other assets that, in the aggregate, may account for up to 20% of total assets. At December 31, 1998 under the expanded QTL test, approximately 94.25% of the Bank's portfolio assets were qualified thrift investments, satisfying the QTL test. FDIC Assessments The deposits of the Bank are insured by the SAIF of the FDIC, up to applicable limits, and are subject to deposit premium assessments by the SAIF. Under the FDIC's risk-based insurance system, SAIF-assessed deposits are currently subject to insurance premiums of between 0 and 27 basis points, depending upon the institution's capital position and other supervisory factors. The rate applicable to the Bank at December 31, 1998 was 0 basis points. Since January 1997, institutions with Bank Insurance Fund ("BIF") deposits have been required to share the cost of funding debt obligations issued by the Financing Corporation ("FICO"), a corporation established by the federal government in 1987 to finance the recapitalization of FSLIC. However, until the earlier of December 31, 1999 or the date of elimination of the thrift charter (see "--Savings Association Charter"), the FICO assessment rate for BIF deposits is only one-fifth of the rate applicable to SAIF deposits. Consequently, the annual FICO assessments to be added to deposit insurance premiums, which may be periodically adjusted, are expected to equal approximately 6.4 basis points for SAIF deposits and 1.3 basis points for BIF deposits from January 1, 1997 through December 31, 1999. Since January 1, 1997, FICO payments have been paid directly by SAIF and BIF institutions in addition to deposit insurance assessments. Recently proposed legislation would extend the difference between the BIF and SAIF contributions for an additional three years. Savings Association Charter Congress has been considering legislation in various forms that would require federal thrifts, such as the Bank, to convert their charters to national bank charters. In the absence of appropriate "grandfather" provisions, legislation eliminating the savings association charter could have a material adverse effect on the Bank and its parent holding companies because, among other things, these holding companies engage in activities that are not permissible for bank holding companies and the regulatory capital and accounting treatment for banks and savings associations differs in certain significant respects. The Company cannot determine whether, or in what form, such legislation may eventually be enacted and there can be no assurance that any legislation that is enacted would contain adequate grandfather rights for the Bank and its parent holding companies. Page 49 Non-Investment Grade Debt Securities Savings associations and their subsidiaries are prohibited from investing in any corporate debt security that, at the time of acquisition, is not rated in one of the four highest rating categories by at least one nationally recognized statistical rating organization. The Bank does not own any non-investment grade debt securities. Community Reinvestment Act and the Fair Lending Laws Savings associations have a responsibility under the Community Reinvestment Act ("CRA") and related regulations of the OTS to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair Housing Act (together, the "Fair Lending Laws") prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. An association's failure to comply with the provisions of CRA could, as a minimum, result in regulatory restrictions on its activities, and failure to comply with the Fair Lending Laws could result in enforcement actions by the OTS, as well as other federal regulatory agencies and the Department of Justice. The Bank received an "Outstanding" rating in its most recently completed March 1997 CRA examination. Change of Control Subject to certain limited exceptions, no company can acquire control of a savings association without the prior approval of the OTS, and no individual may acquire control of a savings association if the OTS objects. Any company that acquires control of a savings association becomes a savings and loan holding company subject to extensive registration, examination and regulation by the OTS. Conclusive control exists, among other ways, when an acquiring party acquires more than 25% of any class of voting stock of a savings association or savings and loan holding company, or controls in any manner the election of a majority of the directors of the company. In addition, a rebuttable presumption of control exists if, among other things, a person acquires more than 10% of any class of voting stock of the savings association or savings and loan holding company (or 25% of any class of stock, whether or not voting) and, in either case, any of certain additional control factors specified in OTS regulations exist. Golden State is in compliance with these requirements. Under 1996 legislation, companies subject to the Bank Holding Company Act that acquire or own savings associations are no longer defined as savings and loan holding companies under the HOLA and, therefore, are not generally subject to supervision and regulation by the OTS. OTS approval is no longer required for a bank holding company to acquire control of an existing savings association, although the OTS has a consultative role with the FRB in examination, enforcement and acquisition matters. Golden State is not subject to the Bank Holding Company Act. TAXATION Prior to the Golden State Acquisition, for federal income tax purposes, Parent Holdings was included in the Mafco Group and accordingly, its federal taxable income and loss was included in the consolidated federal income tax return filed by Mafco Holdings. In connection with the Golden State Acquisition, the tax sharing agreement with Mafco was assumed by the Company for taxable periods ending after the acquisition. The Company, the successor of Parent Holdings, is the parent corporation of the Golden State affiliated group. Accordingly, after September 11, 1998, the Company and its subsidiaries will file a consolidated federal income tax return. See "Management's Discussion and Analysis of Financial Condition and Results of Operations --Provision for Federal and State Income Taxes." Page 50 ITEM 2. PROPERTIES The executive offices of the Bank and of the Company are located at 135 Main Street, San Francisco, California, 94105, and its telephone number is (415) 904-1100. The Bank leases approximately 97,000 square feet in the building in which its executive offices are located, under a ten-year lease expiring in 2001. In addition, the Bank leases two facilities near Sacramento, California including approximately 216,000 square feet in a multiple-building administrative facility under a ten-year lease expiring in 2001 and approximately 46,000 square feet in another administrative facility under a lease expiring in 2004. The Company and its subsidiaries lease additional executive and administrative office space in Dallas which includes approximately 51,000 square feet of space under leases expiring in 2000 and 2002. As part of the Cal Fed Acquisition, the Bank assumed the lease on executive offices and an office building of approximately 513,000 square feet. The Bank vacated all but approximately 44,000 square feet of this facility during the first half of 1997. The office lease was to expire in 2007, however, the Bank terminated its remaining liability on all space other than approximately 44,000 square feet by payment of approximately $28 million. The lease on the remaining 44,000 square feet terminates in 2003. In addition, Old California Federal had certain operating and administrative departments in a leased facility containing approximately 225,000 square feet located in Rosemead, California. The Bank vacated and subleased the Rosemead facility during the first half of 1997. The Rosemead lease expires in 2008. As part of the Golden State Acquisition, the Company acquired ten office buildings containing approximately 310,000 square feet of space. The Company plans to utilize 210,000 square feet of this space for its call center and loan servicing operations, and to sell the remaining 100,000 square feet. Accordingly, such space has been recorded as held for sale in the Company's accounting records. In addition, the Company assumed the lease on executive offices and branch office buildings totalling approximately 330,000 square feet. As of December 31, 1998, leases totalling 124,000 square feet expired. Of the remaining 206,000 square feet, the Company vacated all but approximately 15,000 square feet during the last quarter of 1998. It is the Company's intent to sublease all office space not expiring within the next year. At December 31, 1998, the Bank operated a total of 358 retail branches and maintained 69 vacant branch facilities which were consolidated as a result of certain branch purchases, the 1996 Acquisitions, the Cal Fed Acquisition, the Glen Fed Merger, and various consolidations of operations to West Sacramento. Of the 358 total operating retail branches, 126 were owned and 232 were leased. Some of these retail branches are multi-purpose facilities, housing loan production and administrative facilities in addition to retail space. Of the 69 vacant facilities (ten owned and 59 leased, all in California), 28 locations have been subleased. At December 31, 1998, there were 15 separate loan production offices, of which one was owned and 14 were leased, and which included three offices housing operations acquired in the LMUSA Purchases. All offices house wholesale lending operations. There were five vacant loan production facilities at December 31, 1998, all of which were leased and two of which have been subleased. Page 51 In addition, the Bank operated 21 separate administrative facilities (8 owned and 13 leased) and maintained 14 vacant administrative facilities (2 owned and 12 leased). Of the 14 vacant administrative facilities, 10 were subleased. The administrative facilities include a 230,000 square foot owned building and an approximately 34,000 square foot leased building in Frederick, Maryland, which houses FNMC's operations, and approximately 73,000 square feet of leased space in two buildings in Dallas, which houses Auto One. A state-by-state breakdown of all retail branches, administrative facilities and loan production offices operated by the Bank at December 31, 1998 is shown in the following table:
Branches Administrative Facilities Loan Production Facilities ----------------------------- --------------------------------- ---------------------------- Owned Leased Vacant Owned Leased Vacant Owned Leased Vacant ----- ------ ------ ----- ------ ------ ----- ------ ------ Arizona -- -- -- -- -- -- -- 2 -- California 125 226 69 8 10 13 -- 7 2 Florida -- -- -- -- -- 1 -- -- -- Illinois -- -- -- -- -- -- -- -- 1 Maryland -- -- -- -- -- -- 1 1 1 Minnesota -- -- -- -- -- -- -- -- 1 Montana -- -- -- -- -- -- -- 1 -- Nevada 1 6 -- -- -- -- -- 1 -- Pennsylvania -- -- -- -- -- -- -- 1 -- Texas -- -- -- -- 3 -- -- -- -- Washington -- -- -- -- -- -- -- 1 -- --- --- -- -- -- -- -- -- -- Total 126 232 69 8 13 14 1 14 5 === === == = == == = == =
ITEM 3. LEGAL PROCEEDINGS In addition to the Glendale Goodwill Litigation and the California Federal Litigation, Golden State and its subsidiaries are involved in other legal proceedings on claims incidental to the normal conduct of its businesses. See also "Business--Other Activities--Goodwill Litigation." Although it is impossible to predict the outcome of any outstanding legal proceedings, management believes that such legal proceedings and claims, individually or in the aggregate, will not have a material effect on Golden State, GS Holdings or the Bank. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. Page 52 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock of Golden State trades on the New York Stock Exchange ("NYSE") under the symbol "GSB" and is also listed on the Pacific Exchange ("PE"). 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 December 31, 1998 First Quarter $ 39 3/8 $ 29 7/8 Second Quarter (a) 35 5/8 29 3/4 Third Quarter 32 5/8 15 9/16 Fourth Quarter 20 7/8 10 Year Ended December 31, 1997 First Quarter 28 1/8 22 1/2 Second Quarter 27 22 1/4 Third Quarter 31 7/8 26 1/8 Fourth Quarter 37 3/4 30 1/16
--------------- (a) Golden State distributed its LTW(TM)s to its stockholders, on the basis of one LTW(TM) for each outstanding share, on May 29, 1998. See "Business--Other Activities--Litigation Tracking Warrants(TM)." Second, third and fourth quarter 1998 high and low prices do not include the separate values of the Litigation Tracking Warrants(TM). At the close of business on February 28, 1999, the Company's common stock price was $17 13/16. Number of Holders of Common Stock At February 28, 1999, 134,287,092 shares of Company common stock were outstanding and held by 6,123 holders of record. Dividends During 1997 and 1996, dividends on Golden State's common stock totalled $22.7 million and $375.8 million, respectively. No dividends were paid in 1998. See further discussion of dividend restrictions in Note 28 of Golden State's 1998 consolidated financial statements. Page 53 ITEM 6. SELECTED FINANCIAL DATA The data presented below represents selected financial data relative to the Company for, and as of the end of, each of the years in the five-year period ended December 31, 1998.
Year Ended December 31, 1998 (1) 1997 (2) 1996 1995 1994 (4) ---- ---- ---- ---- ---- (dollars in millions, except per share data) SELECTED OPERATING DATA Interest income $2,549 $ 2,103 $1,234 $1,076 $293 Interest expense 1,820 1,499 848 735 200 Net interest income 729 604 386 341 93 Provision for loan losses 40 80 40 37 6 Noninterest income 477 365 654 151 42 Noninterest expense 764 651 492 333 96 Income before taxes, minority interest and extraordinary item 402 238 508 122 33 Income tax expense (benefit) (5) (107) 41 (76) (58) 3 Income before minority interest and extraordinary item 509 197 584 180 30 Minority interest (6) 111 102 48 35 -- Income before extraordinary item 398 95 536 145 30 Extraordinary item: (loss)/gain on early extinguishment of debt, net (150) -- (2) 2 1 Net income available to common stockholders 248 95 534 147 31 Earnings per common share: Basic: Income before extraordinary item $5.00 $ 1.67 $ 9.44 $ 2.56 $0.52 Net income 3.11 1.67 9.41 2.59 0.54 Diluted: Income before extraordinary item 4.88 1.67 9.44 2.56 0.52 Net income 3.04 1.67 9.41 2.59 0.54 SELECTED PERFORMANCE RATIOS Return on average assets (7) 0.63% 0.31% 3.12% 1.00% 0.69% Return on average common equity (8) 27.38 27.42 127.68 39.31 17.77 Average equity to average assets 2.30 1.13 2.44 2.54 3.90 Yield on interest-earning assets (9) 7.23 7.53 7.76 7.71 6.85 Cost of interest-bearing liabilities (10) 5.05 5.28 5.29 5.35 4.83 Net interest margin (11) 2.07 2.16 2.44 2.44 2.18 Efficiency ratio of the Bank (12) 50.32 51.16 54.88 63.47 N/A RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND MINORITY INTEREST (13) Excluding interest on deposits 1.25x 1.16x 1.95x 1.27x 1.32x Including interest on deposits 1.15 1.08 1.51 1.11 1.16
Page 54
December 31, ----------------------------------------------------------------- 1998 (1) 1997 (2) 1996 (3) 1995 1994(4) ---- ---- ---- ---- ---- (dollars in millions, except per share data) SELECTED FINANCIAL DATA Securities available for sale (14) $ 771 $ 813 $ 542 $ 349 $ 45 Securities held to maturity (14) 251 58 4 1 412 Mortgage-backed securities available for sale 12,948 5,077 1,599 1,478 -- Mortgage-backed securities held to maturity (14) 2,771 1,338 1,622 1,524 3,154 Loans receivable, net 30,281 19,424 10,213 8,830 9,967 Total assets 54,869 31,362 16,635 14,667 14,684 Deposits 24,620 16,203 8,502 10,242 9,157 Securities sold under agreements to repurchase 4,238 1,842 1,583 970 1,883 Borrowings 22,376 11,233 5,365 2,393 2,809 Total liabilities 52,694 29,981 15,850 13,904 14,030 Minority interest 593 1,012 460 301 301 Stockholders' equity 1,582 369 325 424 353 Common shares outstanding 128,597,769 56,722,988 56,722,988 56,722,988 56,722,988 Diluted shares outstanding 139,427,759 56,722,988 56,722,988 56,722,988 56,722,988 Book value per diluted share $ 11.34 $ 6.51 $ 5.74 $ 8.14 $ 6.22 Tangible book value per diluted share 4.72 (5.40) 3.26 7.82 6.01 REGULATORY CAPITAL RATIOS OF THE BANK Tangible capital 5.29% 5.65% 7.17% 5.84% 5.50% Core capital 5.29 5.65 7.17 5.84 5.50 Risk-based capital: Core capital 10.27 10.14 11.50 9.14 8.86 Total capital 11.69 11.93 13.62 11.34 11.01 SELECTED OTHER DATA Number of full service customer facilities 358 225 116 160 156 Loans serviced for others (15) $68,803 $47,933 $44,034 $27,901 $7,475 Number of employees 8,229 5,235 3,547 3,619 3,573 Non-performing assets as a % of the Bank's total assets 0.57% 0.87% 1.36% 1.50% 1.49%
- ------------------ (1) On September 11, 1998, the Company consummated the Glen Fed Merger, acquiring assets with fair values totalling approximately $18.8 billion and liabilities (including deposit liabilities) with fair values totalling approximately $17.7 billion. In addition, on September 11, 1998, the Company consummated the Florida Branch Sale, with associated deposit accounts totalling $1.4 billion, which resulted in a pre-tax gain of $108.9 million. Noninterest expense for the year ended December 31, 1998 includes $59.2 million in merger and integration costs. (2) On January 3, 1997, the Company acquired assets with fair values totalling approximately $14.2 billion and liabilities (including deposit liabilities) with fair values totalling approximately $12.9 billion in the Cal Fed Acquisition. In addition, on May 31, 1997, the Company consummated the Weyerhaeuser Purchase, acquiring a $3.2 billion loan servicing portfolio. Noninterest income for the year ended December 31, 1997 includes pre-tax gains of $14.0 million on the sale of MSRs, $25 million on the sale of ACS stock, and $3.6 million on the sale of deposits. Noninterest expense for the year ended December 31, 1997, includes a $29.0 million provision for professional fees and unreimbursable costs related to the foreclosure of 1-4 unit residential loans serviced for others. (3) On January 31, 1996, FNMC consummated the 1996 LMUSA Purchase, acquiring a $14.1 billion loan servicing portfolio. On February 1, 1996, the Company acquired SFFed, with assets at fair values totalling approximately $4 billion and liabilities (including deposit liabilities) with fair values totalling approximately $3.8 billion. During the year ended December 31, 1996, the Company closed the Branch Sales, with associated deposit accounts totalling $4.6 billion. Noninterest income for the year ended December 31, 1996 includes pre-tax gains of $363.3 million related to the Branch Sales. Noninterest expense for the year ended December 31, 1996 includes a pre-tax charge of $60.1 million for the Special SAIF Assessment (as defined herein). (4) On October 3, 1994, effective immediately following the close of business on September 30, 1994, the Company acquired assets with fair values totalling approximately $14.1 billion and liabilities (including deposit liabilities) with fair values totalling approximately $13.4 billion from Old FNB. (5) Income tax expense recorded in 1994 after the FN Acquisition represents federal AMT reduced, to the extent of 90%, by net operating loss carryovers, and state tax at an assumed rate of 8%. Income tax benefit for 1996 and 1995 includes the recognition of a deferred tax benefit of $125 million and $69 million, respectively, offset by federal AMT tax reduced, to the extent of 90%, by net operating loss carryovers and state tax generally at an assumed rate of 8%. Income tax expense for 1997 and the first half of Page 55 1998 represents federal AMT reduced, to the extent of 90%, by net operating loss carryovers, and state tax at an assumed rate of 11%. On June 30, 1998, the Bank recorded a $250 million reduction of the valuation allowance related to its deferred tax asset. Income tax expense for the second half of 1998 represents an effective tax rate of 42%. (6) Represents dividends on the REIT Preferred Stock, net of related tax benefit, FN Holdings Preferred Stock and the Bank Preferred Stock. The REIT Preferred Stock was issued on January 31, 1997. Minority interest for the year ended December 31, 1998 also includes a 20% minority interest in Auto One. (7) Return on average assets represents net income as a percentage of average assets for the periods presented. (8) Return on average common equity represents net income available to common stockholders as a percentage of average common equity for the periods presented. (9) Yield on interest-earning assets represents interest income as a percentage of average interest-earning assets. (10) Cost of interest-bearing liabilities represents interest expense as a percentage of average interest-bearing liabilities. (11) Net interest margin represents net interest income as a percentage of average interest-earning assets. (12) Efficiency ratio represents noninterest expense reduced by goodwill amortization as a percentage of net interest income plus noninterest income (adjusted for non-recurring items). The efficiency ratio was not meaningful to the Bank's operations in 1994 due to the limited nature of such operations during the period prior to the consummation of the FN Acquisition. (13) Earnings used in computing the ratio of earnings to combined fixed charges and minority interest consist of income before income taxes, extraordinary item and minority interest and fixed charges consist of interest expense on borrowings, the interest component of lease expense and, where indicated, interest expense on deposits. (14) Fluctuation in securities and mortgage-backed securities held to maturity and securities and mortgage-backed securities available for sale from December 31, 1994 to December 31, 1995 resulted from the reclassification of substantially all securities and mortgage-backed securities (except for mortgage-backed securities resulting from the securitization with recourse of certain of the Bank's loans) from held to maturity to securities available for sale on December 29, 1995. (15) Includes loans serviced by the Bank and its subsidiaries, excluding loans serviced for the Bank by FNMC. Page 56 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Golden State is a holding company whose only significant asset is its indirect ownership of all of the common stock of California Federal. As such, Golden State's principal business operations are conducted by California Federal and its subsidiaries. The following discussion should be read in conjunction with the Consolidated Financial Statements of Golden State and the notes thereto included elsewhere in this Form 10-K. The following discussion includes historical information relating to Golden State, including the effects of the Golden State Acquisition and the Cal Fed Acquisition for the periods since consummation on September 11, 1998 and January 3, 1997, respectively. GENERAL Golden State, which is headquartered in San Francisco, California, is a diversified financial services company that primarily serves consumers in California and to a lesser extent, in Nevada. The Company's principal business consists of (i) operating retail deposit branches that provide retail consumers and small businesses with deposit products such as demand, transaction and savings accounts; investment products such as mutual funds, annuities and insurance; and (ii) mortgage banking activities, including originating and purchasing 1-4 unit residential loans for sale to various investors in the secondary market and servicing loans for itself and others. To a lesser extent, the Company originates and/or purchases certain commercial real estate, commercial and consumer loans for investment. These operating activities are financed principally with customer deposits, secured short-term and long-term borrowings, collections on loans, asset sales and retained earnings. Refer to note 25 of the Company's consolidated financial statements for additional information about the Company's business segments. The following is a description of the Company's two most significant acquisitions which have occurred since the FN Acquisition. Each of the acquisitions was recorded using the purchase method of accounting. Under this method of accounting, the purchase price of the acquisition is allocated to the assets and liabilities acquired based on their fair market values as of the date of the acquisition. For further historical summary of the Company's acquisition and divestiture activity, see "Business--General." The Golden State Acquisition On September 11, 1998, Parent Holdings and Hunter's Glen completed the Golden State Merger in a tax-free exchange of shares, accounted for under the purchase method of accounting. Pursuant to the Golden State Merger agreement, (i) FN Holdings contributed all of its assets (including all of the common stock of the Bank) to GS Holdings, (ii) Parent Holdings, which then owned all of the common stock of FN Holdings as a result of the extinguishment of the Hunter's Glen minority interest, merged with and into Golden State, which indirectly owned 100% of the common stock of Glendale Federal, (iii) FN Holdings merged with and into GS Financial, which owned all of the common stock of Glendale Federal and (iv) Glendale Federal merged with and into the Bank. At September 11, 1998, Glendale Federal had total assets of approximately $18.9 billion and deposits of $11.3 billion and operated 181 branches and 26 loan offices in California. At December 31, 1998, the parent company, Golden State, a publicly traded company, had approximately 128.6 million common shares outstanding. As a result of the Golden State Merger, California Federal is the fourth largest insured depository institution headquartered in California. The transaction combined Glendale Federal's lower-cost deposit generation ability with California Federal's strong asset origination capability. Further, it broadened the base from which to expand California Federal's consumer and business banking franchise. The Golden State Acquisition is expected to result in economies of scale with estimated pre-tax expense savings of $160 million annually, after being fully phased in. The Cal Fed Acquisition On January 3, 1997, FN Holdings acquired Cal Fed and Old California Federal for approximately $1.2 billion in cash and the issuance of the CALGLs. At December 31, 1996, Old California Federal had approximately $14.1 billion in assets, $8.9 billion in deposits and operated 119 branches in California and Nevada. Upon consummation of the Cal Fed Acquisition, the Bank merged with Old California Federal, with Old California Federal surviving. In connection Page 57 with the financing of the Cal Fed Acquisition, the Bank received a capital contribution of approximately $685 million from FN Holdings. In addition, stockholders' equity increased $172.5 million due to the assumption by the Bank of the 10 5/8% Preferred Stock. As a result of the Cal Fed Acquisition, the Company gained a substantial presence in Southern California. In order to realize economies of scale and cost reduction opportunities presented by the Cal Fed Acquisition, the Company began to consolidate or eliminate duplicative back office operations and administrative and management functions. The Company presently estimates that, as a result of these measures, it saved approximately $68 million in noninterest expense during the first twelve months of operations following the Cal Fed Acquisition as compared to operating Old California Federal on a stand-alone basis. As a result of the Cal Fed Acquisition, the Company became obligated with respect to the following outstanding debt securities of Old California Federal: (i) $50 million of the 10.668% Subordinated Notes, (ii) $2.6 million of the 6 1/2% Convertible Subordinated Debentures and (iii) $4.3 million of the 10% Subordinated Debentures Due 2003. See "Business--Sources of Funds." Recent Accounting Changes On June 28, 1996, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. In December 1996, the FASB issued SFAS No. 127, Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125 ("SFAS No. 127"). SFAS No. 127 defers for one year the effective date (i) of paragraph 15 of SFAS No. 125 and (ii) of paragraphs 9-12 and 237(b) of SFAS No. 125 for repurchase agreement, dollar-roll, securities lending and similar transactions. SFAS No. 127 provides additional guidance on the types of transactions for which the effective date of SFAS No. 125 has been deferred. It also requires that if it is not possible to determine whether a transaction occurring during calendar-year 1997 is part of a repurchase agreement, dollar-roll, securities lending, or similar transaction, then paragraphs 9-12 of SFAS No. 125 should be applied to that transfer. The Company adopted SFAS No. 125, as amended by SFAS No. 127, on January 1, 1997. Such adoption did not have a material impact on the Company's consolidated financial statements. The Company has adopted SFAS No. 128, Earnings per Share. SFAS No. 128 established requirements for computing and presenting earnings per share that require the presentation of earnings per common share and diluted earnings per common share. Under the requirements, earnings per common share includes the dilutive effect of contingently issuable shares, but excludes the dilutive effect of stock options and warrants. The dilutive effect of stock options, warrants and contingently issuable shares used to compute diluted earnings per common share is based on the average market price of Golden State's common stock and, where appropriate the LTW(TM)s, for the period. See note 2(r) to the Company's consolidated financial statements. This statement has no impact on the financial condition or results of operations of the Company but does affect the Company's disclosure. In February 1997, the FASB issued SFAS No. 129, Disclosure of Information About Capital Structure. SFAS No. 129 supersedes capital structure disclosure requirements found in previous accounting pronouncements and conditions 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. As SFAS No. 129 makes no changes to previous accounting pronouncements as those pronouncements applied to the Company, the adoption of SFAS No. 129 had no impact on the Company's results of operations and financial condition. In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. SFAS No. 130 requires that all items that are Page 58 required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. It does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. This statement is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. This statement, which the Company adopted effective October 1, 1997, had no impact on the financial condition or results of operations of the Company, but did impact the Company's disclosure requirements. In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. This statement supersedes SFAS No. 14, Financial Reporting for Segments of a Business Enterprise, but retains the requirement to report information about major customers. It amends SFAS No. 94, Consolidation of All Majority-Owned Subsidiaries, to remove the special disclosure requirements for previously unconsolidated subsidiaries. This statement is effective for fiscal years beginning after December 15, 1997. In the initial year of application, comparative information for earlier years is to be restated. This statement need not be applied to interim financial statements in the initial year of application, but comparative information for interim periods in the initial year of application is to be reported in financial statements for interim periods in the second year of application. This statement has no impact on the financial condition or results of operations of the Company, but has required changes in the Company's disclosure requirements. In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits ("SFAS No. 132"), an amendment of FASB Statements No. 87, 88 and 106. SFAS No. 132 revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. It standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer useful as they were when SFAS No. 87, Employers' Accounting for Pensions, SFAS No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, were issued. SFAS No. 132 is effective for fiscal years beginning after December 15, 1997 and requires restatement of disclosures for earlier periods provided for comparative purposes, if available. The Company has not experienced any material revision in its disclosures as a result of the adoption of SFAS No. 132. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes standards for derivative instruments and for hedging activities, and requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Under SFAS No. 133, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. SFAS No. 133 applies to all entities and amends SFAS Statements No. 107, Disclosures About Fair Values of Financial Instruments, to include in Statement 107 the disclosure provisions about concentrations of credit risk from Statement 105. SFAS No. 133 supersedes FASB Statements No. 80, Accounting for Futures Contracts, No. 105, Disclosure of Information about Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk, and No. 119, Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments. SFAS No. 133 also nullifies or modifies the consensuses reached in a number of issues addressed by the Emerging Issues Task Force. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Initial application of this statement should be as of the beginning of an entity's fiscal quarter; on that date, hedging relationships must be designated anew and documented pursuant to the provisions of this statement. Earlier application of all of the provisions of SFAS No. 133 is encouraged, but is permitted only as of the beginning of any fiscal quarter that begins after issuance of this statement. SFAS No. 133 should not be applied retroactively to financial statements of prior periods. Management has established a multi-disciplinary task force to assess the statement's effect on the Company's consolidated financial statements and to coordinate its implementation. Page 59 In October 1998, the FASB issued SFAS No. 134, Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise, an amendment of SFAS No. 65. SFAS No. 65 Accounting for Certain Mortgage Banking Activities, as amended by SFAS No. 115 Accounting for Certain Investments in Debt and Equity Securities, requires that after the securitization of a mortgage loan held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed security as a trading security. SFAS No. 134 amends SFAS No. 65 to require that after the securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities or other retained interests based on its ability and intent to sell or hold those investments. SFAS No. 134 conforms the subsequent accounting for securities retained after the securitization of mortgage loans by a mortgage banking enterprise with the subsequent accounting for securities retained after the securitization of other types of assets by a nonmortgage banking enterprise. SFAS No. 134 is effective for the first fiscal quarter after December 15, 1998. Early application is encouraged and is permitted as of the issuance of this statement. The Company adopted SFAS No. 134 effective October 1, 1998. Such adoption did not have a material impact on the Company's consolidated financial statements. RESULTS OF OPERATIONS Golden State reported net income for the year ended December 31, 1998 of $247.8 million, or $3.04 per diluted share, compared with net income of $94.9 million in 1997, or $1.67 per diluted share. Net income for the year ended December 31, 1998 included a $250 million reduction of the valuation allowance related to the Company's deferred tax asset and pre-tax gains of $108.8 million on the sale of branches, partially offset by $150.3 million in extraordinary loss, net of income taxes, related to expenses and tender premiums paid in connection with the Debt Tender Offers and the Parent Holdings Defeasance, $59.2 million in pre-tax merger and integration costs related to the Golden State Acquisition and $36.9 million in minority interest related to net premiums and expenses in connection with the Bank Preferred Stock Tender Offers. Excluding these non-recurring items, net income for the year ended December 31, 1998 totalled $156.2 million, or $1.92 per diluted share. The year-to-year comparisons set forth below, including the changes in magnitude of the various items between periods, have been affected by the acquisitions and dispositions described above and consummated during the periods involved. Page 60 The following table sets forth, for the periods and at the dates indicated, information regarding Golden State's consolidated average balance sheets, together with the total dollar amounts of interest income and interest expense and the weighted average interest rates for the periods presented. Average balances are calculated on a daily basis. The information presented represents the historical activity of Golden State.
Year Ended December 31, ----------------------------------------------------------------------------------- 1998 1997 1996 --------------------------- ---------------------------- ------------------------- Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate ------- -------- ---- ------- -------- ---- ------- -------- ---- (dollars in millions) ASSETS Interest-earning assets (1): Securities and interest-bearing deposits in banks (2) $ 1,121 $ 77 6.84% $ 1,015 $ 62 6.11% 56 $ 35 6.15% Mortgage-backed securities available for sale 7,952 483 6.07 4,485 298 6.64 1,697 116 6.83 Mortgage-backed securities held to maturity 1,753 134 7.67 1,482 113 7.65 1,766 135 7.65 Loans held for sale 1,652 116 7.01 1,068 77 7.15 855 62 7.20 Loans receivable, net 22,772 1,739 7.64 19,859 1,553 7.82 10,994 885 8.05 Covered Assets, net -- -- -- -- -- 26 1 5.41 ------- ----- ------ ----- ------ ----- Total interest-earning assets 35,250 2,549 7.23% 27,909 2,103 7.53% 15,904 1,234 7.76% ----- ----- ----- Noninterest-earning assets 4,047 2,865 1,223 ------- ------ ------- Total assets $39,297 $30,774 $17,127 ======= ======= ======= LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Deposits $18,856 $ 791 4.20% $16,728 $ 747 4.47% $9,360 $419 4.48% Securities sold under agreements to repurchase 2,805 154 5.40 2,512 141 5.52 2,109 120 5.70 Borrowings (3) 14,390 875 6.08 9,153 611 6.67 4,558 309 6.77 ------- ----- ------- ----- ------ ---- Total interest-bearing liabilities 36,051 1,820 5.05% 28,393 1,499 5.28% 16,027 848 5.29% ----- ----- ---- Noninterest-bearing liabilities 1,463 1,030 298 Minority interest 878 1,004 384 Stockholders' equity 905 347 418 ------- ------- ------ Total liabilities, minority interest and stockholders' equity $39,297 $30,774 $17,127 ======= ======= ======= Net interest income $ 729 $ 604 $386 ===== ===== ==== Interest rate spread 2.18% 2.25% 2.47% ==== ==== ==== Net interest margin 2.07% 2.16% 2.44% ==== ==== ==== Average equity to average assets 2.30% 1.13% 2.44% ==== ==== ====
- ------------------ (1) Nonaccruing assets are included in the average balances for the periods indicated. (2) Includes interest-bearing deposits in other banks and securities purchased under agreements to resell. (3) Interest and average rate include the impact of interest rate swaps. Page 61 The following table presents certain information regarding changes in interest income and interest expense of Golden State during the periods indicated. The dollar amount of interest income and interest expense fluctuates depending upon changes in the respective interest rates and upon changes in the respective amounts (volume) of the Company's interest-earning assets and interest-bearing liabilities. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) volume (change in average outstanding balance multiplied by the prior year's rate) and (ii) rate (change in average interest rate multiplied by the prior year's volume). Changes attributable to both volume and rate have been allocated proportionately.
Year ended December 31, ------------------------------------------------------------ 1998 vs. 1997 1997 vs. 1996 ------------------------------------------------------------ Increase (Decrease) Due to Increase (Decrease) Due to -------------------------- -------------------------- Volume Rate Net Volume Rate Net ------ ---- --- ------ ---- --- (in millions) INTEREST INCOME: Securities and interest-bearing deposits in banks $ 7 $ 8 $ 15 $ 28 $ (1) $ 27 Mortgage-backed securities available for sale 209 (24) 185 185 (3) 182 Mortgage-backed securities held to maturity 21 -- 21 (22) -- (22) Loans held for sale 40 (1) 39 15 -- 15 Loans receivable, net 221 (35) 186 692 (24) 668 Covered assets, net -- -- -- (1) -- (1) ---- ---- ---- ---- ---- ---- Total 498 (52) 446 897 (28) 869 ---- ---- ---- ---- ---- ---- INTEREST EXPENSE: Deposits 85 (41) 44 329 (1) 328 Securities sold under agreements to repurchase 16 (3) 13 24 (3) 21 Borrowings 312 (48) 264 306 (4) 302 ---- ---- ---- ---- ---- ---- Total 413 (92) 321 659 (8) 651 ---- ---- ---- ---- ---- ---- Change in net interest income $ 85 $40 $125 $238 $(20) $218 ==== ==== ==== ==== ==== ====
The volume variances in total interest income and total interest expense for the year ended December 31, 1998 compared to 1997 are largely due to increased purchases of mortgage-backed securities funded with FHLB advances, the net impact of the Refinancing Transactions and the additional volume related to the Golden State Acquisition, partially offset by $1.4 billion in deposits sold in the Florida Branch Sale. The positive total rate variance of $40 million is attributed to the lower cost of funds on deposits, lower interest rates paid on new borrowings (including the Refinancing Transactions) and the lower costing liabilities assumed in the Golden State Acquisition, partially offset by the comparatively lower market rates on mortgage-backed securities purchased in 1998 and 1997 and prepayments of higher rate interest-earning assets. The volume variances in total interest income and total interest expense for the year ended December 31, 1997 compared to the corresponding period in 1996 were largely due to the additional $17.0 billion in interest-earning assets acquired and $16.9 billion in interest-bearing liabilities assumed in the Cal Fed Acquisition and the 1996 Acquisitions, as well as the assumption of the FN Holdings 10 5/8% Notes. The negative total rate variance of $20 million was primarily attributable to assets from the Cal Fed Acquisition generally having a lower yield than the rest of the portfolio, the assumption of the FN Holdings 10 5/8% Notes, the issuances of the FN Holdings 9 1/8% Senior Sub Notes and the 12 1/2% Parent Holdings Notes and the impact of the additional wholesale borrowings used to finance the Branch Sales. Page 62 Year Ended December 31, 1998 versus Year Ended December 31, 1997 Interest Income. Total interest income was $2.5 billion for the year ended December 31, 1998, an increase of $446.1 million from the year ended December 31, 1997. Total interest-earning assets for the year ended December 31, 1998 averaged $35.3 billion, compared to $27.9 billion for the corresponding period in 1997. The yield on total interest-earning assets during the year ended December 31, 1998 decreased to 7.23% from 7.53% for the year ended December 31, 1997, primarily due to the lower market rates on mortgage-backed securities purchased in 1998 and 1997 and prepayments of higher rate interest-earning assets. Golden State earned $1.7 billion of interest income on loans receivable for the year ended December 31, 1998, an increase of $186.1 million from the year ended December 31, 1997. The average balance of loans receivable was $22.8 billion for the year ended December 31, 1998, compared to $19.9 billion for the same period in 1997. The weighted average rate on loans receivable decreased to 7.64% for the year ended December 31, 1998, from 7.82% for the year ended December 31, 1997, primarily due to declining market rates. The increase in the average volume is primarily due to the addition of $14.6 billion in loans acquired in the Golden State Acquisition. Golden State earned $115.7 million of interest income on loans held for sale for the year ended December 31, 1998, an increase of $39.4 million from the year ended December 31, 1997. The average balance of loans held for sale was $1.7 billion for the year ended December 31, 1998, an increase of $584 million from 1997, primarily due to increased originations and longer holding periods for jumbo loans during the year ended December 31, 1998. The weighted average yield on loans held for sale decreased to 7.01% for the year ended December 31, 1998, from 7.15% for the year ended December 31, 1997, primarily due to declining market rates. Interest income on mortgage-backed securities available for sale was $482.6 million for the year ended December 31, 1998, an increase of $184.8 million from the year ended December 31, 1997. The average portfolio balances increased $3.5 billion, to $8.0 billion, during the year ended December 31, 1998. The weighted average yield on these assets decreased from 6.64% for the year ended December 31, 1997 to 6.07% for the year ended December 31, 1998. The increase in the volume and decrease in the weighted average yield is primarily due to purchases of $9.0 billion of mortgage-backed securities and additions of $2.4 billion from the Golden State Acquisition, offset by prepayments of higher rate mortgage-backed securities since December 31, 1997. Additionally, the decline in yield was affected by a $19.8 million writedown recorded in 1998 to the carrying value of mortgage-backed securities available for sale determined to have an other-than-temporary impairment. Interest income on mortgage-backed securities held to maturity was $134.5 million for the year ended December 31, 1998, an increase of $21.2 million from the year ended December 31, 1997. The average portfolio balance increased $271 million to $1.8 billion during the year ended December 31, 1998, primarily attributed to the addition of $1.9 billion of the Company's multi-family loans securitized with FNMA during September 1998, having a weighted average rate of 7.39%. The weighted average rates for the years ended December 31, 1998 and 1997, were 7.67% and 7.65%, respectively. Interest income on securities and interest-bearing deposits in other banks was $76.7 million for the year ended December 31, 1998, an increase of $14.7 million from the year ended December 31, 1997. The average portfolio balance increased from $1.0 billion for the year ended December 31, 1997 to $1.1 billion for the year ended December 31, 1998, primarily due to the proceeds received from the GS Escrow Notes, used to fund the Refinancing Transactions during the third and fourth quarters of 1998. The increase in the weighted average rate from 6.11% for the year ended December 31, 1997 to 6.84% for the year ended December 31, 1998 is primarily due to $17.5 million in interest income received on a $65 million federal income tax refund related to Old California Federal and San Francisco Federal. Interest Expense. Total interest expense was $1.8 billion for the year ended December 31, 1998, an increase of $321.1 million from the year ended December 31, 1997. The increase is primarily the result of increased borrowings under FHLB advances, the additional deposits and borrowings assumed in the Golden State Acquisition, and the issuance of the GS Escrow Notes. Interest expense on customer deposits, including Brokered Deposits, was $791.1 million for the year ended December 31, 1998, an increase of $44.1 million from the year ended December 31, 1997. The average balance of customer deposits outstanding increased from $16.7 billion to $18.9 billion during 1998. The increase in the average Page 63 balance is primarily due to $11.3 billion in deposits assumed in the Golden State Acquisition, partially offset by $1.4 billion in deposits sold in Florida Branch Sale, both of which occurred late in the third quarter of 1998. The overall weighted average cost of deposits decreased to 4.20% for the year ended December 31, 1998 from 4.47% for the year ended December 31, 1997, primarily due to the higher average balance of lower rate custodial transaction accounts in 1998 and the lower cost of funds on deposits assumed in the Golden State Acquisition. Interest expense on securities sold under agreements to repurchase totalled $153.7 million for the year ended December 31, 1998, an increase of $13.2 million from the year ended December 31, 1997. The average balance of such borrowings for the years ended December 31, 1998 and 1997, was $2.8 billion and $2.5 billion, respectively. The weighted average interest rate on these instruments decreased to 5.40% during the year ended December 31, 1998, from 5.52% for the year ended December 31, 1997, primarily due to a decrease in rates on new borrowings compared to such borrowings during 1997. Interest expense on borrowings totalled $874.7 million for the year ended December 31, 1998, an increase of $263.9 million from the year ended December 31, 1997. The average balance outstanding for the years ended December 31, 1998 and 1997 was $14.4 billion and $9.2 billion, respectively. The weighted average interest rate on these instruments decreased to 6.08% in 1998 from 6.67% in 1997, primarily due to declining market rates in 1998 and the net impact of the Refinancing Transactions. The change in the volume includes the net impact of the Refinancing Transactions and the addition of $5.4 billion in FHLB advances assumed in the Golden State Acquisition as well as the increase in FHLB advances used to fund the purchase of mortgage-backed securities and to fund the sale of deposits in the Florida Branch Sale. Net Interest Income. Net interest income was $729.3 million for the year ended December 31, 1998, an increase of $125.0 million from the year ended December 31, 1997. The interest rate spread decreased to 2.18% for the year ended December 31, 1998 from 2.25% for the year ended December 31, 1997, primarily as a result of prepayments of higher rate interest-earning assets that were replaced with interest-earning assets having comparatively lower yields. The effect of lower yielding assets was partially offset by lower rates on interest-bearing liabilities in a declining rate environment. Noninterest Income. Total noninterest income, consisting primarily of loan servicing fees, customer banking fees, gains on sales of loans and assets, dividends on FHLB stock and gain on sale of branches, was $477.0 million for the year ended December 31, 1998, an increase of $112.5 million from the year ended December 31, 1997. Income for the year ended December 31, 1998 reflects a $108.8 million gain on sale of branches attributed primarily to the Florida Branch Sale. Income for the year ended December 31, 1997 includes gains of $14.0 million from the Servicing Sale and $25.0 million from the sale of ACS stock. Loan servicing fees, net of amortization of mortgage servicing rights, were $132.5 million for the year ended December 31, 1998, compared to $143.7 million for the year ended December 31, 1997. Although the single-family residential loan servicing portfolio, excluding loans serviced for the Bank, increased from $44.9 billion at December 31, 1997, to $65.4 billion at December 31, 1998, loan servicing fees reflected a $16.7 million increase in amortization of residential servicing rights, primarily due to increased prepayments. During the year ended December 31, 1998, California Federal sold $7.9 billion in single-family mortgage loans originated for sale as part of its ongoing mortgage banking operations compared to $5.5 billion of such sales for the corresponding period in 1997. Customer banking fees were $121.3 million for the year ended December 31, 1998, compared to $100.3 million for the year ended December 31, 1997. The increase is primarily attributed to the impact of increased revenues from the retail banking operations acquired in the Golden State Acquisition, partially offset by the impact of the Florida Branch Sale. Gain on sale of branches was $108.8 million for the year ended December 31, 1998, compared to $3.6 million in 1997. The increase is primarily attributed to the Florida Branch Sale in 1998. Gain on sales of loans was $54.2 million for the year ended December 31, 1998, compared to $24.7 million for the year ended December 31, 1997. The increase in 1998 is primarily attributed to $19.2 million in additional gains from residential loan sales in 1998 and the effects of early payoffs of commercial loans with unamortized discounts of $10.3 million. Page 64 Gain on sale of assets was $.2 million for the year ended December 31, 1998, compared to $38.2 million for the year ended December 31, 1997. The gain in 1997 includes a $25 million gain on the sale of the Company's remaining shares of ACS stock and a $14.0 million gain related to the Servicing Sale. Dividends on FHLB stock were $36.0 million for the year ended December 31, 1998, an increase of $11.3 million from the year ended December 31, 1997, reflecting an increase in the amount of such stock owned by the Company, primarily as a result of an increase in borrowings on FHLB advances, including the addition of $5.4 billion assumed in the Golden State Acquisition as well as the advances used to fund the purchase of mortgage-backed securities and the Florida Branch Sale. Noninterest Expense. Total noninterest expense was $764.0 million for the year ended December 31, 1998, an increase of $113.4 million from the year ended December 31, 1997. The variance between the two periods is primarily attributed to $59.2 million in merger and integration costs incurred in connection with the Golden State Acquisition and increases of $37.5 million in compensation and $17.8 million in occupancy and equipment primarily as a result of the Golden State Acquisition and the Auto One and GSAC Acquisitions. Partially offsetting these increases is a $29.0 million provision for unreimbursable costs in 1997 related to the foreclosure of single-family loans serviced for others (reflected as loan expense and professional fees). Compensation and employee benefits expense was $294.0 million for the year ended December 31, 1998, an increase of $37.5 million from the year ended December 31, 1997. The increase is primarily attributed to the effect of the Golden State Acquisition and the Auto One and GSAC Acquisitions. Occupancy and equipment expense was $99.7 million in 1998 compared to $81.9 million in 1997. This increase reflects the effects of the Golden State Acquisition offset by the Florida Branch Sale. Loan expense was $48.2 million for the year ended December 31, 1998, a decrease of $12.3 million from the year ended December 31, 1997. The decrease is primarily attributed to a $25.0 million provision for unreimbursable costs related to the foreclosure of single-family loans serviced for others recorded during the year ended December 31, 1997, partially offset by additional expenses (such as outside appraisal fees, inspection fees and pass-through interest expense) associated with higher volume of loans serviced. Merger and integration costs, which include severance, conversion and consolidation costs incurred in connection with the Golden State Acquisition, were $59.2 million for the year ended December 31, 1998. Provision for Income Tax. During the years ended December 31, 1998 and 1997, Golden State recorded an income tax benefit of $106.4 million and income tax expense of $41.3 million, respectively. Based on resolutions of federal income tax audits and favorable future earnings expectations, management changed its judgment about the realizability of the Company's deferred tax asset and reduced its valuation allowance by $250 million in the second quarter of 1998 in addition to the amount used to offset income during the period. Golden State's effective Federal tax rate was (36)% and 2% during the years ended December 31, 1998 and 1997, respectively, while its statutory Federal tax rate was 35% during both periods. The difference between the effective and statutory rates was primarily the result of the reductions in the deferred tax asset valuation allowance, partially offset by nondeductible goodwill amortization. Golden State's effective state tax rate was 9% and 15% during the years ended December 31, 1998 and 1997, respectively. Effective July 1, 1998, the Company's marginal tax rate for future periods increased to 42%. Minority Interest. Minority interest for the year ended December 31, 1998 includes $36.9 million in net premiums and expenses related to the Bank Preferred Stock Tender Offers. Dividends on the Bank Preferred Stock, the FN Holdings Preferred Stock and the REIT Preferred Stock totalling $42.1 million (net of amounts paid to GS Holdings), $.6 million and $45.6 million, respectively, were also recorded during the year ended December 31, 1998. Minority interest relative to the REIT Preferred Stock is reflected on the consolidated statements of income net of the income tax benefit of $12.5 million for the year ended December 31, 1998, which will inure to the Company as a result of the deductibility of such dividends for income tax purposes. Minority interest for the year ended December 31, 1998 also includes $2.2 million representing that portion of Auto One's loss attributable to the 20% interest in the common stock of Auto One that was issued as part of the GSAC Acquisition. Page 65 Dividends on the Bank Preferred Stock, the FN Holdings Preferred Stock and the REIT Preferred Stock totalling $52.7 million, $12.8 million and $41.9 million, respectively, were recorded during the year ended December 31, 1997. Minority interest relative to the REIT Preferred Stock is reflected on the consolidated statements of income net of the income tax benefit of $5.3 million for the year ended December 31, 1997, which will inure to the Company as a result of the deductibility of such dividends for income tax purposes. Extraordinary Item. During the year ended December 31, 1998, the Company defeased the 12 1/2% Parent Holdings Notes in the Parent Holdings Defeasance for an aggregate purchase price, including accrued interest payable, of $553.7 million. During the year ended December 31, 1998, the Company also purchased $914.5 million aggregate principal amount of the FN Holdings Notes in the Debt Tender Offers for an aggregate purchase price, including accrued interest payable, of $1.1 billion. The amount of expenses and tender premiums paid in connection with such purchase totalled $150.3 million, net of income taxes and is reflected as an extraordinary loss on early extinguishment of debt on Golden State's consolidated statements of income for the year ended December 31, 1998. Year Ended December 31, 1997 versus Year Ended December 31, 1996 Net Income. Golden State reported net income for the year ended December 31, 1997 of $94.9 million compared with net income of $533.7 million in 1996. Net income for the year ended December 31, 1997 included pre-tax gains of $25.0 million from the sale of the remaining ACS stock, $14.0 million on the sale of mortgage servicing rights and $3.6 million on the sales of branches, partially offset by a $29.0 million provision for professional fees and additional unreimbursable costs related to the foreclosure of 1-4 unit residential mortgage loans serviced for others. Net income for the year ended December 31, 1996 included $363.3 million in pre-tax gains on sales of branches, $40.4 million in pre-tax gains from the sale of ACS stock, $25.6 million in pre-tax income recognized in connection with the termination of the Assistance Agreement and the recognition of a $125.0 million deferred tax benefit, partially offset by a $60.1 million charge for the Special SAIF Assessment. Excluding non-recurring and expected non-recurring items, net income for the years ended December 31, 1997 and 1996 totalled $82.7 million and $76.4 million, respectively. Interest Income. Total interest income was $2.1 billion for the year ended December 31, 1997, an increase of $869 million from the year ended December 31, 1996. The interest-earning assets acquired in the Cal Fed Acquisition and the 1996 Acquisitions resulted in total interest-earning assets for the year of 1997 averaging $27.9 billion, compared to $15.9 billion for the corresponding period in 1996. The weighted average yield on total interest-earning assets during the year ended December 31, 1997 decreased to 7.53% compared to 7.76% for the year ended December 31, 1996, primarily due to assets from the Cal Fed Acquisition generally having a lower yield than the rest of the portfolio. Golden State earned $1.6 billion of interest income on loans receivable for the year ended December 31, 1997, an increase of $668 million from the year ended December 31, 1996. The loans acquired in the Cal Fed Acquisition and the 1996 Acquisitions contributed most of the additional interest income in 1997 and resulted in an increase in the average balance of loans receivable to $19.9 billion for the year ended December 31, 1997 from $11.0 billion for the year ended December 31, 1996. The weighted average yield on loans receivable decreased to 7.82% for the year ended December 31, 1997 from 8.05% for the comparable period in 1996, due primarily to the addition of $10.1 billion in loans from the Cal Fed Acquisition generally having a lower yield than the rest of the portfolio. In addition, Golden State earned $76 million of interest income on loans held for sale for the year ended December 31, 1997, an increase of $15 million from the year ended December 31, 1996. The average balance of loans held for sale was $1.1 billion for the year ended December 31, 1997, an increase of $213 million from the comparable period in 1996, due primarily to increased originations. The weighted average yield on loans held for sale decreased slightly to 7.15% for the year ended December 31, 1997 from 7.20% for the year ended December 31, 1996, primarily due to the portfolio consisting of a higher percentage of lower-rate adjustable rate loans in 1997 compared to a predominantly fixed-rate portfolio in 1996. Interest income on mortgage-backed securities available for sale was $298 million for the year ended December 31, 1997, an increase of $182 million from the year ended December 31, 1996. The average portfolio balances increased $2.8 billion, to $4.5 billion, during the year ended December 31, 1997 compared to the same period in 1996. The weighted average yield on these assets decreased from 6.83% for the year ended December 31, 1996 to 6.64% for the year ended December 31, 1997. The increase in the volume and decrease in the weighted average yield was primarily Page 66 due to the acquisition of $2.0 billion in mortgage-backed securities from the Cal Fed Acquisition and the purchase of $2.6 billion in other mortgage-backed securities during 1997. Interest income on mortgage-backed securities held to maturity was $113 million for the year ended December 31, 1997, a decrease of $22 million from the year ended December 31, 1996. The average portfolio balance decreased $284 million, to $1.5 billion, during the year ended December 31, 1997 compared to the same period in 1996. There was no interest income from Covered Assets for the year ended December 31, 1997, as a result of the disposal of all remaining Covered Assets in August 1996. Interest income from securities and interest-bearing deposits in banks was $62 million for the year ended December 31, 1997, an increase of $27 million from the year ended December 31, 1996. The average portfolio balance increased to $1.0 billion, an increase of $449 million from the year ended December 31, 1996, primarily due to the assets acquired in the Cal Fed Acquisition and purchases of short-term investment securities made by the Company during 1997 to meet liquidity needs. The weighted average yield on these assets decreased to 6.11% for the year ended December 31, 1997 from 6.15% for the year ended December 31, 1996, primarily due to a shift in the mix to lower-rate interest-bearing deposits acquired in the Cal Fed Acquisition, along with a decline in yields earned on interest-bearing deposits in other banks. Interest Expense. Total interest expense was $1.5 billion for the year ended December 31, 1997, an increase of $651 million from the year ended December 31, 1996. The increase was the result of additional interest-bearing liabilities assumed in the Cal Fed Acquisition and the 1996 Acquisitions, the assumption of the FN Holdings 10 5/8% Notes, the issuances of the FN Holdings 9 1/8% Senior Sub Notes and the 12 1/2% Parent Holdings Notes and incrementally higher rates paid on the additional borrowings used to replace the retail deposits sold in the Branch Sales. Interest expense on customer deposits, including Brokered Deposits, was $747 million for the year ended December 31, 1997, an increase of $328 million from the year ended December 31, 1996. The average balance of customer deposits outstanding increased from $9.4 billion to $16.7 billion for the years ended December 31, 1996 and 1997, respectively, primarily due to $9.0 billion in deposits assumed in the Cal Fed Acquisition. The overall weighted average cost of deposits was 4.47% for the year ended December 31, 1997 and 4.48% for the year ended December 31, 1996. Interest expense on securities sold under agreements to repurchase totalled $141 million for the year ended December 31, 1997, an increase of $21 million from the year ended December 31, 1996. The average balance of such borrowings for the years ended December 31, 1997 and 1996 was $2.5 billion and $2.1 billion, respectively. The increase in the average balance was primarily attributable to $1.1 billion of such liabilities assumed in the Cal Fed Acquisition and the 1996 Acquisitions, partially offset by maturities and payoffs that were refinanced with FHLB advances and deposits acquired in the Cal Fed and Home Federal Acquisitions. The weighted average interest rate on these instruments decreased to 5.52% during the year ended December 31, 1997 from 5.70% for the year ended December 31, 1996, primarily due to a decrease in rates on new borrowings compared to such borrowings during 1996. Interest expense on borrowings totalled $611 million for the year ended December 31, 1997, an increase of $302 million from the year ended December 31, 1996. The increase was attributable to the net effect of borrowings assumed in the Cal Fed Acquisition and the 1996 Acquisitions, the assumption of the FN Holdings 10 5/8% Notes, the issuances of the FN Holdings 9 1/8% Senior Sub Notes and the 12 1/2% Parent Holdings Notes and additional borrowings to replace deposits sold in the Branch Sales, partially offset by the impact of a slight decrease in the rates paid on such borrowings. The average balance of borrowings outstanding for the years ended December 31, 1997 and 1996 was $9.2 billion and $4.6 billion, respectively. The weighted average interest rate on these borrowings decreased to 6.67% during the year ended December 31, 1997 from 6.77% for the year ended December 31, 1996, primarily due to the shorter average maturity of the portfolio during the year ended December 31, 1997 compared to the corresponding period in 1996, partially offset by the higher rates paid on the FN Holdings 10 5/8% Notes, the FN Holdings 9 1/8% Senior Sub Notes and the FN Holdings 12 1/2% Notes. Net Interest Income. Net interest income was $604 million for the year ended December 31, 1997, an increase of $218 million from the year ended December 31, 1996. The interest rate spread decreased to 2.25% for the year ended December 31, 1997 from 2.47% for the year ended December 31, 1996. Page 67 Noninterest Income. Total noninterest income, consisting primarily of loan servicing fees, customer banking fees, management fees and gains on the sales of branches and on sales of residential mortgage loans and MSRs, was $364 million for the year ended December 31, 1997, a decrease of $289 million from the year ended December 31, 1996. Income for the year ended December 31, 1997 included a $14.0 million gain from the Servicing Sale, a $25.0 million gain from the sale of the remaining ACS stock and a $3.6 million gain on the sales of branches. The activities in 1996 included (i) gains on the Branch Sales of $363.3 million, (ii) gain from the sale of ACS stock of $40.4 million, (iii) income recognized in connection with the termination of the Assistance Agreement of $25.6 million, and (iv) gain from the sale of consumer loans of $7.5 million. Loan servicing fees, net of amortization of mortgage servicing rights, were $144 million for the year ended December 31, 1997, compared to $124 million for the year ended December 31, 1996. This increase was primarily due to the addition of the mortgage servicing portfolios acquired in the Cal Fed Acquisition, the 1996 Acquisitions, the 1996 LMUSA Purchase and the Weyerhaeuser Purchase, as well as MSRs originated through the increased origination capacity provided by the Cal Fed Acquisition, partially offset by portfolio paydowns. The single-family residential loan servicing portfolio, excluding loans serviced for the Bank, increased from $43.1 billion at December 31, 1996 to $44.9 billion at December 31, 1997. During the year ended December 31, 1997, the Company sold $5.5 billion in single-family mortgage loans originated for sale as part of its ongoing mortgage banking operations compared to $4.9 billion of such sales for the corresponding period in 1996. Customer banking fees and service charges related to retail banking operations, consisting of depositor fees for transaction accounts, overdrafts, and miscellaneous other fees, were $100 million for the year ended December 31, 1997, compared to $45 million for the year ended December 31, 1996. The increase was primarily attributable to the impact of increased revenues from the retail banking operations acquired in the Cal Fed Acquisition and the 1996 Acquisitions, partially offset by the impact of the Branch Sales. Management fees totalled $6 million for the year ended December 31, 1997, compared to $10 million for the year ended December 31, 1996. The decrease was attributable principally to the reduced number of commercial real estate assets under management for others as a result of an increase in dispositions of assets and contracts which have expired. Gain on sales of loans was $25 million for the year ended December 31, 1997, compared to a gain of $18 million for the year ended December 31, 1996. The increase was primarily attributed to early pay-offs of commercial loans with unamortized discounts, partially offset by a $7.5 million gain from the sale of $298.0 million of consumer loans during 1996. Gain on sales of assets was $38 million for the years ended December 31, 1997 and 1996. The gain in 1997 was primarily attributable to a $14.0 million gain related to the Servicing Sale and a $25.0 million gain on the sale of the Bank's remaining shares of ACS stock. The gain in 1996 was primarily the result of a $40.4 million gain from the sale of ACS stock, partially offset by a permanent impairment charge in the mortgage-backed securities available-for-sale portfolio. Gain on sale of branches was $4 million for the year ended December 31, 1997, attributable primarily to the Texas Branch Sales. For information on the 1996 gain on the Branch Sales, see "Business--General." Gain from the termination of the Assistance Agreement was $25.6 million for the year ended December 31, 1996. Dividends on FHLB stock were $25 million for the year ended December 31, 1997, an increase of $13 million from the year ended December 31, 1996, representing an increase in the amount of such stock owned by California Federal, primarily as a consequence of the Cal Fed Acquisition. Other noninterest income was $23 million for the year ended December 31, 1997, an increase of $5 million from the year ended December 31, 1996. The increase was primarily attributable to a settlement received related to the condemnation of a building, an increase in disbursement float income and the recognition of a previously deferred gain on sale of certain retail operations, partially offset by the favorable outcome of an arbitration hearing during the year ended December 31, 1996, related to the FN Acquisition. Page 68 Noninterest Expense. Total noninterest expense was $651 million for the year ended December 31, 1997, an increase of $159 million from the year ended December 31, 1996. The increase was principally due to the growth of the Company through the Cal Fed Acquisition and the 1996 Acquisitions and a $29.0 million provision recorded in 1997 for professional fees and unreimbursable costs related to the foreclosure of single-family loans serviced for others, partially offset by a $60.1 million charge recorded in 1996 for the Special SAIF Assessment. Total compensation and employee benefits expense was $256 million for the year ended December 31, 1997, an increase of $52 million from the year ended December 31, 1996. The increase in expense was primarily attributable to the presence of 1,688 additional employees at December 31, 1997 compared to December 31, 1996 as a result of the Cal Fed Acquisition, partially offset by a reduction in expense from December 31, 1996 to December 31, 1997 of $23.3 million related to a management incentive plan ("Incentive Plan") between FN Holdings and certain executive officers of the Bank. Occupancy and equipment expense was $82 million for the year ended December 31, 1997, an increase of $30 million from the year ended December 31, 1996, attributable primarily to the Cal Fed Acquisition and the 1996 Acquisitions, partially offset by operations sold in the Branch Sales. SAIF deposit insurance premiums decreased $70 million, to $11 million, for the year ended December 31, 1997 compared to the corresponding period in 1996, due to a decrease in the quarterly assessment rate from 23 cents to 6.42 cents per $100 of deposits, partially offset by an increase in the deposit assessment base as a result of the net impact of the Cal Fed Acquisition, the 1996 Acquisitions and the Branch Sales. In addition, the year ended December 31, 1996 included a $60.1 million charge for the Special SAIF Assessment. On September 30, 1996, the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (the "Reduction Act") was enacted. The Reduction Act provided for a special assessment (the "Special SAIF Assessment"), which was levied based on a rate of 65.7 cents per $100 of SAIF-insured domestic deposits held as of March 31, 1995. As a result of the Reduction Act, SAIF deposit insurance premiums included a $60.1 million pre-tax charge for the Special SAIF Assessment for the year ended December 31, 1996. The portion of the assessment related to deposits sold in Ohio, New York, New Jersey and Michigan was borne, pursuant to each sales contract, by the respective purchasers and accordingly, such amounts were not included in the expense recorded by the Company. Loan expense, including foreclosure costs and loan servicing expenses, was $60 million for the year ended December 31, 1997, an increase of $29 million from the year ended December 31, 1996. The increase includes a $25.0 million provision for unreimbursable costs related to the foreclosure of single family loans serviced for others. The increase was also attributed to additional expenses associated with the higher volume of loans serviced, and higher outside appraisal fees, inspection fees and provision for loss on FHA and VA loans serviced. Marketing expense was $20 million for the year ended December 31, 1997, an increase of $9 million from the year ended December 31, 1996, attributed primarily to the Cal Fed Acquisition and the 1996 Acquisitions, partially offset by reduced nationwide marketing efforts as a result of the Branch Sales. Professional fees increased $30 million, to $49 million, for the year ended December 31, 1997 compared to the corresponding period in 1996. This increase included additional legal, consulting and audit expenses related to the Cal Fed Acquisition and the 1996 Acquisitions, as well as $4.0 million in higher fees paid to professional firms in connection with the foreclosure of loans serviced for others. Data processing expense was $12 million for the year ended December 31, 1997, an increase of $2 million from the year ended December 31, 1996, attributed primarily to the Cal Fed Acquisition. Foreclosed real estate operations, including gains on sales, resulted in a net gain of $3 million for the year ended December 31, 1997 compared to a net gain of $7 million for the same period in 1996. The change was primarily attributable to an increase in post-foreclosure write-downs of residential and commercial foreclosed real estate. Amortization of intangible assets increased to $49 million for the year ended December 31, 1997 from $9 million for the corresponding period in 1996, primarily due to the amortization of additional intangible assets recorded in connection with the Cal Fed Acquisition and the 1996 Acquisitions. Page 69 Other noninterest expense was $114 million for the year ended December 31, 1997, an increase of $34 million from the year ended December 31, 1996, primarily due to amortization of deferred issuance costs related to the FN Holdings 10 5/8% Notes and an increase in provisions for telecommunications, postage, office supplies, insurance, retail branch and subservicing losses, OTS assessments and travel expenses, all of which are attributable primarily to the Cal Fed Acquisition and the 1996 Acquisitions. Provision for Income Tax. During the years ended December 31, 1997 and 1996, the Company recorded income tax expense of $41.3 million and income tax benefit of $75.8 million, respectively. The Company's effective federal income tax rate was 2% and (22)% during the years ended December 31, 1997 and 1996, respectively, while its statutory federal income tax rate was 35% during both periods. The difference between the effective and statutory rates was primarily the result of the utilization of net operating loss carryforwards for both periods and the recognition of a $125 million deferred tax benefit in the second quarter of 1996. The Company's effective state income tax rate, before extraordinary item and minority interest, increased to 15% from 8% during the year ended December 31, 1997 compared to the corresponding period in 1996, primarily as a result of the Company's increased presence in California where the state tax rate is generally higher than in other states and nondeductible goodwill amortization from the Cal Fed Acquisition and the 1996 Acquisitions. Minority Interest. Minority interest includes dividends on the Bank Preferred Stock, the FN Holdings Preferred Stock and the REIT Preferred Stock totalling $52.8 million, $12.8 million and $41.9 million, respectively, during the year ended December 31, 1997. Minority interest relative to the REIT Preferred Stock is reflected on the consolidated statement of income net of the income tax benefit of $5.3 million which will inure to the Company as a result of the deductibility of such dividends for income tax purposes. Minority interest includes dividends on the Bank Preferred Stock and the FN Holdings Preferred Stock totalling $43.2 million and $4.8 million, respectively, during the year ended December 31, 1996. Extraordinary Item. During the year ended December 31, 1996, the Company repurchased $44 million aggregate principal amount of the 11.20% Senior Notes, resulting in a loss of $1.6 million, net of income taxes. PROVISION FOR FEDERAL AND STATE INCOME TAXES During the years ended December 31, 1998, 1997 and 1996, Golden State recorded income tax (benefit) expense, excluding the tax effects associated with extraordinary items and minority interest in 1998, 1997 and 1996, of $(106.4) million, $41.3 million, and $(75.8) million, respectively. The Company's effective income tax rates were (26)%, 17% and (15)%, in 1998, 1997 and 1996, respectively. The Company's federal statutory income tax rate was 35% in each of 1998, 1997, and 1996. Based on resolutions of a federal tax audit and favorable future earnings expectations, management changed its judgment about the realizability of the Company's net deferred tax assets and reduced the valuation allowance by $250 million in the second quarter of 1998 and $125 million in the second quarter of 1996. Management believes that the realization of the resulting deferred tax asset is more likely than not, based on the expectation that the Company will generate the necessary amount of taxable income in future periods. Prior to the Golden State Acquisition, for federal income tax purposes, the Bank, FN Holdings and Mafco Holdings were parties to a tax sharing agreement effective as of January 1, 1994 (the "Tax Sharing Agreement"), pursuant to which (i) the Bank paid to FN Holdings amounts equal to the income taxes that the Bank would be required to pay if it were to file a return separately from the affiliated group of which Mafco Holdings is the common parent (the "Mafco Group") and (ii) FN Holdings paid to Mafco Holdings amounts equal to the income taxes that FN Holdings would be required to pay if it were to file a consolidated return on behalf of itself and the Bank separately from the Mafco Group. The Tax Sharing Agreement allowed the Bank to take into account, in determining its liability to FN Holdings, any net operating loss carryovers that it would have been entitled to utilize if it had filed separate returns for each year since the formation of the Bank. The Tax Sharing Agreement also allowed FN Holdings to take into account, in determining its liability to Mafco Holdings, any net operating losses that it would have been entitled to utilize if it had filed a consolidated return on behalf of itself and the Bank for each year since the formation of the Bank. Accordingly, pursuant to the Tax Sharing Agreement, the benefits of any net operating losses generated by the Bank since its formation are retained by the Bank and FN Holdings. In connection with the Golden State Acquisition, for any taxable period ending after September 11, 1998, (i) the Company replaced Mafco Holdings and assumed all of the rights and obligations of Mafco Holdings under the Tax Page 70 Sharing Agreement with respect to such taxable periods; (ii) GS Holdings replaced FN Holdings under the Tax Sharing Agreement and assumed all of the rights and obligations of FN Holdings under the Tax Sharing Agreement with respect to such taxable periods; and (iii) California Federal continued to be bound by the Tax Sharing Agreement. Mafco Holdings continued to be bound for all obligations accruing for taxable periods on or prior to September 11, 1998. The Bank had generated significant federal income tax net operating losses since it was organized in December 1988. This is due, in part, to the fact that, under applicable federal income tax law, certain financial assistance received by the Bank pursuant to the Assistance Agreement was excluded from the taxable income of the Bank. In addition to such tax-free financial assistance, the Bank had been entitled to its normal operating deductions, including interest expense and certain losses relating to its loan portfolio. As a result, the Bank generated significant net operating losses for federal income tax purposes even though its operations were profitable. Furthermore, under the reorganization provisions of the Code, the Bank succeeded to certain net operating loss carryovers of the Texas Closed Banks. Under federal tax law, Parent Holdings, FN Holdings and the Bank are subject to several liabilities with respect to the consolidated federal income tax liabilities of the Mafco Group for any taxable period during which Parent Holdings, FN Holdings or the Bank is, as the case may be, a member of such group. Therefore, Parent Holdings, FN Holdings or the Bank may be required to pay the Mafco Holdings consolidated federal tax liability notwithstanding prior payments made under the Tax Sharing Agreement by FN Holdings or the Bank to Mafco Holdings. Mafco Holdings has agreed, however, under the Tax Sharing Agreement, to indemnify FN Holdings and the Bank for any such federal income tax liability (and certain state and local tax liabilities) of Mafco Holdings or any of its subsidiaries (other than FN Holdings and the Bank) that FN Holdings or the Bank is actually required to pay. In connection with the Golden State Acquisition, the Company deconsolidated from the Mafco Group. As a result, only the amount of the net operating losses ("NOLs") of the Company not utilized by the Mafco Group on or before December 31, 1998 are available to offset taxable income of the Company thereafter. At September 11, 1998, had the Company filed a consolidated federal income tax return on behalf of itself and its subsidiaries for each of the years since the formation of the Company, it would have had regular NOL carryforwards, for federal income tax purposes, of approximately $1.8 billion. Upon deconsolidation, the NOLs available to offset taxable income of the Company are estimated to be reduced by $900 million. This reduction of NOLs and other tax attributes (the "Deconsolidation Adjustment") resulted in a $230.2 million reduction in retained earnings. The Deconsolidation Adjustment may change based upon the actual filing of the Mafco Group 1998 consolidated federal income tax return (including the Company's operations through September 11, 1998) and the results of Internal Revenue Service ("IRS") audits for all open years of Mafco and the Company. Any increase to the Deconsolidation Adjustment will be recorded as an increase to income for the additional federal income tax benefit resulting from the change in the valuation allowance. Such increase to income will be offset by an increase in minority interest since under the Golden State Merger agreement the tax benefits from any NOLs and other tax attributes of Parent Holdings and subsidiaries are retained by First Gibraltar and Hunter's Glen. Accordingly, any change to the Deconsolidation Adjustment should have no significant impact on total stockholders' equity. Any change will be recorded in the period during which such change is determined. At December 31, 1998, the Company had regular NOL carryforwards for federal income tax purposes of approximately $1.1 billion which are available to offset future federal taxable income, if any, through 2009. In addition, the Company had alternative minimum tax credit carryforwards of approximately $14.5 million which are available to offset future federal regular income taxes, if any, over an indefinite period. Substantially all of the NOLs and alternative minimum tax credits are subject to an annual Section 382 limitation on their usage. The NOL carryforwards are subject to review and disallowance, in whole or in part, by the IRS. On August 20, 1996, the Small Business Job Protection Act of 1996 ("the Act"), was enacted into law generally effective for years beginning after 1995. One provision of the Act repealed the Section 593 reserve method of accounting for bad debts by thrift institutions which are treated as large banks. Another provision of the Act requires the Bank to take into income the balance of its post-1987 bad debt reserves over a six year period beginning in 1996 subject to a two-year deferral if certain residential loan tests are satisfied. The Bank had fully provided for the tax related to this recapture. Page 71 In accordance with SFAS No. 109, Accounting for Income Taxes, a deferred tax liability has not been recognized for the base year reserves of the Bank. The base year reserves are generally the balance of the tax bad debt reserve as of December 31, 1987 reduced proportionately for reductions in the Bank's loan portfolio since that date. At December 31, 1998, the amount of those reserves was $305 million. The amount of the unrecognized deferred tax liability at December 31, 1998 was $107 million. Pursuant to the Act, circumstances that may require an accrual of this unrecorded tax liability are a failure to meet the definition of a "bank" for federal income tax purposes, dividend payments in excess of tax earnings and profits, and other distributions, dissolution, liquidation or redemption of stock, excluding preferred stock meeting certain conditions. The IRS is examining the 1993 through 1997 federal income tax returns of Glendale Federal and has raised an issue regarding the limitation on built-in losses that may have resulted from Glendale Federal's 1993 recapitalization. The IRS position is preliminary and currently under discussion with the Bank. The Bank believes that the IRS position is incorrect and intends to vigorously defend itself. The outcome of this issue is uncertain and the amount of any additional taxes, if any, cannot be determined at this time. The Company is subject to taxation in certain states in which it operates, including California. For California franchise tax purposes, savings institutions are taxed as "financial corporations." Financial corporations are taxed at the general corporate franchise tax rate plus an "in lieu" rate based on their statutory exemption from local business and personal property taxes. California has not adopted conforming federal tax law changes to the computation of the bad debt deduction. TAX EFFECTS OF DIVIDEND PAYMENTS BY THE BANK Dividend distributions made to GS Holdings, as the sole owner of the Bank's common stock, and to holders of the Bank Preferred Stock, in each case in excess of the Bank's accumulated earnings and profits, as well as any distributions in dissolution or in redemption or liquidation of stock, may cause the Bank to recognize a portion of its tax bad debt reserves as income, and accordingly, could cause the Bank to make payments to GS Holdings under the Tax Sharing Agreement. As a result, GS Holdings may be required to make payments to Mafco Holdings or the Company under the Tax Sharing Agreement. PROVISION FOR LOAN LOSSES The adequacy of the allowance for loan losses is periodically evaluated by management in order to maintain the allowance at a level that is sufficient to absorb expected loan losses. The allowance for loan losses is increased by provisions for loan losses as well as by balances acquired through acquisitions and is decreased by charge-offs (net of recoveries). The Company charges current earnings with a provision for estimated credit losses on loans receivable. The provision considers both specifically identified problem loans as well as credit risks not specifically identified in the loan portfolio. The Company established provisions for loan losses of $40 million, $79.8 million and $39.6 million for the years ended December 31, 1998, 1997 and 1996, respectively. The decrease in the provision for loan losses from 1997 to 1998 is the result of management's evaluation of the adequacy of the allowance based on, among other things, past loan loss experience and known and inherent risks in the portfolio, evidenced in part by the continued decline in the Bank's level of non-performing assets. The increase in the provision for losses from 1996 to 1997 is due to increased loan production activity (primarily 1-4 unit residential) and loans acquired through acquisitions. In addition, management's periodic evaluation of the adequacy of the allowance for loan losses considers potential adverse situations that have occurred but are not yet known which may affect the borrower's ability to repay, estimated value of any underlying collateral, and economic conditions. Although management believes that its present allowance for loan losses is adequate, it will continue to review its loan portfolio to determine the extent to which any changes in economic conditions or loss experience may require further provisions in the future. Page 72 ASSET AND LIABILITY MANAGEMENT Banks and savings associations are subject to interest rate risk to the degree that their interest-bearing liabilities, consisting principally of deposits, securities sold under agreements to repurchase and FHLB advances, mature or reprice more or less frequently, or on a different basis, than their interest-earning assets. A key element of the banking business is the monitoring and management of liquidity risk and interest rate risk. The process of planning and controlling asset and liability mixes, volumes and maturities to influence the net interest spread is referred to as asset and liability management. The objective of the Company's asset and liability management is to maximize the net interest income over changing interest rate cycles within the constraints imposed by prudent lending and investing practices, liquidity needs and capital planning. Golden State, through the Bank, actively pursues investment and funding strategies to minimize the sensitivity of its earnings to interest rate fluctuations. The Company measures the interest rate sensitivity of its balance sheet through gap and duration analysis, as well as net interest income and market value simulation, and, after taking into consideration both the variability of rates and the maturities of various instruments, evaluates strategies which may reduce the sensitivity of its earnings to interest rate and market value fluctuations. An important decision is the selection of interest-bearing liabilities and the generation of interest-earning assets which best match relative to interest rate changes. In order to reduce interest rate risk by increasing the percentage of interest sensitive assets, the Company has continued its emphasis on the origination of ARM products for its portfolio. Where possible, the Company seeks to originate real estate and other loans that reprice frequently and that on the whole adjust in accordance with the repricing of its liabilities. At December 31, 1998, approximately 72.7% of the Company's loan portfolio consisted of ARMs. ARMs have, from time to time, been offered with low initial interest rates as marketing inducements. In addition, most ARMs are also subject to periodic interest rate adjustment caps or floors. In a period of rising interest rates, ARMs could reach a periodic adjustment cap while still at a rate significantly below their contractual margin over existing market rates. Since repricing liabilities are typically not subject to such interest rate adjustment constraints, the Company's net interest margin would most likely be negatively impacted in this situation. Certain ARMs now offered by the Company have a fixed monthly payment for a given period, with any changes as a result of market interest rates reflected in the unpaid principal balance through negative amortization. As a result of the FN and Cal Fed Acquisitions, the Company acquired the rights and assumed obligations related to certain interest rate swap agreements that were entered into to hedge certain FHLB advances. Under the terms of these agreements, the Company paid a variable rate based on LIBOR and received fixed rates. The Company had no interest rate swap agreements outstanding at December 31, 1998. During 1998, 1997 and 1996, the Company's net interest margin increased by $2.1 million, $.6 million and $.6 million, respectively, as a result of these interest rate swap agreements, largely due to the amortization of the premium assigned to these agreements in the FN and Cal Fed Acquisitions. One of the most important sources of a financial institution's net income is net interest income, which is the difference between the combined yield earned on interest-earning assets and the combined rate paid on interest-bearing liabilities. Net interest income is also dependent on the relative balances of interest-earning assets and interest-bearing liabilities. A traditional measure of interest-rate risk within the savings industry is the interest rate sensitivity gap, which is the sum of all interest-earning assets minus the sum of all interest-bearing liabilities to be repriced within the same period. A gap is considered positive when the amount of interest rate sensitive assets exceeds interest rate sensitive liabilities, while the opposite results in a negative gap. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, and a positive gap would tend to result in an increase in net interest income, while the opposite would tend to occur in a period of falling rates. The following table sets forth the projected maturities based upon contractual maturities as adjusted for projected prepayments and "repricing mechanisms" (provisions for changes in the interest rates of assets and liabilities). Prepayment rates are assumed in each period on substantially all of the Company's loan portfolio based upon expected loan prepayments. Repricing mechanisms on the Company's assets are subject to limitations such as caps on the amount that interest rates and payments on its loans may adjust and, accordingly, such assets may not respond in the Page 73 same manner or to the same extent to changes in interest rates as the Company's liabilities. In addition, the interest rate sensitivity of the assets and liabilities illustrated in the table would vary substantially if different assumptions were used or if actual experience differed from the assumptions set forth. The Company's estimated interest rate sensitivity gap at December 31, 1998 is as follows:
Maturity/Rate Sensitivity ---------------------------------------------------- Within 1-5 Over 5 Noninterest 1 Year Years Years Bearing Total ------ ----- ------ ----------- ----- (dollars in millions) INTEREST-EARNING ASSETS: Securities held to maturity, interest-bearing deposits in other banks and short-term investment securities (1) (2) $ 113 $ -- $ 251 $ -- $ 364 Securities available for sale (3) 771 -- -- -- 771 Mortgage-backed securities available 12,948 -- -- -- 12,948 for sale (3) Mortgage-backed securities held 2,710 27 28 -- 2,765 to maturity (1) (4) Loans held for sale, net (3)(5) 2,350 -- -- -- 2,350 Loans receivable, net (1)(6) 19,486 7,292 3,885 -- 30,663 Investment in FHLB 1,000 -- -- -- 1,000 --------- -------- ------ ------ ------- Total interest-earning assets 39,378 7,319 4,164 -- 50,861 Noninterest-earning assets -- -- -- 4,008 4,008 --------- -------- ------ ------ ------- $39,378 $ 7,319 $4,164 $4,008 $54,869 ========= ======== ====== ====== ======= INTEREST-BEARING LIABILITIES: Deposits (7) $22,640 $ 1,970 $ 10 $ -- $24,620 Securities sold under agreements to 4,238 -- -- -- 4,238 repurchase (1) FHLB advances (1) 9,667 10,406 2 -- 20,075 Other borrowings (1) 141 367 1,793 -- 2,301 --------- -------- ----- ------ ------- Total interest-bearing liabilities 36,686 12,743 1,805 -- 51,234 Noninterest-bearing liabilities -- -- -- 1,460 1,460 Minority interest -- -- -- 593 593 Stockholders' equity -- -- -- 1,582 1,582 --------- -------- ----- ------ ------- $36,686 $12,743 $1,805 $3,635 $54,869 ========= ======== ====== ====== ======= Gap $ 2,692 $(5,424) $2,359 $ (373) ========= ======== ====== ======= Cumulative gap $ 2,692 $(2,732) $ (373) $ (373) ========= ======== ====== ======= Gap as a percentage of total assets 4.91% (9.89)% 4.30 % (0.68)% ====== ===== ===== ===== Cumulative gap as a percentage of total assets 4.91% (4.98)% (0.68)% (0.68)% ====== ===== ===== =====
- --------------------------- (1) Based upon (a) contractual maturity, (b) instrument repricing date, if applicable, and (c) projected repayments and prepayments of principal, if applicable. Prepayments were estimated generally by using the prepayment rates forecast by various large brokerage firms as of December 31, 1998. The actual maturity and rate sensitivity of these assets could vary substantially if future prepayments differ from prepayment estimates. (2) Consists of $53 million of interest-bearing deposits in other banks, $60 million of short-term investment securities and $251million of securities held to maturity. (3) As securities and mortgage-backed securities available for sale and loans held for sale may be sold within one year, they are considered to be maturing within one year. (4) Excludes underlying non-performing loans of $6 million. (5) Excludes non-performing loans of $17 million. Page 74 (6) Excludes allowance for loan losses of $589 million and non-performing loans of $203 million, net of $4 million related to specific reserves. (7) Fixed rate deposits and deposits with a fixed pricing interval are reflected as maturing in the year of contractual maturity or first repricing date. Money market deposit accounts, demand deposit accounts and passbook accounts are reflected as maturing within one year. At December 31, 1998, interest-bearing liabilities of Golden State exceeded interest-earning assets by $373 million. At December 31, 1997, interest-earning liabilities of Golden State exceeded interest-bearing assets by $309 million. The change in the cumulative gap between the two periods was due principally to the net impact of the Refinancing Transactions and the Golden State Acquisition. The maturity/rate sensitivity analysis is a static view of the balance sheet with assets and liabilities grouped into certain defined time periods, and thus only partially depicts the dynamics of the Company's sensitivity to interest rate changes. Being at a point in time, this analysis may not fully describe the complexity of relationships between product features and pricing, market rates and future management of the balance sheet mix. The Company utilizes computer modeling, under various interest rate scenarios, to provide a dynamic view of the effects of the changes in rates, spreads, and yield curve shifts on net interest income. The Company's risk management policies are established by the Asset/Liability Management Committee ("ALCO") of the Bank. ALCO meets monthly to formulate the Bank's investment and risk management strategies. The basic responsibilities of ALCO include management of net interest income and market value of portfolio equity to measure the stability of earnings, management of liquidity to provide adequate funding, and the establishment of asset product priorities by formulating performance evaluation criteria, risk evaluation techniques and a system to standardize the analysis and reporting of originations, competitive trends, profitability and risk. On a quarterly basis, the Board of Directors of the Bank is apprised of ALCO strategies adopted and their impact on operations, and, at least annually, the Board of Directors of the Bank reviews the Bank's interest rate risk management policy statements. See "--Quantitative and Qualitative Disclosures About Market Risk." LIQUIDITY The standard measure of liquidity in the savings industry is the ratio of cash and short-term U.S. government and other specified securities to deposits and borrowings due within one year. Effective November 24, 1997, the OTS established a minimum liquidity requirement of 4.00%, a reduction from 5.00% which had been in effect prior to that date in 1997. The Bank has been in compliance with the liquidity regulations during 1998 and 1997. A major source of the Company's funding is expected to be its retail deposit branch network, which management believes will be sufficient to meet its long-term liquidity needs. The ability of the Company to retain and attract new deposits is dependent upon the variety and effectiveness of its customer account products, customer service and convenience, and rates paid to customers. The Company also obtains funds from the repayment and maturities of loans and mortgage-backed securities, while additional funds can be obtained from a variety of sources including customer and Brokered Deposits, loan sales, securities sold under agreements to repurchase, FHLB advances, and other secured and unsecured borrowings. It is anticipated that FHLB advances and securities sold under agreements to repurchase will continue to be important sources of funding, and management expects there to be adequate collateral for such funding requirements. The Company's primary uses of funds are the origination or purchase of loans, the funding of maturing certificates of deposit, demand deposit withdrawals and the repayment of borrowings. Certificates of deposit scheduled to mature during the twelve months ending December 31, 1999 total $11.1 billion. The Company may renew these certificates, attract new replacement deposits, replace such funds with other borrowings, or it may elect to reduce the size of the balance sheet. In addition, at December 31, 1998, the Company had FHLB advances, securities sold under agreements to repurchase and other borrowings aggregating $14.0 billion maturing or repricing within twelve months. The Company may elect to pay off such debt or to replace such borrowings with additional FHLB advances, securities sold under agreements to repurchase or other borrowings at prevailing rates. During 1994, California Federal issued 3,007,300 shares of the 11 1/2% Preferred Stock. Cash dividends on the 11 1/2% Preferred Stock are noncumulative and are payable at an annual rate of 11 1/2% if, when, and as declared by the Board of Directors of the Bank. The payment of dividends by the Bank is subject to certain federal laws applicable to savings associations. Dividends paid by the Bank on the 11 1/2% Preferred Stock for each year ended December 31, Page 75 1998 and 1997 totalled $34.6 million. However, GS Holdings purchased 2,688,959 shares of the 11 1/2% Preferred Stock in connection with the Bank Preferred Stock Tender Offers, which reduced dividend expense on the 11 1/2% Preferred Stock on a consolidated basis to $26.8 million for the year ended December 31, 1998. The annual dividends on the 11 1/2% Preferred Stock payable to third parties approximate $3.7 million. In the FN Acquisition, the Company assumed $92.1 million of Old FNB's 10% Subordinated Debentures Due 2006 which have an annual interest cost of $9.2 million. In the SFFed Acquisition, the Company assumed $50 million of the 11.2% Senior Notes. On September 12, 1996, the Company repurchased $44 million aggregate principal amount of the 11.2% Senior Notes at a price of approximately 116.45% of the principal amount, plus the accrued interest thereon. The $6.0 million of 11.2% Senior Notes that remain outstanding have an annual interest cost of $.7 million. In the Cal Fed Acquisition, the Company assumed certain indebtedness and the 10 5/8% Preferred Stock, which have an annual interest cost of $.6 million and an annual dividend cost of $18.3 million, respectively. Cash dividends on the 10 5/8% Preferred Stock are noncumulative and are payable at an annual rate of 10 5/8%, if, when, and as declared by the Board of Directors of the Bank. Similar to the 11 1/2% Preferred Stock, the payment of dividends by the Bank is subject to certain federal laws applicable to savings associations. Dividends paid by the Bank on the 10 5/8% Preferred Stock, for each year ended December 31, 1998 and 1997 totalled $18.3 million. However, GS Holdings purchased 1,117,701 shares of the 10 5/8% Preferred Stock in connection with the Bank Preferred Stock Tender Offers, which reduced dividend expense on the 10 5/8% Preferred Stock on a consolidated basis to $15.3 million for the year ended December 31, 1998. The annual dividends on the 10 5/8% Preferred Stock payable to third parties approximate $6.5 million. The dividends, net of tax benefits, on the REIT Preferred Stock were $33.1 million and $36.6 million for the years ended December 31, 1998 and 1997, respectively. Interest on the GS Escrow Notes approximates $140.9 million per year. Although GS Holdings expects that distributions from the Bank will be sufficient to pay interest when due and the principal amount of its long-term debt at maturity, there can be no assurance that earnings from the Bank will be sufficient to make such distributions to GS Holdings. In addition, there can be no assurance that such distributions will be permitted by the terms of any debt instruments of GS Holdings' subsidiaries then in effect, by the terms of any class of Preferred Stock issued by the Bank or its subsidiaries, including the REIT Preferred Stock and the Bank Preferred Stock, or under applicable federal thrift laws. During the year ended December 31, 1998, $914.5 million of the FN Holdings Notes have been purchased in connection with the Debt Tender Offers, with related premiums, fees and other expenses totalling $98.7 million on an after-tax basis. In addition, during the year ended December 31, 1998, $455 million of the 12 1/2% Parent Holdings Notes were defeased, with related premiums, fees and other expenses totaling $51.6 million on an after-tax basis. At December 31, 1998, only $.2 million of the FN Holdings 12 1/4% Notes and $.3 million of the FN Holdings 10 5/8% Notes remain outstanding. The Company anticipates that cash and cash equivalents on hand, the cash flow from assets as well as other sources of funds will provide adequate liquidity for its operating, investing and financing needs and the Bank's regulatory liquidity requirements for the foreseeable future. See "Business--Regulation of the Bank." In addition to cash and cash equivalents of $968.0 million at December 31, 1998, the Company has substantial additional secured borrowing capacity with the FHLB and other sources. Net cash used in operating activities for the year ended December 31, 1998 totalled $572.2 million compared to net cash used of $431.8 million during the year ended December 31, 1997. The change was principally due to the increase in purchases and originations of loans held for sale, net of sales. Net cash used in operating activities for the year ended December 31, 1997 totalled $431.8 million compared to net cash provided by operating activities of $485.9 million during the year ended December 31, 1996. The change was principally due to the increase in purchases and originations of loans held for sale. Net cash provided by operating activities for the year ended December 31, 1996 totalled $485.9 million, an increase of $902.7 million from the year ended December 31, 1995. The increase was principally due to the increase Page 76 in proceeds from the sale of loans held for sale. Substantially all loan production in 1996 was sold in the secondary market, whereas variable rate loans originated during the first nine months of 1995 were retained by the Company. Net cash used in investing activities for the year ended December 31, 1998 totalled $3.0 billion, an increase of $1.9 billion from the year ended December 31, 1997. Cash flows used in investing activities included purchases of securities of $892 million and purchases of $9.0 billion in mortgage-backed securities. Cash flows provided by investing activities included a net decrease in loans receivable of $1.7 billion, principal payments on mortgage-backed securities totalling $3.8 billion and proceeds from maturities of securities of $978.1 million. Net cash used in investing activities for the year ended December 31, 1997 totalled $1.0 billion, a decrease of $3.2 billion from the year ended December 31, 1996. Cash flows used in investing activities included $198.3 million for acquisitions, purchases of securities of $1.4 billion and purchases of $2.6 billion in mortgage-backed securities. Cash flows provided by investing activities included a net decrease in loans receivable of $514.4 million, principal payments on mortgage-backed securities totalling $1.4 billion and proceeds from maturities of securities of $1.0 billion. Net cash provided by investing activities for the year ended December 31, 1996 totalled $2.2 billion, an increase of $.4 billion from the year ended December 31, 1995. Cash flows provided by investing activities included a net decrease in loans receivable of $1.5 billion, principal payments on mortgage-backed securities totalling $863.1 million and proceeds from maturities of securities of $243.8 million. Cash flows used in investing activities included a net $52.4 million from acquisitions, purchases of securities of $507.3 million and purchases of $149.7 million in mortgage-backed securities. Net cash provided by financing activities for the year ended December 31, 1998 totalled $4.1 billion. Cash flows provided by financing activities included additional borrowings of $25.6 billion and proceeds from the GS Escrow Merger of $2.0 billion. Cash flows used in financing activities included principal payments on borrowings totalling $20.5 billion, a decrease in deposits of $1.4 billion, and funds used in the Parent Holdings Defeasance, Debt Tender Offers and Bank Preferred Stock Tender Offers of $553.7 million, $1.1 billion and $423.5 million, respectively. Additionally, $1.3 billion was used in the Florida Branch Sale, $25.0 million was used in the redemption of the FN Holdings Preferred Stock and dividends paid to minority stockholders, totalled $80.5 million. Net cash provided by financing activities for the year ended December 31, 1997 totalled $1.6 billion. Cash flows provided by financing activities included additional borrowings of $19.6 billion, proceeds of $482.4 million from the issuance of the REIT Preferred Stock and proceeds from the FN Escrow Merger of $603.3 million. Cash flows used in financing activities included principal payments on borrowings totalling $17.5 billion and a decrease in deposits of $1.2 billion. Additionally, $142.3 million was used in the redemption of the FN Holdings Preferred Stock and dividends on preferred and common stock, including dividends paid to minority stockholders, totalled $122.8 million. Net cash used in financing activities for the year ended December 31, 1996 totalled $2.7 billion. Principal payments on borrowings totalled $8.5 billion, funding of the Branch Sales totalled $4.6 billion and the net decrease in securities sold under agreements to repurchase totalled $202.2 million. Additionally, cash used in financing activities included a capital distribution to parent of $227.1 million and dividends of $375.8 million. Cash flows provided by financing activities included additional borrowings of $11.1 billion (including $455 million from the issuance of the 12 1/2% Parent Holdings Notes) and proceeds from the issuance of FN Holdings Preferred Stock of $144.2 million. The terms of the Bank Preferred Stock provide that the Bank may not declare or pay any dividends or other distributions (other than in shares of common stock of the Bank or other Bank Junior Stock), with respect to any Bank Junior Stock or repurchase, redeem or otherwise acquire, or set apart funds for the repurchase, redemption or other acquisition of any Bank Junior Stock (including the common stock held by GS Holdings) through a sinking fund or otherwise, unless and until: (i) the Bank has paid in full dividends on the Bank Preferred Stock for the four most recent dividend periods or funds have been paid over to the dividend disbursing agent of the Bank for payment of such dividends, and (ii) the Bank has declared a cash dividend on the Bank Preferred Stock at the annual dividend rate for the current dividend period, and sufficient funds have been paid over to the dividend disbursing agent of the Bank for the payment of a cash dividend for such current dividend period. The Bank is currently in compliance with such requirement. Page 77 Similarly, the terms of the REIT Preferred Stock provide that Preferred Capital Corp. may not declare or pay any dividends or other distributions (other than in shares of common stock of Preferred Capital Corp. or other Preferred Capital Corp. Junior Stock), with respect to any Preferred Capital Corp. Junior Stock or repurchase, redeem or otherwise acquire, or set apart funds for the repurchase, redemption or other acquisition of any Preferred Capital Corp. Junior Stock (including the common stock held by the Bank) through a sinking fund or otherwise, unless and until: (i) Preferred Capital Corp. has paid full dividends on the REIT Preferred Stock for the four most recent dividend periods or funds have been paid over to the dividend disbursing agent of Preferred Capital Corp. for payment of such dividends, and (ii) Preferred Capital Corp. has declared a cash dividend on the REIT Preferred Stock at the annual dividend rate for the current dividend period, and sufficient funds have been paid over to the dividend disbursing agent of Preferred Capital Corp. for the payment of a cash dividend for such current dividend period. Preferred Capital Corp. is currently in compliance with such requirement. IMPACT OF INFLATION AND CHANGING PRICES Prevailing interest rates have a more significant impact on the Company's performance than does the general level of inflation. While interest rates may bear some relationship to the general level of inflation (particularly in the long run), over short periods of time interest rates may not necessarily move in the same direction or change in the same magnitude as the general level of inflation. As a result, the business of the Company is generally not affected by inflation in the short run, but may be affected by inflation in the long run. PROBLEM AND POTENTIAL PROBLEM ASSETS Loans collectively reviewed for impairment by the Company include all business banking loans, single-family loans and performing multi-family and commercial real estate loans under $500,000, excluding loans which have entered the workout process. The Company considers a loan to be impaired when, based upon current information and events, it is "probable" that it will be unable to collect all amounts due (i.e., both principal and interest) according to the contractual terms of the loan agreement. Any insignificant delay or insignificant shortfall in amount of payments will not cause a loan to be considered impaired. In determining impairment, the Company considers large non-homogeneous loans including nonaccrual loans, troubled debt restructurings, and performing loans that exhibit, among other characteristics, high LTV ratios, low debt-coverage ratios or other indications that the borrowers are experiencing increased levels of financial difficulty. The measurement of impairment may be based on (i) the present value of the expected future cash flows of the impaired loan discounted at the loan's original effective interest rate, (ii) the observable market price of the impaired loan, or (iii) the fair value of the collateral of a collateral-dependent loan. The Company bases the measurement of collateral-dependent impaired loans on the fair value of the loan's collateral. The amount, if any, by which the recorded investment of the loan exceeds the measure of the impaired loan's value is recognized by recording a valuation allowance. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Cash receipts on impaired loans not performing according to contractual terms are generally used to reduce the carrying value of the loan, unless the Company believes it will recover the remaining principal balance of the loan. Impairment losses are included in the allowance for loan losses through a charge to the provision for loan losses. Adjustments to impairment losses due to changes in the fair value of collateral of impaired loans are included in the provision for loan losses. Upon disposition of an impaired loan, loss of principal, if any, is recorded through a charge-off to the allowance for loan losses. At December 31, 1998 and 1997, the carrying value of loans that were considered to be impaired totalled $135.2 million and $110.1 million, respectively, (of which $32.5 million and $18.6 million, respectively, were on nonaccrual status). The average recorded investment in impaired loans during the years ended December 31, 1998 and 1997, was approximately $137.1 million and $112.9 million, respectively. For the years ended December 31, 1998 and 1997, the Company recognized interest income on those impaired loans of $9.0 million and $10.5 million, respectively, which included $1.2 million and $.6 million, respectively, of interest income recognized using the cash basis method of income recognition. Page 78 The following table presents the amounts, net of specific allowances for losses and purchase accounting adjustments, of the Company's non-performing loans, foreclosed real estate, repossessed assets, troubled debt restructurings, and impaired loans as of the dates indicated. These categories are not mutually exclusive; certain loans are included in more than one classification. Purchased sub-prime auto loans are reflected as non-performing, impaired, or restructured using each individual loan's contractual unpaid principal balance.
December 31, 1998 December 31, 1997 -------------------------------------- ----------------------------------------- Non-performing Impaired Restructured Non-performing Impaired Restructured -------------- -------- ------------ -------------- -------- ------------ (in millions) Real Estate: 1-4 unit residential $190 $ -- $ 4 $165 $ -- $ 2 5+ unit residential 16 55 9 12 43 7 Commercial and other 10 78 19 6 67 24 Land -- 1 -- -- -- -- Construction 1 1 -- 2 -- -- ---- ---- --- ---- ---- ---- Total real estate 217 135 32 185 110 33 Non-real estate 9 -- -- 7 -- -- ---- ---- --- ---- ---- ---- Total loans 226 (a) $135 (b) $32 192 (a) $110 (b) $ 33 ==== === ==== ==== Foreclosed real estate, net 80 77 Repossessed assets 4 3 ---- ---- Total non-performing assets $310 $272 ==== ====
- ------------------ (a) Includes loans securitized with recourse on non-performing status of $6.0 million and $5.2 million at December 31, 1998 and 1997, respectively, and loans held for sale on non-performing status of $17.0 million and $1.2 million at December 31, 1998 and 1997, respectively. (b) Includes $32.5 million and $18.6 million of non-performing loans and $16.4 million and $17.5 million of loans classified as troubled debt restructurings at December 31, 1998 and 1997, respectively. There were no accruing loans contractually past due 90 days or more at December 31, 1998 or 1997. The Company's non-performing assets, consisting of nonaccrual loans, net of purchase accounting adjustments, repossessed assets and foreclosed real estate, net, increased to $310 million at December 31, 1998, compared with $272 million at December 31, 1997. However, non-performing assets as a percentage of the Bank's total assets decreased to .57% at December 31, 1998, from .87% of total assets at December 31, 1997. The decrease in the Bank's non-performing assets as a percentage of total assets is due to the level of the Bank's non-performing assets increasing at a much lower rate than the significant increase in total assets over such time period. Golden State, through the Bank, manages its credit risk by assessing the current and estimated future performance of the real estate markets in which it operates. The Company continues to place a high degree of emphasis on the management of its asset portfolio. The Company has three distinct asset management functions: performing loan asset management, problem loan asset management and credit review. Each of these three functions is charged with the responsibility of reducing the risk profile within the residential, commercial, multi-family and other asset portfolios by applying asset management and risk evaluation techniques that are consistent with the Company's portfolio management strategy and regulatory requirements. In addition to these asset management functions, the Company has a specialized credit risk management group that is charged with development of credit policies and performing credit risk analyses for all asset portfolios. Page 79 The following table presents non-performing real estate assets by geographic region of the country as of December 31, 1998:
Total Non-performing Foreclosed Non-performing Real Estate Real Estate, Real Estate Geographic Loans, Net (2) Net (2) Assets Concentration -------------- ------- ------ ------------- (dollars in millions) Region: Northeast (1) $ 28 $ 8 $ 36 12.12% California 135 51 186 62.63 Other regions 54 21 75 25.25 ---- --- ---- ------ Total $217 $80 $297 100.00% ==== === ==== ======
- ------------------ (1) Consists of Connecticut, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island and Delaware. (2) Net of purchase accounting adjustments and specific allowances for losses. At December 31, 1998, the Company's largest non-performing asset was $7.3 million, and the Company had four non-performing assets over $2 million in size with balances averaging approximately $3.6 million. At December 31, 1998, the Company had 1,810 non-performing assets below $2 million in size, including 1,674 non-performing 1-4 unit residential assets. The level of non-performing assets is directly affected by economic conditions throughout the country. The following table indicates non-performing real estate loans, net of purchase accounting adjustments and specific allowances for losses, by collateral type, interest rate type and state concentration as of December 31, 1998:
Total 1-4 unit 5+ unit Commercial Non-performing Residential Residential and Other Real Estate % of State Variable Fixed Variable Fixed Variable Fixed Loans Total ----- -------- ----- -------- ----- -------- ----- ----- ----- (dollars in millions) California $ 99 $13 $15 $-- $6 $2 $135 62.07% New York 11 5 -- -- -- -- 16 7.13 Florida 12 6 -- -- -- -- 18 8.48 Hawaii 8 2 -- -- 3 -- 13 6.12 New Jersey 4 3 -- -- -- -- 7 2.92 Illinois 2 -- -- -- -- -- 2 1.12 Ohio 1 1 -- -- -- -- 2 1.11 Connecticut 1 1 -- -- -- -- 2 1.01 Texas 1 1 -- -- -- -- 2 1.05 Other states (1) 11 8 1 -- -- -- 20 8.99 ---- --- --- --- -- -- ---- ------ Total $150 $40 $16 $-- $9 $2 $217 100.00% ==== === === === == == ==== ======
- ------------------ (1) There are 41 states, Puerto Rico, Virgin Islands, Guam and the District of Columbia, of which no one state had non-performing loans in excess of 1% of the total. Page 80 The following table indicates outstanding balances of impaired loans, net of purchase accounting adjustments and specific allowances for losses, by collateral type, interest rate type and state concentration as of December 31, 1998:
5+ Unit Commercial Residential and Other Total % of ----------------- ---------------- -------------------- Variable Fixed Variable Fixed Impaired Total -------- ----- -------- ----- -------- ----- (dollars in millions) California $49 $1 $54 $8 $112 82.98% New York 3 -- 3 -- 6 4.44 Illinois -- -- 6 -- 6 4.44 Hawaii -- -- 3 -- 3 2.22 Florida -- -- 5 -- 5 3.70 Arizona -- -- -- 1 1 0.74 Other states (1) 2 -- -- -- 2 1.48 --- -- --- -- ---- ------ Total $54 $1 $71 $9 $135 100.00% === == === == ==== ======
- ------------------ (1) Represents four states, none of which had impaired loans in excess of 1% of the total. The following table indicates outstanding balances of troubled debt restructured loans, net of purchase accounting adjustments and specific allowances for losses, by collateral type, interest rate type and state concentration as of December 31, 1998:
1-4 Unit 5+ Unit Commercial Total Residential Residential and Other Troubled ----------------- ----------------- ---------------- Debt % of State Variable Fixed Variable Fixed Variable Fixed Restructured Total ----- -------- ----- -------- ----- -------- ----- ------------ ----- (dollars in millions) California $3 $1 $2 $1 $7 $ -- $14 43.75% New York -- -- 1 5 -- 12 18 56.25 -- -- -- -- -- --- -- ------ Total $3 $1 $3 $6 $7 $12 $32 100.00% == == == == == === === ======
A summary of the activity in the allowance for loan losses by loan type is as follows for the years ended December 31, 1998, 1997 and 1996:
5+ Unit Residential 1-4 Unit and Commercial Consumer Residential Real Estate and Other Total ----------- ----------- --------- ----- (in millions) Balance - December 31, 1995 $116 $ 85 $ 9 $210 Purchases and acquisitions, net 6 32 1 39 Provision for loan losses 34 2 4 40 Charge-offs (35) (4) (6) (45) Recoveries 2 -- 1 3 ---- ---- --- ---- Balance - December 31, 1996 123 115 9 247 Purchases and acquisitions, net 55 79 10 144 Provision for loan losses 60 12 8 80 Charge-offs (38) (8) (10) (56) Recoveries 2 -- 2 4 ---- ---- --- ---- Balance - December 31, 1997 202 198 19 419 Purchases and acquisitions, net 50 78 42 170 Provision for loan losses 25 9 6 40 Charge-offs (28) (10) (8) (46) Recoveries 1 2 3 6 ---- ---- --- ---- Balance - December 31, 1998 $250 $277 $62 $589 ==== ==== === ====
Page 81 The ratio of allowance for loan losses to non-performing loans at December 31, 1998, 1997 and 1996 was 260.2%, 217.8% and 143.2%, respectively. The increase in the ratio in 1998 is primarily attributed to balances acquired in the Golden State Acquisition. The increase in the ratio in 1997 is primarily attributed to the Cal Fed Acquisition and the expiration of the Put Agreement. See "Business--Non-performing Assets--Allowance for Loan Losses" for further discussion. MORTGAGE BANKING OPERATIONS The Company, through FNMC, has significantly expanded its mortgage banking operations. During January 1998, FNMC acquired mortgage servicing assets of $3.6 billion as a result of bulk servicing acquisitions. With the consummation of bulk servicing acquisitions, the acquisition of additional 1-4 unit residential loan servicing portfolios in the Glen Fed Merger and the originated servicing, the 1-4 unit residential loans serviced for others (including loans subserviced for others and excluding loans serviced for the Bank) totalled $65.4 billion at December 31, 1998, an increase of $20.5 billion from December 31, 1997. During 1998, the Company, through FNMC, originated $12.4 billion and sold (generally with servicing retained) $7.9 billion of 1-4 unit residential loans. Gross revenues from mortgage loan servicing activities for 1998 totalled $264.2 million, an increase of $28.5 million from the year ended December 31, 1997. A decline in long-term interest rates generally results in an acceleration of mortgage loan prepayments. Higher than anticipated levels of prepayments generally cause the accelerated amortization of MSRs and generally will result in a reduction of the market value of MSRs and in the Company's servicing fee income. To reduce the sensitivity of its earnings to interest rate and market value fluctuations, the Company hedged the change in value of its MSRs based on changes in interest rates ("MSR Hedge"). At December 31, 1998, the Company, through FNMC, was a party to several interest rate floor contracts maturing in 2003. The Company paid counterparties a premium in exchange for cash payments in the event that the 10-year Constant Maturity Swaps rate falls below the strike prices. At December 31, 1998, the notional amount of the interest rate floors was $2.1 billion and the strike prices were between 5.2% and 5.6%. The Company, through FNMC, also entered into principal only swap agreements with a notional amount of $164.7 million at December 1998. Further, to hedge against prepayment risk in its mortgage servicing portfolio, the Company entered into prepayment-linked swaps with a notional value of $1.9 billion at December 31, 1998. The Company was also a party to swaption contracts with a weighted average maturity of 2.8 years, a notional amount of $2.3 billion and a weighted average strike rate of 5.57% at December 31, 1998. The estimated fair values of interest rate floor contracts and principal-only swaps designated as hedges against MSRs at December 31, 1998, were $32.2 million and $18.8 million, respectively. The estimated fair values of the interest rate swaption contracts and the prepayment-linked swaps was $89.3 million and $1.3 million, respectively, at December 31, 1998. For further discussion, see note 39 to the Company's consolidated financial statements. The premium paid by the Company on the interest rate floor contracts is amortized over the life of the contract. Amounts receivable or payable under the principal only swap agreements and prepayment linked swap agreements, and amounts receivable under the interest rate floor contracts, swaptions or terminated hedges are included in the carrying value of MSRs and are amortized as part of the MSR basis. Gains and losses on early termination of these hedges would be included in the carrying amount of the related MSRs and amortized over the remaining terms of the assets. Two requirements must be met in order to use these hedge accounting methods: (i) MSRs must expose the Company to interest rate risk, and (ii) at the inception of the hedge and throughout the hedge period, high correlation of changes in the market value of the hedge instruments and the fair value of the MSRs must be probable so that the results of the hedge instruments will substantially offset the effects of interest rate changes on the MSRs. If these requirements are not met, the hedge instruments would be considered speculative and marked to market with changes in market value reflected in current earnings. When a mortgage loan is sold and servicing rights are retained, a portion of the cost of originating a mortgage loan is allocated to the MSRs based on its relative fair market value. This cost of originating the loan is capitalized and amortized over the period of estimated future net servicing income. The net gains on sales of 1-4 unit residential loans during the year ended December 31, 1998 totalled $32.3 million and included amounts related to the capitalization of originated and excess MSRs of $170.0 million. Page 82 The following is a summary of activity in MSRs and the MSR Hedge for the year ended December 31, 1998 (in millions):
Total MSR MSRs MSR Hedge Balance Balance at December 31, 1997 $ 531 $ 5 $ 536 Additions - Glen Fed Merger 213 -- 213 Originated servicing 170 -- 170 Additions - other purchases 161 -- 161 Sale - Servicing Sale (1) -- (1) Gain on termination -- (76) (76) Premiums paid -- 107 107 Payments received from counterparties, net -- (8) (8) Amortization (152) (6) (158) ----- ----- ----- Balance at December 31, 1998 $ 922 $ 22 $ 944 ===== ===== =====
Capitalized MSRs are amortized in proportion to, and over the period of, estimated net servicing income. SFAS No. 125 requires enterprises to measure the impairment of MSRs based on the difference between the carrying amount of the MSRs and their current fair value. At December 31, 1998 and 1997, no allowance for impairment of the MSRs was necessary. CAPITAL RESOURCES OTS capital regulations require savings associations to satisfy three minimum capital requirements: tangible capital, core (leverage) capital and risk-based capital. In general, an association's tangible capital, which must be at least 1.5% of adjusted total assets, is the sum of common stockholders' equity (including retained earnings), noncumulative perpetual preferred stock and minority interest in equity accounts of fully consolidated subsidiaries, less disallowed intangibles. An association's ratio of core capital to adjusted total assets (the "core" capital or "leverage capital" ratio) must be at least 4%, recently amended from 3% which had been in effect prior to March 1998. Core capital generally is the sum of tangible capital plus certain other qualifying intangibles. Under the risk-based capital requirement, a savings association must have total capital (core capital plus supplementary capital) equal to at least 8% of risk-weighted assets (which equals assets plus the credit risk equivalent of certain off-balance sheet items, each multiplied by the appropriate risk weight). Supplementary capital, which may not exceed 100% of core capital for purposes of the risk-based requirement, includes, among other things, certain permanent capital instruments such as qualifying cumulative perpetual preferred stock, as well as some forms of term capital instruments, such as qualifying subordinated debt. The capital requirements are viewed as minimum standards by the OTS, and most associations are expected to maintain capital levels well above the minimum. In addition, the OTS regulations provide that minimum capital levels higher than those provided in the regulations may be established by the OTS for individual savings associations, depending upon their particular circumstances. These capital requirements are applicable to the Bank but not to Golden State. The Bank is not subject to any such individual minimum regulatory capital requirement. The "Business--Regulation of the Bank--Regulatory Capital Requirements." Page 83 At December 31, 1998, the Bank's regulatory capital levels exceeded the minimum regulatory capital requirements, with tangible, core and risk-based capital ratios of 5.29%, 5.29% and 11.69%, respectively. The following is a reconciliation of the Bank's stockholders' equity to regulatory capital as of December 31, 1998:
Tangible Core Risk-based Capital Capital Capital ------- ------- ------- (dollars in millions) Stockholders' equity of the Bank $3,679 $3,679 $3,679 Minority interest - REIT Preferred Stock 498 498 498 Unrealized holding gain on securities available for sale, net (5) (5) (5) Non-qualifying MSRs (94) (94) (94) Non-allowable capital: Intangible assets (924) (924) (924) Goodwill Litigation Assets (160) (160) (160) Investment in non-includable subsidiaries (58) (58) (58) Excess deferred tax asset (119) (119) (119) Supplemental capital: Qualifying subordinated debentures -- -- 93 General loan loss allowance -- -- 346 Assets required to be deducted: Land loans with more than 80% LTV ratio -- -- (13) Equity in subsidiaries -- -- (25) Low-level recourse deduction -- -- (12) ------ ------- ------ Regulatory capital of the Bank 2,817 2,817 3,206 Minimum regulatory capital requirement 799 2,131 2,194 ------ ------- ------ Excess above minimum capital requirement $2,018 $ 686 $1,012 ====== ======= ====== Tangible Leverage Risk-based Capital Capital Capital Ratio Ratio Ratio ----- ----- ----- Regulatory capital of the Bank 5.29% 5.29% 11.69% Minimum regulatory capital requirement 1.50 4.00 8.00 ---- ---- ---- Excess above minimum capital requirement 3.79% 1.29% 3.69% ==== ==== ====
The amount of adjusted total assets used for the tangible and leverage capital ratios is $53.3 billion. Risk-weighted assets used for the risk-based capital ratio amounted to $27.4 billion. The Bank is also subject to the "prompt corrective action" standards prescribed in the FDICIA and related OTS regulations, which, among other things, define specific capital categories based on an association's capital ratios. See "Business -- Regulation of the Bank." At December 31, 1998, the Bank's capital levels were sufficient for it to be considered "well capitalized."
Risk-based Leverage ---------------------- Capital Tier 1 Total Capital ------- ------ ------------- Regulatory capital of the Bank 5.29% 10.27% 11.69% "Well capitalized" ratio 5.00 6.00 10.00 ---- ---- ----- Excess above "well capitalized" ratio 0.29% 4.27% 1.69% ==== ==== =====
OTS capital regulations allow a savings association to include a net deferred tax asset in regulatory capital, subject to certain limitations. To the extent that the realization of a deferred tax asset depends on a savings association's future taxable income, such deferred tax asset is limited for regulatory capital purposes to the lesser of the amount that can be realized within one year or 10 percent of core capital. At December 31, 1998, $119 million of the net tax benefit was determined to be attributable to the amount of taxable income that may be realized in periods beyond one year. Accordingly, such amount has been excluded from regulatory capital at December 31, 1998. Page 84 YEAR 2000 The Company has developed and is currently executing a comprehensive plan to make its computer systems, applications and facilities Year 2000 ready. The Company's operations, like those of most financial institutions, are substantially dependent upon computer systems for lending and deposit activities. Issues regarding Year 2000 arise because computer systems and related software may have been designed to recognize only dates that relate to the 20th century. Accordingly, if no changes are implemented, some computer systems would interpret "1/1/00" as January 1, 1900 instead of January 1, 2000. Additionally, some equipment, being controlled by microprocessor chips, may not deal appropriately with a year "00." The Company has formed a Year 2000 Project Steering Committee with senior representatives from every functional area of the Company. At the direction of the Board of Directors, the Committee is leading the efforts to ensure that the Company is ready for the Year 2000. The Board of Directors has approved the Company's Year 2000 Plan that was developed in accordance with the guidelines set forth by the Federal Financial Institutions Examination Council ("FFIEC"). The Company's plan covers four stages including (i) inventory, (ii) assessment, (iii) remediation and (iv) testing and certification. Inventory involves taking stock of and recording known computer hardware, software and chip-embedded technologies. The assessment stage includes evaluation and identification of actions necessary to ensure Year 2000 compliance. Remediation consists of the corrective actions, including modifications, upgrades or replacement of non-compliant hardware, software and chip-embedded technologies. Testing and certification entails validation that the system will operate correctly for Year 2000, and includes exercising predefined tests that simulate specific activities known to be problematic for otherwise compliant technologies, such as century roll-over, Year 2000 leap year, etc. At December 31, 1998, the Company had completed the inventory and assessment stages for its Company owned systems and applications, and was substantially complete with the remediation stage. During this remediation process, the Company is utilizing both internal and external resources to reprogram and/or replace, and test the software for Year 2000 modifications. The remediation process for existing mission-critical systems is targeted to be complete by March 31, 1999; testing and certification of these systems and applications are currently targeted for completion at the same time. In addition, during February and March of 1999, the Company has participated in industry-wide Year 2000 integration testing sponsored by the Mortgage Banking Association. The Company is currently assessing risks related to the potential failure of material third parties to be ready for Year 2000. The Company also completed its inventory and assessment of electrical and electronic equipment which may be controlled by microprocessor chips, including automatic teller machines, telecommunications systems, building management systems, security equipment and systems, telecommunications equipment, vehicles and office equipment. All such equipment and systems not certified as Year 2000 ready are planned to be upgraded, discarded or replaced by March 31, 1999. In addition, the Company has completed its inventory of business forms to identify those containing a preprinted "19__." All such forms have been redesigned and replacement supplies have been ordered. It is currently expected that costs related to Year 2000 will total approximately $16.4 million over the years 1997 to 2000. Of this, $9.8 million has been incurred since the inception of the Year 2000 project through December 31, 1998. Historically, cost estimates and actuals by year for year 2000 are as follows (in millions): 1997 1998 ---- ---- Estimates $1.2 $8.9 Actual 1.2 8.6 Of the total Year 2000 project costs, $10.1 million are incremental third party expenses which will be funded through operating cash flows. Costs related to purchase of project equipment and replacement of non-compliant equipment are projected to be $2.9 million and $.9 million, respectively, which will also be funded through operating cash flows. However, an increase in reprogramming costs or other unforeseen equipment replacement costs would adversely affect these costs estimates. Expenditures in 1998 represented 11.6% of the total Information and Technology Services ("ITS") expenses. In 1999, expenditures are estimated to be 9.1% of the total ITS budget. No critical ITS projects have been deferred as a result of the Year 2000 efforts. Instead, incremental resources including consultants, contractors, software utilities and hardware were obtained from outside the Company to supplement existing staff. In addition, the Company has prioritization mechanisms in place to ensure that other critical projects Page 85 are addressed. The Company is currently unaware of any asserted or unasserted claims of breach of contract or warranty, and, at the present time, does not anticipate any assertion of such claims in the future. The Company has initiated communications with its critical external relationships to determine the extent to which the Company may be vulnerable to such parties' failure to remediate their own Year 2000 issues. From its critical service providers, the Company has obtained written statements indicating they will be Year 2000-ready. However, through the testing and certification stage, the Company will continue to assess and attempt to mitigate its risks with respect to the failure of these entities to be Year 2000-ready. The effect, if any, on the Company's results of operations from the failure of such parties to be Year 2000-ready cannot be reasonably estimated. The Company has completed its risk assessment of each of its loan portfolios and identified material borrowers which are most likely to experience Year 2000 related problems. In an effort to educate borrowers and further assess Year 2000 preparedness, material borrowers have been contacted through questionnaires, surveys, or loan officer phone calls and visits. Educational materials have been sent to the majority of borrowers not categorized as material customers for Year 2000 purposes. Ongoing efforts to mitigate potential Year 2000 problems in higher-risk portfolios include incorporating Year 2000 compliance requirements in loan documents and assessing Year 2000 readiness in the Company's underwriting process for new loans and renewals. Year 2000 is the highest priority project within the ITS unit of the Company. Management believes there is no material risk that the Company will fail to address Year 2000 issues in a timely manner, and little possibility of material changes in its estimates of reserves, allowances for capitalized software costs, litigation and deferred revenue. In light of normal ongoing field visits by Bank regulatory examiners, there is little likelihood of enforcement action on the Company's Year 2000 project. The Company does not anticipate material loan losses or acceleration of prepayments due to Year 2000. However, the amount of potential liability and lost revenue, if any, cannot be reasonably estimated at this time nor can the Company identify specifically the most likely worst case scenario. If unforeseen circumstances were to arise, the Year 2000 issue could disrupt the Company's normal business operations. The most reasonably likely worst case Year 2000 scenario foreseeable at this time would include the inability to systematically process, in some combination, various types of customer transactions. This could affect the Company's ability to accept deposits or process withdrawals, originate new loans or accept loan payments in the automated manner currently utilized. Depending upon how long this scenario lasted, this could have a material adverse effect on the Company's operations. In the unlikely event the Company or its vendors and/or business partners are not ready for the Year 2000, the Company has been developing a contingency plan of action. This contingency plan addresses possible failures of the remediated systems and failure to remediate a system on time, and will address a support infrastructure for specific systems. The contingency plan focuses on three main areas: service providers, critical supply vendors and in-house systems. At December 31, 1998, contingency plans had been completed for all but seven of the Company's 45 service providers. Contingency plans for the services provided by the seven remaining vendors were completed in January 1999. The contingency plans for the critical supply vendors was completed in mid-February 1999. Finally, since remediation, testing and certification of in-house maintained systems will have been substantially completed by the March 31, 1999 date established by federal regulators, no specific contingencies will be developed for these systems. However, a plan will be developed to address how the Company will treat the possibility of Year 2000-related problems with in-house maintained systems after they have been tested and certified. This plan will address a 1999- 2000 schedule of events and a support infrastructure necessary to see the Company through Year 2000 with its systems. The support plan for in-house maintained applications will be completed by September 30, 1999. Page 86 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the normal course of business, the Company is exposed to interest-rate risk, which is the potential for loss due to changes in interest rates. Financial products that expose the Company to interest-rate risk include securities, loans, deposits, debt and derivative financial instruments such as swaps, swaptions and floors. ALCO, which includes senior management representatives, monitors and considers methods of managing the rate and sensitivity repricing characteristics of the balance sheet components consistent with maintaining acceptable levels of changes in net portfolio value ("NPV") and net interest income. A primary purpose of the Company's asset and liability management is to manage interest rate risk to effectively invest the Company's capital and to preserve the value created by its core business operations. As such, certain management monitoring processes discussed below are designed to minimize the impact of sudden and sustained changes in interest rates on NPV and net interest income. The Company's exposure to interest rate risk is reviewed on at least a quarterly basis by the Board of Directors and the ALCO. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine the Company's change in NPV and net interest income in the event of hypothetical changes in interest rates and interest rate sensitivity gap analysis is used to determine the repricing characteristics of the Company's assets and liabilities. If estimated changes to NPV and net interest income are not within the limits established by the Board, the Board may direct management to adjust its asset and liability mix to bring interest rate risk within Board-approved limits. In order to reduce the exposure to interest rate fluctuations, the Company has developed strategies to manage its liquidity, shorten its effective maturities of certain interest-earning assets, and increase the ability of its asset base to respond to changes in interest rates. Management has sought to decrease the average maturity of its assets by emphasizing the origination of adjustable-rate residential mortgage loans and consumer loans, which are retained by the Company for its portfolio. In addition, long-term, fixed-rate single-family residential mortgage loans are underwritten according to guidelines of FHLMC, GNMA and the FNMA, and are either swapped with the FHLMC, GNMA and the FNMA in exchange for mortgage-backed securities secured by such loans which are then sold or are sold directly for cash in the secondary market, generally with servicing retained. Interest rate sensitivity analysis is used to measure the Company's interest rate risk by computing estimated changes in NPV of its cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. NPV represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained increase or decrease in the market interest rates of one hundred to four hundred basis points. The Bank's Board of Directors has adopted an interest rate risk policy which establishes maximum decreases in the NPV of 15%, 30%, 45% and 60% in the event of a sudden and sustained increase or decrease in market interest rates of 100, 200, 300 and 400 basis points, respectively. The following table presents the Company's projected change in NPV for the various rate shock levels at December 31, 1998. All market risk sensitive instruments presented in this table are held to maturity or available for sale. The Company has no trading securities.
Percent Change ------------------- Change in Market Value of Actual Board Interest Rates Portfolio Equity Change Actual Limit -------------- ---------------- ------ ------ ----- (dollars in millions) 400 basis point rise $2,435 $(1,490) -38.0% -60% 300 basis point rise 2,955 (971) -24.7% -45% 200 basis point rise 3,460 (466) -11.9% -30% 100 basis point rise 3,843 (83) -2.1% -15% Base Scenario 3,926 -- -- -- 100 basis point decline 3,874 (52) -1.3% -15% 200 basis point decline 3,710 (216) -5.5% -30% 300 basis point decline 3,727 (199) -5.1% -45% 400 basis point decline 3,822 (104) -2.7% -60%
Page 87 The preceding table indicates that at December 31, 1998, in the event of a sudden and sustained increase in prevailing market interest rates, the Company's NPV, including minority interest, would be expected to decrease, and that in the event of a sudden and sustained decrease in prevailing market interest rates, the Company's NPV would be expected to experience a much lesser decline. At December 31, 1998, the Company's estimated changes in NPV were within the targets established by the Board of Directors. The fair market value of portfolio equity decreases in a rising interest rate environment because the Company's interest-bearing liabilities generally reprice faster than its interest-earning assets, and certain interest-earning assets are subject to periodic caps. The reduction in value of the net interest-earning assets is partially offset by an increase in value of MSRs that appreciate in value as rates rise. In a declining interest rate environment, the reduction in value of MSRs generally outweighs the increase in value of the rest of the portfolio resulting from the repricing differences of interest-earning assets and interest-bearing liabilities. NPV is calculated by the Company pursuant to guidelines established by the OTS. The calculation is based on the net present value of estimated discounted cash flows utilizing market prepayment assumptions and market rates of interest provided by independent broker quotations and other public sources as of December 31, 1998, with adjustments made to reflect the shift in the Treasury yield curve as appropriate. The computation of prospective effects of hypothetical interest rate changes is based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposits decay, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the ALCO could undertake in response to changes in interest rates. Certain shortcomings are inherent in the method of analysis presented in the computation of NPV. Actual values may differ from those projections presented, should market conditions vary from assumptions used in the calculation of the NPV. Certain assets, such as adjustable-rate loans, which represent one of the Company's primary loan products, have features which restrict changes in interest rates on a short-term basis and over the life of the assets. In addition, the proportion of adjustable-rate loans in the Company's portfolio could decrease in future periods if market interest rates remain at or decrease below current levels due to refinance activity. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in the NPV. Finally, the ability of many borrowers to repay their adjustable-rate mortgage loans may decrease in the event of interest rate increases. In addition, the Company uses interest rate sensitivity gap analysis to monitor the relationship between the maturity and repricing of its interest-earning assets and interest-bearing liabilities, while maintaining an acceptable interest rate spread. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Asset/Liability Management" and note 39 of the consolidated financial statements for further information. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements of Golden State at December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and 1996 are included in this report at the pages indicated. Page Independent Auditors' Report F-1 Consolidated Balance Sheets F-2 Consolidated Statements of Income F-3 Consolidated Statements of Comprehensive Income F-4 Consolidated Statements of Stockholders' Equity F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-8 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. Page 88 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Those portions of Golden State's definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A for use in connection with Golden State's Annual Meeting of Stockholders to be held on May 17, 1999 ("Proxy Statement") appearing under the captions "Proposal I - Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" are incorporated herein by reference. The following table sets forth certain information (ages as of March 1, 1999) concerning the executive officers of Golden State.
Name Age Position ---- --- -------- Gerald J. Ford 54 Chairman of the Board, Chief Executive Officer and Director Carl B. Webb 49 President, Chief Operating Officer and Director Richard H. Terzian 62 Executive Vice President and Chief Financial Officer Christie S.Flanagan 60 Executive Vice President and General Counsel Richard A. Fink 58 Executive Vice President Richard P. Hodge 44 Executive Vice President Scott A. Kisting 51 Executive Vice President James R. Staff 51 Executive Vice President Stephen J. Trafton 52 Executive Vice President Renee Nichols Tucei 42 Senior Vice President and Controller
In addition to the officers listed above, below are those individuals who hold senior positions with the Bank and are deemed to be executive officers of the Company for reporting purposes under the Securities Exchange Act of 1934.
Name Age Position ---- --- -------- Kendall M. Fugate 61 Executive Vice President and Information and Technology Services Director Walter C. Klein 55 Executive Vice President; President, FNMC Richard A. Leweke 49 Executive Vice President and Administrative Services Director Lacy G. Newman, Jr. 49 Executive Vice President and Chief Credit Officer Peter K. Thomsen 56 Executive Vice President and Retail Banking Director Michael R. Walker 53 Executive Vice President - Commercial Real Estate Dennis L. Verhaegen 47 Executive Vice President - Director of Corporate Finance
Mr. Ford has served as the Chairman of the Board and Chief Executive Officer of Golden State since September 1998 and as the Chairman of the Board and Chief Executive Officer of the Bank and its predecessors since 1988. Mr. Ford was previously President and Director of Parent Holdings, Golden State's predecessor, from its inception in 1994 until its merger with Golden State. Mr. Ford has also been Chairman of the Board and Chief Executive Officer of GS Holdings since its formation in 1998 and of Preferred Capital Corporation since its formation in November 1996. Mr. Ford was Chairman of the Board of First Madison from 1993 to 1994 and Chairman of the Board and Chief Executive Officer of First Gibraltar from 1988 through 1993, both predecessors of California Federal. Mr. Ford served as the Chairman of the Board and Chief Executive Officer of First United Bank Group from 1993 to 1994. Mr. Ford is Chairman of the Board of FNMC. Mr. Ford is also Chairman of the Board and Chief Executive Officer of Liberte Investors Inc., and a Director of McMoRan Oil and Gas Co. Mr. Webb has served as President, Chief Operating Officer and a Director of Golden State since September 1988 and as the President, Chief Operating Officer and a Director of the Bank and its predecessors since 1988, and of Preferred Capital Corp. since its formation in November 1996. Mr. Webb has also been President and Chief Operating Officer of GS Holdings since its formation in 1998. Mr. Webb served as President, Chief Executive Officer and Director of First Madison from 1993 through 1994, and as President, Chief Operating Officer and a Director of First Gibraltar from 1988 through 1993. Mr. Webb also serves as a Director of FNMC. Page 89 Mr. Terzian has served as Executive Vice President and Chief Financial Officer of Golden State since September 1998 and of the Bank since April 1, 1995. Mr. Terzian has been the Executive Vice President, Chief Financial Officer and a Director of Preferred Capital Corp. since its formation in November 1996. Mr. Terzian also serves as a Director of the Federal Home Loan Bank of San Francisco. For the five years prior to April 1, 1995, Mr. Terzian served as Chief Financial Officer of Dime Bancorp, Inc. and its subsidiary, The Dime Savings Bank of New York, FSB. Mr. Flanagan has been the Executive Vice President and General Counsel of Golden State since September 1998. Mr. Flanagan has also served as Executive Vice President and General Counsel of the Bank since the consummation of the FN Acquisition. Mr. Flanagan has been the Executive Vice President, General Counsel and a Director of Preferred Capital Corp. since its formation in November 1996. He also serves as a Director of FNMC. Mr. Flanagan has been associated with the law firm of Jenkens & Gilchrist, P.C. and its predecessors since 1968 in various capacities, including Managing Partner, and he is currently Of Counsel to that firm. Mr. Fink has been Executive Vice President of Golden State and Executive Vice President and Goodwill Litigation Manager of the Bank since September 1998. Mr. Fink was Vice Chairman and a Director of Golden State from June 1997 until its merger with Parent Holdings on September 11, 1998. Mr. Fink previously served as Senior Executive Vice President and a Director of Glendale Federal from May 1992 to September 1998. He served as Chief Legal Officer from May 1992 until April 1994; as Director, Corporate Development, from April 1994 until February 1996; and served as Glendale Federal's Chief Credit Officer from February 1996 until September 1998. Mr. Hodge has been an Executive Vice President of Golden State since September 1998 and of the Bank since January 1996. He has been employed by the Bank since November 1995. Mr. Hodge previously was associated with the public accounting firm of KPMG Peat Marwick LLP and its predecessors since 1981, including most recently as a tax partner since 1986. Mr. Kisting has been an Executive Vice President of Golden State since September 11, 1998, and Executive Vice President of the Bank and Director of the Retail Bank since September 1, 1998. From September 1997 to August 1998, Mr. Kisting served as Chief Operating Officer of the New England-based Citizens Financial Group. From 1993 to 1997, Mr. Kisting was associated with Norwest Corporation in Minneapolis, where he served as Group Executive Vice President from 1995 to 1997, and as Regional President from 1993 to 1995. Prior to that time, Mr. Kisting was an Executive Vice President of Bank of America. Mr. Staff has been an Executive Vice President of Golden State since September 1998 and of the Bank since October 17, 1994. He also serves as a Director of Preferred Capital Corp. and FNMC. Mr. Staff served as Chairman and Director of FGB Realty in 1996 and 1997. Mr. Staff previously was associated with the public accounting firm of KPMG Peat Marwick LLP and its predecessors since 1979, including most recently as Partner-in-charge of Financial Services for the Southwest-Dallas area. Mr. Trafton has been Executive Vice President of Golden State and Executive Vice President and Goodwill Litigation Manager of the Bank since September 1998. Mr. Trafton previously served as Chairman of the Board, Chief Executive Officer and President of Glendale Federal from April 1992 to September 1998. He joined Glendale Federal in July 1990 as Senior Executive Vice President and Chief Financial Officer and served as Chief Financial Officer until April 1992. He has served as a Director since June 1991. From June 1991 until April 1992 he was Vice Chairman of the Board. Ms. Tucei has been Senior Vice President and Controller of Golden State since September 1998. She has been an Executive Vice President of the Bank since January 1999. Ms. Tucei served as Senior Vice President and the Controller of the Bank since the consummation of the FN Acquisition. Ms. Tucei previously served as Senior Vice President and Controller of First Madison from 1993 to 1994, and as Senior Vice President for First Gibraltar from 1988 to 1993. Mr. Fugate has been an Executive Vice President of Golden State since September 1998 and an Executive Vice President of the Bank since the consummation of the FN Acquisition. Mr. Fugate previously served as Executive Vice President of Old FNB from 1991 to 1994, and held various executive positions with Citibank, N.A. and Citibank California, FSB from 1982 to 1991. Page 90 Mr. Klein has been an Executive Vice President of Golden State since September 1998 and an Executive Vice President of the Bank and the President of FNMC since January 1996. He also serves as a Director of FNMC. Mr. Klein previously was associated with PNC Mortgage Corp. of America and its predecessor, Sears Mortgage Corporation, since 1986, including most recently as Chairman and Chief Executive Officer. Mr. Leweke has been an Executive Vice President of Golden State since September 1998 and an Executive Vice president of the Bank since January 1998. Mr. Leweke served as Senior Vice President--Administrative Services since the consummation of the FN Acquisition. Prior to that time, he served in the same capacity for Old FNB from 1992 to 1994. Mr. Newman has been an Executive Vice President of Golden State since September 1998 and Executive Vice President and Chief Credit Officer of the Bank since the consummation of the FN Acquisition. Mr. Newman has also served as Executive Vice President of First Madison from 1993 to 1994, and Executive Vice President of First Gibraltar since 1992. In addition, he served as President and a Director of Madison Realty since 1992. Mr. Thomsen has been an Executive Vice President of Golden State since September 1998 and an Executive Officer of the Bank since the consummation of the FN Acquisition. Mr. Thomsen previously served as Senior Executive Vice President of Old FNB and a Director from 1992 to 1994. Mr. Thomsen was an Executive Vice President of Old FNB from 1991 to 1992. Mr. Thomsen had been Executive Vice President of Michigan National Corporation from 1986 to 1991 and a Director from 1989 to 1991, and the President of Michigan National Bank from 1988 to 1991 and a Director from 1989 to 1991. Mr. Thomsen was Chairman of Independence One Mortgage Corporation, a subsidiary of Michigan National Bank, from 1986 to 1990. Mr. Walker has been an Executive Vice President of Golden State since September 1998 and an Executive Vice President of the Bank since the consummation of the FN Acquisition. Mr. Walker served as Senior Vice President of First Madison from 1993 to 1994. Mr. Walker previously served as Senior Vice President of First Gibraltar from 1988 to 1993. Mr. Verhaegen has been an Executive Vice President of Golden State since September 1998 and an Executive Vice President of the Bank since February 1997. Mr. Verhaegen previously served as a Managing Director of First Southwest Company from 1992 to 1994. Mr. Verhaegen served as a Senior Managing Director and co-head of the Financial Institutions Group of Bear Stearns & Co. Inc. from 1988 to 1992. From 1994 to 1996, Mr. Verhaegen operated his own financial advisory and consulting firm. ITEM 11. EXECUTIVE COMPENSATION Those portions of Golden State's Proxy Statement appearing under the caption "Executive Compensation and Other Information," "Report of the Compensation Committee on Executive Compensation" and "Stock Price Performance Graph" are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT That portion of Golden State's Proxy Statement appearing under the caption "Beneficial Ownership of Golden State Securities" is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS That portion of Golden State's Proxy Statement appearing under the caption "Certain Relationships and Related Transactions" is incorporated herein by reference. Page 91 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) 1. FINANCIAL STATEMENT SCHEDULES Schedules are omitted because of the absence of conditions under which they are required or because the required information is provided in the consolidated financial statements or notes thereto. (B) EXHIBITS 2.1 Agreement and Plan of Reorganization, dated as of February 4, 1998, by and among First Nationwide (Parent) Holdings Inc., First Nationwide Holdings Inc., First Gibraltar Holdings, Inc., Hunter's Glen/Ford, Ltd. Golden State Bancorp Inc. and Golden State Financial Corporation. (Incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated February 4, 1998 (the "February 1998 Form 8-K")). 2.2 Amendment No. 1 dated as of July 31, 1998, by and among First Nationwide (Parent) Holdings Inc., First Nationwide Holdings Inc., Golden State Bancorp Inc., Golden State Financial Corporation, First Gibraltar Holdings Inc. and Hunter's Glen/Ford Ltd., to the Agreement and Plan of Reorganization, dated as February 4, 1998, by and among the Parties. 3.1 Third Restated Certificate of Incorporation of the Registrant. (Incorporated by reference to Exhibits 3.1 and 3.2 to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1998). 3.2 By-laws of the Registrant. (Incorporated by reference to Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). 3.3 By-laws of the Registrant, as amended. 4.1 Indenture, dated as of April 15, 1996 between the Registrant and The Bank of New York, as trustee, relating to the 12 1/2% Senior Exchange Notes due 2003. (Incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-1 (File No. 333-4026)). 4.2 First Supplemental Indenture, dated as of September 10, 1998 between First Nationwide (Parent) Holdings Inc. and the Bank of New York, as Trustee, relating to the 12 1/2% Senior Exchange Notes due 2003. 4.3 Indenture, dated as of September 19, 1996, between First Nationwide Escrow Corp. and The Bank of New York, as trustee, relating to the 10 5/8% Senior Subordinated Exchange Notes Due 2003 (the "10 5/8% Notes"). (Incorporated by reference to Exhibit 4.1 to Amendment No. 1 to FN Holdings Registration Statement on Form S-1 (File No. 333-21015)). 4.4 First Supplemental Indenture, dated as of January 3, 1997, among FN Holdings, First Nationwide Escrow Corp. and The Bank of New York, as trustee, relating to the 10 5/8% Notes. (Incorporated by reference to Exhibit 4.2 to Amendment No. 1 to FN Holdings' Registration Statement on Form S-1 (File No. 333-21015)). 4.5 Second Supplemental Indenture dated September 11, 1998, supplementing the Indenture, dated as of September 19, 1996, as Supplemented, between First Nationwide Holdings Inc. and The Bank of New York, as Trustee, relating to the 10 5/8% Senior Subordinated Exchange Notes Due 2003. 4.6 Third Supplemental Indenture dated September 14, 1998, between Golden State Holdings Inc. (formerly known as New First Nationwide Holdings Inc.), as successor to First Nationwide Holdings Inc., and The Bank of New York, as Trustee, relating to the 10 5/8% Senior Subordinated Exchange Notes Due 2003. Page 92 4.7 Indenture, dated as of January 31, 1996, between FN Holdings and The Bank of New York, as trustee, relating to the 9 1/8% Senior Subordinated Exchange Notes Due 2003. (Incorporated by reference to Exhibit 4.1 to FN Holdings' Registration Statement on Form S-1 (File No. 333-00854)). 4.8 First Supplemental Indenture dated as of September 11, 1998, supplementing the Indenture, dated as of January 31, 1996, between First Nationwide Holdings Inc. and The Bank of New York, as Trustee, relating to the 9 1/8% Senior Subordinated Exchange Notes Due 2003. 4.9 Second Supplemental Indenture dated as of September 14, 1998, supplementing the Indenture dated as of January 31, 1996, as Supplemented, between Golden State Holdings Inc. (formerly known as New First Nationwide Holdings Inc.), as successor to First Nationwide Holdings Inc., and The Bank of New York, as Trustee, relating to the 9 1/8% Senior Subordinated Exchange Notes Due 2003. 4.10 Indenture, dated as of July 15, 1994, between FN Holdings and The First National Bank of Boston, as trustee, relating to the 12 1/4% Senior Exchange Notes Due 2001 (the "12 1/4% Senior Note Indenture"). (Incorporated by reference to Exhibit 4.1 to FN Holdings' Registration Statement on Form S-1 (File No. 33-82654)). 4.11 First Supplemental Indenture, dated as of January 17, 1997, between FN Holdings and State Street Bank and Trust Company, as trustee, supplementing the 12 1/4% Senior Note Indenture. (Incorporated by reference to Exhibit 4.5 to Amendment No. 1 to FN Holdings' Registration Statement on Form S-1 (File No. 333-21015)). 4.12 Second Supplemental Indenture dated as of September 11, 1998, supplementing the Indenture dated as of July 15, 1994, as Supplemented, between Golden State Holdings Inc. (formerly known as New First Nationwide Holdings Inc.), as successor to First Nationwide Holdings Inc., and State Street Bank and Trust Company, as successor to The First National Bank of Boston, as trustee, relating to the 12 1/4% Senior Exchange Notes Due 2001. 4.13 Third Supplemental Indenture dated as of September 14, 1998, supplementing the Indenture dated as of July 15, 1994, as Supplemented, between Golden State Holdings Inc. (formerly known as New First Nationwide Holdings Inc.), as successor to First Nationwide Holdings Inc., and State Street Bank and Trust Company, as successor to The First National Bank of Boston, as trustee, relating to the 12 1/4% Senior Exchange Notes Due 2001. 4.14 Indenture, dated as of October 1, 1986, between First Nationwide Bank, A Federal Savings Bank, and Bank of America National Trust and Savings Association Re: $100,000,000 10% Subordinated Debentures due 2006 (the "2006 Indenture"). (Incorporated by reference to Exhibit 4.5 to FN Holdings' Annual Report on Form 10-K for the year ended December 31, 1994.) 4.15 First Supplemental Indenture, dated as of September 30, 1994, among First Madison Bank, FSB, First Nationwide Bank, A Federal Savings Bank, and Bank of America National Trust and Savings Association, supplementing the 2006 Indenture. (Incorporated by reference to Exhibit 4.6 to FN Holdings' Annual Report on Form 10-K for the year ended December 31, 1994.) 4.16 Second Supplemental Indenture, dated as of January 3, 1997, among First Nationwide Bank, A Federal Savings Bank, California Federal Bank, A Federal Savings Bank and Bank of America National Trust and Savings Association, as trustee, supplementing the 2006 Indenture. (Incorporated by reference to Exhibit 4.8 to Amendment No. 1 to FN Holdings' Registration Statement on Form S-1 (File No. 333-21015)). 4.17 Indenture, dated February 15, 1986, between Cal Fed Bancorp Inc. and Manufacturers Hanover Trust Company, as trustee, relating to the 6 1/2% Convertible Subordinated Debentures Due 2001 (the "6 1/2% Convertible Debenture Indenture"). (Incorporated by reference to Exhibit 4.11 to Amendment No. 1 to FN Holdings' Registration Statement on Form S-1 (File No. 333-21015)). Page 93 4.18 First Supplemental Indenture, dated as of December 16, 1992, among Cal Fed Bancorp Inc., XCF Acceptance Corporation, California Federal Bank, A Federal Savings Bank, and Chemical Bank, supplementing the 6 1/2% Convertible Debenture Indenture. (Incorporated by reference to Exhibit 4.12 to Amendment No. 1 to FN Holdings' Registration Statement on Form S-1 (File No. 333- 21015)). 4.19 Second Supplemental Indenture dated as of December 13, 1996 among XCF Acceptance Corporation, California Federal Bank, A Federal Savings Bank, and The Chase Manhattan Bank, as trustee, supplementing the 6 1/2% Convertible Debenture Indenture. (Incorporated by reference to Exhibit 4.13 to Amendment No. 1 to FN Holdings' Registration Statement on Form S-1 (File No. 333-21015)). 4.20 Third Supplemental Indenture dated as of December 13, 1996 among Cal Fed Bancorp Inc., XCF Acceptance Corporation, California Federal Bank, A Federal Savings Bank, and The Chase Manhattan Bank, as Trustee, supplementing the 6 1/2% Convertible Debenture Indenture. (Incorporated by reference to Exhibit 4.14 to Amendment No. 1 to FN Holdings' Registration Statement on Form S-1 (File No. 333-21015)). 4.21 Fourth Supplemental Indenture dated as of December 13, 1996 among Cal Fed Bancorp Inc., XCF Acceptance Corporation, and The Chase Manhattan Bank, as trustee, supplementing the 6 1/2% Convertible Debenture Indenture. (Incorporated by reference to Exhibit 4.15 to Amendment No. 1 to FN Holdings' Registration Statement on Form S-1 (File No. 333-21015)). 4.22 Indenture, dated December 1, 1992, between California Federal Bank, A Federal Savings Bank and Chemical Bank, as trustee, relating to the 10% Subordinated Debentures Due 2003. (Incorporated by reference to Exhibit 4.16 to Amendment No. 1 to FN Holdings' Registration Statement on Form S-1 (File No. 333-21015)). 4.23 Agreement Regarding Contingent Litigation Recovery Participation Interests, dated as of June 30, 1995, between California Federal Bank, A Federal Savings Bank, and Chemical Trust Company of California, as Interest Agent. (Incorporated by reference to Exhibit 4.17 to Amendment No. 1 to FN Holdings' Registration Statement on Form S-1 (File No. 333-21015)). 4.24 Agreement regarding Secondary Contingent Litigation Recovery Participation Interests, dated as of December 2, 1996, between California Federal Bank, A Federal Savings Bank, and ChaseMellon Shareholder Services, L.L.C., as Interest Agent. (Incorporated by reference to Exhibit 4.18 to Amendment No. 1 to FN Holdings' Registration Statement on Form S-1 (File No. 333-21015)). 4.25 Note Agreement Regarding $50,000,000 aggregate principal amount of 10.668% Senior Subordinated Notes Due 1998 of California Federal Bank, A Federal Savings Bank. (Incorporated by reference to Exhibit 4.19 to Amendment No. 1 to FN Holdings' Registration Statement on Form S-1 (File No. 333-21015)). 4.26 Indenture dated as of August 6, 1998 between GS Escrow Corp. and The Bank of New York, as Trustee. (Incorporated by reference to Exhibit 4.1 to Golden State Holdings Inc.'s Registration Statement on Form S-1 (File No 333-64597)). 4.27 First Supplemental Indenture dated as of August 6, 1998 between GS Escrow Corp. and The Bank of New York, as Trustee. (Incorporated by reference to Exhibit 4.2 to Golden State Holdings Inc.'s Registration Statement on Form S-1 (File No 333-64597)). 4.28 Second Supplemental Indenture dated as of August 6, 1998 between GS Escrow Corp. and The Bank of New York, as Trustee. (Incorporated by reference to Exhibit 4.3 to Golden State Holdings Inc.'s Registration Statement on Form S-1 (File No 333-64597)). Page 94 4.29 Third Supplemental Indenture dated as of August 6, 1998 between GS Escrow Corp. and The Bank of New York, as Trustee. (Incorporated by reference to Exhibit 4.4 to Golden State Holdings Inc.'s Registration Statement on Form S-1 (File No 333-64597)). 4.30 Fourth Supplemental Indenture dated as of August 6, 1998 between GS Escrow Corp. and The Bank of New York, as Trustee (Incorporated by reference to Exhibit 4.5 to Golden State Holdings Inc.'s Registration Statement on Form S-1 (File No 333-64597)). 4.31 Fifth Supplemental Indenture dated as of September 11, 1998 between Golden State Holdings Inc. and the Bank of New York, as Trustee (Incorporated by reference to Exhibit 4.6 to Golden State Holdings Inc.'s Registration Statement on Form S-1 (File No 333-64597)). 10.1 Tax Sharing Agreement, effective as of January 1, 1994, by and among First Madison Bank, FSB, FN Holdings and Mafco Holdings, Inc. (Incorporated by reference to Exhibit 10.10 to FN Holdings' Registration Statement on Form S-1 (File No. 33-82654)). 10.2 Amendment to Tax Sharing Agreement, effective September 11, 1998, by and among Mafco Holdings Inc., Golden State Bancorp Inc., First Nationwide Holdings Inc., Glendale Federal Bank, A Federal Savings Bank, and New First Nationwide Holdings Inc. 10.3 Tax Sharing Modification Agreement dated as of December 22, 1998, between Mafco Holdings Inc. and Golden State Bancorp Inc. 10.4 Asset Purchase Agreement, dated as of April 14, 1994, between First Madison Bank, FSB, and First Nationwide Bank, A Federal Savings Bank. (Incorporated by reference to Exhibit 2.1 to FN Holdings' Current Report on Form 8-K dated October 3, 1994.) 10.5 Amendment No. 1 to the Asset Purchase Agreement, dated as of September 30, 1994, between First Madison Bank, FSB, and First Nationwide Bank, A Federal Savings Bank. (Incorporated by reference to Exhibit 2.3 to FN Holdings' Current Report on Form 8-K dated October 3, 1994.) 10.6 Amendment No. 2 to the Asset Purchase Agreement, dated as of September 30, 1994, between First Madison Bank, FSB, and First Nationwide Bank, A Federal Savings Bank. (Incorporated by reference to Exhibit 2.4 to FN Holdings' Current Report on Form 8-K dated October 3, 1994.) 10.7 Exchange Agreement dated September 26, 1994 by and among Gerald J. Ford, First Nationwide Holdings Inc. and NationsBank of Texas, N.A. (Incorporated by reference to Exhibit 10.12 to Amendment No. 2 to FN Holdings' Registration Statement on Form S-1 (File No. 33-82654)). 10.8 Exchange Agreement dated October 20, 1994 between Carl B. Webb and FN Holdings. (Incorporated by reference to Exhibit 10.11 to FN Holdings' Registration Statement on Form S-1 (File No. 333-00854)). 10.9 Stockholders Agreement dated October 3, 1994 by and among Gerald J. Ford, FN Holdings and the Registrant. (Incorporated by reference to Exhibit 10.16 to Amendment No. 2 to FN Holdings' Registration Statement on Form S-1 (File No. 33-82654)). 10.10 Office Lease, dated as of November 15, 1990, between Webb/San Francisco Ventures, Ltd. and First Nationwide Bank, A Federal Savings Bank. Confidential treatment has been granted for portions of this document (Incorporated by reference to Exhibit 10.6 to Amendment No. 3 to FN Holdings' Registration Statement on Form S-1 (File No. 33-82654)). 10.11 Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and Gerald J. Ford, dated as of October 1, 1994. (Incorporated by reference to Exhibit 10.13 to FN Holdings' Annual Report on Form 10-K for the year ended December 31, 1994.) Page 95 10.12 Amendment to Employment Agreement between California Federal Bank, A Federal Savings Bank, and Gerald J. Ford, dated as of January 1, 1998. (Incorporated by reference to Exhibit 10.10 of the Registrant' Annual Report on Form 10-K for the year ended December 31, 1997.) 10.13 Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and Carl B. Webb, II, dated as of February 1, 1995. (Incorporated by reference to Exhibit 10.14 to FN Holdings' Annual Report on Form 10-K for the year ended December 31, 1994.) 10.14 Amendment to Employment Agreement, dated as of June 1, 1996, between First Nationwide Bank, A Federal Savings Bank, and Carl B. Webb, II. (Incorporated by reference to Exhibit 10.1 to FN Holdings' Current Report on Form 8-K dated August 30, 1996 ( the "August 1996 Form 8-K")). 10.15 Employment Agreement dated as of January 1, 1998 between California Federal Bank, A Federal Savings Bank, and Carl B. Webb II. (Incorporated by reference to Exhibit 10.13 of the Registrant' Annual Report on Form 10-K for the year ended December 31, 1997.) 10.16 Employment Agreement, dated as of June 1, 1996, between First Nationwide Bank, A Federal Savings Bank, and Christie S. Flanagan. (Incorporated by reference to Exhibit 10.4 to the August 1996 Form 8-K.) 10.17 Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and James R. Staff, dated as of February 1, 1995. (Incorporated by reference to Exhibit 10.16 to FN Holdings' Annual Report on Form 10-K for the year ended December 31, 1994.) 10.18 Amendment to Employment Agreement, dated as of June 1, 1996, between First Nationwide Bank, A Federal Savings Bank, and James R. Staff. (Incorporated by reference to Exhibit 10.3 to the August 1996 Form 8-K.) 10.19 Employment Agreement dated as of January 1, 1998 between California Federal Bank, A Federal Savings Bank, and J. Randy Staff. (Incorporated by reference to Exhibit 10.17 of the Registrant' Annual Report on Form 10-K for the year ended December 31, 1997.) 10.20 Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and Lacy G. Newman, Jr. dated as of February 1, 1995. (Incorporated by reference to Exhibit 10.17 to FN Holdings' Registration Statement on Form S-1 (File No. 333-00854)). 10.21 Amendment to Employment Agreement, dated as of June 1, 1996, between First Nationwide Bank, A Federal Savings Bank, and Lacy G. Newman, Jr. (Incorporated by reference to Exhibit 10.5 to the August 1996 Form 8-K.) 10.22 Employment Agreement dated as of January 1, 1998, between California Federal Bank, A Federal Savings Bank, and Lacy G. Newman, Jr. (Incorporated by reference to Exhibit 10.20 of the Registrant' Annual Report on Form 10-K for the year ended December 31, 1997.) 10.23 Employment Agreement dated as of January 1, 1996, between First Nationwide, A Federal Savings Bank and Richard P. Hodge. (Incorporated by reference to Exhibit 10.16 to FN Holdings' Annual Report on Form 10-K for the year ended December 31, 1995.) 10.24 Amendment to Employment Agreement, dated as of June 1, 1996, between First Nationwide Bank, A Federal Savings Bank, and Richard P. Hodge (Incorporated by reference to Exhibit 10.2 to the August 1996 Form 8-K.) 10.25 Employment Agreement dated as of January 1, 1999, by and between California Federal Bank, A Federal Savings Bank, and Richard P. Hodge. Page 96 10.26 Employment Agreement between First Nationwide Mortgage Corporation, and Walter C. Klein, Jr., dated as of January 8, 1996. (Incorporated by reference to Exhibit 10.43 to Amendment No. 1 to FN Holdings' Registration Statement on Form S-1 (File No. 333-21015)). 10.27 Amendment to Employment Agreement dated as of July 10, 1997, between First Nationwide Mortgage Corporation and Walter C. Klein, Jr. (Incorporated by reference to Exhibit 10.25 of the Registrant' Annual Report on Form 10-K for the year ended December 31, 1997.) 10.28 Post-Employment Consulting Agreement between California Federal Bank, A Federal Savings Bank and Edward G. Harshfield, dated January 6, 1997. (Incorporated by reference to Exhibit 10.44 to Amendment No. 1 to FN Holdings' Registration Statement on Form S-1 (File No. 333-21015)). 10.29 Special Bonus Agreement, dated as of November 25, 1996, by and between First Nationwide Holdings Inc. and Carl B. Webb. (Incorporated by reference to Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996.) 10.30 Mortgage Company Asset Sale Agreement by and among Resolution Trust Corporation as conservator for Standard Federal Savings Association, America's Mortgage Servicing, Inc., A Mortgage Company, America's Lending Network, Inc., and Stanfed Financial Services, Inc.; and First Nationwide Mortgage Corporation dated as of December 1, 1994. (Incorporated by reference to Exhibit 10.18 to FN Holdings' Annual Report on Form 10-K for the year ended December 31, 1994.) 10.31 Receivables Sale Agreement by and among Resolution Trust Corporation as conservator for Standard Federal Savings Association, America's Mortgage Servicing, Inc., A Mortgage Company, and America's Lending Network, Inc.; and First Nationwide Mortgage Corporation, dated as of December 1, 1994. (Incorporated by reference to Exhibit 10.19 to FN Holdings' Annual Report on Form 10-K for the year ended December 31, 1994.) 10.32 Purchase and Sale Agreement by and between Resolution Trust Corporation in its corporate capacity and First Nationwide Mortgage Corporation, dated as of December 1, 1994. (Incorporated by reference to Exhibit 10.20 to FN Holdings' Annual Report on Form 10-K for the year ended December 31, 1994.) 10.33 Purchase and Sale Agreement by and among Resolution Trust Corporation as receiver of or conservator for certain associations and First Nationwide Mortgage Corporation, dated as of December 1, 1994. (Incorporated by reference to Exhibit 10.21 to FN Holdings' Annual Report on Form 10-K for the year ended December 31, 1994.) 10.34 Letter agreement between the Resolution Trust Corporation, as conservator for Standard Federal Savings Association, et al., and First Nationwide Mortgage Corporation, dated December 2, 1994, regarding the Mortgage Company Asset Sale Agreement, Receivable Sales Agreement, and two Purchase and Sales Agreements among such parties, dated as of December 1, 1994. (Incorporated by reference to Exhibit 10.22 to FN Holdings' Annual Report on Form 10-K for the year ended December 31, 1994.) 10.35 Letter agreement between the Resolution Trust Corporation, as conservator for Standard Federal Savings Association, et al., and First Nationwide Mortgage Corporation, dated February 23, 1995, regarding the Mortgage Company Asset Sale Agreement, Receivable Sales Agreement, and two Purchase and Sales Agreements among such parties, dated as of December 1, 1994. (Incorporated by reference to Exhibit 10.23 to FN Holdings' Annual Report on Form 10-K for the year ended December 31, 1994.) 10.36 Letter agreement between the Resolution Trust Corporation, as conservator for Standard Federal Savings Association, et al., and First Nationwide Mortgage Corporation, dated February 24, 1995, regarding the Mortgage Company Asset Sale Agreement among such parties, dated as of December 1, 1994. (Incorporated by reference to Exhibit 10.24 to FN Holdings' Annual Report on Form 10-K for the year ended December 31, 1994.) Page 97 10.37 Letter agreement between the Resolution Trust Corporation, as conservator for Standard Federal Savings Association, et al., and First Nationwide Mortgage Corporation, dated February 28, 1995, regarding the Mortgage Company Asset Sale Agreement among such parties, dated as of December 1, 1994 (power of attorney matters). (Incorporated by reference to Exhibit 10.25 to FN Holdings' Annual Report on Form 10-K for the year ended December 31, 1994.) 10.38 Letter agreement between the Resolution Trust Corporation, as conservator for Standard Federal Savings Association, et al., and First Nationwide Mortgage Corporation, dated February 28, 1995, regarding the Mortgage Company Asset Sale Agreement among such parties, dated as of December 1, 1994 (amendments to schedules). (Incorporated by reference to Exhibit 10.26 to FN Holdings' Annual Report on Form 10-K for the year ended December 31, 1994.) 10.39 Agreement for Provision of Services between First Nationwide Bank, A Federal Savings Bank and Trans Network Insurance Services, Inc. (then named "First Gibraltar (Parent) Holdings Inc."), dated as of December 1, 1994. (Incorporated by reference to Exhibit 10.27 to FN Holdings' Annual Report on Form 10-K for the year ended December 31, 1994.) 10.40 Assignment from Trans Network Insurance Services Inc. to First Nationwide Management Corp. of Agreement for Provision of Services. (Incorporated by reference to Exhibit 10.37 to FN Holdings' Annual Report on Form 10-K for the year ended December 31, 1995.) 10.41 Asset Purchase Agreement between Trans Network Insurance Services Inc. and FNC Insurance Agency, Inc. dated effective June 1, 1995. (Incorporated by reference to Exhibit 10.24 to Post- Effective Amendment No. 1 to FN Holdings' Registration Statement on Form S-1 (File No. 33- 82654)). 10.42 Trans Network Marketing and Support Services Agreement between First Nationwide Bank, A Federal Savings Bank, and Trans Network Insurance Services Inc. dated effective June 1, 1995. (Incorporated by reference to Exhibit 10.25 to Post-Effective Amendment No. 1 to FN Holdings' Registration Statement on Form S-1 (File No. 33-82654)). 10.43 Amendment No. 2 to Lease between First Nationwide Bank, A Federal Savings Bank, and RNM 135 Main, L.P. dated April 6, 1995. (Incorporated by reference to Exhibit 10.26 to Post-Effective Amendment No. 1 to FN Holdings' Registration Statement on Form S-1 (File No. 33-82654)). 10.44 Consulting Agreement between First Nationwide Management Corp. and Gerald J. Ford dated as of October 1, 1994. (Incorporated by reference to Exhibit 10.27 to Post-Effective Amendment No. 1 to FN Holdings' Registration Statement on Form S-1 (File No. 33-82654)). 10.45 Amendment to Consulting Agreement between First Nationwide Management Corp. and Gerald J. Ford, dated effective December 17, 1997. (Incorporated by reference to Exhibit 10.43 of the Registrant' Annual Report on Form 10-K for the year ended December 31, 1997.) 10.46 First Amendment, dated as of January 1, 1995, by and among First Nationwide Management Corp., Diamond A-Ford Corporation, Trans Network Insurance Services, Inc. and Gerald J. Ford, supplementing the Consulting Agreement between First Nationwide Management Corp. and Gerald J. Ford dated as of October 1, 1994. (Incorporated by reference to Exhibit 10.33 to FN Holdings' Registration Statement on Form S-1 (File No. 333-00854)). 10.47 Management Incentive Plan for Certain Employees of First Nationwide Bank, A Federal Savings Bank. (Incorporated by reference to Exhibit 10.34 to FN Holdings' Registration Statement on Form S-1 (File No. 333-00854)). Page 98 10.48 Deferred Executive Compensation Program. (Incorporated by reference to Exhibit 10.46 of the Registrant' Annual Report on Form 10-K for the year ended December 31, 1997.) 10.49 Reimbursement and Expense Allocation Agreement, dated as of January 1, 1996, by and between First Nationwide Management Corp. and FN Holdings. (Incorporated by reference to Exhibit 10.35 to FN Holdings' Registration Statement on Form S-1 (File No. 333-00854)). 10.50 Registration Agreement, dated September 13, 1996, among FN Holdings Inc., First Nationwide Escrow Corp. and the initial purchasers named therein relating to the 10 5/8% Notes. (Incorporated by reference to Exhibit 4.20 to Amendment No. 1 to FN Holdings' Registration Statement on Form S-1 (File No. 333-21015)). 10.51 Amended and Restated Agreement and Plan of Merger dated as of the 27th day of July, 1996 by and among First Nationwide Holdings Inc., CFB Holdings, Inc., Cal Fed Bancorp Inc. and California Federal Bank, A Federal Savings Bank. (Incorporated by reference to Exhibit 2.1 to FN Holdings' Registration Statement on Form S-1 (File No. 333-21015)). 10.52 Stock Option Agreement, dated as of February 4, 1998, by and between Golden State Bancorp Inc. and First Nationwide (Parent) Holdings Inc. (Incorporated by reference to Exhibit 99.1 to the February 1998 Form 8-K.) 10.53 Litigation Management Agreement, dated as of February 4, 1998, by and among Golden State Bancorp Inc., Glendale Federal Bank, Federal Savings Bank, California Federal Bank, A Federal Savings Bank, Stephen J. Trafton and Richard A. Fink. (Incorporated by reference to Exhibit 99.2 to the February 1998 Form 8-K.) 10.54 Purchase and Assumption Agreement between Norwest Bank Nevada, N.A., and California Federal Bank, A Federal Savings Bank, dated October 30, 1998. 10.55 Purchase and Assumption Agreement between Wells Fargo Bank, N.A., and California Federal Bank, A Federal Savings Bank, dated October 30, 1998. 10.56 Reimbursement and Expense Allocation Agreement between Golden State Bancorp Inc. and California Federal Bank, A Federal Savings Bank, dated November 23, 1998. 10.57 Agreement for Provision of Services between California Federal Bank, A Federal Savings Bank and Golden State Management Inc., dated November 23, 1998. 10.58 Agreement for Provision of Services between Mafco Holdings Inc. and Golden State Bancorp Inc., dated effective January 1, 1999. 10.59 Asset Purchase Agreement between Trans Network Insurance Services Inc. and Golden State Bancorp Inc., dated effective December 1, 1998. 10.60 Stock Purchase Agreement (GSB Aviation) between Trans Network Insurance Services Inc., and Golden State Management Inc., dated October 7, 1998. 10.61 Stock Purchase Agreement (First Nationwide Management) between Trans Network Insurance Services Inc. and Golden State Management Inc., dated effective December 1, 1998. 10.62 Stock Purchase Agreement (FGB Services) between Trans Network Insurance Services Inc. and Golden State Management Inc. 10.63 Equity Purchase Agreement between RGI Group Incorporated and Golden State Management Inc., dated January 19, 1999. Page 99 12.1 Statement regarding the computation of ratio of earnings to combined fixed charges and minority interest for the Registrant. 21.1 Subsidiaries of the Registrant. 23.1 Consent of KPMG LLP, Independent Auditors of the Registrant. 24.1 Power of Attorney executed by Ronald O. Perelman. 24.2 Power of Attorney executed by Paul M. Bass, Jr. 24.3 Power of Attorney executed by Gabrielle K. McDonald 24.4 Power of Attorney executed by Howard Gittis. 27.1 Financial Data Schedule. (C) REPORTS ON FORM 8-K None. Page 100 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 25, 1999 GOLDEN STATE BANCORP INC. By: /s/ Gerald J. Ford ------------------------------- Gerald J. Ford Chairman of the Board and Chief Executive Officer Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
NAME TITLE DATE /s/ Gerald J. Ford Chairman of the Board, Chief March 25, 1999 ---------------------------------- Executive Officer and Director Gerald J. Ford (Principal Executive Officer) /s/ Carl B. Webb President, Chief Operating Officer March 25, 1999 ---------------------------------- and Director Carl B. Webb /s/ Richard H. Terzian Executive Vice President March 25, 1999 ---------------------------------- and Chief Financial Officer Richard H. Terzian (Principal Financial Officer) /s/ Renee Nichols Tucei Senior Vice President and March 25, 1999 ---------------------------------- Controller Renee Nichols Tucei (Principal Accounting Officer) * Director March 25, 1999 ---------------------------------- Ronald O. Perelman * Director March 25, 1999 ---------------------------------- Paul M. Bass, Jr. /s/ George W. Bramblett, Jr. Director March 25, 1999 ---------------------------------- George W. Bramblett, Jr. Page 101 /s/ The Honorable Bob Bullock Director March 25, 1999 ---------------------------------------- The Honorable Bob Bullock /s/ Brian P. Dempsey Director March 25, 1999 ---------------------------------------- Brian P. Dempsey * Director March 25, 1999 ---------------------------------------- Howard Gittis /s/ John F. King Director March 25, 1999 ---------------------------------------- John F. King /s/ John F. Kooken Director March 25, 1999 ---------------------------------------- John F. Kooken * Director March 25, 1999 ---------------------------------------- Gabrielle K. McDonald /s/ B. M. Rankin, Jr. Director March 25, 1999 ---------------------------------------- B. M. Rankin, Jr. /s/ Thomas S. Sayles Director March 25, 1999 ---------------------------------------- Thomas S. Sayles /s/ Robert Setrakian Director March 25, 1999 ---------------------------------------- Robert Setrakian /s/ Cora M. Tellez Director March 25, 1999 ---------------------------------------- Cora M. Tellez
* Eric K. Kawamura, by signing his name hereto, does hereby execute this report on Form 10-K on behalf of the directors and officers of the Registrant indicated above by asterisks, pursuant to powers of attorney duly executed by such directors and officers and filed as exhibits to this report on Form 10-K. By: /s/ Eric K. Kawamura ----------------------- Eric K. Kawamura Attorney-in-fact Page 102 INDEPENDENT AUDITORS' REPORT The Shareholders and Board of Directors Golden State Bancorp Inc.: We have audited the accompanying consolidated balance sheets of Golden State Bancorp Inc. and subsidiaries (the "Company") as of December 31, 1998 and 1997, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 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 consolidated 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 December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP San Francisco, California January 26, 1999 F-1 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1998 and 1997 (dollars in thousands, except per share data)
Assets 1998 1997 ------ ---- ---- Cash and amounts due from banks $ 854,954 $ 350,214 Interest-bearing deposits in other banks 52,671 36,164 Short-term investment securities 60,325 25,933 ------------ ------------ Cash and cash equivalents 967,950 412,311 Securities available for sale, at fair value 770,747 813,085 Securities held to maturity (fair value $251,489 in 1998 and $58,299 in 1997) 250,964 58,299 Mortgage-backed securities available for sale, at fair value 12,947,992 5,076,598 Mortgage-backed securities held to maturity (fair value $2,825,227 in 1998 and $1,373,289 in 1997) 2,770,913 1,337,877 Loans held for sale, net 2,366,583 1,483,466 Loans receivable, net 30,280,944 19,424,410 Investment in Federal Home Loan Bank ("FHLB") System 1,000,147 468,191 Office premises and equipment, net 336,874 159,349 Foreclosed real estate, net 80,068 76,997 Accrued interest receivable 317,455 188,203 Intangible assets (net of accumulated amortization of $113,709 in 1998 and $60,294 in 1997) 923,598 675,927 Mortgage servicing rights 943,581 536,703 Other assets 911,168 650,740 ------------ ------------ Total assets $ 54,868,984 $ 31,362,156 ============ ============ Liabilities, Minority Interest and Stockholders' Equity ------------------------------------------------------- Deposits $ 24,620,066 $ 16,202,605 Securities sold under agreements to repurchase 4,238,395 1,842,442 Borrowings 22,375,557 11,232,530 Other liabilities 1,459,750 702,959 ------------ ------------ Total liabilities 52,693,768 29,980,536 ------------ ------------ Commitments and contingencies -- -- Minority interest 593,438 1,012,136 Stockholders' equity: Common stock, $1.00 par value, (250,000,000 shares authorized; 128,687,763 and 56,722,988 shares issued at December 31, 1998 and 1997, respectively) 128,688 56,723 Additional paid-in capital 1,392,155 -- Accumulated other comprehensive income 6,151 35,162 Retained earnings (substantially restricted) 56,471 277,599 Treasury stock (89,994 shares at December 31, 1998) (1,687) -- ------------ ------------ Total stockholders' equity 1,581,778 369,484 ------------ ------------ Total liabilities, minority interest and stockholders' equity $ 54,868,984 $ 31,362,156 ============ ============
See accompanying notes to consolidated financial statements. F-2 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Consolidated Statements of Income Years Ended December 31, 1998, 1997 and 1996 (in thousands, except per share data)
1998 1997 1996 ---- ---- ---- Interest income: Loans receivable $ 1,739,294 $ 1,553,210 $ 884,905 Mortgage-backed securities available for sale 482,567 297,816 115,983 Mortgage-backed securities held to maturity 134,537 113,300 135,103 Covered assets -- -- 1,413 Loans held for sale 115,714 76,364 61,595 Securities available for sale 49,736 53,936 31,416 Securities held to maturity 4,702 2,436 257 Interest-bearing deposits in other banks 22,263 5,638 3,127 ----------- ----------- ----------- Total interest income 2,548,813 2,102,700 1,233,799 ----------- ----------- ----------- Interest expense: Deposits 791,112 746,985 419,174 Securities sold under agreements to repurchase 153,697 140,547 120,280 Borrowings 874,736 610,885 308,840 ----------- ----------- ----------- Total interest expense 1,819,545 1,498,417 848,294 ----------- ----------- ----------- Net interest income 729,268 604,283 385,505 Provision for loan losses 40,000 79,800 39,600 ----------- ----------- ----------- Net interest income after provision for loan losses 689,268 524,483 345,905 ----------- ----------- ----------- Noninterest income: Loan servicing fees, net 132,543 143,704 123,887 Customer banking fees and service charges 121,283 100,263 45,044 Management fees 2,263 6,211 9,694 Gain on sale of assets, net 193 38,230 38,118 Gain on sale of branches 108,825 3,569 363,342 Gain on sale of loans, net 54,217 24,721 17,802 Gain from termination of Assistance Agreement -- -- 25,632 Dividends on FHLB stock 36,042 24,790 11,670 Other income 21,633 22,996 18,189 ----------- ----------- ----------- Total noninterest income 476,999 364,484 653,378 ----------- ----------- ----------- Noninterest expense: Compensation and employee benefits 293,982 256,448 204,818 Occupancy and equipment 99,746 81,914 51,936 Data processing 15,708 12,402 10,491 Savings Association Insurance Fund ("SAIF") deposit insurance premium 11,055 10,680 81,149 Marketing 19,597 20,186 10,908 Professional fees 56,360 48,771 18,986 Loan expense 48,183 60,437 31,282 Foreclosed real estate operations, net (6,152) (3,304) (7,390) Amortization of intangible assets 53,415 49,153 9,445 Merger and integration costs 59,162 -- -- Other 112,947 113,882 80,111 ----------- ----------- ----------- Total noninterest expense 764,003 650,569 491,736 ----------- ----------- ----------- Income before income taxes, minority interest and extraordinary item 402,264 238,398 507,547 Income tax (benefit) expense (106,351) 41,315 (75,807) ----------- ----------- ----------- Income before minority interest and extraordinary item 508,615 197,083 583,354 Minority interest 110,527 102,135 48,045 ----------- ----------- ----------- Income before extraordinary item 398,088 94,948 535,309 Extraordinary item - loss on early extinguishment of debt, net of tax 150,333 -- 1,586 ----------- ----------- ----------- Net income $ 247,755 $ 94,948 $ 533,723 =========== =========== =========== Earnings per share: Basic Before extraordinary item $ 5.00 $ 1.67 $ 9.44 Extraordinary item (1.89) -- (0.03) ----------- ----------- ----------- Net income $ 3.11 $ 1.67 $ 9.41 =========== =========== =========== Diluted Before extraordinary item $ 4.88 $ 1.67 $ 9.44 Extraordinary item (1.84) -- (0.03) ----------- ----------- ----------- Net income $ 3.04 $ 1.67 $ 9.41 =========== =========== ===========
F-3 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income Years Ended December 31, 1998, 1997 and 1996 (in thousands)
1998 1997 1996 ---- ---- ---- Net income $ 247,755 $ 94,948 $ 533,723 Other comprehensive income, net of tax: Unrealized holding (loss) gain on securities available for sale: Unrealized holding (loss) gain arising during the period (28,167) 10,907 18,225 Less: reclassification adjustment for gain included in net income (844) (21,964) (35,518) --------- --------- --------- Other comprehensive loss (29,011) (11,057) (17,293) --------- --------- --------- Comprehensive income $ 218,744 $ 83,891 $ 516,430 ========= ========= =========
See accompanying notes to consolidated financial statements. F-4 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (dollars in thousands)
Preferred Stock Accumulated Series A Common Stock Additional Other ------------------ ------------ Paid-in Comprehensive Shares Amount Shares Amount Capital Income ------ ------ ------ ------ ------- ------ Balance at December 31, 1995, as previously reported -- $ -- 1,000 $ 1 $ 267,055 $ 50,810 Restatement for "as if" pooling -- -- 56,721,988 56,722 (39,976) 12,702 ------ --------- ---------- ------ ------- ----------- Balance at December 31, 1995, as restated -- -- 56,722,988 56,723 227,079 63,512 Net income -- -- -- -- -- -- Capital contribution -- -- -- -- 1,819 -- Dividends and distributions to stockholders -- -- -- -- (227,079) -- Change in net unrealized holding gain on securities available for sale -- -- -- -- -- (17,293) Costs of FN Holdings Preferred Stock issuance -- -- -- -- (1,819) -- ------ --------- ----------- ----------- ----------- ----------- Balance at December 31, 1996 -- -- 56,722,988 56,723 -- 46,219 Net income -- -- -- -- -- -- FN Escrow Merger -- -- -- -- (1,164) -- Redemption of FN Holdings Preferred Stock -- -- -- -- 2,339 -- Costs of FN Holdings Preferred Stock issuance -- -- -- -- (650) -- Issuance costs of REIT Preferred Stock -- -- -- -- (574) -- Change in net unrealized holding gain on securities available for sale -- -- -- -- -- (11,057) Dividends to Parent -- -- -- -- -- -- Capital contribution -- -- -- -- 49 -- ------ --------- ---------- ----------- ----------- ----------- Balance at December 31, 1997 -- -- 56,722,988 56,723 -- 35,162 Net income -- -- -- -- -- -- Golden State Acquisition 4,183,599 4,184 61,880,950 61,881 1,400,332 -- Conversion of Series A Preferred Stock (4,181,061) (4,181) 10,051,200 10,051 (5,870) -- Redemption of Additional FN Holdings Preferred Stock -- -- -- -- 787 -- Change in net unrealized holding gain on securities available for sale -- -- -- -- -- (29,011) Liability reflecting value of Golden State Common Stock to be distributed to First Gibraltar and Hunter's Glen in respect of their proportionate ownership of the California Federal Goodwill Litigation Asset -- -- -- -- -- -- Liability reflecting value of Golden State Common Stock to be distributed to First Gibraltar and Hunter's Glen upon use of Parent Holdings' pre-merger tax benefits -- -- -- -- -- -- GS Escrow Merger -- -- -- -- (3,535) -- Dividend of tax benefits to parent due to deconsolidation -- -- -- -- -- -- Pre-merger dividends to parent -- -- -- -- -- -- Redemption of Series A Preferred Stock (2,538) (3) -- -- (61) -- Exercise of stock options -- -- 32,625 33 611 -- Capital contribution -- -- -- -- 22 -- Sale of common stock in treasury -- -- -- -- (131) -- ------ --------- ----------- ----------- ----------- ----------- Balance at December 31, 1998 -- $ -- 128,687,763 $ 128,688 $ 1,392,155 $ 6,151 ====== ========= =========== =========== =========== =========== Common Stock in Treasury Total Retained ----------- Stockholders' Earnings Shares Amount Equity -------- ------ ------ ------ $ 86,289 -- $ -- $ 404,155 28,813 -- -- 58,261 ---------- ------- --------- ----------- 115,102 -- -- 462,416 533,723 -- -- 533,723 -- -- -- 1,819 (422,541) -- -- (649,620) -- -- -- (17,293) (3,932) -- -- (5,751) ---------- ------- --------- ----------- 222,352 -- -- 325,294 94,948 -- -- 94,948 -- -- -- (1,164) -- -- -- 2,339 -- -- -- (650) (16,977) -- -- (17,551) -- -- -- (11,057) (22,724) -- -- (22,724) -- -- -- 49 ---------- ------- --------- ----------- 277,599 -- -- 369,484 247,755 -- -- 247,755 (108,574) (2,036) 1,464,361 -- -- -- -- -- -- -- 787 -- -- -- (29,011) (58,791) -- -- (58,791) (170,139) -- -- (170,139) -- -- -- (3,535) (230,161) -- -- (230,161) (9,793) -- -- (9,793) 1 -- -- (63) -- -- -- 644 -- -- -- 22 -- 18,580 349 218 ---------- ------- --------- ----------- $ 56,471 (89,994) $ (1,687) $ 1,581,778 ========== ======= ========= ===========
See accompanying note to consolidated financial statements. F-5 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years Ended December 31, 1998, 1997 and 1996 (in thousands)
1998 1997 1996 ---- ---- ---- Cash flows from operating activities: Net income $ 247,755 $ 94,948 $ 533,723 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Amortization of intangible assets 53,415 49,153 9,445 Accretion of discount on borrowings 832 744 523 Accretion of purchase accounting premiums and discounts, net (236) (20,650) (15,771) Amortization of mortgage servicing rights 158,163 110,282 90,981 Provision for loan losses 40,000 79,800 39,600 Gain on sale of assets, net (193) (38,230) (38,118) Gain on sale of branches (108,825) (3,569) (363,342) Gain on sale of foreclosed real estate (13,559) (12,087) (12,951) Loss on sale of loans, net 115,754 95,744 63,226 Capitalization of originated mortgage servicing rights (169,971) (120,465) (81,028) Gain from termination of Assistance Agreement -- -- (25,632) Extraordinary loss on early extinguishment of debt, net 150,333 -- 1,586 Depreciation and amortization of office premises and equipment 26,720 16,773 10,921 Amortization of deferred debt issuance costs 8,592 7,591 2,978 FHLB stock dividend (36,042) (24,790) (11,670) Purchases and originations of loans held for sale (8,843,499) (6,293,262) (4,822,753) Proceeds from the sale of loans held for sale 7,892,122 5,510,777 5,157,186 (Increase) decrease in other assets (51,894) 165,747 (91,552) (Increase) decrease in accrued interest receivable (17,630) (11,197) 20,991 Decrease in other liabilities (134,531) (136,673) (30,439) Minority interest 110,527 97,555 48,045 ----------- ----------- ----------- Net cash (used in) provided by operating activities (572,167) (431,809) 485,949 ----------- ----------- -----------
(Continued) See accompanying notes to consolidated financial statements. F-6 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows, continued Years Ended December 31, 1998, 1997 and 1996 (in thousands)
1998 1997 1996 ---- ---- ---- Cash flows from investing activities: Acquisitions and divestitures: Golden State Acquisition $ 782,228 $ -- $ -- Cal Fed Acquisition -- (161,196) -- GSAC Acquisition (13,577) -- -- Auto One Acquisition -- (2,845) -- SFFed Acquisition -- -- (83,184) Home Federal Acquisition -- -- 79,044 Mortgage loan servicing rights and operations -- (34,260) (48,305) Purchases of securities available for sale (891,643) (1,340,881) (497,963) Proceeds from sales of securities available for sale -- 52,014 92,320 Proceeds from maturities of securities available for sale 975,288 1,015,410 242,514 Purchases of securities held to maturity (384) (58,965) (9,303) Principal payments and proceeds from maturities of securities held to maturity 2,827 4,938 1,255 Purchases of mortgage-backed securities available for sale (8,959,321) (2,589,257) (149,724) Principal payments on mortgage-backed securities available for sale 3,284,430 1,099,699 475,186 Proceeds from sales of mortgage-backed securities available for sale 5,664 50,772 -- Purchases of mortgage-backed securities held to maturity -- (458) -- Principal payments on mortgage-backed securities held to maturity 468,544 283,696 387,891 Proceeds from sales of loans 10,875 21,179 123,026 Net decrease in loans receivable 1,687,198 514,377 1,498,588 Decrease in covered assets -- -- 39,349 Purchases of FHLB stock, net (278,955) (50,721) (65,753) Purchases of office premises and equipment (71,361) (66,131) (42,368) Proceeds from the disposal of office premises and equipment 30,634 31,400 4,071 Proceeds from sales of foreclosed real estate 164,278 200,275 170,443 Purchases of mortgage servicing rights (157,224) (29,627) (65,994) Proceeds from sales of mortgage servicing rights -- 31,051 -- ------------ ------------ ------------ Net cash (used in) provided by investing activities (2,960,499) (1,029,530) 2,151,093 ------------ ------------ ------------ Cash flows from financing activities: Branch sales (1,267,517) (79,900) (4,585,022) Net decrease in deposits (1,449,687) (1,196,360) (56,694) Proceeds from additional borrowings 25,559,922 19,595,218 11,144,414 Principal payments on borrowings (20,496,018) (17,495,008) (8,484,883) Net increase (decrease) in securities sold under agreements to repurchase 1,945,646 (40,289) (202,169) Proceeds from GS Escrow Merger 1,970,285 -- -- Bank Preferred Stock Tender Offers (423,509) -- -- Debt Tender Offers (1,089,885) -- -- Defeasance of Parent Holdings Notes (553,667) -- -- Proceeds from FN Escrow Merger -- 603,313 -- Issuance of FN Holdings Preferred Stock, net -- (650) 144,249 Issuance of REIT Preferred Stock, net -- 482,449 -- Redemption of FN Holdings Preferred Stock (25,000) (125,000) -- Redemption of FN Holdings/FN Escrow Preferred Stock -- (17,250) -- Redemption of Series A Preferred Stock (68) -- -- Dividends -- (22,724) (375,772) Dividends paid to minority stockholders, net of taxes (80,506) (100,067) (38,607) Exercise of stock options 644 -- -- Sale of treasury stock 218 -- -- Capital contribution from parent -- 49 1,819 Capital distribution (2,553) -- (227,079) ------------ ------------ ------------ Net cash provided by (used in) financing activities 4,088,305 1,603,781 (2,679,744) ------------ ------------ ------------ Net change in cash and cash equivalents 555,639 142,442 (42,702) Cash and cash equivalents at beginning of year 412,311 269,869 312,571 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 967,950 $ 412,311 $ 269,869 ============ ============ ============
See accompanying notes to consolidated financial statements. F-7 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (1) Organization Golden State Bancorp Inc. (the "Company" or "Golden State") is a holding company with no business operations of its own. The Company's only significant asset is its indirect ownership of all of the common stock of Golden State Holdings Inc. ("GS Holdings"), formerly First Nationwide Holdings Inc. ("FN Holdings"), which owns all of the common stock of California Federal Bank, A Federal Savings Bank and its subsidiaries ("California Federal" or "Bank"), formerly First Nationwide Bank, A Federal Savings Bank ("First Nationwide"), formerly First Madison Bank, FSB ("First Madison"). The Company's principal business operations are conducted by California Federal. Pursuant to the Golden State Merger (as defined herein) agreement, First Gibraltar Holdings Inc. ("First Gibraltar"), parent company of First Nationwide (Parent) Holdings Inc. ("Parent Holdings"), and Hunter's Glen/Ford Ltd. ("Hunter's Glen"), a 20% minority shareholder of FN Holdings, received at the closing of the Golden State Acquisition (as defined herein), in consideration of their interests as stockholders of Parent Holdings and FN Holdings, 56,722,988 shares of common stock, par value $1.00 (the "Golden State Common Stock"), that constituted, in the aggregate, 47.9% of the common stock outstanding, immediately after giving effect to the Golden State Acquisition (as defined herein). In connection with the Golden State Merger, the Hunter's Glen minority interest in FN Holdings was extinguished. On September 11,1998, Parent Holdings, which then owned all of the common stock of FN Holdings, merged with and into Golden State, pursuant to the Golden State Merger agreement. See note 3. The Bank was organized and chartered as First Gibraltar Bank, FSB ("First Gibraltar"), a federal stock savings bank, in December 1988 for the primary purpose of acquiring substantially all of the assets and assuming deposit, secured and certain other liabilities of five insolvent Texas savings and loan associations ("Closed Associations") from the Federal Savings and Loan Insurance Corporation ("FSLIC"), as receiver. On February 1, 1993, First Gibraltar sold to BankAmerica Corporation certain assets, liabilities and substantially all of the branch operations of First Gibraltar located in Texas, including $829 million of loans and 130 branches with approximately $6.9 billion in deposits (the "BAC Sale"). Concurrently with the BAC Sale, First Gibraltar changed its name to First Madison Bank, FSB ("First Madison"). On April 14, 1994, First Madison entered into the Asset Purchase Agreement with First Nationwide Bank, A Federal Savings Bank ("Old FNB"), an indirect subsidiary of Ford Motor Company ("Ford Motor"). On October 3, 1994, effective immediately after the close of business on September 30, 1994, First Madison acquired substantially all of the assets and certain of the liabilities (the "FN Acquired Business") of Old FNB (the "FN Acquisition"). Effective October 1, 1994, First Madison changed its name to First Nationwide Bank, A Federal Savings Bank ("First Nationwide"). On January 3, 1997, pursuant to an Agreement and Plan of Merger (the "Merger Agreement") among FN Holdings, Cal Fed Bancorp Inc. ("Cal Fed") and California Federal Bank, A Federal Savings Bank ("Old California Federal"), FN Holdings acquired 100% of the outstanding stock of Cal Fed and Old California Federal, and First Nationwide merged with and into Old California Federal (the "Cal Fed Acquisition") The aggregate consideration paid under the Merger Agreement consisted of approximately $1.2 billion in cash and the issuance of litigation interests. Cal Fed, a savings and loan holding company, owned 100% of the common stock of Old California Federal. At December 31, 1996, Old California Federal had total assets of approximately $14.1 billion and deposits of $8.9 billion, and operated 119 branches in California and Nevada. Effective January 3, 1997, First Nationwide changed its name to California Federal Bank, A Federal Savings Bank. In connection with the Cal Fed Acquisition, FN Holdings made a capital contribution to the Bank on January 3, 1997 of approximately $685 million. In November 1996, the Bank formed California Federal Preferred Capital Corporation ("Preferred Capital Corp."), a real estate investment trust ("REIT"), for the purpose of acquiring, holding and managing real estate mortgage assets. All of Preferred Capital Corp.'s common stock is owned by the Bank. Pursuant to a subservicing agreement with the Bank's wholly-owned mortgage banking subsidiary, First Nationwide Mortgage Corporation ("FNMC"), FNMC services Preferred Capital Corp.'s mortgage assets. On January 31, 1997, Preferred Capital Corp. issued to the public $500 million of its 9 1/8% Noncumulative Exchangeable Preferred Stock (the "REIT Preferred Stock"), which is reflected in the Company's consolidated balance sheet as minority interest. Preferred Capital Corp. used the proceeds from such offering to acquire mortgage assets from the Bank. The Bank is a diversified financial services company that primarily serves consumers in California, and to a lesser extent, in Nevada. The Bank's principal business consists of (i) operating retail deposit branches that provide retail F-8 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) consumers and small businesses with deposit products such as demand, transaction and savings accounts; investment products such as mutual funds, annuities and insurance; and (ii) mortgage banking activities, including originating and purchasing 1-4 unit residential loans for sale to various investors in the secondary market and servicing loans for itself and others. To a lesser extent, the Bank originates and/or purchases certain commercial real estate and consumer loans for investment. These operating activities are financed principally with customer deposits, secured short-term and long-term borrowings, collections on loans, asset sales and retained earnings. (2) Summary of Significant Accounting Policies The accounting and reporting policies of the Company conform to generally accepted accounting principles and prevailing practices within the savings and loan industry. The following summarizes the more significant of these policies. (a) Basis of Presentation The accompanying consolidated financial statements include the accounts of Golden State which indirectly owns all of the common stock of GS Holdings, which owns all of the common stock of the Bank. Unless the context otherwise indicates, "Golden State" or "Company" refers to Golden State Bancorp Inc. as the surviving entity after the consummation of the Golden State Acquisition. On September 11, 1998, Glendale Federal Bank, Federal Savings Bank ("Glendale Federal") merged with and into the Bank pursuant to the Golden State Merger. Unless the context otherwise indicates, "California Federal" or "Bank" refers to California Federal as the surviving entity after the consummation of the Golden State Merger. On January 3, 1997, First Nationwide merged with and into the Bank pursuant to the Cal Fed Acquisition. Unless the context otherwise indicates, (i) "Old California Federal" refers to California Federal Bank, A Federal Savings Bank prior to the consummation of the Cal Fed Acquisition and (ii) "California Federal" or "Bank" refers to California Federal Bank, A Federal Savings Bank, as the surviving entity after the consummation of the Cal Fed Acquisition, and to First Nationwide and its predecessors for periods prior to the Cal Fed Acquisition. All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts in the prior years have been reclassified to conform to the current period's presentation. Pursuant to the Golden State Merger agreement, First Gibraltar Holdings, Inc. ("First Gibraltar"), parent company of Parent Holdings, and Hunter's Glen received at the closing of the Golden State Acquisition (as defined herein), in consideration of their interests as stockholders of Parent Holdings and FN Holdings, 56,722,988 shares of common stock, par value $1.00 per share (the "Golden State Common Stock"), that constituted, in the aggregate, 47.9% of the common stock outstanding, immediately after giving effect to the Golden State Acquisition. In connection with the Golden State Merger, the Hunter's Glen minority interest in FN Holdings was extinguished. Accordingly, the net income, minority interest and stockholders' equity amounts of prior periods have been restated to reflect this change. Minority interest as restated represents amounts attributable to (i) the Bank Preferred Stock, (ii) the Preferred Stock of FN Holdings, which was redeemed during 1998, (iii) the REIT Preferred Stock and (iv) that portion of stockholders' equity of Auto One, a subsidiary of the Bank, attributable to 20% of its common stock. Golden State is a holding company whose only significant asset is its indirect ownership of all of the common stock of the Bank, and therefore, all activities for the consolidated entity are carried out by the Bank and its operating subsidiaries. (b) Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and amounts due from banks, interest-bearing deposits in other banks, and other short-term investment securities with original maturities of three months or less. Savings and loan associations are required by the Federal Reserve System to maintain non-interest bearing cash reserves equal to a percentage of certain deposits. The reserve requirement for California Federal at December 31, 1998 was $89.7 million, which was met with vault cash of $90.1 million and cash reserve of $1.3 million. F-9 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (c) Securities and Mortgage-backed Securities The Company's investment in securities consists primarily of U.S. government and agency securities and mortgage-backed securities. The Company classifies debt and equity securities, including mortgage-backed securities, into one of three categories: held to maturity, available for sale or trading securities. Securities held to maturity represent securities which management has the positive intent and ability to hold to maturity and are reported at amortized cost. Securities bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in income. All other securities including equity securities with readily determinable fair values are classified as available for sale and are carried at fair value, with unrealized holding gains and losses, net of tax, reported as a separate component of stockholders' equity until realized. Declines in the value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. Realized gains or losses on securities available for sale are computed on a specific identification basis and are accounted for on a trade-date basis. Amortization and accretion of premiums and discounts relating to mortgage-backed securities is recognized using the interest method over the estimated lives of the underlying mortgages with adjustments based on prepayment experience. (d) Loans Held for Sale, Net One-to-four unit residential loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market value as determined by outstanding commitments from investors or current investor yield requirements calculated on an aggregate basis. Net unrealized losses are recognized in a valuation allowance by charges to income. (e) Loans Receivable, Net Loans receivable, net, is stated at unpaid principal balances, less the allowance for loan losses, and net of deferred loan origination fees and purchase discounts or premiums. Discounts or premiums on 1-4 unit residential loans are accreted or amortized to income using the interest method over the remaining period the loans are expected to be outstanding. Discounts or premiums on consumer and other loans are recognized over the lives of the loans using the interest method. A significant portion of the Company's real estate loan portfolio is comprised of adjustable-rate mortgages. The interest rate and payment terms of these mortgages adjust on a periodic basis in accordance with various published indices. The majority of these adjustable-rate mortgages have terms which limit the amount of interest rate adjustment that can occur each year and over the life of the mortgage. During periods of limited payment increases, negative amortization may occur on certain adjustable-rate mortgages. See note 37. The allowance for loan losses is adjusted by charges to income and decreased by charge-offs (net of recoveries). Management's periodic evaluation of the adequacy of the allowance is based on such factors as the Company's past loan loss experience, delinquency trends, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, and current economic conditions. As management utilizes information currently available to make such evaluation, the allowance for loan losses is subjective and may be adjusted in the future depending on changes in economic conditions or other factors. Additionally, regulatory authorities, as an integral part of their regular examination process, review the Bank's allowance for estimated losses on a periodic basis. These authorities may require the Bank to recognize adjustments to the allowance based on their judgment of information available to them at the time of their examination. Uncollectible interest on loans that are contractually ninety days or more past due is charged off, or an allowance is established, based on management's periodic evaluation. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received. When, in management's judgment, the borrower's ability to make periodic interest and principal payments resumes, the loan is returned to accrual status. F-10 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (f) Auto One Loans The Company, through its subsidiary, Auto One, purchases loans individually and in groups. Such loans are grouped and accounted for in homogeneous pools based upon certain common risk characteristics, including interest coupon rate, credit quality, and period of origination. At acquisition, the Company estimates the amount and timing of undiscounted expected future principal and interest cash flows ("Expected Cash Flows") for each pool. For certain purchased pools of loans, the amount paid reflects the Company's determination that it is probable the Company will be unable to collect all amounts due according to the contractual terms of the underlying loans in the pool. Accordingly, at acquisition, the Company recognizes the excess of the pool's scheduled contractual principal and contractual interest payments over its Expected Cash Flows as an amount that should not be accreted ("Nonaccretable Difference"). The remaining amount - representing the excess of the pool's Expected Cash Flows over the amount paid - is accreted into interest income over the remaining life of each pool ("Accretable Yield"). Over the life of each pool of loans, the Company continues to estimate Expected Cash Flows. In the event a pool's actual cash flows plus the expected future cash payments are less than the Expected Cash Flows estimated at the time of purchase, the amount by which the current carrying value of the pool exceeds the present value of the future expected cash flows discounted at the originally estimated internal rate of return is an impairment and requires an allocation of the allowance for loan losses established by provisions for loan losses. If the present value of a pool's expected remaining cash flows discounted at the originally estimated internal rate of return exceeds the current carrying value of the pool, the amount of the Accretable Yield is increased and the amount of the Nonaccretable Difference is decreased by the amount the sum of a pool's expected remaining cash flows exceeds the sum of the remaining payments less the Nonaccretable Difference. The adjusted Accretable Yield is accreted into interest income over the pool's remaining life using the interest method. (g) Impaired Loans The Company considers a loan is impaired when, based on current information and events, it is "probable" that it will be unable to collect all amounts due (i.e., both principal and interest) according to the contractual terms of the loan agreement. Any insignificant delay or insignificant shortfall in amount of payments will not cause a loan to be considered impaired. In determining impairment, the Company considers large non-homogeneous loans including nonaccrual loans, troubled debt restructurings, and performing loans that exhibit, among other characteristics, high loan-to-value ratios, low debt-coverage ratios, or other indications that the borrowers are experiencing increased levels of financial difficulty. The measurement of impairment may be based on (i) the present value of the expected future cash flows of the impaired loan discounted at the loan's original effective interest rate, (ii) the observable market price of the impaired loan, or (iii) the fair value of the collateral of a collateral-dependent loan. The Company bases the measurement of collateral-dependent impaired loans on the fair value of the loan's collateral less disposal costs. The amount, if any, by which the recorded investment of the loan exceeds the measure of the impaired loan's value is recognized by recording a valuation allowance. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. For the Company, loans collectively reviewed for impairment include all business banking loans, single-family loans, and performing multi-family and commercial real estate loans under $500,000, excluding loans that have entered the workout process. Cash receipts on impaired loans not performing according to contractual terms are generally used to reduce the carrying value of the loan, unless the Company believes it will recover the remaining principal balance of the loan. Impairment losses are included in the allowance for loan losses through a charge to provision for loan losses. Adjustments to impairment losses due to changes in the fair value of collateral of impaired loans are included in provision for loan losses. Upon disposition of an impaired loan, loss of principal, if any, is recorded through a charge-off to the allowance for loan losses. (h) Loan Origination and Commitment Fees and Related Costs Loan origination fees, net of direct underwriting and closing costs, are deferred and amortized to interest income using the interest method over the contractual term of the loans, adjusted for actual loan prepayment experience. Unamortized fees on loans sold or paid in full are recognized as income. Adjustable-rate loans with lower initial interest rates during the introductory period result in the amortization of a substantial portion of the net deferred fee during the introductory period. F-11 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) Fees received in connection with loan commitments are deferred and recognized as fee revenue on a straight-line basis over the term of the commitment. If the commitment is subsequently exercised during the commitment period, the remaining unamortized commitment fee at the time of exercise is recognized over the term of the loan using the interest method. Commitment fees paid to investors, for the right to deliver permanent residential mortgages in the future to the investors at a specified yield, are deferred. Amounts are included in the recognition of gain (loss) on sale of loans as loans are delivered to the investor in proportion to the percentage relationship of loans delivered to the total commitment amount. Any unused fee is recognized as an expense at the expiration of the commitment date, or earlier, if it is determined that the commitment will not be filled. Other loan fees and charges, which represent income from the prepayment of loans, delinquent payment charges, and miscellaneous loan services, are recognized as income when collected. (i) Office Premises and Equipment Land is carried at cost. Premises, equipment and leasehold improvements are stated at cost, less accumulated depreciation. Premises, equipment and leasehold improvements are depreciated on a straight-line basis over the lesser of the lease term or the estimated useful lives of the various classes of assets. Maintenance and repairs on premises and equipment are charged to expense in the period incurred. Closed facilities of the Company and its subsidiaries are carried at fair value. In the case of leased premises that are vacated by the Company, a liability is recorded representing the difference between the net present value of future lease payments plus holding costs and the net present value of anticipated sublease income, if any, for the remaining term of the lease. (j) Foreclosed Real Estate Real estate acquired through, or in lieu of, loan foreclosure is initially recorded at fair value less estimated disposal costs at the time of foreclosure. Subsequent to foreclosure, the Company charges current earnings with a provision for estimated losses if the carrying value of the collateral property exceeds its fair value. Gains or losses on the sale of real estate are recognized upon disposition of the property. Carrying costs such as maintenance and property taxes are expensed as incurred. (k) Intangible Assets Intangible assets, which primarily consist of the excess of cost over fair value of net assets acquired in business combinations accounted for as a purchase, are amortized on a straight-line basis over the expected period to be benefited of 15 years. The Company periodically reviews the operations of the businesses acquired to determine that income from operations continues to support the recoverability of its intangible assets and the amortization periods used. (l) Mortgage Servicing Rights The Company purchases mortgage servicing rights separately and acquires mortgage servicing rights through the sale of loans it purchases or originates. Generally, purchased mortgage servicing rights are capitalized at the cost to acquire the rights and are carried at the lower of cost, net of accumulated amortization, or fair value. Originated mortgage servicing rights are capitalized based on the relative fair value of the servicing right to the fair value of the loan and the servicing right and are carried at the lower of the capitalized amount, net of accumulated amortization, or fair value. A portion of the cost of originating a mortgage loan is allocated to the mortgage servicing right based on its fair value. To determine the fair value of mortgage servicing rights, the Company uses market prices for comparable mortgage servicing contracts, when available, or alternatively uses a valuation model that calculates the present value of future net servicing income. In using this valuation method, the Company incorporates assumptions that market participants would use in estimating future net servicing income, which include estimates of the cost of servicing, the discount rate, mortgage escrow earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. F-12 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing income. The amortization of the mortgage servicing rights is analyzed periodically and is adjusted to reflect changes in prepayment rates and other estimates. A decline in long-term interest rates generally results in an acceleration in mortgage loan prepayments. The Company evaluates the possible impairment of servicing rights based on the difference between the carrying amount and current fair value of the servicing rights. In determining impairment, the Company aggregates all mortgage servicing rights and stratifies them based on the predominant risk characteristics of interest rate, loan type and investor type. A valuation allowance would be established for any excess of amortized cost over the current fair value, by risk stratification, by a charge to income. The Company employs hedging techniques through the use of interest rate floor contracts, swaptions, principal- only swap agreements and prepayment linked swap agreements to reduce the sensitivity of its earnings and value of its servicing rights to declining interest rates and borrower prepayments as further discussed in note 38. The Company uses hedge accounting because mortgage servicing rights expose the Company to interest rate risk and at the inception of the hedge and throughout the hedge period, high correlation of changes in the market value of the hedge instruments and the fair value of the mortgage servicing rights are probable so that the results of the hedge instruments will substantially offset the effects of interest rate changes on the mortgage servicing rights. If these requirements are not met, the hedge instruments would be considered speculative and would be marked to market with changes in market value reflected in current income. The premium paid by the Company on the interest rate floor contracts and swaptions is amortized over the life of the contract. Amounts receivable or payable under the principal only swap agreements and prepayment linked swap agreements and amounts receivable under the interest rate floor contracts, swaptions or terminated hedges are included in the carrying value of mortgage servicing rights and are amortized as part of the basis in mortgage servicing rights. (m) Gains/Losses on Sales of Mortgage Loans Mortgage loans are generally sold with the mortgage servicing rights retained by the Company. The carrying value of mortgage loans sold is reduced by the cost allocated to the associated mortgage servicing rights. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold. Deferred origination fees and expenses, net of commitment fees paid in connection with the sale of the loans, are recognized at the time of sale in the gain or loss determination. (n) Servicing Fee Income Servicing fee income is recorded for fees earned for servicing mortgage loans under servicing agreements with Fannie Mae ("FNMA"), Freddie Mac ("FHLMC"), the Government National Mortgage Association ("GNMA"), and certain private investors. The fees are based on a contractual percentage of the outstanding principal balance or a fixed amount per loan and are recorded as income when received. The amortization of mortgage servicing rights is netted against servicing fee income. (o) Derivatives The Company uses interest rate derivative financial instruments (interest rate swaps, interest rate floors, swaptions, principal only swaps and prepayment linked swaps) primarily to hedge against prepayment risk in its mortgage servicing portfolio caused by declining interest rates and, to a lesser extent, to hedge against the interest rate risk inherent in fixed-rate FHLB advances. These instruments serve to reduce rather than increase the Company's exposure to movements in interest rates, both at the inception and throughout the hedge period. At the inception of the hedge, the Company identifies an individual asset or liability, or an identifiable group of essentially similar assets or liabilities, that expose the Company to interest rate risk at the consolidated level. Interest rate derivative financial instruments receive hedge accounting treatment only if they are designated as a hedge and are expected to be, and are, effective in substantially reducing interest rate risk arising from the assets and liabilities identified as exposing the Company to risk. Those derivative financial instruments that do not meet the hedging criteria discussed below would be classified as trading activities and would be recorded at fair value with changes in fair value recorded in earnings. Derivative hedge contracts must meet specific correlation tests (i.e., the F-13 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) change in their fair values must be within 80 to 125 percent of the opposite change in the fair values of the hedged assets or liabilities). Changes in fair value of the derivative financial instruments must be effective at offsetting changes in fair value of the hedged items during the term of the hedge. Further, if the underlying financial instrument differs from the hedged asset or liability, there must be a clear economic relationship between the prices of the two financial instruments. If periodic assessment indicates derivatives no longer provide an effective hedge, the derivatives contracts would be closed out, settled or classified as a trading activity. The net settlement amount (upon close out or termination) that offsets changes in value of the hedged asset or liability is deferred and amortized into net interest income over the life of the hedged asset or liability. The portion, if any, of the net settlement amount that did not offset changes in the value of the hedged asset or liability is recognized immediately in noninterest income. Interest rate swaps are accounted for under the "accrual method." Interest rate floors, swaptions, principal only swaps and prepayment linked swaps are accounted for under the "deferral method." Under the accrual method, the net interest payment due or owed under the instrument is recognized over the life of the contract in net interest income. Under the deferral method, realized gains or losses, or payments made or received on the derivative financial instrument, are reported as adjustments to the carrying value of the hedged asset or liability. There is no recognition under either method on the balance sheet for changes in the derivative's fair value. Except for contracts designated as a hedge of an available-for-sale security, derivative financial instruments are not carried at fair value. If there were contracts that were designated as a hedge of an available-for-sale security, in addition to the accrual method and deferral method of accounting, these contracts would be carried at fair value with the resulting gain or loss recognized in other comprehensive income. Swaption and interest rate floor premiums are classified on the balance sheet with the hedged asset or liability at the time the premium is paid. These premiums are amortized to net loan servicing fee income over the life of the contract. If a hedged asset or liability settles before maturity of the hedging interest rate derivatives, the derivatives are closed out, and previously unrecognized hedge results, if any, and the net settlement upon close out would be accounted for as part of the gains and losses on the hedged asset or liability. If derivative financial instruments used in an effective hedge are closed out before the hedged item settles, previously unrecognized hedge results, if any, and the net settlement upon close out are deferred and amortized over the life of the hedged asset or liability. Cash flows resulting from the derivative financial instruments that are accounted for as hedges of assets and liabilities are classified in the cash flow statement in the same category as the cash flows of the items being hedged. (p) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is maintained against the deferred tax asset in an amount representing the amount of such asset which it is more likely than not that the Company will be unable to utilize. The deferred tax asset is continually evaluated for realizability. To the extent that management's judgment regarding the realization of the deferred tax asset changes, an adjustment to the allowance is recorded, with an offsetting increase or decrease, as appropriate, in income tax expense. Such adjustments are recorded in the period in which management's estimate as to the realizability of the asset changed. Prior to the Golden State Merger, for federal income tax purposes, Parent Holdings and FN Holdings were members of Mafco Holdings Inc. affiliated group ("Mafco Group"), and accordingly, their federal taxable income or loss will be included in the consolidated federal income tax return filed by Mafco. Parent Holdings may also be included in certain state and local income tax returns of Mafco or its subsidiaries. The FN Holdings tax sharing agreement with Mafco provided that income taxes be based on the separate results of FN Holdings. The agreement F-14 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) generally provided that FN Holdings will pay to Mafco amounts equal to the taxes that FN Holdings would be required to pay if it were to file a return separately from the affiliated group. Furthermore, the agreement provided that FN Holdings shall be entitled to take into account any net operating loss carryovers in determining its tax liability. The agreement also provided that Mafco pay FN Holdings amounts equal to tax refunds FN Holdings would be entitled to if it had always filed a separate company tax return. Parent Holdings did not enter into any tax sharing agreements with Mafco. In connection with the Golden State Acquisition, the tax sharing agreement with Mafco was assumed by the Company for taxable periods ending after the acquisition. The Company, the successor of Parent Holdings, is the parent corporation of the Golden State affiliated group. Accordingly, after September 11, 1998, the Company and its subsidiaries will file a consolidated federal income tax return and certain consolidated state and local income tax returns. (q) Stock Compensation Plan Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. Stock options issued under Golden State's stock option plan established for the benefit of the Bank's employees have no intrinsic value at the grant date, and under APB Opinion No. 25 no compensation cost was recognized for them. The Company has elected to continue with the accounting methodology prescribed in APB Opinion No. 25 and complies with the disclosure requirements of SFAS No. 123. (r) Earnings per Common Share The Company has adopted SFAS No. 128, Earnings per Share. SFAS No. 128 requires the presentation of earnings per common share and diluted earnings per common share. Under the requirements, earnings per common share includes the dilutive effect of contingently issuable shares, but excludes the dilutive effect of stock options and warrants. The dilutive effect of stock options and warrants (which are convertible into the right to receive both shares of Golden State Common Stock and LTW(TM)s (as defined herein)) used to compute diluted earnings per share, is based on the average market prices of Golden State's Common Stock and LTW(TM)s for the period. The dilutive effect of contingently issuable shares (used in both the basic and diluted earnings per share computation) is based solely on the average market price of Golden State's Common Stock for the period, as such shares are not eligible to receive LTW(TM)s upon issuance. Earnings per common share is computed by dividing net income available to common stockholders by the average number of common shares outstanding during the period, including the dilutive effect of contingently issuable shares. Diluted earnings per common share is computed by dividing net income available to common stockholders by the average number of common shares outstanding during the period, including the dilutive effect of contingently issuable shares, stock options and warrants outstanding during the period. (s) Management's Use of Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) disclosure of contingent assets and liabilities at the date of the consolidated financial statements and (iii) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (t) Accounting Pronouncements Issued During the Years Presented On June 28, 1996, the FASB issued SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control F-15 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) has been surrendered, and derecognizes liabilities when extinguished. This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. In December 1996, the FASB issued SFAS No. 127, Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125. SFAS No. 127 defers for one year the effective date (i) of paragraph 15 of SFAS No. 125 and (ii) of paragraphs 9-12 and 237(b) of SFAS No. 125 for repurchase agreement, dollar-roll, securities lending and similar transactions. SFAS No. 127 provides additional guidance on the types of transactions for which the effective date of SFAS No. 125 has been deferred. It also requires that if it is not possible to determine whether a transaction occurring during calendar-year 1997 is part of a repurchase agreement, dollar-roll, securities lending, or similar transaction, then paragraphs 9-12 of SFAS No. 125 should be applied to that transfer. The Company adopted SFAS No. 125, as amended by SFAS No. 127, on January 1, 1997. Such adoption did not have a material impact on the Company's consolidated financial statements. The Company has adopted SFAS No. 128, Earnings per Share. SFAS No. 128 established requirements for computing and presenting earnings per share that require the presentation of earnings per common share and diluted earnings per common share. Under the requirements, earnings per common share includes the dilutive effect of contingently issuable shares, but excludes the dilutive effect of stock options and warrants. The dilutive effect of stock options, warrants and contingently issuable shares used to compute diluted earnings per common share is based on the average market price of Golden State's Common Stock and, where applicable, the LTW(TM)s, for the period. See note 2(r). This statement has no impact on the financial condition or results of operations of the Company but does affect the Company's disclosure. In February 1997, the FASB issued SFAS No. 129, Disclosure of Information About Capital Structure. SFAS No. 129 supersedes capital structure disclosure requirements found in previous accounting pronouncements and conditions 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. As SFAS No. 129 makes no changes to previous accounting pronouncements as those pronouncements applied to the Company, the adoption of SFAS No. 129 had no impact on the Company's results of operations and financial condition. In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. SFAS No. 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. It does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. This statement is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. This statement, which the Bank adopted effective October 1, 1997, had no impact on the financial condition or results of operations of the Bank, but did impact the Company's disclosure requirements. In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. This statement supersedes SFAS No. 14, Financial Reporting for Segments of a Business Enterprise, but retains the requirement to report information about major customers. It amends SFAS No. 94, Consolidation of All Majority-Owned Subsidiaries, to remove the special disclosure requirements for previously unconsolidated subsidiaries. This statement is effective for fiscal years beginning after December 15, 1997. In the initial year of application, comparative information for earlier years is to be restated. This statement need not be applied to interim financial statements in the initial year of application, but comparative information for interim periods in the initial year of application is to be reported in financial statements for interim periods in the second year of application. This statement has no impact on the financial condition or results of operations of the Company, but has required changes in the Company's disclosure. In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, an amendment of SFAS No. 87, No. 88 and No. 106. SFAS No. 132 revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. It standardizes the disclosure requirements for pensions and other postretirement benefits to the extent F-16 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer as useful as they were when Statements No. 87, Employers' Accounting for Pensions, No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and No. 106, Employers' Accounting for Postretirement Benefits Other than Pensions, were issued. SFAS No. 132 is effective for fiscal years beginning after December 15, 1997 and requires restatement of disclosures for earlier periods provided for comparative purposes, if available. The Company has not experienced any material revision in its disclosures as a result of the adoption of SFAS No. 132. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes standards for derivative instruments and for hedging activities, and requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Under SFAS No. 133, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurements approach for determining the ineffective aspect of the hedge. SFAS No. 133 applies to all entities and amends SFAS No. 107, Disclosures About Fair Values of Financial Instruments, to include in SFAS No. 107 the disclosure provisions about concentrations of credit risk from SFAS No. 105. SFAS No. 133 supersedes SFAS No. 80, Accounting for Futures Contracts, SFAS No. 105, Disclosure of Information about Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk, and SFAS No. 119, Disclosure about Derivative Instruments and Fair Value of Financial Instruments. SFAS No. 133 also nullifies or modifies the consensuses reached on a number of issues addressed by the Emerging Issues Task Force. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Initial application of this statement should be as of the beginning of an entity's fiscal quarter. On that date, hedging relationships must be designated anew and documented pursuant to the provisions of this statement. Earlier application of all of the provisions of SFAS No. 133 is encouraged, but is permitted only as of the beginning of any fiscal quarter that begins after issuance of this statement. SFAS No. 133 should not be applied retroactively to financial statements of prior periods. Management has established a multi-disciplinary task force to assess the Standard's effect on the Company's consolidated financial statements and to coordinate its implementation. In October 1998, the FASB issued SFAS No. 134, Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise, an amendment of SFAS No. 65. SFAS No. 65 Accounting for Certain Mortgage Banking Activities, as amended by SFAS No. 115 Accounting for Certain Investments in Debt and Equity Securities, requires that after the securitization of a mortgage loan held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed security as a trading security. SFAS No. 134 amends SFAS No. 65 to require that after the securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities or other retained interests based on its ability and intent to sell or hold those investments. SFAS No. 134 conforms the subsequent accounting for securities retained after the securitization of mortgage loans by a mortgage banking enterprise with the subsequent accounting for securities retained after the securitization of other types of assets by a nonmortgage banking enterprise. SFAS No. 134 is effective for the first fiscal quarter after December 15, 1998. Early application is encouraged and is permitted as of the issuance of this statement. The Company adopted SFAS No. 134 effective October 1, 1998. Such adoption did not have a material impact on the Company's consolidated financial statements. (3) Acquisitions and Divestitures Golden State Acquisition On September 11, 1998, Parent Holdings and Hunter's Glen completed the merger with Golden State, the publicly traded parent company of Glendale Federal, in a tax-free exchange of shares (the "Golden State Merger"), accounted for under the purchase method of accounting. Pursuant to the Golden State Merger agreement, (i) FN Holdings, contributed all of its assets (including all of the common stock of the Bank) to GS Holdings (the "FN Holdings Asset Transfer"), (ii) Parent Holdings, which then owned all of the common stock of FN Holdings, merged with and into Golden State, which indirectly owned 100% of the common stock of Glendale Federal, (iii) FN Holdings merged with and into Golden State Financial Corporation ("GS Financial"), which owned all of the common stock of Glendale Federal (the "FN Holdings Merger," and together with the Golden State Merger, the "Holding Company Mergers") and (iv) Glendale Federal merged with and into the Bank (the "Glen Fed Merger"). The FN Holdings Asset Transfer, the Holding Company Mergers and the Glen Fed Merger are referred to collectively as the "Golden State Acquisition." F-17 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) At September 11, 1998, Glendale Federal had total assets of approximately $18.9 billion and deposits of $11.3 billion and operated 181 branches and 26 loan offices in California. The following is a summary of assets acquired and liabilities assumed in connection with the Golden State Acquisition at September 11, 1998.
Estimated Carrying Fair Value Fair Remaining Value Adjustments Value Lives ----- ----------- ----- ----- (dollars in thousands) (in years) Cash and cash equivalents $ 782,233 $ -- $ 782,233 -- Securities and mortgage-backed securities 2,354,263 16,015 2,370,278 1-5 Loans receivable, net 14,432,389 129,718 14,562,107 6-9 Office premises and equipment, net 158,446 (9,692) 148,754 2-12 Investment in FHLB System 314,591 -- 314,591 -- Foreclosed real estate, net 47,504 -- 47,504 -- Accrued interest receivable 115,165 -- 115,165 -- Mortgage servicing rights 230,764 (17,831) 212,933 2-7 Goodwill 271,743 (271,743) -- -- Other assets 204,372 59,319 263,691 2-5 Deposits (11,293,173) (10,547) (11,303,720) 1-8 Borrowings (5,877,574) (45,310) (5,922,884) 1-5 Other liabilities (399,737) (81,324) (481,061) 1-10 ------------ ------------ ------------ $ 1,340,986 $ (231,395) 1,109,591 ============ ============ Purchase price 1,464,361 Excess cost over fair value of net ------------ assets acquired $ 354,770 15 ============
The Golden State Acquisition was accounted for as a purchase and accordingly, the purchase price was allocated to the assets acquired and liabilities assumed in the transaction based on estimates of fair value at the date of purchase. Since the date of purchase, the results of operations related to such assets and liabilities have been included in the Company's consolidated statement of income for the year ended December 31, 1998. Merger and integration costs associated with the Golden State Merger were $59.2 million for the year ended December 31, 1998, including severance for terminated Cal Fed employees, expenses for Cal Fed branch closures, conversion and consolidation costs, as well as transition expenses for duplicate personnel, facilities and computer systems during the integration period. Auto One and GSAC Acquisitions On September 1, 1997, the Bank acquired Auto One Acceptance Corporation ("Auto One") in a purchase transaction (the "Auto One Acquisition"). Auto One primarily engages in indirect sub-prime auto financing activities, providing loan processing, funding and loan servicing for over 800 franchised automobile dealers. Auto One is a licensed lender in 47 states and is headquartered in Dallas, Texas. The Company's consolidated statements of income include the results of operations for Auto One from September 1, 1997. On February 4, 1998, Auto One, a subsidiary of the Bank, acquired 100% of the partnership interests in Gulf States Acceptance Company, a Delaware limited partnership ("GSAC") and its general partner, Gulf States Financial Services, Inc., a Texas corporation. GSAC was liquidated and its assets and liabilities were transferred to Auto One (the "GSAC Acquisition"). The aggregate consideration paid by Auto One in connection with the GSAC Acquisition was approximately $13.6 million plus 250 shares of its common stock, par value $1.00 per share, representing a 20% interest in the common stock of Auto One. This interest is reflected in the Company's consolidated balance sheet as minority interest. F-18 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) Weyerhaeuser Purchase On May 31, 1997, FNMC acquired a 1-4 unit residential loan servicing portfolio of approximately $3.2 billion and approximately 40,000 loans from WMC Mortgage Corporation (the "Weyerhaeuser Purchase") for $37.1 million. The Company's consolidated statements of income include the results of the acquired servicing portfolio from June 1, 1997. Cal Fed Acquisition The following is a summary of the assets acquired and liabilities assumed in connection with the Cal Fed Acquisition at January 3, 1997.
Cal Fed Bank Estimated Carrying Fair Value Carrying Remaining Value Adjustments Value Lives ----- ----------- ----- ----- (dollars in thousands) (in years) Cash and cash equivalents $ 1,027,491 $ -- $ 1,027,491 -- Securities 6,013 12 6,025 1 Mortgage-backed securities 1,963,869 4,532 1,968,401 6-9 Loans receivable, net 10,084,170 (23,991) 10,060,179 2-12 Office premises and equipment, net 58,900 (17,592) 41,308 3-10 Investment in FHLB System 166,786 -- 166,786 -- Foreclosed real estate, net 18,482 (16) 18,466 -- Accrued interest receivable 71,868 -- 71,868 -- Mortgage servicing rights 4,759 39,738 44,497 2-7 Other assets 87,096 142,634 229,730 2-5 Deposits (8,985,630) (9,699) (8,995,329) 1-8 Borrowings (3,468,004) (2,918) (3,470,922) 1-5 Other liabilities (198,454) (117,713) (316,167) 1-10 Preferred stock (172,500) -- (172,500) -- ------------- ----------- ------------ $ 664,846 $ 14,987 679,833 ============ =========== Purchase price 1,188,687 Excess cost over fair value ------------ of net assets acquired $ 508,854 15 ============
The Cal Fed Acquisition was accounted for as a purchase and accordingly, the purchase price was allocated to the assets acquired and liabilities assumed in the transaction based on estimates of fair value at the date of purchase. During 1998, the Company recorded fair value adjustments to reduce other liabilities and excess cost over fair value of net assets acquired by $71.2 million related to (i) the receipt of a tax refund related to periods prior to January 3, 1997 and (ii) previously accrued severance and contract termination costs (which had not been utilized upon completion of the integration plan). Since the date of purchase, the results of operations related to such assets and liabilities have been included in the Company's consolidated statements of income. F-19 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) 1996 Acquisitions On February 1, 1996, the Bank acquired SFFed Corp. ("SFFed") and its wholly-owned subsidiary, San Francisco Federal Savings and Loan Association (the "SFFed Acquisition"). The following is a summary of the assets acquired and liabilities assumed in connection with the SFFed Acquisition at February 1, 1996.
SFFed Bank Estimated Carrying Fair Value Carrying Remaining Value Adjustments Value Lives ----- ----------- ----- ----- (dollars in thousands) (in years) Cash and cash equivalents $ 181,061 $ -- $ 181,061 -- Mortgage-backed securities 918,817 11,007 929,824 1-5 Loans receivable, net 2,715,758 (23,245) 2,692,513 2-12 Office premises and equipment 20,581 (11,672) 8,909 3-10 Investment in FHLB System 31,989 -- 31,989 -- Foreclosed real estate, net 30,018 -- 30,018 -- Accrued interest receivable 22,740 -- 22,740 -- Mortgage servicing rights 2,238 13,762 16,000 2-4 Other assets 44,938 (7,773) 37,165 2-5 Deposits (2,678,692) (10,950) (2,689,642) 1-5 Securities sold under agreements to repurchase (815,291) (3,640) (818,931) -- Borrowings (227,203) (8,831) (236,034) 1-9 Other liabilities (50,805) (605) (51,410) 1-5 ------------ ----------- ---------- $ 196,149 $ (41,947) 154,202 =========== =========== Purchase price 264,245 Excess cost over fair value ---------- of net assets acquired $ 110,043 15 ==========
During 1998, the Company recorded $5.5 million in fair value adjustments to reduce other liabilities and excess cost over fair value of net assets acquired, primarily related to the receipt of a tax refund associated with periods prior to February 1, 1996. F-20 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) On June 1, 1996, the Company acquired Home Federal Financial Corporation ("HFFC"), and its wholly-owned federally chartered savings association, Home Federal Savings and Loan Association of San Francisco (the "Home Federal Acquisition," and together with the SFFed Acquisition, the "1996 Acquisitions"). The aggregate consideration paid in connection with the Home Federal Acquisition was approximately $67.8 million. The following is a summary of the assets acquired and liabilities assumed in the Home Federal Acquisition at June 1, 1996.
HFFC Bank Estimated Carrying Fair Value Carrying Remaining Value Adjustments Value Lives ----- ----------- ----- ----- (dollars in thousands) (in years) Cash and cash equivalents $146,867 $ -- $ 146,867 -- Mortgage-backed securities 4,053 (65) 3,988 1-5 Loans receivable, net 538,722 4,020 542,742 2-12 Office premises and equipment 4,202 (2,125) 2,077 3-10 Investment in FHLB Systems 6,259 -- 6,259 -- Foreclosed real estate, net 2,421 (198) 2,223 -- Accrued interest receivable 3,594 -- 3,594 -- Mortgage servicing rights 817 2,243 3,060 2-4 Other assets 10,016 2,392 12,408 2-5 Deposits (632,399) (1,875) (634,274) 1-5 Borrowings (30,000) 241 (29,759) 1-6 Other liabilities (3,602) (2,700) (6,302) 1-5 -------- ------- ---------- $ 50,950 $ 1,933 52,883 ======== ======= Purchase price 67,823 ---------- Excess cost over fair value of net assets acquired $ 14,940 15 ==========
1996 LMUSA Purchase On January 31, 1996, FNMC purchased from Lomas Mortgage USA, Inc. ("LMUSA") a $14.1 billion loan servicing portfolio (including a sub-servicing portfolio of $2.4 billion), a master servicing portfolio of $2.7 billion, $5.9 million in foreclosed real estate, $46.8 million in net other servicing receivables, $2.6 million in mortgage loans, and $6.2 million in net other assets (including $1.4 million in cash and cash equivalents) for a purchase price of approximately $160.9 million (the "1996 LMUSA Purchase"). The 1996 Acquisitions and the 1996 LMUSA Purchase were accounted for as purchases and, accordingly, their respective purchase prices were allocated to the assets acquired and liabilities assumed in each transaction based on estimates of fair values at the date of purchase. Since the respective dates of purchase, the results of operations related to such assets and liabilities have been included in the Company's consolidated statements of income. Florida Branch Sale On September 11, 1998, the Bank consummated the sale of its Florida bank franchise (consisting of 24 branches with deposits of $1.4 billion) to Union Planters Bank of Florida, a wholly owned subsidiary of Union Planters Corp. (the "Florida Branch Sale"). The Company recorded a pre-tax gain of approximately $108.9 million in connection with the Florida Branch Sale, representing a deposit premium of approximately 7.92%. Texas Branch Sale On December 12, 1997, the Bank sold its retail deposits and all related retail banking facilities in the state of Texas (consisting of three branches) totalling $57.6 million at a gross price representing a deposit premium of 4.1% and resulting in a pre-tax gain on sale of $2.5 million (the "Texas Branch Sale"). F-21 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) Servicing Sale On September 30, 1997, FNMC sold servicing rights for approximately 52,000 loans with an unpaid principal balance of approximately $2.3 billion, recognizing a pre-tax gain of $14.0 million (the "Servicing Sale"). Garberville Branch Sale On May 9, 1997, the Bank consummated the sale of deposit accounts and related retail banking assets comprised of cash on hand, loans on deposits and facilities totalling $21.7 million to Humboldt Bank at a gross price representing a deposit premium of 4.5% (the "Garberville Branch Sale"), and resulting in a pre-tax gain on sale of $1.1 million. Branch Sales During the first six months of 1996, the Bank consummated the sale of its retail deposits and the related retail banking assets comprised of cash on hand, loans on deposits, and facilities in Ohio, New York, New Jersey and Michigan (collectively, the "Branch Sales") at gross prices which represented an average premium of 7.96% of the approximately $4.6 billion deposits sold. The Bank recorded a pre-tax gain of $363.3 million in connection with the Branch Sales. The Company's consolidated statements of income include the results of operations of those branches sold in the Branch Sales for the period prior to sale. Pro Forma Financial Information The following unaudited pro forma financial information combines the historical results of the Company as if the Golden State Acquisition, the issuance of the GS Escrow Notes (as defined herein) and the Refinancing Transactions (as defined herein) had occurred as of the beginning of each of the years presented (in thousands):
Year Ended December 31, ----------------------- 1998 1997 ---- ---- Net interest income $1,053,314 $1,001,484 Net income 556,834 136,810 Earnings per share: Basic $4.21 $1.18 Diluted 3.68 1.09
The pro forma information does not include the effect of the Weyerhaeuser Purchase, the Auto One Acquisition, the GSAC Acquisition, the Servicing Sale, the Garberville Branch Sale, the Texas Branch Sale, or the Florida Branch Sale because such effect is not significant. The pro forma results are not necessarily indicative of the results which would have actually been obtained if the Golden State Acquisition, the issuance of the GS Escrow Notes or the Refinancing Transactions had been consummated in the past nor do they project the results of operations in any future period. Purchase Accounting Adjustments Premiums and discounts related to interest-earning assets acquired and interest-bearing liabilities assumed are amortized (accreted) to operations using the interest method over the estimated remaining lives of the respective assets and liabilities. Nevada Branch Purchase On November 2, 1998, the Bank signed a definitive agreement to acquire twelve retail branches located in Nevada (with deposits of approximately $637 million as of September 30, 1998) from Norwest Bank, Nevada, a subsidiary of Norwest Corporation, and Wells Fargo Bank, N.A. This transaction is expected to close in April 1999. F-22 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (4) Issuance of Debt Securities On August 6, 1998, GS Escrow Corp. ("GS Escrow"), an affiliate of GS Holdings, issued $2 billion in debt securities consisting of (i) $250 million aggregate principal amount of its Floating Rate Notes Due 2003 (the "Floating Rate Notes"), (ii) $350 million aggregate principal amount of its 6 3/4% Senior Notes due 2001 (the "2001 Notes"), (iii) $600 million aggregate principal amount of its 7% Senior Notes Due 2003 (the "2003 Notes") and (iv) $800 million aggregate principal amount of its 7 1/8% Senior Notes Due 2005 (the "2005 Notes" and, together with the 2001 Notes and the 2003 Notes, the "Fixed Rate Notes" and, together with the Floating Rate Notes, the "GS Escrow Notes"). Interest on the Fixed Rate Notes is payable semi-annually in arrears on February 1 and August 1 of each year, commencing on February 1, 1999. The Floating Rate Notes bear interest at a rate equal to the three-month LIBOR plus 100 basis points per annum, except that the initial rate was 6 3/4% per annum, based on six-month LIBOR (which initial interest rate resets on the first interest payment date, and, thereafter, on a quarterly basis). The first interest payment date for the Floating Rate Notes was February 1, 1999, at which time the interest rate reset to 5.97%. Thereafter, interest will be payable, and the interest rate will reset, quarterly on each May 1, August 1, November 1 and February 1. The 2001 Notes, 2003 Notes and 2005 Notes will mature on August 1 of the respective year. The GS Escrow Notes were issued to fund, in part, the Refinancing Transactions that occurred following the Golden State Acquisition. Deferred issuance costs of $38.6 million related to the GS Escrow Notes are included in the Company's other assets and are being amortized over the life of such notes. See note 23. (5) Refinancing Transactions On August 17, 1998, FN Holdings commenced cash tender offers (the "Bank Preferred Stock Tender Offers") for each of the Bank's two outstanding series of Bank Preferred Stock (as defined herein), which had a total aggregate liquidation preference of $473.2 million. The Bank Preferred Stock Tender Offers expired on September 14, 1998, at which time 222,721 shares of the 10 5/8% Preferred Stock (as defined herein) and 995,437 shares of the 11 1/2% Preferred Stock (as defined herein) were purchased for an aggregate purchase price of $135.8 million. During the remainder of 1998, GS Holdings continued to purchase Bank Preferred Stock through privately negotiated transactions. Through December 31, 1998, 894,980 additional shares of the 10 5/8% Preferred Stock and 1,693,522 shares of the 11 1/2% Preferred Stock had been purchased for an aggregate purchase price of $287.7 million. The net tender premiums and expenses paid in connection with the Bank Preferred Stock Tender Offers totalled $36.9 million and are reflected as minority interest on the Company's consolidated statements of income for the year ended December 31, 1998. GS Holdings expects to purchase any outstanding Bank Preferred Stock not acquired in the Bank Preferred Stock Tender Offers once it becomes redeemable (April 1, 1999 in the case of the 10 5/8% Preferred Stock and September 1, 1999 in the case of the 11 1/2% Preferred Stock). See notes 27 and 45. On September 14, 1998, GS Holdings commenced cash tender offers (the "Debt Tender Offers" and, together with the Bank Preferred Stock Tender Offers and the Parent Holdings Defeasance (as defined herein), the "Refinancing Transactions") for the FN Holdings 12 1/4% Senior Notes, the FN Holdings 9 1/8% Senior Sub Notes and the FN Holdings 10 5/8% Notes (each as defined herein and collectively, the "FN Holdings Notes"), which together had a total aggregate principal amount of $915 million. Through December 31, 1998, GS Holdings purchased $914.5 million aggregate principal amount of the FN Holdings Notes for an aggregate purchase price, including accrued interest payable, of $1.1 billion. At December 31, 1998, only $.2 million of the FN Holdings 12 1/4% Senior Notes and $.3 million of the FN Holdings 10 5/8% Notes remained outstanding. The after-tax tender premiums and expenses paid in connection with the Debt Tender Offers totalled $98.7 million and are reflected as an extraordinary loss, net of taxes, on the Company's consolidated statement of income for the year ended December 31, 1998. Concurrently with the closings of the Debt Tender Offers, GS Financial, as the successor obligor, gave a 30-day notice of redemption for all the outstanding $455 million aggregate principal amount of 12 1/2% Senior Notes Due 2003 of Parent Holdings (the "Parent Holdings Notes"), and irrevocably deposited money or government obligations in trust in an amount sufficient to pay the redemption price therefor, together with any accrued and unpaid interest to the date of redemption, for the purpose of defeasing the Parent Holdings Notes (the "Parent Holdings Defeasance"). The Parent Holdings Defeasance was completed on October 14, 1998. The after-tax redemption premiums and expenses paid in connection with the Parent Holdings Defeasance totalled $51.6 million and are reflected as extraordinary loss, net of taxes, on the consolidated statement of income for the year ended December 31, 1998. F-23 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (6) GS Escrow Merger On September 14, 1998, GS Escrow was merged with and into GS Holdings, pursuant to a merger agreement by and between GS Escrow and GS Holdings (the "GS Escrow Merger"). In connection therewith, GS Holdings acquired the net proceeds of $2.0 billion from the Refinancing Transactions and became successor obligor on the GS Escrow Notes. GS Escrow was a newly formed subsidiary of First Gibraltar Holdings Inc., an indirect parent company of FN Holdings, and had no significant assets. GS Escrow had not engaged in any business operations, acquired any assets or incurred any liabilities, other than in connection with the issuance of the GS Escrow Notes. (7) FN Escrow Merger On January 3, 1997 and prior to the consummation of the Cal Fed Acquisition, First Nationwide Escrow Corp. ("FN Escrow"), an affiliate of FN Holdings, was merged with and into FN Holdings, pursuant to a merger agreement by and between FN Holdings and FN Escrow (the "FN Escrow Merger"). In connection therewith, FN Holdings acquired the net proceeds from the issuance of FN Escrow's $575 million of senior subordinated notes due 2003 (the "FN Holdings 10 5/8% Notes") and assumed FN Escrow's obligations under the FN Holdings 10 5/8% Notes and indenture. Deferred issuance costs associated with the FN Holdings 10 5/8% Notes of $19 million were included in FN Escrow's other assets and are being amortized over the term of the FN Holdings 10 5/8% Notes. Concurrent with the issuance of the FN Holdings 10 5/8% Notes, FN Escrow issued approximately $36 million aggregate liquidation value of cumulative perpetual preferred stock (the "FN Escrow Preferred Stock") to Trans Network Insurance Services Inc., an affiliate of FN Escrow. The FN Escrow Preferred Stock had a stated liquidation value of $10,000 per share, plus accrued and unpaid dividends, if any. Cash dividends on the FN Escrow Preferred Stock were cumulative and accrued at an annual rate of approximately 7.3% of the stated liquidation value. In connection with the FN Escrow Merger, each share of FN Escrow Preferred Stock was converted into and became one share of cumulative perpetual preferred stock of FN Holdings (the "FN Holdings/FN Escrow Preferred Stock"), which stock had the same relative rights, terms and preferences as the FN Escrow Preferred Stock. Immediately after issuance, FN Holdings redeemed the FN Holdings/FN Escrow Preferred Stock at a redemption price of $36.8 million, representing its stated liquidation value and accrued and unpaid dividends to January 3, 1997. At the same time, a $19 million loan receivable from an affiliate of FN Holdings was repaid. (8) Supplemental Disclosure of Cash Flow Information (in thousands)
Year Ended December 31 ------------------------------------------ 1998 1997 1996 ---- ---- ---- Cash paid for: Interest $1,783,032 $1,459,676 $841,192 Income taxes, net (142,012) 20,778 40,035 Non-cash investing and financing activities: Principal reductions to loans due to foreclosure 118,801 179,607 109,817 Loans made to facilitate the sale of real estate 10,898 19,413 13,036 Loans exchanged for mortgage-backed securities 1,905,274 50,772 -- Reclassification of certain consumer loans from loans held for sale to loans receivable -- -- 27,734 Preferred stock dividends reinvested 107 2,227 792 Reduction of loans through redemption of and dividends on Class C common stock -- -- 46,769 Contribution of capital through redemption of Additional FN Holdings Preferred Stock 787 1,871 -- Dividend to parent 230,161 -- --
F-24 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (9) Securities Available for Sale At December 31, 1998 and 1997, securities available for sale and the related unrealized gain or loss consisted of the following (in thousands):
December 31, 1998 --------------------------------------------------------------- Gross Gross Net Amortized Unrealized Unrealized Unrealized Carrying Cost Gains Losses Gain Value ---- ----- ------ ---- ----- Marketable equity securities $ -- $2,142 $ -- $ 2,142 $ 2,142 U.S. government and agency obligations 767,558 1,226 (179) 1,047 768,605 -------- ------ ---- ------- ------- Total $767,558 $3,368 $ (179) 3,189 $770,747 ======== ====== ====== ======== Estimated tax effect (1,222) ------- Net unrealized holding gain in stockholders' equity $ 1,967 =======
December 31, 1997 -------------------------------------------------------------- Gross Gross Net Amortized Unrealized Unrealized Unrealized Carrying Cost Gains Losses Gain Value ---- ----- ------ ---- ----- U.S. government and agency obligations $812,716 $957 $(588) $369 $813,085 ======== ==== ===== (47) ======== Estimated tax effect ---- Net unrealized holding gain in stockholders' equity $322 ====
The following represents a summary of the amortized cost, estimated fair value (carrying value) and weighted average yield of securities available for sale with related maturities (dollars in thousands):
December 31, 1998 ----------------------------------- Estimated Weighted Amortized Fair Average Cost Value Yield ---- ----- ----- Marketable equity securities $ -- $ 2,142 --% U.S. government and agency obligations: Maturing within 1 year 75,478 75,498 5.01 Maturing after 1 year but within 5 years 57,622 57,709 6.03 Maturing after 5 years through 10 years 335,518 335,701 6.28 Maturing after 10 years 298,940 299,697 6.42 -------- -------- Total $767,558 $770,747 6.19% ======== ========
At December 31, 1998, U.S. government and agency obligations available for sale of $75.3 million were pledged as collateral for various obligations. Pursuant to the terms of a settlement agreement dated June 17, 1991 between California Federal, Affiliated Computer Services ("ACS"), and the Federal Deposit Insurance Corporation ("FDIC"), the FDIC was entitled to share in a defined portion of the proceeds from the sale of ACS common stock owned by the Bank. On June 28, 1996, California Federal sold 2,000,000 shares of its investment in common stock of ACS for gross proceeds totalling $92.3 million from which it satisfied its full obligation to the FDIC. A pre-tax gain of $40.4 million resulted from this transaction and was recorded as a gain on sale of assets in the 1996 consolidated statement of income. The Bank's remaining shares of ACS common stock were sold in October 1997, resulting in a pre-tax gain of approximately $25.0 million. F-25 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (10) Securities Held to Maturity At December 31, 1998 and 1997 securities held to maturity consist of the following (in thousands):
December 31, 1998 --------------------------------------------------- Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value ---- ----- ------ ---------- Municipal securities $ 84,428 $533 $(8) $ 84,953 Commercial paper 166,536 -- -- 166,536 -------- ---- ---- -------- Total $250,964 $533 $(8) $251,489 ======== ==== ==== ======== December 31, 1997 -------------------------------------------------- Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value ---- ----- ------ ---------- Municipal securities $ 170 $ -- $ -- $ 170 Commercial paper 58,129 -- -- 58,129 ------- ----- ---- ------- Total $58,299 $ -- $ -- $58,299 ======= ===== ==== =======
The weighted average stated interest rates on securities held to maturity were 4.77% and 5.32% at December 31, 1998 and 1997, respectively. The following represents a summary of the amortized cost (carrying value), estimated fair value, and weighted average yield of securities held to maturity with related maturities (dollars in thousands): December 31, 1998 --------------------------------- Estimated Weighted Amortized Fair Average Cost Value Yield ---- ----- ----- Municipal securities: Maturing after 10 years $ 84,428 $ 84,953 5.19% Commercial paper: Maturing within 1 year 166,536 166,536 4.59 -------- --------- Total $250,964 $251,489 4.77% ======== ======== F-26 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (11) Mortgage-Backed Securities Available for Sale At December 31, 1998 and 1997, mortgage-backed securities available for sale and the related unrealized gain or loss consisted of the following (in thousands):
December 31, 1998 ----------------------------------------------------------------- Gross Gross Net Amortized Unrealized Unrealized Unrealized Carrying Cost Gains Losses Gain (Loss) Value ---- ----- ------ ----------- ----- GNMA $ 761,515 $ 1,366 $ (5,324) $ (3,958) $ 757,557 FNMA 2,896,972 11,829 (13,394) (1,565) 2,895,407 FHLMC 1,354,254 7,415 (5,239) 2,176 1,356,430 Other mortgage-backed securities 705,459 3,372 (4,467) (1,095) 704,364 Collateralized mortgage obligations 7,222,559 26,155 (14,480) 11,675 7,234,234 ----------- -------- --------- ------- ----------- Total $12,940,759 $50,137 $(42,904) 7,233 $12,947,992 =========== ======= ======== =========== Estimated tax effect (3,049) -------- Net unrealized holding gain in stockholders' equity $ 4,184 ========
December 31, 1997 ----------------------------------------------------------------- Gross Gross Net Amortized Unrealized Unrealized Unrealized Carrying Cost Gains Losses Gain (Loss) Value ---- ----- ------ ----------- ----- GNMA $ 249,023 $ 2,710 $ -- $ 2,710 $ 251,733 FNMA 2,408,173 17,519 (5,923) 11,596 2,419,769 FHLMC 1,197,867 20,097 (548) 19,549 1,217,416 Other mortgage-backed securities 574,625 5,371 (111) 5,260 579,885 Collateralized mortgage obligations 606,965 2,698 (1,868) 830 607,795 ---------- ------- --------- -------- ---------- Total $5,036,653 $48,395 $ (8,450) 39,945 $5,076,598 ========== ======= ========= ========== Estimated tax effect (5,105) -------- Net unrealized holding gain in stockholders' equity $ 34,840 ========
The following represents a summary of the amortized cost, estimated fair value (carrying value) and weighted average yield of mortgage-backed securities available for sale (dollars in thousands):
December 31, 1998 ----------------------------------------- Estimated Weighted Amortized Fair Average Cost Value Yield ---- ----- ----- GNMA $ 761,515 $ 757,557 6.72% FNMA 2,896,972 2,895,407 6.64 FHLMC 1,354,254 1,356,430 7.02 Other mortgage-backed securities 705,459 704,364 6.93 Collateralized mortgage obligations 7,222,559 7,234,234 6.59 ----------- ----------- Total $12,940,759 $12,947,992 6.66% =========== ===========
F-27 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) The weighted average stated interest rates on mortgage-backed securities available for sale were 6.74% and 7.16% at December 31, 1998 and 1997, respectively. At December 31, 1998 and 1997, mortgage-backed securities available for sale included securities totalling $1.1 billion and $1.4 billion, respectively, which resulted from the securitization of certain qualifying mortgage loans from the Bank's loan portfolio. At December 31, 1998 and 1997, mortgage-backed securities available for sale included $5.6 billion and $4.6 billion, respectively, of variable-rate securities. At December 31, 1998, mortgage-backed securities available for sale of $8.4 billion were pledged as collateral for various obligations as further discussed in notes 22, 23 and 37. Further, at December 31, 1998, mortgage-backed securities available for sale with a carrying value of $116.5 million were pledged to FNMA and were associated with the sales of certain securitized multi-family loans. (12) Mortgage-Backed Securities Held to Maturity At December 31, 1998 and 1997, mortgage-backed securities held to maturity consist of the following (in thousands):
December 31, 1998 ------------------------------------------------- Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value ---- ----- ------ ---------- FHLMC $ 223,378 $ 4,553 $ -- $ 227,931 FNMA 2,545,967 49,766 (5) 2,595,728 Other mortgage-backed securities 1,568 -- -- 1,568 ----------- ------- ---- ---------- Total $2,770,913 $54,319 $ (5) $2,825,227 ========== ======= ==== ========== December 31, 1997 ------------------------------------------------- Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value ---- ----- ------ ---------- FHLMC $ 317,766 $15,364 $ -- $ 333,130 FNMA 1,017,835 20,048 -- 1,037,883 Other mortgage-backed securities 2,276 -- -- 2,276 ----------- ------- ---- ---------- Total $1,337,877 $35,412 $ -- $1,373,289 ========== ======= ==== ==========
The following represents a summary of the amortized cost (carrying value), estimated fair value and weighted average yield of mortgage-backed securities held to maturity (dollars in thousands):
December 31, 1998 --------------------------------------------- Estimated Weighted Amortized Fair Average Cost Value Yield ---- ----- ----- FHLMC $ 223,378 $ 227,931 7.83% FNMA 2,545,967 2,595,728 7.32 Other mortgage-backed securities 1,568 1,568 12.78 ---------- ---------- Total $2,770,913 $2,825,227 7.36% ========== ==========
The weighted average stated interest rates on mortgage-backed securities held to maturity were 7.22% and 7.33% at December 31, 1998 and 1997, respectively. At December 31, 1998 and 1997, mortgage-backed securities held to maturity included variable rate securities totalling $2.7 billion and $1.3 billion, respectively, which resulted from the securitization with FNMA and FHLMC of certain qualifying mortgage loans from the Bank's loan portfolio with full recourse to the Bank. F-28 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) At December 31, 1998, mortgage-backed securities held to maturity of $2.5 billion were pledged as collateral for various obligations as further discussed in notes 22, 23 and 37. (13) Loans Receivable, Net At December 31, 1998 and 1997 loans receivable, net, included the following (in thousands):
Real estate loans: 1998 1997 ---- ---- 1-4 unit residential $23,493,221 $14,071,258 5+ unit residential 2,640,635 3,035,195 Commercial 2,940,129 2,145,634 Construction 32,066 3,737 Land 33,002 4,766 ------------ ------------- 29,139,053 19,260,590 Undisbursed loan funds (9,933) (2,714) ------------ ------------- Total real estate loans 29,129,120 19,257,876 ------------ ------------- Equity-line loans 385,118 354,966 Other consumer loans 241,884 107,089 Purchased auto loans 464,922 170,808 Business banking loans 528,665 22,143 Commercial loans 12,683 8,370 ------------ ------------- Total consumer and other loans 1,633,272 663,376 ------------ ------------- Total loans receivable 30,762,392 19,921,252 Deferred loan fees, costs, discounts and premiums, net 103,377 47,219 Allowance for loan losses (588,533) (418,674) Purchase accounting discounts, net 3,708 (125,387) ------------ ------------- Total loans receivable, net $30,280,944 $19,424,410 ============ =============
At December 31, 1998, $19.1 billion in residential loans were pledged as collateral for FHLB advances as further discussed in note 23. As a result of the Golden State and the Cal Fed Acquisitions, the Bank assumed obligations for certain loans sold with recourse. The outstanding balances of loans sold with recourse at December 31, 1998 totalled $5.1 billion. No loans were sold with recourse during the years ended December 31, 1998, 1997 and 1996. The Bank evaluates the credit risk of loans sold with recourse and, if necessary, records a liability (included in other liabilities) for estimated losses related to these potential obligations. At December 31, 1998, such liability totalled $71.9 million. Auto loans purchased at a discount related to credit quality are included in the balance sheet amount of loans receivable as follows (in thousands):
December 31, --------------------------- 1998 1997 ---- ---- Auto loans: contractual payments receivable $ 674,401 $253,226 Accretable Yield (88,145) (35,198) Nonaccretable Difference (121,334) (47,220) --------- -------- Subtotal 464,922 170,808 Deferred fees and unearned premiums 21,649 17,251 Allowance for loan losses (7,118) -- --------- -------- Loans purchased at a discount relating to credit quality, net $ 479,453 $188,059 ========= ========
F-29 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) Nonaccretable Difference represents contractual principal and interest cash flows that the Company determined, at acquisition, it was probable the Company would be unable to collect. The increase in Accretable Yield in 1998 includes a $2.0 million reclassification from Nonaccretable Difference for cash flows expected to be collected in excess of those previously expected. No reclassification was needed in 1997. Accretable Nonaccretable Yield Difference ----- ---------- (in thousands) Balance at December 31, 1996 $ -- $ -- Addition - Auto One Acquisition (29,046) (39,297) Addition - other purchases (9,116) (14,724) Accretion 2,964 -- Eliminations -- 6,801 ---------- ---------- Balance at December 31, 1997 (35,198) (47,220) Addition - Glen Fed Merger (6,934) (7,324) Addition - GSAC Acquisition (38,359) (30,845) Addition - other purchases (53,599) (97,985) Accretion 47,929 -- Reclassifications (1,984) 1,984 Eliminations -- 60,056 --------- --------- Balance at December 31, 1998 $ (88,145) $(121,334) ========= ========= During the year ended December 31, 1998, the Company accrued losses of $2.5 million on loans purchased at a discount by increasing the allowance for loan losses relative to such loans. Further, loss allowances totalling $5.1 million were acquired from predecessor institutions in connection with the Glen Fed Merger and the GSAC Acquisition. No loss accruals were recorded during the year ended December 31, 1997. No loss accruals were reversed in 1998 or 1997. The following table indicates the carrying value of loans which have been placed on nonaccrual status as of the dates indicated (in thousands): Nonaccrual loans: At December 31, ----------------------- Real estate loans: 1998 1997 ---- ---- 1-4 unit residential $189,193 $164,923 5+ unit residential 16,045 12,128 Commercial and other 10,362 6,240 Construction 1,208 1,560 -------- -------- Total real estate 216,808 184,851 Non-real estate 9,380 7,344 -------- -------- Total nonaccrual loans $226,188 $192,195 ======== ======== The following table indicates the carrying value of loans classified as troubled debt restructuring, as of December 31, 1998 and 1997 (in thousands): At December 31, ------------------------- 1998 1997 ---- ---- 1-4 unit residential $ 3,921 $ 2,135 5+ unit residential 8,805 6,718 Commercial and other real estate 19,211 24,563 ------- ------- Total restructured loans $31,937 $33,416 ======= ======= F-30 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) At December 31, 1998, $24.9 billion, or 86%, of the Company's loan portfolio consisted of real estate loans collateralized by properties located in California. The financial condition of the Company is subject to general economic conditions such as the volatility of interest rates and real estate market conditions and, in particular, to conditions in the California residential real estate market. Any downturn in the economy generally, and in California in particular, could reduce real estate values. An increase in the general level of interest rates may adversely affect the ability of certain borrowers to pay the interest on and principal of their obligations. Accordingly, in the event interest rates rise or real estate market values decline, particularly in California, the Company and the Bank may find it difficult to maintain its asset quality and may require additional allowances for loss above the amounts currently estimated by management. For nonaccrual loans and loans classified as troubled debt restructurings, the following table summarizes the interest income recognized ("Recognized") and total interest income that would have been recognized had the borrowers performed under the original terms of the loans ("Contractual") for the years ended December 31, 1998 and 1997 (in thousands).
December 31, 1998 December 31, 1997 ------------------------- -------------------------- Recognized Contractual Recognized Contractual ---------- ----------- ---------- ----------- Restructured loans $ 3,007 $ 2,982 $ 3,532 $ 3,583 Nonaccrual loans 9,680 18,219 6,779 15,880 ------- ------- ------- ------- Total $12,687 $21,201 $10,311 $19,463 ======= ======= ======= =======
Activity in the allowance for loan losses for the years ended December 31, 1998, 1997 and 1996 is summarized as follows (in thousands):
1998 1997 1996 ---- ---- ---- Balance - beginning of year $418,674 $246,556 $210,484 Purchases, net 170,014 143,819 38,486 Provision for loan losses 40,000 79,800 39,600 Charge-offs (46,126) (56,124) (44,785) Recoveries 5,971 4,623 2,771 -------- -------- -------- Balance - end of year $588,533 $418,674 $246,556 ======== ======== ========
FN Holdings loaned approximately $46.8 million to an affiliate on March 1, 1996. Such loan bore interest at the rate of 10.5% over the prevailing yield to maturity of the five-year United States treasury note, and was an unsecured subordinated obligation of the borrower guaranteed by certain other affiliates of FN Holdings, which obligation to FN Holdings was evidenced by a promissory note (the "Promissory Note"). Management believes that the terms and conditions of such loan were at least as favorable to FN Holdings as might have been obtained in a similar transaction with an unaffiliated party. On May 15, 1996, FN Holdings distributed the Promissory Note to Parent Holdings as a partial redemption of and dividends on class C common stock. Parent Holdings distributed the Promissory Note in the form of a dividend to an affiliate. During 1996 FN Holdings loaned approximately $19 million to an affiliate. Such loan accrued interest at the rate of 14%, and was an unsecured subordinated obligation of the borrower, which obligation to FN Holdings was evidenced by a promissory note. Management believes that the terms and conditions of such loan were at least as favorable to FN Holdings as might have been obtained in a similar transaction with an unaffiliated party. On January 3, 1997, such loan, together with the accrued interest thereon, was repaid. F-31 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (14) Impaired Loans At December 31, 1998 and 1997, the carrying value of loans that are considered to be impaired totalled $135.2 million and $110.1 million respectively (of which $32.5 million and $18.6 million, respectively, were on nonaccrual status). The average recorded investment in impaired loans during the years ended December 31, 1998, 1997 and 1996 was approximately $137.1 million, $112.9 million and $103.7 million, respectively. For the years ended December 31, 1998, 1997 and 1996, the Company recognized interest income on those impaired loans of $9.0 million, $10.5 million and $10.7 million, respectively, which included $1.2 million, $.6 million and $.3 million, respectively, of interest income recognized using the cash basis method of income recognition. Generally, allowances for loan losses relative to impaired loans have not been allocated from the general allowance because the carrying value of such loans, net of purchase accounting adjustments, exceeds the loans' related collateral values less estimated selling costs. (15) Put Agreement In connection with the FN Acquisition, the Bank assumed generally the same rights under an agreement ("Put Agreement") Old FNB had with Granite Management and Disposition, Inc. ("Granite"), an indirect subsidiary of Ford Motor, whereby Old FNB had the option to sell ("put") to Granite, on a quarterly basis, up to approximately $500 million of certain assets, primarily non-performing commercial real estate loans and residential mortgage loans with an original principal balance greater than $250,000. The Put Agreement expired on November 30, 1996. The aggregate purchase price of assets "put" to Granite equals $500 million, including assets "put" to Granite by Old FNB through October 3, 1994. Granite purchased these assets for an amount equal to the assets' outstanding principal balance, accrued interest and certain other expenses. (16) Receivables from the FSLIC/RF - Covered Assets As part of First Gibraltar's 1988 acquisition of the five Closed Associations, it entered into an assistance agreement (the "Assistance Agreement") with the FSLIC. Assets subject to the Assistance Agreement were known as "Covered Assets." The Assistance Agreement generally provided for guaranteed yield amounts to be paid on the book value of the Covered Assets, and paid the Bank for 90% of the losses incurred upon disposition of the Covered Assets ("Capital Loss Coverage"). In 1995, the FDIC, as manager of the FSLIC Resolution Fund ("FSLIC/RF"), as successor to the FSLIC, exercised its rights under the Assistance Agreement to purchase substantially all of the remaining Covered Assets at the fair market value of such assets (the "FDIC Purchase"). Any losses sustained by the Bank as a result of the FDIC Purchase were reimbursed under the Capital Loss Coverage provision of the Assistance Agreement. Proceeds from this transaction were reinvested in the normal course of business. On August 19, 1996, the Bank and the FSLIC/RF executed an agreement which resulted in the termination of the Assistance Agreement. As a result of the agreement, the FSLIC/RF paid the Bank the remaining Covered Asset balance of $39 million and, among other things, assumed the responsibility for the disposition of several litigation matters involving Covered Assets which had been retained by the Bank following the FDIC Purchase. In connection with the agreement, a pre-tax gain of $25.6 million was recorded. (17) Investment in FHLB The Company's investment in FHLB stock is carried at cost. The FHLB provides a central credit facility for member institutions. As a member of the FHLB system, the Bank is required to own capital stock in the FHLB in an amount equal to the greater of (i) 1% of the aggregate outstanding principal amount of its residential mortgage loans, home purchase contracts and similar obligations at the beginning of each calendar year, (ii) .3% of total assets, or (iii) 5% of its advances (borrowings) from the FHLB of San Francisco. The Bank was in compliance with this requirement at December 31, 1998, 1997 and 1996. At December 31, 1998, the Bank's investment in FHLB stock was pledged as collateral for FHLB advances as further discussed in note 23. F-32 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (18) Office Premises and Equipment, Net Office premises and equipment, net, at December 31, 1998 and 1997 is summarized as follows (dollars in thousands):
Estimated Depreciable Lives at 1998 1997 December 31, 1998 ---- ---- ------------------- Land $ 49,812 $ 29,942 -- Buildings and leasehold improvements 146,108 74,141 25 Furniture and equipment 154,393 85,519 6 Construction in progress 43,483 5,253 -- -------- -------- 393,796 194,855 Accumulated depreciation and amortization (56,922) (35,506) -------- -------- Total office premises and equipment, net $336,874 $159,349 ======== ========
Depreciation and amortization expense related to office premises and equipment for the years ended December 31, 1998, 1997 and 1996 totalled $26.7 million, $16.8 million and $10.9 million, respectively. The Company rents certain office premises and equipment under long-term, noncancelable operating leases expiring at various dates through the year 2034. Rental expense under such operating leases, included in occupancy and equipment expense, for the years ended December 31, 1998, 1997 and 1996 totalled $36.0 million, $29.6 million and $19.3 million, respectively. Rental income from sublease agreements for the years ended December 31, 1998, 1997 and 1996 totalled $3.0 million, $2.0 million and $1.6 million, respectively. At December 31, 1998, the projected minimum rental commitments, net of sublease agreements, under terms of the leases were as follows (in thousands):
Cash Effect on Year Ending Commitment Net Income ----------- ---------- ---------- 1999 $ 46,226 $ 31,145 2000 42,923 28,801 2001 34,970 22,511 2002 28,599 16,893 2003 24,434 13,095 Thereafter 104,121 48,555 -------- -------- Total $281,273 $161,000 ======== ========
The effect of lease commitments on net income is different from the cash commitment primarily as a result of lease commitments assumed in acquisitions with related purchase accounting adjustments and accrued facilities costs recorded in connection with branch consolidations. See note 24. (19) Accrued Interest Receivable Accrued interest receivable at December 31, 1998 and 1997 is summarized as follows (in thousands):
1998 1997 ---- ---- Cash and cash equivalents and securities $ 46,321 $ 10,832 Mortgage-backed securities 57,051 43,700 Loans receivable and loans held for sale 214,083 133,671 -------- -------- Total accrued interest receivable $317,455 $188,203 ======== ========
F-33 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (20) Mortgage Servicing Rights The following is a summary of activity for mortgage servicing rights ("MSRs") and the hedge against the change in value of the mortgage servicing rights ("MSR Hedge") for the years ended December 31, 1998, 1997 and 1996 (in thousands):
MSR MSR Hedge Total --- ----- ----- Balance at December 31, 1995 $ 241,355 $ -- $ 241,355 Additions from 1996 LMUSA Purchase 105,029 -- 105,029 Additions from SFFed Acquisition 16,000 -- 16,000 Additions from Home Federal Acquisition 3,060 -- 3,060 Originated servicing 81,028 -- 81,028 Additions - other purchases 64,421 -- 64,421 Premiums paid for interest rate floor contracts -- 3,509 3,509 Payments to counterparties, net -- 271 271 Amortization (90,706) (275) (90,981) --------- --------- --------- Balance at December 31, 1996 420,187 3,505 423,692 Additions from Cal Fed Acquisition 44,497 -- 44,497 Additions from Weyerhaeuser Purchase 41,949 -- 41,949 Originated servicing 120,465 -- 120,465 Additions - other purchases 27,939 -- 27,939 Sales - Servicing Sale (16,792) -- (16,792) Sales - other (4) -- (4) Premiums paid for interest rate floor contracts -- 7,088 7,088 Payments received from counterparties, net -- (1,849) (1,849) Amortization (106,972) (3,310) (110,282) --------- --------- --------- Balance at December 31, 1997 531,269 5,434 536,703 Additions from Glen Fed Merger 212,933 -- 212,933 Originated servicing 169,972 -- 169,972 Additions - other purchases 160,619 -- 160,619 Sales (1,057) -- (1,057) Gain on termination -- (76,154) (76,154) Premiums paid -- 107,412 107,412 Payments received from counterparties, net -- (8,684) (8,684) Amortization (152,107) (6,056) (158,163) --------- --------- --------- Balance at December 31, 1998 $ 921,629 $ 21,952 $ 943,581 ========= ========= =========
At December 31, 1998, 1997 and 1996, the outstanding balances of 1-4 unit residential loan participations, whole loans and mortgage pass-through securities serviced for other investors (not including the Bank) by FNMC totalled $65.4 billion, $44.9 billion and $43.1 billion, respectively. In addition, FNMC had $10.4 billion, $6.2 billion and $5.7 billion of master servicing at December 31, 1998, 1997 and 1996, respectively. The percentage of principal outstanding in the Company's portfolio of loans serviced for others, secured by properties located in California, Texas and Florida was 54%, 8% and 8%, respectively, at December 31, 1998 and 46%, 11% and 7%, respectively, at December 31, 1997. These percentages include the effect of subservicing at December 31, 1997. There was no subservicing at December 31, 1998. The estimated fair value of the MSRs was $989.7 million and $674 million at December 31, 1998 and 1997, respectively. The estimated market value of prepayment linked swaps, interest rate floor contracts, principal only swaps and swaptions designated as hedges against MSRs at December 31, 1998 were $1.3 million, $32.2 million, $18.8 million and $89.3 million, respectively. At December 31, 1998 and 1997, no allowance for impairment of the MSRs was necessary. A decline in long-term interest rates generally results in an acceleration of mortgage loan prepayments. Higher than anticipated levels of prepayments generally cause the accelerated amortization of mortgage servicing rights and generally will result in a reduction of the market value of the mortgage servicing rights and in the Company's servicing F-34 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) fee income. To reduce the sensitivity of its earnings to interest rate and market value fluctuations, the Company hedged the change in value of its servicing rights based on changes in interest rates. At December 31, 1998, the Company, through FNMC, was a party to several interest rate floor contracts maturing in 2003. The Company paid counterparties a premium in exchange for cash payments in the event that the 10-year Constant Maturity Swaps rate falls below the strike prices. At December 31, 1998, the notional amount of the interest rate floors was $2.1 billion and the strike prices were between 5.2% and 5.6%. In addition, the Company, through FNMC, entered into principal only swap agreements with a notional amount of $.2 billion and prepayment linked swap agreements with a notional amount of $1.9 billion. Further, at December 31, 1998, the Company, through FNMC, was a party to swaption contracts in which the Company paid to the counterparties premiums in exchange for the right, but not the obligation, to purchase an interest rate swap. At December 31, 1998, the notional amount of the underlying interest rate swap agreement was $2.3 billion. See note 39 for further discussion. Servicing advances and other receivables related to 1-4 unit residential loan servicing, net of valuation allowances of $30.7 million and $43.2 million in 1998 and 1997, respectively, (included in other assets) consisted of the following (in thousands): December 31, ------------------------- 1998 1997 ---- ---- Servicing advances $168,855 $165,027 Checks in process of collection 924 (156) Other 1,520 2,110 -------- -------- $171,299 $166,981 ======== ======== (21) Deposits A summary of the carrying values of deposits at December 31, 1998 and 1997 follows (in thousands): 1998 1997 ---- ---- Passbook accounts $ 3,371,976 $ 2,161,967 Demand deposits: Interest-bearing 1,865,151 1,149,294 Noninterest-bearing 3,001,959 1,179,344 Money market deposit accounts 3,254,690 1,269,540 Term accounts 13,079,920 10,389,507 ----------- ----------- 24,573,696 16,149,652 Accrued interest payable 39,438 51,538 Purchase accounting adjustments 6,932 1,415 ----------- ----------- Total deposits $24,620,066 $16,202,605 =========== =========== The aggregate amount of jumbo certificates of deposit (term deposits) with a minimum denomination of $100,000 was approximately $2.9 billion and $2 billion at December 31, 1998 and 1997, respectively. Brokered certificates of deposit totalling $369 million and $363 million were included in deposits at December 31, 1998 and 1997, respectively. Total deposits at December 31, 1998 and 1997 include escrow balances for loans serviced for others of $1.5 billion and $702 million, respectively. A summary of interest expense by deposit category follows (in thousands):
1998 1997 1996 ---- ---- ---- Passbook accounts $ 96,942 $ 68,408 $ 31,418 Interest-bearing demand deposits 13,770 12,331 5,398 Money market deposit accounts 65,234 50,152 32,073 Term accounts 615,166 616,094 350,285 -------- -------- -------- Total $791,112 $746,985 $419,174 ======== ======== ========
F-35 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) At December 31, 1998, term accounts had scheduled maturities as follows (in thousands): Year Ending ----------- 1999 $11,124,007 2000 1,415,115 2001 231,803 2002 210,805 2003 82,811 Thereafter 15,379 ----------- Total $13,079,920 =========== (22) Securities Sold Under Agreements to Repurchase A summary of information regarding securities sold under agreements to repurchase follows (dollars in thousands):
December 31, 1998 -------------------------------------------------------------- Underlying Collateral Repurchase Liability ------------------------------- --------------------------- Recorded Market Interest Value (i) Value Amount Rate --------- ----- ------ ---- Maturing 30 days to 90 days $2,895,807 $2,908,071 $2,984,964 5.13% Maturing after 90 days to 1 year 1,287,385 1,285,310 1,237,094 4.86 ---------- ---------- ---------- Total (ii) 4,183,192 4,193,381 4,222,058 Accrued interest payable -- -- 16,337 ---------- ---------- ---------- $4,183,192 $4,193,381 $4,238,395 ========== ========== ==========
December 31, 1997 ------------------------------------------------------------ Underlying Collateral Repurchase Liability ---------------------------- ---------------------------- Recorded Market Interest Value (i) Value Amount Rate --------- ----- ------ ---- Maturing 30 days to 90 days $1,848,385 $1,859,169 $1,774,950 5.75% Maturing 90 days to 1 year 62,909 63,532 53,920 6.59 ---------- ---------- ---------- Total (ii) 1,911,294 1,922,701 1,828,870 Purchase accounting adjustment (424) -- 99 Accrued interest payable -- -- 13,473 ---------- ---------- ---------- $1,910,870 $1,922,701 $1,842,442 ========== ========== ==========
(i) Recorded value includes accrued interest at December 31, 1998 and 1997. In addition, the recorded values at December 31, 1998 and 1997 include adjustments for the unrealized gain or loss on mortgage-backed securities available for sale. (ii) Total mortgage-backed securities collateral at December 31, 1998 and 1997 includes $2.0 billion and $.6 billion, respectively, in outstanding balances of loans securitized with full recourse to the Bank. The market value of such collateral was $2.0 billion and $.6 billion at December 31, 1998 and 1997, respectively. At December 31, 1998 and 1997, these agreements had weighted average stated interest rates of 5.05% and 5.78%, respectively. The underlying securities were delivered to, and are being held under the control of, third party securities dealers. These dealers may have loaned the securities to other parties in the normal course of their operations, but all agreements require the dealers to resell to California Federal the identical securities at the maturities of the agreements. The average daily balance of securities sold under agreements to repurchase was $2.8 billion and $2.5 billion during 1998 and 1997, respectively, and the maximum amount outstanding at any month-end during these periods was $4.3 billion and $3.1 billion, respectively. At December 31, 1998, securities sold under agreements to repurchase were collateralized with $4.2 billion of mortgage-backed securities. F-36 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (23) Borrowings Borrowings are summarized as follows (dollars in thousands):
December 31, ----------------------------------------------------------- 1998 1997 ------------------------ --------------------------- Carrying Average Carrying Average Value Rate Value Rate ----- ---- ----- ---- Fixed-rate borrowings from FHLB $15,427,033 5.38% $ 5,447,168 5.88% Variable-rate borrowings from FHLB 4,570,743 5.53 4,074,182 5.95 12 1/2% Parent Holdings Notes due 2001 -- -- 455,000 12.50 10% Subordinated Debentures due 2006 92,100 10.00 92,100 10.00 11.20% Senior Notes due 2004 6,000 11.20 6,000 11.20 FN Holdings 12 1/4% Senior Notes due 2001 225 12.25 200,000 12.25 FN Holdings 9 1/8% Senior Sub Notes due 2003 -- -- 140,000 9.13 FN Holdings 10 5/8% Notes due 2003 250 10.63 575,000 10.63 10.668% Subordinated Notes due 1998 -- -- 50,000 10.67 6 1/2% Convertible Subordinated Debentures due 2001 2,635 6.50 2,633 6.50 10% Subordinated Debentures due 2003 4,299 10.00 4,299 10.00 Floating Rate Notes due 2003 250,000 6.75 -- -- 6 3/4% Senior Notes due 2001 350,000 6.75 -- -- 7% Senior Notes due 2003 600,000 7.00 -- -- 7 1/8% Senior Notes due 2005 800,000 7.13 -- -- Federal funds purchased 138,000 5.00 130,000 6.50 Other borrowings 4,083 8.78 570 8.89 ----------- ------------- Total borrowings 22,245,368 5.57 11,176,952 6.64 Discount on borrowings (5,643) (3,907) Purchase accounting adjustments, net 38,989 803 ----------- ------------- Subtotal 22,278,714 5.54% 11,173,848 6.60% Accrued interest payable 96,843 58,682 ----------- ----------- $22,375,557 $11,232,530 =========== ===========
Maturities and weighted average stated in terest rates of borrowings at December 31, 1998, not including accrued interes t payable or purchase accounting adjustments, are as follows (dollars in thousands):
Weighted Balances Maturing Average Rates Maturities during the Years ---------------------------- ------------------- Ending December 31 FHLB Other FHLB Other ------------------ ---- ----- ---- ----- 1999 $ 7,879,898 $ 138,033 5.34% 5.00% 2000 4,820,000 58 5.50 9.50 2001 1,210,833 352,860 5.56 6.75 2002 685,000 70 5.69 8.57 2003 5,400,000 854,549 5.38 6.94 Thereafter 2,045 902,022 7.83 7.46 ----------- ---------- Total $19,997,776 $2,247,592 5.41% 7.00% =========== ==========
F-37 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) Interest expense on borrowings for the years ended December 31, 1998, 1997 and 1996 is summarized as follows (in thousands):
Year Ended December 31, ----------------------------------------- 1998 1997 1996 ---- ---- ---- FHLB advances $706,299 $443,966 $221,017 Interest rate swap agreements (2,536) (10,743) (11,532) 12 1/2% Parent Holdings Notes due 2001 45,420 57,613 40,494 10% Subordinated Debentures due 2006 9,209 9,210 9,210 11.20% Senior notes due 2004 672 672 3,641 FN Holdings 12 1/4% Senior Notes due 2001 18,093 24,500 24,504 FN Holdings 9 1/8% Senior Sub Notes due 2003 9,337 12,775 11,739 FN Holdings 10 5/8% Notes due 2003 44,353 60,648 -- 10.668% Subordinated Notes due 1998 5,203 5,291 -- 6 1/2% Convertible Subordinated Debentures due 2001 171 172 -- 10% Subordinated Debentures due 2003 430 418 -- Floating Rate Notes due 2003 5,006 -- -- 6 3/4% Senior Notes due 2001 7,031 -- -- 7% Senior Notes due 2003 12,441 -- -- 7 1/8% Senior Notes due 2005 16,882 -- -- Federal funds purchased 3,987 5,300 3,529 Other borrowings 271 434 199 Purchase accounting adjustments (7,533) 629 6,039 -------- -------- -------- Total $874,736 $610,885 $308,840 ======== ======== ========
The following is a summary of the carrying value of assets pledged as collateral for FHLB advances (in thousands): December 31, 1998 ----------------- Real estate loans (primarily residential) $19,141,744 Mortgage-backed securities 6,131,500 FHLB stock 1,000,147 ----------- Total $26,273,391 =========== 12 1/2% Senior Notes Due 2003 On April 17, 1996, Parent Holdings issued $455 million of its Parent Holdings Notes. During 1998, all of the Parent Holdings Notes were redeemed in connection with the Parent Holdings Defeasance for an aggregate redemption price, including accrued interest payable, of $553.7 million. FN Holdings 12 1/4% Senior Notes Due 2001 In connection with the FN Acquisition, the Company issued $200 million principal amount of 12 1/4% Senior Notes due 2001 ("FN Holdings 12 1/4% Senior Notes"), including $5.5 million principal amount of FN Holdings 12 1/4% Senior Notes to certain directors and officers of the Bank. During 1998, a total of $199.8 million aggregate principal amount of the FN Holdings 12 1/4% Senior Notes have been repurchased in connection with the Debt Tender Offers for an aggregate purchase price, including accrued interest payable, of $228.3 million. At December 31, 1998, $.2 million of the FN Holdings 12 1/4% Senior Notes remain outstanding. The notes mature on May 15, 2001 with interest payable semiannually on May 15 and November 15. The notes are redeemable at the option of GS Holdings, in whole or in part, during the twelve-month period beginning May 15, F-38 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) 1999, at a redemption price of 106.125% plus accrued interest to the date of redemption, and thereafter at 100% plus accrued interest. The notes are subordinated to all existing and future liabilities, including deposits and other borrowings of the Bank, and to the 11 1/2% Preferred Stock (as defined herein). FN Holdings 9 1/8% Senior Subordinated Notes Due 2003 On January 31, 1996, FN Holdings issued $140 million principal amount of the 9 1/8% Senior Sub Notes due 2003 (the "FN Holdings 9 1/8% Senior Sub Notes"). During 1998, all of the FN Holdings 9 1/8% Senior Sub Notes were repurchased in connection with the Debt Tender Offers for an aggregate purchase price, including accrued interest payable, of $159.9 million. FN Holdings 10 5/8% Senior Subordinated Notes Due 2003 In connection with the Cal Fed Acquisition, GS Holdings acquired the net proceeds from the issuance of $575 million principal amount of FN Escrow's 10 5/8% Notes and assumed FN Escrow's obligations under the FN Holdings 10 5/8% Notes and indenture. During 1998, a total of $574.8 million aggregate principal amount of the FN Holdings 10 5/8% Notes have been repurchased in connection with the Debt Tender Offers for an aggregate purchase price, including accrued interest payable, of $692.7 million. At December 31, 1998, $.3 million of the FN Holdings 10 5/8% Notes remain outstanding. The FN Holdings 10 5/8% Notes are redeemable at the option of GS Holdings, in whole or in part, during the twelve-month period beginning January 1, 2001, at a redemption price of 105.313% plus accrued and unpaid interest to the date of redemption, during the twelve-month period beginning January 1, 2002 at a redemption price of 102.656% plus accrued and unpaid interest to the date of redemption, and thereafter at 100% plus accrued and unpaid interest to the date of redemption. The FN Holdings 10 5/8% Notes are subordinate in right of payment to all existing and future subordinated debt, if any is issued, of GS Holdings. The FN Holdings 10 5/8% Notes are subordinated to all existing and future liabilities, including deposits, indebtedness and trade payables, of the subsidiaries of GS Holdings, including California Federal and all preferred stock issued by the Bank, including the Bank Preferred Stock (as defined herein). 10% Subordinated Debentures Due 2006 As part of the FN Acquisition, California Federal assumed $92.1 million principal amount of subordinated debentures, which bear interest at 10% per annum and mature on October 1, 2006 (the "10% Subordinated Debentures Due 2006"). Events of Default under the indenture governing the 10% Subordinated Debentures Due 2006 (the "Old FNB Indenture") include, among other things: (i) a default in the payment of interest when due and such default continues for 30 days, (ii) a default in the payment of any principal when due, (iii) the failure to comply with covenants in the Old FNB Indenture, provided that the trustee or holders of at least 25% in principal amount of the outstanding 10% Subordinated Debentures Due 2006 notify the Bank of the default and the Bank does not cure the default within 60 days after receipt of such notice, (iv) certain events of bankruptcy, insolvency or reorganization of the Bank, (v) the FSLIC/RF (or a comparable entity) is appointed to act as conservator, liquidator, receiver or other legal custodian for the Bank and (vi) a default under other indebtedness of the Bank in excess of $10 million resulting in such indebtedness becoming due and payable, and such default or acceleration has not been rescinded or annulled within 60 days after the date on which written notice of such failure has been given by the trustee to the Bank or by holders of at least 25% in principal amount of the outstanding 10% Subordinated Debentures Due 2006 to the Bank and the trustee. 11.20% Senior Notes Due 2004 As part of the SFFed Acquisition, California Federal assumed $50 million principal amount of SFFed 11.20% Senior Notes due September 1, 2004 (the "11.20% Senior Notes"). In connection with the assumption of the 11.20% Senior Notes, the Bank and all of the holders of the 11.20% Senior Notes entered into an agreement amending certain provisions of the note purchase pursuant to which the 11.20% Senior Notes were sold (as amended, the "Note Purchase Agreement"). On September 12, 1996, the Bank repurchased $44.0 million aggregate principal amount of the 11.20% F-39 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) Senior Notes at a price of approximately 116.45% of the principal amount, plus the accrued interest thereon. The Bank recorded an extraordinary loss, net of tax, of $1.6 million in connection with such repurchase. Events of Default under the Note Purchase Agreement include, among other things: (i) failure to make any payment of principal when due; (ii) any failure to make any payment of interest when due and such payment is not made within 15 days after the date such payment was due; (iii) failure to comply with certain covenants in the Note Purchase Agreement, provided that such failure continues for more than 60 days; (iv) failure to deliver to holders a notice of default, notice of event of default, or notice of claimed default as provided in the Note Purchase Agreement; (v) failure to comply with any provision of the Note Purchase Agreement, provided that such failure continues for more than 60 days after notice is delivered to the Bank; (vi) a default under other indebtedness provided that the aggregate amount of all obligations in respect of such indebtedness exceeds $15 million; (vii) one or more final, non-appealable judgments outstanding against the Bank or its subsidiaries for the payment of money aggregating in excess of $15 million, any one of which has been outstanding for 45 days and shall not have been discharged in full or stayed; (viii) any warranty, representation or other statement contained in the Note Purchase Agreement by the Bank or any of its subsidiaries being false or misleading in any material respect when made; or (ix) certain events of bankruptcy, insolvency or reorganization of the Bank or its subsidiaries. As a result of the Cal Fed Acquisition, the Bank is obligated with respect to the following three outstanding securities of Old California Federal: 10.668% Subordinated Notes Due 1998 California Federal assumed $50 million of 10.668% unsecured senior subordinated notes which matured and were repaid in full on December 22, 1998 (the "10.668% Subordinated Notes"). 6 1/2% Convertible Subordinated Debentures Due 2001 In 1986, Cal Fed Inc., Old California Federal's former parent company, issued $125 million of 6.5% convertible subordinated debentures due February 20, 2001 (the "6 1/2% Convertible Subordinated Debentures"). As a result of a corporate restructuring in December 1992, Cal Fed Inc. was merged with and into XCF Acceptance Corporation ("XCF"), a subsidiary of Old California Federal. The 6 1/2% Convertible Subordinated Debentures are redeemable at the option of the holders on February 20, 2000, at 123% of their principal amount. Due to the purchase of all of the Cal Fed stock by FN Holdings in the Cal Fed Acquisition on January 3, 1997, the common stock conversion feature has been eliminated. Events of Default under the indenture governing the 6 1/2% Convertible Subordinated Debentures include, among other things: (i) any failure to make any payment of interest when due and such payment is not made within 30 days after the date such payment was due; (ii) failure to make any payment of principal when due; (iii) default in the performance, or breach, of any covenant or warranty in the indenture, provided that such default or breach continues for more than 60 days after notice is delivered to the Bank; or (iv) certain events of bankruptcy, insolvency or reorganization of the Bank or its subsidiaries. 10% Subordinated Debentures Due 2003 On December 16, 1992, Old California Federal issued $13.6 million of 10.0% unsecured subordinated debentures due 2003 (the "10% Subordinated Debentures"). Events of Default under the indenture governing the 10% Subordinated Debentures include, among other things: (i) failure to make any payment of principal when due; (ii) any failure to make any payment of interest when due and such payment is not made within 30 days after the date such payment was due; (iii) failure to comply with certain covenants in the indenture; (iv) failure to comply with certain covenants in the indenture provided that such failure continues for more than 60 days after notice is delivered to the Bank; (v) certain events of bankruptcy, insolvency or reorganization of the Bank; or (vi) the default or any event which, with the giving of notice or lapse of time or both, would constitute a default under any indebtedness of the Bank and cause such indebtedness with an aggregate principal amount exceeding $15 million to accelerate. F-40 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) GS Escrow Notes On August 6, 1998, GS Escrow, which subsequently merged into GS Holdings, issued $2 billion principal amount of fixed and floating rate notes, as described below. The GS Escrow Notes are unsecured and unsubordinated obligations of GS Holdings and rank in right of payment with all other unsubordinated and unsecured indebtedness of GS Holdings. The terms and conditions of the notes indentures impose restrictions that affect, among other things, the ability of GS Holdings to incur debt, pay dividends or make distributions, engage in a business other than holding the common stock of the Bank and similar banking institutions, make acquisitions, create liens, sell assets and make certain investments. Floating Rate Notes Due 2003 ---------------------------- On August 6, 1998, GS Escrow, an affiliate of GS Holdings, issued $250 million principal amount of the Floating Rate Notes Due 2003. The notes will mature on August 1, 2003 with interest payable quarterly on February 1, May 1, August 1 and November 1. Interest on the Floating Rate Notes is equal to three-month LIBOR plus 100 basis points per annum, except that the initial rate was 6 3/4%, based on six-month LIBOR until the first interest payment date on February 1, 1999. The interest rate on the Floating Rate Notes reset on February 1, 1999 to 5.97%. Deferred costs associated with the issuance of the Floating Rate Notes totaling $3.1 million were recorded in other assets and are being amortized over the term of the Floating Rate Notes. The Floating Rate Notes are redeemable at the option of GS Holdings, in whole or in part, after August 1, 2000 at a price of 101.5% of the outstanding principal amount during the twelve-month period beginning August 1, 2000; at a price of 101% of the outstanding principal amount during the twelve-month period beginning August 1, 2001; and at a price of 100.5% of the outstanding principal amount during the twelve-month period beginning August 1, 2002; including accrued and unpaid interest, if any, to the date of redemption. In the event of a change in control, the Floating Rate Notes are redeemable in whole at the option of GS Holdings. The redemption price includes principal plus accrued and unpaid interest, if any, to the date of redemption, plus the excess, if any, of (i) the sum of the present value of the redemption price for the Floating Rate Notes and the remaining scheduled interest payments over (ii) the outstanding principal amount of the Floating Rate Notes to be redeemed. Fixed Rate Notes ---------------- On August 6, 1998, GS Escrow, an affiliate of GS Holdings, issued $350 million principal amount of the 2001 Notes, $600 principal amount of the 2003 Notes and $800 million principal amount of the 2005 Notes. The Fixed Rate Notes will mature on August 1 of the respective year with interest payable semiannually on February 1 and August 1. Deferred costs associated with the issuance of the Fixed Rate Notes totaling $3.5 million, $12.5 million and $19.5 million for the 2001 Notes, the 2003 Notes and the 2005 Notes, respectively, were recorded in other assets and are being amortized over the term of the notes. The Fixed Rate Notes are redeemable at the option of GS Holdings, in whole or in part, at a redemption price equal to principal plus accrued and unpaid interest, if any, to the date of redemption, plus the excess, if any, of (i) the sum of the present value of the redemption price for the notes and the remaining scheduled interest payments over (ii) the outstanding principal amount of the notes to be redeemed. F-41 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (24) Accrued Termination and Facilities Costs During the year ended December 31, 1998, the Bank recognized liabilities in connection with the Glen Fed Merger resulting from (i) branch consolidations due to duplicate facilities; (ii) employee severance and termination benefits due to a planned reduction in force; and (iii) expenses incurred under a contractual obligation to terminate services provided by outside service providers (principally relating to data processing expenses). The merger and integration plan relative to the Glen Fed Merger was in place on September 11, 1998. The table below reflects a summary of the liability for such costs related to the Glen Fed Merger (in thousands):
Expenses Merger Costs Recognized Included in in Net Charges to Balance Allocation of Income Liability December 31, Purchase Price (Pre-tax) Total Account 1998 -------------- --------- ----- ------- ---- Branch consolidations $22,304 $ 7,566 $29,870 $ -- $29,870 Severance and termination benefits 42,211 6,092 48,303 (14,823) 33,480 Contract termination 14,455 -- 14,455 (2,640) 11,815 ------- ------- ------- -------- ------- Total liability established $78,970 $13,658 $92,628 $(17,463) $75,165 ======= ======= ======= ======== =======
The Bank has identified certain of its retail banking facilities that will be closed and marketed for sale, with the related operations consolidated into other retail banking facilities acquired in the Glen Fed Merger. Accordingly, a liability of $29.9 million was established during the year ended December 31, 1998, representing the estimated present value of future occupancy expenses, offset by estimates of sub-lease income over the applicable remaining lease terms. Amounts recorded in the allocation of the purchase price of the Glen Fed Merger represent costs associated with Glendale Federal branches to be closed; those recorded in noninterest expense relate to California Federal branches. The first group of branches was closed in November 1998; closures are scheduled to continue through May 1999. In connection with the Glen Fed Merger, management has identified approximately 1,100 full-time equivalent positions to be eliminated. These positions span all areas and business units of the Bank. An initial liability for termination benefits totalling $48.3 million was established, of which $14.8 million has been charged against the liability during 1998. The elimination of the identified duplicate and excess positions is expected to be completed by June 1999. The Bank has also established additional liabilities totalling $14.5 million for contract termination costs with outside service providers. At December 31, 1998, costs totalling approximately $2.6 million have been charged against the liability. The termination of the contracts is expected to be finalized during the first quarter of 1999. (25) Segment Reporting The Company has two reportable segments, the community bank and the mortgage bank. The community bank operates retail deposit branches in California and Nevada. The community bank segment provides retail consumer and small businesses with: (i) deposit products such as demand, transaction and savings accounts, (ii) investment products such as mutual funds, annuities and insurance and (iii) lending products, such as consumer and commercial loans. Further, the community bank segment invests in residential real estate loans purchased from FNMC and from others, and also invests in mortgage-backed and other securities. The mortgage banking segment, conducted by FNMC, operates loan production facilities throughout the United States and originates or purchases fixed rate 1-4 unit residential loans for sale to various investors in the secondary market and services loans for itself and for others. The mortgage banking segment also originates adjustable rate loans for the community bank segment. The accounting policies of the segments are the same as those described in note 2. The Company evaluates performance based on net interest income, noninterest income, and noninterest expense. The total of these three items is the reportable segment's net contribution. The Company's reportable segments are strategic business units that offer different services in different geographic areas. They are managed separately because each segment appeals to different markets and, accordingly, requires different technology and marketing strategies. F-42 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) Since the Company derives a significant portion of its revenues from interest income and interest expense is the most significant expense, the segments are reported below using net interest income. Because the Company also evaluates performance based on noninterest income and noninterest expense goals, these measures of segment profit and loss are also presented. The Company does not allocate income taxes to the segments. Community Banking Mortgage Banking Total ------- ---------------- ----- (in thousands) Net interest income: (1) 1998 $ 777,810 $ 52,830 $ 830,640 1997 624,834 45,788 670,622 1996 396,830 35,118 431,948 Noninterest income: (2) 1998 320,184 191,706 511,890 1997 199,461 187,536 386,997 1996 469,077 186,945 656,022 Noninterest expense: (3) 1998 594,440 174,203 768,643 1997 501,285 153,924 655,209 1996 308,335 183,401 491,736 Segment assets: (4) 1998 54,573,016 4,847,633 59,420,649 1997 31,175,543 3,072,219 34,247,762 1996 16,302,053 1,634,258 17,936,311 - ---------- (1) Includes $101.4 million, $66.3 million and $46.4 million for 1998, 1997 and 1996, respectively, in earnings credit provided to FNMC by the Bank primarily for custodial bank account balances generated by FNMC. Also includes $198.9 million, $124.1 million and $70.1 million for 1998, 1997 and 1996, respectively, in interest income and expense on intercompany loans. (2) Includes $34.9 million, $22.5 million and $2.6 million for 1998, 1997 and 1996, respectively, in intercompany servicing fees. (3) Includes $4.6 million in both 1998 and 1997, in intercompany noninterest expense. There was no intercompany noninterest expense in 1996. (4) Includes $4.5 billion, $2.9 billion and $1.3 billion for 1998, 1997 and 1996, respectively, in intercompany borrowings and $27.6 million, $20.2 million and $23.3 million for 1998, 1997 and 1996, respectively, in intercompany deposits maintained with the Bank. F-43 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) The following reconciles the above table to the amounts shown on the consolidated financial statements as of and for the years ended December 31 (in thousands):
1998 1997 1996 ---- ---- ---- Net interest income: Total net interest income for reportable segments $ 830,640 $ 670,622 $ 431,948 Elimination of intersegment net interest income (101,372) (66,339) (46,443) ------------- ------------ ------------ Total $ 729,268 $ 604,283 $ 385,505 ============= ============ ============ Noninterest income: Total noninterest income for reportable segments $ 511,890 $ 386,997 $ 656,022 Elimination of intersegment servicing fee (34,891) (22,513) (2,644) ------------- ------------ ------------ Total $ 476,999 $ 364,484 $ 653,378 ============= ============ ============ Noninterest expense: Total noninterest expense for reportable segments $ 768,643 $ 655,209 $ 491,736 Elimination of intersegment expense (4,640) (4,640) -- ------------- ------------ ------------ Total $ 764,003 $ 650,569 $ 491,736 ============= ============ ============ Total assets: Total assets for reportable segments $ 59,420,649 $ 34,247,762 $ 17,936,311 Elimination of intersegment deposits (27,593) (20,218) (23,306) Elimination of intersegment borrowings (4,524,072) (2,865,388) (1,277,932) ------------- ------------ ------------ Total $ 54,868,984 $ 31,362,156 $ 16,635,073 ============= ============ ============
The Company typically reviews the results of operations for the mortgage banking segment based on that segment's contribution as opposed to its income before income taxes, extraordinary item and minority interest. The main difference between the two measures of profitability is that contribution for the mortgage banking segment includes custodial earnings that are reported in the community banking segment when computing net income and that intercompany interest expense is computed using an internal cost of funds rate instead of a market rate. The mortgage banking segment's contribution for the years ended December 31, 1998, 1997 and 1996, was $66.0 million, $35.9 million and $54.9 million, respectively. F-44 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (26) Comprehensive Income The Company adopted SFAS No. 130, Reporting Comprehensive Income, as of October 1, 1997. Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items along with net income are components of comprehensive income. The adoption of SFAS No. 130 had no effect on the Company's net income or stockholders' equity. The tax effect associated with unrealized gain (loss) on securities for the years ended December 31, 1998, 1997 and 1996 is summarized as follows (in thousands):
Before-tax Tax benefit Net-of-tax amount (expense) amount ------ --------- ------ 1998 - ---- Unrealized gain (loss) on securities: Unrealized holding (loss) gain arising during the period $(28,761) $ 594 $(28,167) Less: reclassification adjustments for gains in net income (1,131) 287 (844) -------- --------- -------- Other comprehensive (loss) income $(29,892) $ 881 $(29,011) ======== ========= ======== 1997 - ---- Unrealized gain (loss) on securities: Unrealized holding (loss) gain arising during the period $ 14,142 $ (3,235) $ 10,907 Less: reclassification adjustments for gains in net income (25,182) 3,218 (21,964) -------- --------- -------- Other comprehensive (loss) income $(11,040) $ (17) $(11,057) ======== ========= ======== 1996 - ---- Unrealized gain (loss) on securities: Unrealized holding (loss) gain arising during the period $ 20,251 $ (2,026) $ 18,225 Less: reclassification adjustments for gains in net income (39,465) 3,947 (35,518) -------- --------- -------- Other comprehensive (loss) income $(19,214) $ 1,921 $(17,293) ======== ========= ========
Unrealized gain (loss) on securities is the only component of other comprehensive income and accumulated other comprehensive income for the years ended December 31, 1998, 1997 and 1996. (27) Minority Interest Prior to the Golden State Merger, minority interest included that portion of stockholder's equity of FN Holdings attributable to its class B common stock, which was owned by Hunter's Glen, a limited partnership controlled by the Bank's Chairman of the Board and Chief Executive Officer. In connection with the Golden State Merger, Hunter's Glen received shares of Golden State Common Stock in consideration for its interest in FN Holdings as described in note 28. As a result, the Hunter's Glen minority interest in FN Holdings was extinguished. Accordingly, the net income, minority interest and stockholders' equity amounts have been restated to reflect this change. Auto One Common Stock In connection with the GSAC Acquisition, Auto One issued 250 shares of its common stock par value $1.00 per share, representing a 20% interest in Auto One. The carrying value of Auto One's common stockholders' equity attributable to the minority stockholders at December 31, 1998 is ($1.7) million. 11 1/2% Preferred Stock In connection with the FN Acquisition, California Federal issued 3,007,300 shares of its 11 1/2% noncumulative perpetual preferred stock ("11 1/2% Preferred Stock") with a par value of $.01 per share, having a liquidation preference F-45 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) of $300.7 million. This stock has a stated liquidation value of $100 per share. Costs related to the 11 1/2% Preferred Stock issuance were deducted from additional paid-in capital. In connection with the Bank Preferred Stock Tender Offers, 2,688,959 shares of the 11 1/2% Preferred Stock were purchased by GS Holdings during the year ended December 31, 1998. The stated liquidation value of the remaining 11 1/2% Preferred Stock not purchased by GS Holdings at December 31, 1998 was $31.8 million. See note 5. At or after September 1, 1999, the remaining shares of 11 1/2% Preferred Stock are redeemable at the option of the Bank, in whole or in part, at $105.75 per share prior to September 1, 2000, and at prices which will decrease annually thereafter to the stated liquidation value of $100 per share on or after September 1, 2004, plus declared but unpaid dividends. Dividends are payable quarterly at an annual rate of 11.50% per share when declared by the Bank's Board of Directors. Dividends paid on the 11 1/2% Preferred Stock for each year ended December 31, 1998 and 1997, totalled $34.6 million of which $26.8 million and $34.6 million was included in minority interest in 1998 and 1997, respectively. 10 5/8% Preferred Stock In connection with the Cal Fed Acquisition, California Federal assumed Cal Fed's 10 5/8% noncumulative perpetual preferred stock with a liquidation value of $172.5 million (the "10 5/8% Preferred Stock" and, together with the 11 1/2% Preferred Stock, the "Bank Preferred Stock"). In connection with the Bank Preferred Stock Tender Offers, 1,117,701 shares of the 10 5/8% Preferred Stock were purchased by GS Holdings during the year ended December 31, 1998. The stated liquidation value of the remaining 10 5/8% Preferred Stock not purchased by GS Holdings at December 31, 1998 was $60.7 million. See note 5. Cash dividends on the 10 5/8% Preferred Stock are noncumulative and are payable at an annual rate of 10 5/8% per share if, when, and as declared by the Board of Directors of the Bank. The 10 5/8% Preferred Stock is redeemable at the option of the Bank, in whole or in part, at $105.313 per share on or after April 1, 1999 and prior to April 1, 2000, and at prices decreasing annually thereafter to the liquidation preference of $100.00 per share on or after April 1, 2003, plus declared but unpaid dividends. In addition, in the event of a change of control, the 10 5/8% Preferred Stock is redeemable at the option of the Bank or its successor on or after April 1, 1996 and prior to April 1, 1999 in whole, but not in part, at $114.50 per share. Dividends paid on the 10 5/8% Preferred Stock for each year ended December 31, 1998 and 1997 totalled $18.3 million, of which $15.3 million and $18.3 million was included in minority interest in 1998 and 1997, respectively. See note 45. REIT Preferred Stock On January 31, 1997, Preferred Capital Corp. issued 20,000,000 shares of the REIT Preferred Stock for $500 million. The REIT Preferred Stock has a stated liquidation value of $25 per share, plus declared and unpaid dividends, if any. The annual cash dividends on the 20,000,000 shares of REIT Preferred Stock, assuming such dividends are declared by the Board of Directors of Preferred Capital Corp., are expected to approximate $45.6 million per year. As long as Preferred Capital Corp. qualifies as a REIT, distributions on the REIT Preferred Stock will be a dividends-paid deduction by Preferred Capital Corp. for tax purposes. Dividends paid on the REIT Preferred Stock during 1998 and 1997 were $33.1 million and $36.6 million, respectively, net of the income tax benefit. FN Holdings Preferred Stock On September 19, 1996, FN Holdings issued 10,000 shares of preferred stock ("FN Holdings Preferred Stock") with a liquidation value of $150 million to a corporation owned by the Chairman of the Board of the Bank. Cash dividends on the FN Holdings Preferred Stock were cumulative and payable: (i) in cash at an annual rate of the cost of funds to an affiliate of FN Holdings under such affiliate's bank credit facility (the "Cost of Funds Rate") and (ii) in newly issued shares of another series of cumulative perpetual preferred stock of FN Holdings ("Additional FN Holdings Preferred Stock") at an annual rate of 2% of the stated liquidation value of the FN Holdings Preferred Stock, if, when, and as declared by the Board of Directors of FN Holdings. Dividends on the Additional FN Holdings Preferred Stock were cumulative and accrued and were payable in shares of Additional FN Holdings Preferred Stock at an annual rate equal to the Cost of Funds Rate plus 2% of the stated liquidation value of the Additional FN Holdings Preferred Stock if, when and as declared by the Board of Directors of FN Holdings. Additional FN Holdings Preferred Stock had substantially the same relative rights, terms and preferences as the FN Holdings Preferred Stock except as set forth above with respect to the payment of dividends. Dividends on the FN Holdings Preferred Stock were payable quarterly each year, commencing January 1, 1997, out of funds legally available therefor. F-46 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) In March 1998, FN Holdings redeemed all remaining 1,666.7 outstanding shares of the FN Holdings Preferred Stock. The redemption price was equal to the liquidation value of $15,000 per share. Upon redemption of the FN Holdings Preferred Stock, all remaining 52.5 shares of the Additional FN Holdings Preferred Stock totalling $.8 million liquidation value were contributed to the capital of FN Holdings without any payment therefor. Such shares were retired and cancelled. Dividends on the FN Holdings Preferred Stock totalled $.6 million, $12.8 million and $4.8 million during 1998, 1997 and 1996, respectively, including the issuance of Additional FN Holdings Preferred Stock of $.1 million, $2.2 million and $.8 million. (28) Stockholders' Equity Series A Preferred Stock In connection with the Golden State Acquisition the Company acquired 4,183,599 shares of the Series A Preferred Stock, with 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 ratio of $2.404 per share, subject to adjustment in certain events. In connection with the Golden State Acquisition, the Company converted 4,181,061 shares of the Company's Series A Preferred Stock into 10,051,200 shares of the Company's common stock. During September 1998, the Company announced its intention to redeem the Series A Preferred Stock at the stated redemption price on that date of $26.09375 per share plus an amount equal to any dividends declared but unpaid as of the date of redemption. On October 1, 1998, the remaining 2,538 shares of Series A Preferred Stock were redeemed. Common Stock The Company has 250 million shares of common stock authorized with a par value of $1.00 per share. Pursuant to the Golden State Merger agreement, First Gibraltar and Hunter's Glen received 56,722,988 shares of the Golden State Common Stock, which represented 47.9% of the common stock outstanding as of September 11, 1998, and provided for existing Golden State shareholders to own 61,880,950 shares of the Golden State Common Stock. During September 1998, an additional 10,051,200 shares were issued resulting from conversions of the Series A Preferred Stock. Holders of Golden State Common Stock are entitled to receive dividends when, as and if declared by the Board of Directors of the Company, subject to the superior rights of the holders of any series of Preferred Stock that may be issued. At December 31, 1998, there were 128,687,763 shares of the Golden State Common Stock issued and outstanding (including treasury stock). Treasury Stock In connection with the Golden State Acquisition, the Company acquired 108,574 shares of Golden State Common Stock held in treasury with an aggregate cost of $2.0 million. During the year ended December 31, 1998, 18,580 shares were issued out of treasury in connection with options exercised by holders related to an earlier acquisition by Golden State. At December 31, 1998, the Company had 89,994 shares of its common stock in treasury with an aggregate cost of $18.75 per share. Payment of Dividends The terms of the GS Escrow Notes indenture generally will permit GS Holdings to make distributions of up to 75% of the Consolidated Net Income (as defined therein) of GS Holdings since July 1, 1998 if after giving effect to such distribution, (i) the Bank is "well capitalized" under applicable OTS regulations and (ii) the Consolidated Common Shareholders' Equity (as defined therein) of the Bank is at least equal to the Minimum Common Equity Amount (as defined therein). The Federal thrift laws and regulations of the Office of Thrift Supervision (the "OTS") limit the Bank's ability to pay dividends on its preferred or common stock. The Bank generally may not pay dividends without the consent of the OTS if, after the payment of the dividends, it would not be deemed "adequately capitalized" under the prompt corrective action standards of the Federal Deposit Insurance Corporation Improvement Act of 1991. F-47 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) As of December 31, 1998, the Bank could pay dividends of $264.7 million without the consent of the OTS and it could pay dividends of $152.9 million and still be "well capitalized." As of December 31, 1998, GS Holdings could pay dividends, in addition to those already paid, of $267.2 million without violating the most restrictive terms of the GS Escrow Notes indenture. Warrants The Company has a class of common stock purchase warrants outstanding (the "Warrants"), totalling 12,776 at December 31, 1998, that were issued by Golden State 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 and one LTW(TM) (as defined herein) 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. No Warrants have been exercised since September 11, 1998. The Company has also issued transferable Standby Warrants (the "Standby Warrants"), of which 10.77 million were outstanding at December 31, 1998. No Standby Warrants have been exercised since September 11, 1998. Each Standby Warrant entitles the holder thereof to purchase one share of common stock and one LTW(TM) for a purchase price of $12.00 per share. The Standby Warrants are exercisable at any time through August 21, 2000. (29) Litigation Tracking Warrants In connection with the Glendale Goodwill Litigation, Golden State distributed 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% of the net after-tax proceeds, if any, from the Glendale Goodwill Litigation. The LTW(TM)s would be exercisable after notification by Golden State of its receipt of proceeds from a final judgement in or settlement of the litigation. The LTW(TM)s would expire 60 days after such notice is given. Golden State distributed LTW(TM)s on 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 million. The LTW(TM)s trade on the NASDAQ national market system under the ticker symbol "GSBNZ." (30) Regulatory Capital of the Bank The Bank is subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory -- and possibly additional discretionary -- actions by regulators that, if undertaken, could have a direct material effect on the Company's and the Bank's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to insure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of tangible and leverage capital to adjusted total assets, and of Tier 1 and total risk-based capital to risk-weighted assets. Management believes, as of December 31, 1998, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1998 and 1997, the most recent notification from the OTS categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain F-48 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) minimum leverage, Tier 1 risk-based and total risk-based ratios as set forth in the table below. There are no conditions or events since the most recent notification that management believes have changed the institution's category. The Bank's actual capital amounts and ratios as of December 31, 1998 and 1997 are also presented in the following table (dollars in thousands):
To be Adequately Actual Capitalized To be Well Capitalized ----------------------- ---------------------- ---------------------- As a % of As a % of As a % of 1998 Amount Assets Amount Assets Amount Assets ------ ------ ------ ------ ------ ------ ------ Stockholders' equity of the Bank per financial statements $3,678,712 Minority interest 498,348 Net unrealized holding gains (4,884) ---------- 4,172,176 Adjustments for tangible and leverage capital: Goodwill litigation assets (160,341) Intangible assets (923,598) Non-qualifying MSRs (94,358) Non-includable subsidiaries (57,999) Excess deferred tax asset (118,659) ---------- Total tangible capital $2,817,221 5.29% $ 799,271 1.50% N/A N/A ========== ========== Total leverage capital $2,817,221 5.29% $2,131,388 4.00% $2,664,235 5.00% ========== ========== ========== Tier 1 risk-based capital $2,817,221 10.27% N/A N/A $1,645,485 6.00% ========== ========== Adjustments for risk-based capital: Qualifying subordinated debt debentures 93,210 General loan loss allowance 345,583 Qualifying portion of unrealized holding gains 73 Low level recourse (11,759) Assets required to be deducted (38,234) ---------- Total risk-based capital $3,206,094 11.69% $2,193,980 8.00% $2,742,475 10.00% ========== ========== ==========
F-49 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued)
To Be Adequately Actual Capitalized To Be Well Capitalized ---------------------- --------------------- ----------------------- As a % of As a % of As a % of 1997 Amount Assets Amount Assets Amount Assets ------ ------ ------ ------ ------ ------ ------ Stockholders' equity of the Bank $2,260,044 per financial statements Minority interest in Preferred 500,000 Capital Corp. Net unrealized holding gains (35,162) 2,724,882 Adjustments for tangible and leverage capital: Goodwill litigation asset (100,000) Intangible assets (675,927) Non-allowable minority interest in Preferred Capital Corp. (71,099) Non-qualifying MSRs (53,670) Non-includable subsidiaries (53,582) Excess deferred tax asset (55,000) ---------- Total tangible capital $1,715,604 5.65% $ 455,457 1.50% N/A N/A ========== =========== Total leverage capital $1,715,604 5.65% $ 910,915 3.00% $1,518,191 5.00% ========== =========== ========== Tier 1 risk-based capital $1,715,604 10.14% N/A N/A $1,015,036 6.00% ========== ========== Adjustments for risk-based capital: Qualifying subordinated debt debentures 93,847 General loan loss allowance 214,217 Assets required to be deducted (5,648) ---------- Total risk-based capital $2,018,020 11.93% $1,353,382 8.00% $1,691,727 10.00% ========== ========== ==========
F-50 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (31) Other Noninterest Expense Other noninterest expense amounts are summarized as follows for the years ended December 31, 1998, 1997 and 1996 (in thousands):
1998 1997 1996 ---- ---- ---- Other noninterest expense: Telephone $ 19,640 $ 15,932 $11,727 Insurance and surety bonds 6,027 5,642 3,811 Postage 10,023 8,070 7,141 Printing, copying and office supplies 11,179 9,230 6,549 Employee travel 10,386 8,745 6,112 Clerical and other losses 10,534 11,410 2,636 Other 45,158 54,853 42,135 -------- -------- ------- $112,947 $113,882 $80,111 ======== ======== =======
(32) Income Taxes Total income tax expense (benefit) for the years ended December 31, 1998, 1997 and 1996 was allocated as follows (in thousands):
1998 1997 1996 ---- ---- ---- Income before income taxes, extraordinary item and minority interest $(106,351) $41,315 $(75,807) Extraordinary item (103,823) -- (176) Net unrealized holding (loss) gain on securities available for sale (881) 17 (1,921) --------- ------- -------- $(211,055) $41,332 $(77,904) ========= ======= ========
Income tax expense (benefit) attributable to income before income taxes, extraordinary item and minority interest consisted of (in thousands): 1998 1997 1996 ---- ---- ---- Federal Current $ 51,443 $ 4,687 $ 10,900 Deferred (214,131) -- (125,000) --------- --------- --------- (162,688) 4,687 (114,100) --------- --------- --------- State and local Current 49,137 27,187 38,293 Deferred 7,200 9,441 -- --------- --------- --------- 56,337 36,628 38,293 --------- --------- --------- $(106,351) $ 41,315 $ (75,807) ========= ========= ========= F-51 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) The consolidated income tax expense (benefit) for the years ended December 31, 1998, 1997 and 1996 differs from the amounts computed by applying the statutory federal corporate tax rate of 35% for 1998, 1997 and 1996 to income before income taxes, extraordinary item and minority interest as follows (in thousands):
1998 1997 1996 ---- ---- ---- Computed "expected" income tax expense $ 140,792 $ 83,439 $177,642 Increase (decrease) in taxes resulting from: State income taxes, net of federal income tax benefit 36,619 23,808 24,890 Tax exempt income -- (5) (584) Amortization of excess cost over fair value of net assets acquired 17,613 16,959 33 Adjustment to prior year's tax expense -- -- 595 Unrealized holding (loss) gain on securities available for sale recognized for tax purposes -- (12,234) (3,703) Other 109 2,762 1,214 Adjustments to deferred tax asset fully offset by valuation allowance: Temporary differences from acquisitions -- (107,416) 6,196 Adjustment to deferred tax asset 64,527 (17,130) 2,821 REIT Preferred Stock dividends (6,700) (14,682) -- Change in the beginning-of-the-year balance of the valuation allowance for deferred tax assets allocated to income tax expense (359,311) 65,814 (284,911) --------- -------- --------- $(106,351) $ 41,315 $ (75,807) ========= ======== =========
The significant components of deferred income tax (benefit) expense attributable to income before income taxes, extraordinary item and minority interest are as follows (in thousands):
1998 1997 1996 ---- ---- ---- Deferred tax expense (exclusive of the effects of other components listed below) $ 87,353 $ 73,414 $ 150,894 Adjustments to deferred tax asset fully offset by valuation allowance 57,827 (139,228) 9,017 Increase (decrease) in beginning-of-the-year balance of the valuation allowance for deferred tax assets (359,311) 65,814 (284,911) --------- --------- --------- $(214,131) -- $(125,000) ========= ========= =========
F-52 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below (in thousands):
1998 1997 ---- ---- Deferred tax assets: Net operating loss carryforwards $ 392,182 $ 750,193 Foreclosed real estate 2,182 7 Deferred interest 8,509 8,737 Loans receivable 77,523 75,896 Miscellaneous accruals 161,540 37,960 Accrued liabilities 31,364 104,311 State taxes 29,147 38,704 Purchased mortgage servicing rights 221,743 47,988 Alternative minimum tax credit and investment tax credit carryforwards 15,347 14,911 Other 16,749 8,148 --------- --------- Total gross deferred tax assets 956,286 1,086,855 Less valuation allowance (232,632) (591,943) --------- --------- Net deferred tax assets 723,654 494,912 --------- --------- Deferred tax liabilities: Change in accounting method -- 36,129 Securities -- 9,835 Mortgage servicing rights 238,938 88,963 Purchase accounting adjustments 2,071 21,842 FHLB stock 101,595 63,029 Unrealized gains on securities available for sale 4,271 5,152 Goodwill litigation 111,746 70,391 Other 155,024 78,615 --------- --------- Net deferred tax liabilities 613,645 373,956 --------- --------- Net deferred tax assets and liabilities $ 110,009 $ 120,956 ========= =========
The net change in the total valuation allowance for the year ended December 31, 1998 was a decrease of $359 million which is attributable to income before income taxes and minority interest. Based on resolutions of federal tax audits and favorable future earnings expectations, management changed its judgment about the realizability of the Company's net deferred tax assets and reduced the valuation allowance by $250 million in the second quarter of 1998 and $125 million in the second quarter of 1996. Management believes that the realization of the resulting deferred tax asset is more likely than not, based upon the expectation that the Company will generate the necessary amount of taxable income in future periods. In connection with the Golden State Merger, the Company deconsolidated from the Mafco Group. As a result, only the amount of the net operating losses ("NOLs") of the Company not utilized by the Mafco Group on or before December 31, 1998 are available to offset taxable income of the Company thereafter. At September 11, 1998, had the Company filed a consolidated federal income tax return on behalf of itself and its subsidiaries for each of the years since the formation of the Company, it would have had regular NOL carryforwards, for federal income tax purposes of approximately $1.8 billion. Upon deconsolidation, the NOLs available to offset taxable income of the Company is estimated to be reduced by $900 million. This reduction of NOLs and other tax attributes (the "Deconsolidation Adjustment") resulted in a $230.2 million reduction in retained earnings. The Deconsolidation Adjustment may change based upon the actual filing of the Mafco Group 1998 consolidated federal income tax return (including the Company's operations through September 11, 1998) and the results of Internal Revenue Service ("IRS") audits for all open years of Mafco and the Company. Any increase to the Deconsolidation Adjustment will be recorded as an increase to income for the additional federal income tax benefit resulting from the change in the valuation allowance. Such increase to income will be offset by an increase in minority interest since under the Golden State Merger agreement the tax benefit from any NOLs and other tax attributes of Parent Holdings and subsidiaries are retained by First Gibraltar and Hunter's Glen. Accordingly, any change to the Deconsolidation Adjustment should have no significant impact on total F-53 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) stockholders' equity. Any change will be recorded in the period during which such change is determined. At December 31, 1998, the Company had regular NOL carryforwards for federal income tax purposes of approximately $1.1 billion which are available to offset future federal taxable income, if any, through 2009. In addition, the Company had alternative minimum tax credit carryforwards of approximately $14.5 million which are available to offset future federal regular income taxes, if any, over an indefinite period. Substantially all of the NOLs and alternative minimum tax credits are subject to an annual Section 382 limitation on their usage. The NOL carryforwards are subject to review and disallowance, in whole or in part, by the IRS. On August 20, 1996, the Small Business Job Protection Act of 1996 (the "Act") was enacted into law generally effective for tax years beginning after 1995. One provision of the Act repealed the Section 593 reserve method of accounting for bad debts by thrift institutions which are treated as large banks. Another provision of the Act requires the Company to take into income the balance of its post-1987 bad debt reserves over a six year period beginning in 1996 subject to a two-year deferral if certain residential loan tests are satisfied. The Company has fully provided for the tax related to this recapture. In accordance with SFAS No. 109, Accounting for Income Taxes, a deferred tax liability has not been recognized for the base year reserves of the Company. The base year reserves are generally the balance of the tax bad debt reserve as of December 31, 1987 reduced proportionately for reductions in the Company's loan portfolio since that date. At December 31, 1998, the amount of those reserves was $305 million. The amount of the unrecognized deferred tax liability at December 31, 1998 was $107 million. Pursuant to the Act, circumstances that may require an accrual of this unrecorded tax liability are a failure to meet the definition of a "bank" for federal income tax purposes, dividend payments in excess of tax earnings and profits, and other distributions, dissolution, liquidation or redemption of stock, excluding preferred stock meeting certain conditions. The IRS is examining the 1993 through 1997 federal income tax returns of Glendale Federal and has raised an issue regarding the limitation on built-in losses that may have resulted from the Glendale Federal 1993 recapitalization. The IRS position is preliminary and currently under discussion with the Bank. The Bank believes that the IRS position is incorrect and intends to vigorously defend itself. The outcome of this issue is uncertain and the amount of any additional taxes, if any, cannot be determined at this time. (33) Employee Benefit Plans ---------------------- Postretirement Health Care and Defined Benefit Plans The Bank provides certain postretirement medical benefits to certain eligible employees and their dependents through age 64. In general, early retirement is age 55 with 10 years of service. Retirees participating in the plans generally pay Consolidated Omnibus Budget Reduction Act premiums for the period of time they participate. The estimated cost for postretirement health care benefits has been accrued on an actuarial net present value basis. In connection with the SFFed Acquisition, the Bank assumed SFFed's defined benefit pension plan, which covered substantially all employees of San Francisco Federal. The SFFed benefit plan was frozen effective September 30, 1995, at which time all employees become 100% vested and no additional benefits accrued. In connection with the Cal Fed Acquisition, the Bank assumed sponsorship of the Old California Federal defined benefit plan, which was frozen effective May 31, 1993, at which time all accrued benefits became 100% vested. Effective April 30, 1997, the SFFed benefit plan was merged with and into the Old California Federal benefit plan. The fair value of the assets transferred was $23.6 million. In connection with the Glen Fed Merger, the Bank assumed Glendale Federal's defined benefit pension plan (the "Glendale Federal Retirement Plan") and the Redlands Federal Bank defined benefit plan, (collectively "the Glen Fed Pension Plan"), which covered substantially all employees of Glendale Federal. The Glen Fed Pension Plan was frozen upon the merger on September 11, 1998 and no additional benefits accrued after such time. Effective October 15, 1998, the Glen Fed Pension Plan was merged with and into the Old California Federal defined benefit plan. The fair value of the assets transferred was $102.0 million. F-54 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) The following table sets forth the changes in the plan's benefit obligations and fair value of plan assets, as well as the funded status at December 31, 1998 and 1997 (in thousands).
Non-Qualified Plans Qualified Plan ------------------- -------------- Postretirement Benefits Pension Benefits Pension Benefits ----------------------- ---------------- ---------------- 1998 1997 1998 1997 1998 1997 ---- ---- ---- ---- ---- ---- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 4,125 $ 3,416 $ 9,206 $ 8,917 $ 35,795 $21,720 Service Cost 309 364 -- -- -- -- Interest cost 317 498 723 657 4,157 2,796 Amendments -- -- -- -- -- -- Actuarial (gain) loss 182 (3,104) 1,634 500 9,218 8,002 Glen Fed Merger 3,446 -- 5,025 -- 95,900 19,275 Acquisitions -- 3,344 -- -- -- -- Settlements -- -- -- -- -- 1,154 Benefits paid (213) (393) (1,107) (868) (8,252) (17,152) -------- ------- -------- ------- -------- ------- Benefit obligation at end of year $ 8,166 $ 4,125 $ 15,481 $ 9,206 $136,818 $35,795 ======== ======= ======== ======= ======== ======= CHANGE IN PLAN ASSETS Fair value at beginning of year N/A N/A $ -- $ -- $ 29,754 $23,085 Actual return on plan assets -- -- -- -- 388 4,614 Glen Fed Merger -- -- -- -- 117,500 19,207 Employer contribution -- -- 1,107 868 -- -- Benefits paid -- -- (1,107) (868) (8,252) (17,152) -------- ------- -------- ------- -------- ------- Fair value at end of year $ -- $ -- $ -- $ -- $139,390 $29,754 ======== ======= ======== ======= ======== ======= Funded Status $ -- $ -- $ -- $ -- $ 2,572 $(6,041) Unrecognized actuarial loss -- -- -- 509 16,656 2,836 -------- ------- -------- ------- -------- ------- Prepaid (accrued) benefit cost recognized in the consolidated balance sheet $ (8,166) $(4,125) $(15,481) $(8,697) $ 19,228 $(3,205) ======== ======= ======== ======= ======== =======
Assumptions used in computing the funded status were:
Non-Qualified Plans Qualified Plan Weighted Average Assumptions as of Postretirement Benefits Pension Benefits Pension Benefits December 31, 1998 1997 1998 1997 1998 1997 - ---------------------------------- ---- ---- ---- ---- ---- ---- Discount rate 6.75% 7.50% 6.00% 7.25% 6.00% 7.25% Expected return on plan assets N/A N/A 9.00 9.00 9.00 9.00 Rate of compensation increase 0.00 0.00 0.00 0.00 0.00 0.00
The initial health care cost trend rate for medical benefits in 1999 is assumed to be 8.5%, the average trend rate is assumed to be 5.67% and the ultimate trend rate is assumed to be 5.5%, which will be reached in eight years. At December 31, 1998, an increase of 1% in the health care cost trend rate would cause the accumulated postretirement benefit obligation to increase by $.9 million, and the service and interest cost to increase by less than $.2 million. At December 31, 1998, a decrease of 1% in the health care cost trend rate would cause the accumulated postretirement benefit obligation to decrease by $.8 million, and the service and interest costs to decrease by $.1 million. F-55 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) The net periodic benefits cost for the years ended December 31, 1998 and 1997 included the following components (in thousands):
Postretirement Benefits Pension Benefits ------------------------- ---------------------------- 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- Service cost $309 $ 364 $301 $ -- $ -- $ -- Interest cost 317 498 231 4,880 3,453 2,143 Recognized net actuarial loss (gain) 182 (3,104) 19 2,294 1,611 2,966 Settlement/curtailment gain -- -- -- -- (404) -- ---- ------- ---- ------ ------ ------ Net periodic cost (income) $808 $(2,242) $551 $7,174 $4,660 $5,109 ==== ======= ==== ====== ====== ======
Defined Contribution Plan The Bank offers a defined contribution plan, which is available to substantially all employees with at least one year of employment. Employee contributions are voluntary. The plan provides for the deferral of up to 12% of eligible compensation of plan participants not to exceed the maximum allowed by the Internal Revenue Service. The Bank's matching contribution was a maximum of 100% of up to the first 3% of employee deferrals. The annual discretionary employer profit sharing contribution is a maximum of 3% of eligible compensation. It can be declared at any level in the range from 0% to 3%. Employees vest immediately in their own deferrals and any employer profit sharing contributions and vest in employer matching contributions based on completed years of service. The Bank's contributions to such plan totalled $9.3 million, $3.8 million, and $2.3 million for the years ended December 31, 1998, 1997 and 1996, respectively. In connection with the Glen Fed Merger, the Bank assumed sponsorship of the Glendale Federal's defined contribution plan. This plan was frozen at the merger date, therefore no contributions were made to the plan subsequent to the merger date. The plan is being maintained as a separate plan. It is anticipated that Glendale Federal's plan will be merged with the Bank's plan at a later date. During 1996, defined contribution plans assumed in the SFFed and Home Federal Acquisitions were merged with and into the First Nationwide Employees' Investment Plan defined contribution plan. The fair value of assets transferred was $14.4 million. In the Cal Fed Acquisition, contributions made to Old California Federal's defined contribution plan (the "Investment Plus Plan") became 100% vested at the date of acquisition. Effective December 31, 1997, the Investment Plus Plan was merged with and into the First Nationwide Employees' Investment Plan, which was renamed in 1997 to the California Federal Employees' Investment Plan. The fair value of assets transferred was $33.6 million. Effective January 1, 1999, the California Federal Employees' Investment Plan was amended to provide for automatic enrollment into the plan at a contribution rate of 3% unless the employee opts, in writing, to participate at a different deferral rate, or to opt out of the plan. Effective January 15, 1999, the plan was amended to allow the use of certain employer and employee contributions to purchase Golden State common stock at market prices. Effective March 1, 1999, the plan was also amended to reduce the length of required service to six months before an employee can contribute to the plan and to amend the enrollment date to the first of the month following six months of service. Stock Option Plan In connection with the Glen Fed Merger, the Bank is administering a stock option plan that provided for the granting of options of Golden State common stock to employees and directors. Upon the merger on September 11, 1998, all options outstanding became exercisable. F-56 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) The following is a summary of the transactions under the stock option plan:
Weighted Number of Range of Option Average Exercise Shares Prices Price ------ ------ ----- Outstanding at September 11, 1998 2,238,326 $9.00 - $35.00 $19.99 Canceled or expired 193,334 $28.50 - $28.50 $28.50 Exercised 51,205 $12.63 - $17.75 $14.80 Outstanding at December 31, 1998 1,993,787 $9.00 - $35.00 $19.30
Information about stock options outstanding at December 31, 1998 was as follows:
Outstanding and Exercisable --------------------------- Weighted Average Remaining Weighted Average Exercise Price Range Contractual Life (in years) Number Exercise Price - -------------------- --------------------------- ------ -------------- $ 9.00 - $12.63 5.7 610,676 $11.16 $14.50 - $17.75 7.3 667,111 $16.49 $28.50 - $35.00 8.7 716,000 $28.86
The stock option plan expired on August 18, 1998, as to the granting of additional options. (34) Incentive Plan Effective October 1, 1995, FN Holdings entered into a management incentive plan ("Incentive Plan") with certain executive officers of the Bank ("Participants"). Awards under the Incentive Plan were made in the form of performance units. Each performance unit entitles Incentive Plan Participants to receive cash and/or stock options ("Bonuses") based upon the Participants' vested interest in a bonus pool. Generally, the Incentive Plan provides for the payment of Bonuses, on a quarterly basis, to the Participants upon the occurrence of certain events. Bonuses vest at 20% per year beginning October 1, 1995 and are subject to a cap of $50 million. Bonuses are recorded by a charge to compensation and employee benefits and an increase to other liabilities. During 1997 and 1996, accruals relative to the Incentive Plan totalled $12.4 million and $35.6 million, respectively. No expense was recorded in 1998. The Glen Fed Merger constituted a change of control pursuant to the terms of the Incentive Plan and, as such, cash payments were made to the Participants on September 11, 1998. (35) Special SAIF Assessment On September 30, 1996, the Economic Growth and Regulatory Paperwork Reduction Act ("Act") of 1996 was enacted. The Act included a special assessment ("Special SAIF Assessment") related to the recapitalization of the Savings Association insurance Fund ("SAIF"), which was levied based on a rate of 65.7 cents per $100 of SAIF-insured domestic deposits held as of March 31, 1995. As a result of the Act, the Company recorded a pre-tax charge of $60.1 million on September 30, 1996. The 1997 SAIF deposit premiums declined to 6.42 cents per $100 of SAIF-insured deposits per year from the prior rate of 23 cents, while the 1998 SAIF deposit premiums declined further to 5.40 cents per $100 of SAIF-insured deposits. F-57 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (36) Extraordinary Loss from Extinguishment of Debt During 1996, the Bank repurchased $44 million aggregate principal amount of the $50 million in 11.20% Senior Notes (as defined herein) assumed in the SFFed Acquisition, resulting in an extraordinary loss of approximately $1.6 million, net of income taxes, on the early extinguishment of debt. In connection with the Debt Tender Offers during 1998, GS Holdings purchased $914.5 million aggregate principal amount of the FN Holdings Notes for an aggregate purchase price, including accrued interest payable of $1.1 billion, resulting in an extraordinary loss of $98.7 million, net of income taxes, on the early extinguishment of such debt. In connection with the Parent Holdings Defeasance during 1998, GS Financial redeemed $455 million aggregate principal amount of the Parent Holdings Notes for an aggregate redemption price, including accrued interest payable, of $553.7 million. The after-tax redemption premiums and expenses paid in connection with the Parent Holdings Defeasance totalled $51.6 million and are reflected as extraordinary loss, net of taxes, on the consolidated statement of income for the year ended December 31, 1998. (37) Commitments and Contingencies In the ordinary course of business, the Company has commitments and contingent liabilities that are not reflected in the accompanying consolidated financial statements. The Company, through FNMC, enters into financial instruments with off-balance sheet risk through the origination and sale of mortgage loans and the management of the related loss exposure caused by fluctuations in interest rates. These financial instruments include commitments to extend credit and purchase loans (mortgage loan pipeline) and mandatory and optional forward commitments to sell loans. The following is a summary of the Company's pipeline of loans in process and mandatory forward commitments to sell loans at December 31, 1998 (in thousands): Commitments to originate and purchase loans $ 4,016,014 Mandatory commitments to sell loans 2,746,839 The Company's pipeline of loans in process includes loan applications in various stages of processing. Until all required documentation is provided and underwritten, there is no credit risk to the Company. There is no interest rate risk until a rate commitment is extended by the Company to a borrower. Some of these commitments will ultimately be denied by the Company or declined by the borrower and therefore the commitment amounts do not necessarily represent future cash requirements. Loans in process for which rates were committed to the borrower totalled approximately $1.6 billion at December 31, 1998. On a daily basis, the Company determines what percentage of the portfolio of loans in process for which rate commitments have been extended to a borrower to hedge. Both the anticipated percentage of the pipeline that is expected to fund and the inherent risk position of the portfolio are considered in making this determination. Mandatory and optional delivery forward commitments to sell loans are used by the Company to hedge its interest rate exposure from the time a loan has a committed rate to the time the loan is sold. These instruments involve varying degrees of credit and interest rate risk. Credit risk on these instruments is controlled through credit approvals, limits and monitoring procedures. To the extent that counterparties are not able to fulfill forward commitments, the Company is at risk for any fluctuations in the market value of the mortgage loans and locked pipeline. Realized gains and losses on mandatory and optional-delivery forward commitments are recognized in the period settlement occurs. Unrealized gain and losses on mandatory and optional-delivery forward commitments are included in the lower of cost or market valuation adjustment to mortgage loans held for sale. On September 28, 1994, the Company entered into an agreement with FNMA pursuant to which FNMA provided credit enhancements for certain bond-financed real estate projects originated by Old FNB. The agreement requires that the Company pledge to FNMA collateral in the form of certain eligible securities which are held by a third party trustee. The collateral requirement varies based on the balance of the bonds outstanding, losses incurred (if any), as well as other factors. At December 31, 1998, the Company had pledged as collateral certain securities available for sale with a F-58 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) carrying value of $75.3 million, of which $71.4 million was pledged as collateral to guarantee credit enhancements on loans securitized by FNMA. At December 31, 1998, mortgage-backed securities available for sale with a carrying value of $116.5 million were pledged to FNMA associated with the sales of certain securitized multi-family loans. At December 31, 1998, the Bank had pledged as collateral certain mortgage-backed securities available for sale with a carrying value of $213.2 million and $5.5 million to guarantee credit enhancements on loans securitized by FNMA and FHLMC, respectively. At December 31, 1998, the Bank had pledged as collateral certain mortgage-backed securities available for sale with a carrying value of $36.2 million to guarantee state and local agency deposits. At December 31, 1998, the Bank had pledged as collateral certain mortgage-backed securities available for sale with a carrying value of $18.3 million to guarantee certain deposits with the Federal Reserve Bank. In addition, the Bank retains principal and interest funds on securitized loans with appropriate collateral held and monitored by the trustee. The pledge agreement requires the collateral to be 150% of the average remittances for the prior twelve months, to be adjusted quarterly. At December 31, 1998, the Bank had pledged as collateral certain mortgage-backed securities available for sale with a carrying value of $260.1 million. At December 31, 1998, mortgage-backed securities available for sale and mortgage-backed securities held to maturity of $8.4 billion and $2.5 billion, respectively, were pledged as collateral for various obligations as discussed in notes 11, 12, 22 and 23. At December 31, 1997, mortgage-backed securities available for sale and mortgage-backed securities held to maturity of $4.1 billion and $1.3 billion, respectively, were pledged as collateral for various obligations. At December 31, 1998, $19.1 billion in residential loans were pledged as collateral for FHLB advances. At December 31, 1998 and 1997, loans receivable included approximately $7.8 billion and $7.5 billion, respectively, of loans that had the potential to experience negative amortization. (38) Legal Proceedings Goodwill Litigation Against the Government The Bank is the plaintiff in a claim against the United States in the lawsuit, California Federal Bank v. United States, Civil Action No. 92-138C (the "California Federal Litigation"). In the California Federal Litigation, the Bank alleges, among other things, that the United States breached certain contractual commitments regarding the computation of its regulatory capital for which the Bank seeks damages and restitution. The Bank's claims arose from changes, mandated by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), with respect to the rules for computing Old California Federal's regulatory capital. In connection with the Glen Fed Merger, the Bank is a plaintiff in a claim against the United States in the lawsuit Glendale Federal Bank, Federal Savings Bank v. United States, No. 90-772C ("Glendale Goodwill Litigation"). In the Glendale Goodwill Litigation, 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 merged with a Florida thrift and was permitted to include the goodwill resulting from the merger in its regulatory capital. 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. 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. 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 F-59 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) 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 were held on September 11, 1998. California Federal anticipates a decision on April 9, 1999. In connection with the Cal Fed Acquisition, the Bank recorded as an asset part of the estimated after-tax cash recovery from the California Federal Litigation that will inure to the Bank, net of amounts payable to holders of the Litigation Interests and the Secondary Litigation Interests in any such recovery (the "Goodwill Litigation Asset"). In connection with the Glen Fed Merger, the Bank recorded a second Goodwill Litigation Asset related to the estimated after-tax cash recovery from the Glendale Goodwill Litigation that will inure to the Bank, net of amounts payable to holders of the Litigation Tracking Warrants. The Goodwill Litigation Asset related to the California Federal Litigation was recorded at its estimated fair value of $100 million, net of estimated tax liabilities, as of January 3, 1997. The Goodwill Litigation Asset related to the Glendale Goodwill Litigation was recorded at its estimated fair value of $60 million, net of estimated tax liabilities, as of September 11, 1998. Both Goodwill Litigation Assets are included in other assets in the consolidated balance sheet as of December 31, 1998. Other Litigation In addition to the matters described above, the Company is involved in legal proceedings on claims incidental to the normal conduct of its business. Although it is impossible to predict the outcome of any outstanding legal proceedings, management believes that such legal proceedings and claims, individually or in the aggregate, will not have a material effect on the financial condition or results of operations of the Company. (39) Off-Balance-Sheet Activities Credit Related Financial Instruments The Company is a party to credit related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Company's exposure to credit loss is represented by the contractual amount of these commitments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. Listed below are unfunded financial instruments whose contract amounts represent credit risk at December 31, 1998 and 1997 (in thousands): Contract Amount --------------- Commitments to extend credit: 1998 1997 - ----------------------------- ---- ---- Unutilized consumer lines of credit $905,907 $465,292 Unutilized commercial lines of credit 169,536 23,277 Commercial and standby letters of credit 4,552 23,757 Unutilized consumer lines of credit are commitments to extend credit. These lines are either secured or nonsecured and may be cancelled by the Company if certain conditions of the contract are not met. Many consumer lines of credit customers are not expected to fully draw down their total lines of credit and, therefore, the total contractual amount of these lines does not necessarily represent future cash requirements. Unutilized commitments under commercial lines of credit are commitments for possible future extensions of credit to existing customers. These lines of credit are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed. Commercial and standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within five years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company generally holds collateral supporting those commitments in an amount deemed to be necessary. F-60 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) Derivative Financial Instruments The Company utilizes various derivative instruments for other-than-trading purposes such as asset/liability management. The primary focus of the Company's asset/liability management program is to measure and monitor the sensitivity of the Company's net portfolio value and net income under varying interest rate scenarios. On a quarterly basis, the Company simulates the net portfolio value and net income expected to be earned over a twelve-month period following the date of simulation. The simulation is based on a projection of market interest rates at varying levels and estimates the impact of such market rates on mortgage prepayment speeds, the levels of interest-earning assets and interest-bearing liabilities during the measurement period. Based upon the outcome of the simulation analysis, the Company may consider the use of derivatives as a means of reducing the volatility of net portfolio value and projected net income within certain ranges of projected changes in interest rates. The Company evaluates the effectiveness of entering into any derivative instrument agreement by measuring the cost of such an agreement in relation to the reduction in net portfolio value and net income volatility within an assumed range of interest rates. Derivative financial instruments include swaps, futures, forwards, and options contracts, all of which derive their value from underlying interest rates. These transactions involve both credit and market risk. The notional amounts are amounts on which calculations, payments, and the value of the derivative are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to these agreements. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, but does not expect any counterparties to fail their obligations. The Company deals only with primary dealers and the FHLB of San Francisco. Derivative instruments are generally either negotiated over-the-counter ("OTC") contracts or standardized contracts executed on a recognized exchange. Negotiated OTC derivative contracts are generally entered into between two counterparties that negotiate specific agreement terms, including the underlying instrument, amount, exercise prices and maturity. Interest Rate Swaps -------------------- The Company utilizes interest rate swaps primarily as an asset/liability management strategy to hedge against the interest rate risk inherent in fixed-rate FHLB advances. Interest rate swap agreements are contracts to make or receive payments, such as making a series of floating rate payments in exchange for receiving a series of fixed rate payments. Payments related to swap contracts are made either monthly, quarterly or semi-annually by one of the parties depending on the specific terms of the related contract. The notional amount of the contracts, on which the payments are based, are not exchanged. The primary risks associated with swaps are the exposure to movements in interest rates and the ability of the counterparties to meet the terms of the contract. There were no interest rate swap agreements outstanding at December 31, 1998. At December 31, 1997, interest rate swap agreements with a notional balance of $400 million were outstanding. These agreements provided for the Company to make payments at a variable rate determined by a specified index (three month LIBOR) in exchange for receiving payments at a fixed rate. The interest rate swap agreements matured in April of 1998. At December 31, 1997, the weighted average pay rate was 5.76% and the weighted average receive rate was 8.38%. Principal Only Swaps --------------------- The Company utilizes principal only ("PO") swap agreements to hedge against prepayment risk in its mortgage servicing portfolio caused by declining interest rates. PO swap agreements simulate the ownership of a PO strip, the value of which is affected directly by prepayment rates themselves in an inverse manner as servicing rights, which act in a manner similar to interest only ("IO") strips. Under the terms of the PO swap agreements, the counterparty to the transaction purchases a PO strip and places the PO strip in a trust. The contract calls for the Company to pay floating interest to the counterparty based on: (i) an index tied to one month LIBOR and (ii) the notional balance of the swap. The contract calls for the Company to receive cash from the counterparty based on the cashflows received from the PO strip. The amounts to be paid and to be received are then netted together each month. The structure of this instrument results in increased cashflows and positive changes in the value of the swap during a declining interest rate environment. F-61 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) This positive change in the value of the swap is highly correlated to prepayment activity. PO swap agreements present yield curve risk to the extent that short term interest rates (which impact the cash amount that the Company pays on the swap to the counterparty) rise while long term rates (which drive prepayment rates) stay the same. A third type of risk associated with PO swaps is the ability of the counterparties to meet the terms of the contract. At December 31, 1998, PO swap agreements with a notional balance of $164.7 million were outstanding. During 1998, the calculated amount to be paid to and to be received from the PO swap counterparties was $6.2 million and $11.2 million, respectively. The Company received $16.1 million from counterparties to terminate PO swap agreements in 1998. At December 31, 1997, PO swap agreements with a notional balance of $150.2 million were outstanding. During 1997, the calculated amount to be paid to and to be received from the PO swap counterparties was $5.2 million and $2.4 million, respectively. The Company received $4.2 million from counterparties to terminate PO swap agreements in 1997. Prepayment Linked Swaps ------------------------ The Company utilizes prepayment linked swap agreements to hedge against prepayment risk in its mortgage servicing portfolio caused by declining interest rates. Prepayment linked swap agreements are similar to interest rate floors, discussed below. However, interest rate floor contracts provide for the counterparty to make immediate payments to the Company if the floating rate drops below a specified strike rate. Under the terms of the prepayment linked swap agreements, the Company is to pay fixed interest to the counterparty based on: (i) a fixed rate and (ii) the amortized notional balance of the swap. The Company is to receive cash from the counterparty only after a sustained drop in the 10-year Constant Maturity Treasury interest rate below a strike interest rate. The amounts to be paid and to be received are netted together each month. The structure of this instrument results in increased cashflows and positive changes in the value of the swap during a sustained decline in the interest rate environment. This positive change in the value of the swap is correlated to prepayment activity. Prepayment linked swap agreements have basis risk and yield curve risk. A third type of risk associated with prepayment linked swaps is the ability of the counterparties to meet the terms of the contract. At December 31, 1998, prepayment linked swap agreements with a notional balance of $1.9 billion were outstanding. During 1998, the calculated amount to be paid to and to be received from the prepayment linked swap counterparties was $.2 million and $.8 million, respectively. No prepayment linked swap agreements were terminated in 1998. At December 31, 1997, there were no prepayment linked swap agreements outstanding. Interest Rate Floors --------------------- The Company currently uses interest rate floors to hedge against prepayment risk in its mortgage servicing portfolio caused by declining interest rates. Interest rate floors are interest rate protection instruments that involve payment from the seller to the buyer of an interest differential. This differential represents the difference between a long-term rate (e.g. 10-year Constant Maturity Swaps in 1998, 10-year Constant Maturity Treasury in 1997) and an agreed-upon rate, the strike rate, applied to a notional principal amount. By purchasing a floor, the Company will be paid the differential by a counterparty, should the current short-term rate fall below the strike level of the agreement. The Company generally receives cash monthly on purchased floors (when the current interest rate falls below the strike rate.) The unamortized premium, if any, paid for interest rate purchased floor agreements are included with the assets hedged. Interest rate floors are subject to basis risk because changes in the relationship between prepayment rates and the interest rate may occur, as well as market volatility and swap spread movement. In addition, a credit risk associated with purchased interest rate floor agreements is the ability of the counterparties to meet the terms of the contract. At December 31, 1998 and 1997, the Company was a party to interest rate floor contracts with a weighted average maturity of 4.8 years and 4.0 years, respectively. At December 31, 1998, the notional amount of the remaining interest rate floor contracts was $2.1 billion, the weighted average strike rate was 5.31% and the monthly floating rate was 5.47%. During 1998, the Company received cash from the interest rate floor counterparties in the amount of $4.8 million. At December 31, 1997, the notional amount of the remaining interest rate floor contracts was $970 million, the weighted average strike rate was 5.79% and the monthly floating rate was 5.74%. During 1997, the Company received cash from the interest rate floor counterparties in the amount of $.5 million. The amount of the unamortized premium on the interest rate floors at December 31, 1998 and 1997 was $27.6 million and $6.5 million, respectively. At December 31, 1998, the floating rate exceeded the strike rate by 0.16%. At December 31, 1997, the strike rate exceeded the floating rate by 0.05%. F-62 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) Swaptions --------- The Company also uses swaptions to hedge against the prepayment risk in its mortgage servicing portfolio caused by declining interest rates. A swaption (a combination of an interest rate swap and an option) is an over-the-counter option that provides the right but not the obligation to enter into an interest rate swap agreement at predetermined terms at some time in the future. The unamortized premiums, if any, paid for swaptions are included with the assets hedged. Swaptions are subject to basis risk because changes in the relationship between prepayment rates and the interest rate may occur, as well as market volatility and swap spread movement. In addition, a credit risk associated with swaptions is the ability of the counterparties to meet the terms of the contract. At December 31, 1998, the Company was a party to swaption contracts with a weighted average maturity of 2.8 years in which the Company paid the counterparties premiums in exchange for the right but not the obligation to purchase an interest rate swap agreement. Under the terms of the underlying interest rate swap agreement, the Company would pay the variable rate tied to three month LIBOR and would receive the fixed rate. At December 31, 1998, the notional amount of the underlying interest rate swap contract was $2.3 billion, the weighted average strike rate was 5.57% and three month LIBOR rate was 5.06%. At December 31, 1998, the strike rate exceeded the floating rate by 0.51%. The unamortized premium on the swaptions at December 31, 1998 was $60.2 million. At December 31, 1997, there were no swaption contracts outstanding. During 1998, there were no swaption contracts that expired or that were sold. Information pertaining to the notional amounts of the Company's derivative financial instruments is as follows (in thousands):
December 31, 1998 December 31, 1997 ----------------- ----------------- Notional Notional Amount Credit Risk (1) Amount Credit Risk (1) ------ --------------- ------ --------------- Interest rate swaps $ -- $ -- $ 400,000 $ 2,954 Principal only swaps 164,672 18,770 150,211 13,520 Prepayment linked swaps 1,850,000 1,255 -- -- Interest rate floors 2,075,000 32,229 970,000 18,024 Interest rate swaptions 2,345,000 89,332 -- -- ---------- -------- ---------- ------- Total $6,434,672 $141,586 $1,520,211 $34,498 ========== ======== ========== =======
(1) Credit risk represents current replacement cost after the effects of master netting agreements. The maturity of derivative financial instruments used for other-than-trading purposes at December 31, 1998 is as follows (in thousands):
Notional Amounts ---------------------------------------------------------------------- 1999 2000 2001 2003 Total ---- ---- ---- ---- ----- Principal only swaps $ 47,043 $9,105 $ 108,524 $ -- $ 164,672 Prepayment linked swaps 1,850,000 -- -- -- 1,850,000 Interest rate floors -- -- -- 2,075,000 2,075,000 Interest rate swaptions -- -- 2,345,000 -- 2,345,000 ---------- ------ ---------- ---------- ---------- Total $1,897,043 $9,105 $2,453,524 $2,075,000 $6,434,672 ========== ====== ========== ========== ==========
F-63 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) The year-end fair values of derivative financial instruments used for other-than-trading purposes at December 31, 1998 and 1997 are listed below (in thousands). Fair value amounts consist of unrealized gains and losses, accrued interest receivable and payable, and premiums paid or received. 1998 1997 ---- ---- Interest rate swaps $ -- $ 2,954 Principal only swaps 18,770 13,520 Prepayment linked swaps 1,255 -- Interest rate floors 32,229 18,024 Interest rate swaptions 89,332 -- -------- ------- Total $141,586 $34,498 ======== ======= (40) Earnings per Common 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 period presented. Information used to calculate basic and diluted earnings per share ("EPS") is as follows (dollars in thousands, except per share data):
1998 1997 1996 ----------------------- --------------------- ------------------------ Basic Diluted Basic Diluted Basic Diluted EPS EPS EPS EPS EPS EPS --- --- --- --- --- --- Income before extraordinary loss $398,088 $398,088 $94,948 $94,948 $535,309 $535,309 Extraordinary loss 150,333 150,333 -- -- 1,586 1,586 -------- -------- ------- ------- -------- -------- Net Income $247,755 $247,755 $94,948 $94,948 $533,723 $533,723 ======== ======== ======= ======= ======== ======== Weighted average common shares outstanding 78,046 78,046 56,723 56,723 56,723 56,723 Contingently issuable shares 1,511 1,511 -- -- -- -- -------- -------- ------- ------- -------- -------- Basic weighted average common shares outstanding (i) 79,557 79,557 56,723 56,723 56,723 56,723 Effect of Dilutive Securities: Options and warrants (ii) -- 1,595 -- -- -- -- Convertible preferred stock -- 389 -- -- -- -- -------- -------- ------- ------- -------- -------- Total 79,557 81,541 56,723 56,723 56,723 56,723 ======== ======== ======= ======= ======== ======== Earnings per common share before extraordinary item $5.00 $4.88 $1.67 $1.67 $9.44 $9.44 Extraordinary loss (1.89) (1.84) -- -- (0.03) (0.03) ----- ----- ----- ----- ----- ----- Earnings per common share $3.11 $3.04 $1.67 $1.67 $9.41 $9.41 ===== ===== ===== ===== ===== =====
(i) 1998 shares include the effect of 5,687,996 contingent shares issuable to First Gibraltar and Hunter's Glen as contingent consideration for the net tax benefits realized by the Bank during 1998. See note 41. (ii) Golden State's diluted shares outstanding are not affected by the LTW(TM)s until they become excercisable because the amount of the proceeds from the Glendale Goodwill Litigation and the number of shares of common stock to be issued cannot be determined until the LTW(TM)s become exercisable. F-64 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (41) Contingent Shares During 1998, net tax benefits totalling $102.7 million were realized by California Federal with respect to its gain from the Florida Branch Sale and the receipt of a federal income tax refund in excess of the amount reflected on the Company's consolidated balance sheets. Consistent with the terms of the Golden State Merger agreement, a total of 5,687,996 shares of Golden State Common Stock, valued at $102.7 million, are to be issued to First Gibraltar and Hunter's Glen as a result of these benefits. In January 1999, a total of 5,540,319 shares of common stock, valued at $100 million, were issued. The remaining 147,677 common shares, valued at $2.7 million, are expected to be issued at a future date. Such contingent shares are included, to the extent appropriate, in the 1998 basic and diluted EPS calculations. See note 40. (42) Fair Value of Financial Instruments The following table presents the carrying amounts and fair values of the Company's financial instruments at December 31, 1998 and 1997 (in thousands):
1998 1997 ------------------------------ ------------------------------ Carrying Fair Carrying Fair Value Value Value Value ----- ----- ----- ----- Financial Assets: Cash and cash equivalents $ 967,950 $ 967,950 $ 412,311 $ 412,311 Securities available for sale 770,747 770,747 813,085 813,085 Securities held to maturity 250,964 251,489 58,299 58,299 Mortgage-backed securities available for sale 12,947,992 12,947,992 5,076,598 5,076,598 Mortgage-backed securities held to maturity 2,770,913 2,825,227 1,337,877 1,373,289 Loans held for sale 2,366,583 2,379,216 1,483,466 1,498,860 Loans receivable, net 30,280,944 30,561,022 19,424,410 19,786,805 Investment in FHLB 1,000,147 1,000,147 468,191 468,191 Accrued interest receivable 317,455 317,455 188,203 188,203 Mortgage servicing rights 943,581 989,683 536,703 673,975 Financial Liabilities: Deposits 24,620,066 24,601,797 16,202,605 16,224,399 Securities sold under agreements to repurchase 4,238,395 4,238,395 1,842,442 1,842,737 Borrowings: Gross 22,375,557 22,425,592 11,232,931 11,427,457 Interest rate swap agreements (1) -- -- (401) (2,954) ----------- ----------- ----------- ----------- Total borrowings $22,375,557 $22,425,592 $11,232,530 $11,424,503 =========== =========== =========== =========== Off-balance sheet net unrealized gains (losses): Forward Commitments: Commitments to originate loans -- $ 9,102 -- $ 7,552 Commitments to sell loans -- (5,412) -- (7,099) Derivatives: Interest rate swaps -- -- -- 2,954 Principal only swaps -- 18,770 -- 13,520 Prepayment linked swaps -- 1,255 -- -- Interest rate floors -- 32,229 -- 18,024 Interest rate swaptions -- 89,332 -- --
(1) Designated as a hedge against FHLB advances. F-65 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) The carrying amounts in the table are included in the accompanying consolidated balance sheet under the indicated captions, except for off-balance sheet net unrealized gains (losses). The following summary presents a description of the methodologies and assumptions used to estimate the fair value of the Company's financial instruments. Much of the information used to determine fair value is highly subjective. When applicable, readily available market information has been utilized. However, for a significant portion of the Company's financial instruments, active markets do not exist. Therefore, considerable judgment was required in estimating fair value for certain items. The subjective factors include, among other things, the estimated timing and amount of cash flows, risk characteristics, and interest rates, all of which are subject to changes. Cash and cash equivalents: Cash and cash equivalents are valued at their carrying amounts included in the consolidated statement of financial condition, which are reasonable estimates of fair value due to the relatively short period to maturity of the instruments. Securities and mortgage-backed securities: Securities and mortgage-backed securities are valued at quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans held for sale: Loans held for sale are valued based on quoted market prices for mortgage-backed securities backed by similar loans. Loans receivable, net: Fair values are estimated for loans in groups with similar financial and risk characteristics. Loans are segregated by type including residential, multi-family and commercial. Each loan type is further segmented into fixed and variable interest rate terms and by performing and non-performing categories in order to estimate fair values. For performing residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources. The fair value of performing commercial and multi-family loans is calculated by discounting scheduled principal and interest cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the respective loan type. Fair value for non-performing loans is based on discounting estimated cash flows using a rate commensurate with the risk associated with the estimated cash flows, or underlying collateral values, where appropriate. Investment in FHLB: Since no secondary market exists for FHLB stock and the stock is bought and sold at par by FHLB, fair value of these financial instruments approximates the carrying value. Accrued interest: The carrying amounts of accrued interest approximate their fair values. Mortgage servicing rights: The fair value of mortgage servicing rights is based on market prices for comparable mortgage servicing contracts, when available, or alternatively a valuation model that calculates the present value of future net servicing income. In using the valuation model, the Company incorporates assumptions that market participants would use in estimating future net servicing income, which include estimates of the cost of servicing, the discount rate, mortgage escrow earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Deposits: The fair values of demand deposits, passbook accounts, money market accounts, and other deposits immediately withdrawable, by definition, approximate carrying values for the respective financial instruments. For fixed maturity deposits, the fair value was estimated by discounting expected cash flows by the current offering rates of deposits with similar terms and maturities. Securities sold under agreements to repurchase: The fair value of securities sold under agreements to repurchase is estimated using a discounted cash flow analysis based on interest rates currently offered on such repurchase agreements with similar maturities. F-66 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) Borrowings: The fair value of borrowings, other than FHLB advances, is estimated using discounted cash flow analyses based on current incremental rates for similar borrowing arrangements. The fair values of FHLB advances are estimated using a discounted cash flow analysis based on interest rates currently offered on advances with similar maturities. Off-balance sheet financial instruments: FORWARD COMMITMENTS Fair values of the Company's commitments to originate loans are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate commitments, fair value also considers the difference between current levels of interest rates and the committed rates. Fair values of forward commitments to sell loans are determined using current estimated replacement costs. DERIVATIVE FINANCIAL INSTRUMENTS Derivative financial instruments are recorded at fair value based on the estimated amounts that the Company would receive or pay to terminate the contracts at the reporting date (i.e., mark-to-market value). Dealer quotes are available for substantially all of the Company's derivative financial instruments. F-67 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (43) Selected Quarterly Financial Data (Unaudited) -------------------------------------------- The following table presents selected quarterly financial data for the years ended December 31, 1998 and 1997 (in thousands, except per share data):
Quarter Ended ------------------------------------------------------------ December 31, September 30, June 30, March 31, 1998 1998 1998 1998 Total 1998 ---- ---- ---- ---- ---------- Total interest income $853,515 $618,337 $543,539 $533,422 $2,548,813 Total interest expense (588,117) (450,026) (398,536) (382,866) (1,819,545) -------- -------- -------- -------- ---------- Net interest income 265,398 168,311 145,003 150,556 729,268 Provision for loan losses (10,000) (10,000) (10,000) (10,000) (40,000) -------- -------- -------- -------- ---------- Net interest income after provision for loan losses 255,398 158,311 135,003 140,556 689,268 Total noninterest income 93,897 198,368 94,956 89,778 476,999 Total noninterest expense (260,769) (200,517) (157,461) (145,256) (764,003) -------- -------- -------- -------- ---------- Income before income taxes, minority interest and extraordinary item 88,526 156,162 72,498 85,078 402,264 Income tax (expense) benefit (45,494) (71,973) 237,708 (13,890) 106,351 -------- -------- -------- -------- ---------- Income before minority interest and extraordinary item 43,032 84,189 310,206 71,188 508,615 Minority interest (27,929) (36,406) (22,662) (23,530) (110,527) -------- -------- -------- -------- ---------- Income before extraordinary item 15,103 47,783 287,544 47,658 398,088 Extraordinary loss (70,326) (80,007) -- -- (150,333) -------- -------- -------- -------- ---------- Net (loss) income available to common stockholders $(55,223) $(32,224) $287,544 $ 47,658 $ 247,755 ======== ======== ======== ======== ========== Earnings per share: Basic Before extraordinary item $ 0.11 $ 0.68 $ 5.07 $ 0.84 $ 5.00 Extraordinary item (0.52) (1.14) -- -- (1.89) -------- -------- -------- -------- ---------- Net income $ (0.41) $ (0.46) $ 5.07 $ 0.84 $ 3.11 Diluted Before extraordinary item $ 0.11 $ 0.65 $ 5.07 $ 0.84 $ 4.88 Extraordinary item (0.51) (1.09) -- -- (1.84) -------- -------- -------- -------- ---------- Net income $ (0.40) $ (0.44) $ 5.07 $ 0.84 $ 3.04 ======== ======== ======== ======== ==========
F-68 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued)
Quarter Ended ------------------------------------------------------------ December 31, September 30, June 30, March 31, 1997 1997 1997 1997 Total 1997 ------------ ------------- -------- --------- ---------- Total interest income $530,809 $531,303 $527,837 $512,751 $2,102,700 Total interest expense (383,286) (380,268) (375,468) (359,395) (1,498,417) -------- -------- -------- -------- ---------- Net interest income 147,523 151,035 152,369 153,356 604,283 Provision for loan losses (19,950) (19,950) (19,950) (19,950) (79,800) -------- -------- -------- -------- ---------- Net interest income after provision for loan losses 127,573 131,085 132,419 133,406 524,483 Total noninterest income 108,351 94,846 82,448 78,839 364,484 Total noninterest expense (170,443) (154,758) (171,644) (153,724) (650,569) -------- -------- -------- -------- ---------- Income before income taxes and minority interest 65,481 71,173 43,223 58,521 238,398 Income tax expense (9,888) (12,208) (9,025) (10,194) (41,315) -------- -------- -------- -------- ---------- Income before minority interest 55,593 58,965 34,198 48,327 197,083 Minority interest (24,961) (25,938) (26,864) (24,372) (102,135) -------- -------- -------- -------- ---------- Net income available to common stockholders $ 30,632 $ 33,027 $ 7,334 $ 23,955 $ 94,948 ======== ======== ======== ======== ========== Earnings per share: Basic $0.54 $0.58 $0.13 $0.42 $1.67 Diluted $0.54 $0.58 $0.13 $0.42 $1.67
(44) Condensed Parent Company Financial Information The following represents condensed balance sheets of the Company (parent company only) at December 31, 1998 and 1997 (in thousands):
1998 1997 ---- ---- Assets Cash $ 16,756 $ -- Investment in subsidiaries 1,809,306 843,507 Other assets and deferred charges 3,149 15,077 ---------- -------- Total assets $1,829,211 $858,584 ========== ======== Liabilities, Minority Interest and Stockholders' Equity Parent Holdings Notes $ -- $455,000 Discount on borrowings -- (3,907) Accrued interest payable -- 11,843 Other liabilities 247,433 484 ---------- -------- Total liabilities 247,433 463,420 Minority interest - FN Holdings Preferred Stock -- 25,680 Total stockholders' equity 1,581,778 369,484 ---------- -------- Total liabilities, minority interest and stockholders' equity $1,829,211 $858,584 ========== ========
The following represents parent company only condensed statements of income for the years ended December 31, 1998, 1997 and 1996 (in thousands): F-69 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued)
1998 1997 1996 ---- ---- ---- Dividends received from GS Financial Corp. $ 38,200 $ 56,876 $ 57,902 Interest expense 39,354 57,613 40,494 Noninterest expense 377 1,850 1,167 -------- -------- -------- 39,731 59,463 41,661 Income before equity in undistributed net income of subsidiaries (1,531) (2,587) 16,241 Equity in undistributed net income of subsidiaries 243,523 104,493 519,621 -------- -------- -------- Income before income taxes and minority interest 241,992 101,906 535,862 Income tax (benefit) expense (6,341) 5,833 2,676 -------- -------- -------- Income before minority interest 248,333 107,739 538,538 Minority interest - FN Holdings Preferred Stock dividends 578 12,791 4,815 -------- -------- -------- Net income $247,755 $ 94,948 $533,723 ======== ======== ========
The following represents parent company only statements of cash flows for the years ended December 31, 1998, 1997 and 1996 (in thousands):
1998 1997 1996 ---- ---- ---- Cash flows from operating activities: Net income $ 247,755 $ 94,948 $ 533,723 Adjustments to reconcile net income to net cash provided by operating activities: Accretion of discount on Parent Holdings Notes -- 744 523 Amortization of deferred issuance costs -- 1,825 1,167 (Increase) decrease other assets and deferred charges (693) 876 (2,332) (Decrease) increase in other liabilities (2,890) 1,775 (2,163) Increase (decrease) in accrued interest payable 33,167 (6) 11,849 Minority interest - FN Holdings Preferred Stock 578 12,791 4,815 Equity in undistributed net income of subsidiaries (243,523) (104,493) (519,621) ----------- --------- --------- Net cash provided by operating activities 34,394 8,460 27,961 ----------- --------- --------- Cash flows provided by investing activities: Redemption of FN Holdings' class C common stock -- -- 124,670 ----------- --------- --------- Net cash provided by investing activities -- -- 124,670 ----------- --------- --------- Cash flows used in financing activities: Proceeds from issuance of Parent Holdings Notes -- -- 434,083 Exercise of stock options 644 -- -- Redemption of Series A Preferred Stock (68) -- -- Sale of treasury stock 218 -- -- Capital contribution 1,464,361 49 1,819 Capital distribution (1,482,793) -- (434,083) Dividends -- (8,509) (154,450) ----------- --------- --------- Net cash used in financing activities (17,638) (8,460) (152,631) ----------- --------- --------- Net change in cash and cash equivalents 16,756 -- -- Cash and cash equivalents at beginning of year -- -- -- ----------- --------- --------- Cash and cash equivalents at end of year $ 16,756 $ -- $ -- =========== ========= =========
F-70 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) Supplemental Disclosure of Cash Flow Information:
Year Ended December 31 ------------------------------------------- 1998 1997 1996 ---- ---- ---- (in thousands) Cash paid for interest $28,438 $56,875 $28,122 Non-cash investing and financing activities: Preferred stock dividends reinvested 107 2,227 792 Reduction of loans through redemption of and dividends on class C common stock -- -- 46,769 Dividend to Parent 230,161 -- --
(45) Subsequent Event (Unaudited) 10 5/8% Preferred Stock On February 5, 1999, the Board of Directors of the Bank resolved to redeem all outstanding shares of the 10 5/8% Preferred Stock on April 1, 1999 at $105.313 per share plus declared and unpaid dividends. Such shares will be purchased by GS Holdings. F-71 EX-2.2 2 AMENDMENT NO.1 EXHIBIT 2.2 AMENDMENT NO. 1 AMENDMENT NO. 1, dated as of July 13, 1998, by and among First Nationwide (Parent) Holdings Inc., a Delaware corporation, First Nationwide Holdings Inc., a Delaware corporation, Golden State Bancorp Inc., a Delaware corporation, Golden State Financial Corporation, a Delaware corporation, First Gibraltar Holdings Inc., a Delaware corporation, and Hunter's Glen/Ford Ltd., Texas limited partnership (collectively, the "Parties"), to the Agreement and Plan of Reorganization (the "Agreement"), dated as of February 4, 1998, by and among the Parties. Capitalized terms which are not otherwise defined herein shall have the meanings set forth in the Agreement. WHEREAS, in accordance with Section 8.3 of the Agreement, the Parties desire to amend the Agreement as set forth herein: NOW, THEREFORE, in consideration of the foregoing, and intending to be legally bound hereby, the Parties hereby agree as follows: 1. Section 1.6(c)(ii)(C) of the Agreement is hereby amended by adding the following new language at the end of subsection (3) thereof after the words "Effective Date" but before the period: , plus (4) if the closing of the sale of assets and the assumption of liabilities contemplated by the Purchase and Sale Agreement, dated as of March 29, 1998, by and between CFB and Union Planters Bank of Florida(the "Florida Branch Sale"), occurs on or before the Effective Date, then for the first Taxable Period immediately following the Effective Date, any federal income tax savings resulting from the Florida Branch Sale. For this purpose, the amount of federal income tax savings resulting from the Florida Branch Sale shall be an amount equal to (i) the product of the amount of the gain recognized by CFB for federal income tax purposes as a result of the Florida Branch Sale and the highest marginal federal income tax rate applicable to corporations for the taxable year in which the Florida Branch Sale occurs, less (ii) the amount of any federal income taxes actually paid as a result of such sale (including any payment in lieu of federal income taxes under the Tax Sharing Agreement(as defined in Section 6.14)) by CFB. 2. Section 1.6(c)(ii)(A) of the Agreement is hereby amended by adding the following new sentence at the end of such section: In the calculation of the Tax Benefits there shall be excluded any deductions resulting from or arising in connection with the refinancing of all of the long-term debt of FNH and Parent Holdings and the purchasing of all of the preferred stock of CFB, in each case outstanding as of the date hereof, pursuant to the refinancing transactions contemplated to be consummated immediately after the consummation of the transactions contemplated by this Agreement, or any transactions with substantially similar purpose or effect. 3. Section 6.7(b) of the Agreement is hereby deleted in its entirety and replaced with the following new Section 6.7(b): Parent Holdings shall use its reasonable best efforts to cause the persons serving as officers and directors of Golden State immediately prior to the Effective Time to be covered for a period of six (6) years from the Effective Time (the "Coverage Period") by the directors' and officers' liability insurance policy maintained by Golden State (except that effective as of the Effective Time the single aggregate coverage limit shall be increased to $100 million, and provided that Parent Holdings may substitute for such policy, as amended pursuant hereto, policies of directors' and officers' liability insurance of at least the same coverage and amounts and containing terms and conditions which are not less advantageous to such directors and officers of Golden State than the terms and conditions of such policy, as amended pursuant hereto) with respect to acts and omissions occurring prior to the Effective Time which were committed by such officers and directors in their capacity as such; provided that Parent Holdings shall not be required as to any such policy to pay premiums in excess of 300% of the amount currently expended annually by Golden State to obtain such insurance, and if such insurance cannot be obtained for such premium Parent Holdings shall obtain for such persons A-45 the maximum coverage that may be obtained for such premiums. It is the understanding of the parties hereto that the obligations of Parent Holdings contemplated by the preceding sentence are expected to be satisfied through the purchase by Parent Holdings, by means of the payment of a single premium prior to the Effective Time, of a directors' and officers' liability insurance policy with a single aggregate coverage limit of $100 million, and shall be so satisfied for so long as such policy remains in effect during the Coverage Period. 4. Section 6.14(a)(ii) and Section 6.14(b)(i) of the Agreement are hereby amended by deleting the words "Merger Sub" and inserting instead the words "New FNH". 5. All references to "this Agreement" in the Agreement shall be deemed to refer to the Agreement as amended hereby. 6. Each of the Parties represents to the other that (i) it has full corporate (or partnership) power and authority to execute and deliver this Amendment and, subject to the terms and conditions set forth in the Agreement, to consummate the transactions contemplated hereby, (ii) the execution and delivery of this Amendment by such party have been duly and validly approved by the Board of Directors of such party and no other corporate proceedings on the part of such party are necessary in connection with the execution and delivery of this Amendment by such party, and (iii) this Amendment has been duly and validly executed and delivered by such party and constitutes a valid and binding obligation of such party, enforceable against such party in accordance with its terms. 7. Except as expressly amended by this Amendment, the Agreement is hereby ratified and confirmed in all respects. 8. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original and all of which shall be considered one and the same agreement, and shall become effective when counterparts have been signed by each of the Parties and delivered to the other Parties, it being understood that all Parties need not sign the same counterpart. 9. This Amendment shall be governed and construed in accordance with the laws of the State of Delaware, without regard to any applicable conflicts of law provisions. A-46 IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the date first above written. GOLDEN STATE BANCORP INC. By: /s/ Richard A. Fink ----------------------- Name: Richard A. Fink Title: Vice Chairman GOLDEN STATE FINANCIAL CORPORATION By: /s/ Richard A. Fink ----------------------- Name: Richard A. Fink Title: Vice President FIRST NATIONWIDE (PARENT) HOLDINGS INC. By: /s/ Glenn P. Dickes ----------------------- Name: Glenn P. Dickes Title: Vice President FIRST NATIONWIDE HOLDINGS INC. By: /s/ Glenn P. Dickes ----------------------- Name: Glenn P. Dickes Title: Vice President FIRST GIBRALTAR HOLDINGS INC. By: /s/ Glenn P. Dickes ----------------------- Name: Glenn P. Dickes Title: Vice President HUNTER'S GLEN/FORD, LTD. By: /s/ Gerald J. Ford ----------------------- Name: Gerald J. Ford Title: General Partner A-47 EX-3.3 3 BYLAWS OF GOLDEN STATE BANCORP INC. BYLAWS OF GOLDEN STATE BANCORP INC. Adopted June, 23, 1997 As Amended - Effective May 18, 1999 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. The annual 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 on such date and time as shall be designated from time to time by the Board and stated 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 to be transacted at any special meeting of the stockholders called upon the written request of stockholders in accordance with this Section 3 shall be limited to the business set forth in such written request and any other business or proposals as the Board of Directors shall determine and shall be set forth in the notice of such meeting. 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 1 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 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 2 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 stock holders 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. "Advance Notice of New Business at Annual Meetings. At the annual meeting of stockholders only such business shall be conducted that is either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors (or any duly authorized committee thereof), (b) otherwise properly brought before the annual meeting by or at the direction of the Board of Directors (or any duly authorized committee thereof) or by the Chairman or (c) otherwise properly brought before the annual meeting by any stockholder of the Corporation (I) who is a stockholder of record on the date of the giving of the notice provided for in this Section 11 and on the record date for the determination of stockholders entitled to vote at such annual meeting and (ii) who complies with the notice procedures set forth in this Section 11. In addition to any other applicable requirements for business to be properly brought before an annual meeting by a stockholder, such stockholder must have given timely notice thereof in proper written form to the Secretary of the Corporation. To be timely, a stockholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation not less than ninety (90) days nor more than one-hundred twenty (120) days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within thirty (30) days before or after such anniversary date, notice by the stockholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs. To be in proper written form, a stockholder's notice to the Secretary must set forth as to each matter such stockholder proposes to bring before the annual meeting (i) a brief description 3 of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of such stockholder, (iii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such stockholder, (iv) a description of all arrangements or understandings between such stockholder and any other person or persons (including their names) in connection with the proposal of such business by such stockholder and any material interest of such stockholder in such business and (v) a representation that such stockholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting. No business shall be conducted at the annual meeting of stockholders except business brought before the annual meeting in accordance with the procedures set forth in this Section 11, provided, however, that, once business has been properly brought before the annual meeting in accordance with such procedures, nothing in this Section 11 shall be deemed to preclude discussion by any stockholder of any such business. If the Chairman of an annual meeting determines that business was not properly brought before the annual meeting in accordance with the foregoing procedures, the Chairman shall declare to the meeting that the business was not properly brought before the meeting and such business shall not be transacted. The provisions of this Section 11 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. 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 4 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 Chairman from among its members, and shall designate, when present, either the Chairman or the President or a Vice Chairman to preside at its meeting. 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, a 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 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 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 changes 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. Advance Notice for Nomination of Directors. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors of the Corporation, except as may be otherwise provided in the Certificate of Incorporation with respect to the right of holders of preferred stock of the Corporation to nominate and elect a specified number of directors in certain circumstances. Nominations of persons for election to the Board of Directors may be made at any annual meeting of stockholders, or at any special meeting of stockholders called for the purpose of electing directors, (a) by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (b) by any stockholder of the Corporation (i) who is a stockholder of record on the date of the giving of the notice provided for 5 in this Section 4 and on the record date for the determination of stockholders entitled to vote at such meeting and (ii) who complies with the notice procedures set forth in this Section 4. In addition to any other applicable requirements, for a nomination to be made by a stockholder, such stockholder must have given timely notice thereof in proper written form to the Secretary of the Corporation. To be timely, a stockholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation (a) in the case of an annual meeting, not less than ninety (90) days nor more than one hundred twenty (120) days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within thirty (30) days before or after such anniversary date, notice by the stockholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs; and (b) in the case of a special meeting of stockholders called for the purpose of electing directors, not later than the close of business on the tenth (10th) day following the day on which notice of the date of the special meeting was mailed or public disclosure of the date of the special meeting was made, whichever first occurs. To be in proper written form, a stockholder's notice to the Secretary must set forth (a) as to each person whom the stockholder proposes to nominate for election as a director (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by the person and (iv) any other information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder; and (b) as to the stockholder giving the notice (i) the name and record address of such stockholder, (ii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such stockholder, (iii) a description of all arrangements or understandings between such stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such stockholder, (iv) a representation that such stockholder intends to appear in person or by proxy at the meeting to nominate the persons named in its notice and (v) any other information relating to such stockholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. Such notice must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serve as a director if elected. No person shall be eligible for election as a director of the Corporation unless nominated 6 in accordance with the procedures set forth in this Section 4. If the Chairman of the meeting determines that a nomination was not made in accordance with the foregoing procedures, the Chairman shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded. 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. 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 II 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. 7 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. ARTICLE IV EXECUTIVE AND OTHER COMMITTEES SECTION 1. Appointment. The Board, by resolution adopted by a majority of the 8 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. 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 be 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 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 9 shall not be necessary to make it effective. 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 other 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 any 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. 10 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, CHECK 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. 11 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 31st day of December of each year. The Corporation shall be subject to an annual audit as of the end of its fiscal year by independent public 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 corporation 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, suite or proceeding, whether civil, 12 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 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 reasonable 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, suite or proceeding referred to in Sections 1 and 2 of this Article XII, 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 13 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 of this Article XII, 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 as 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 14 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. 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 15 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. 16 EX-4.2 4 FIRST NATIONWIDE (PARENT) HOLDINGS INC. ----------------------- FIRST NATIONWIDE (PARENT) HOLDINGS INC. 12 1/2% Senior Exchange Notes due 2003 ----------------------- FIRST SUPPLEMENTAL INDENTURE Dated as of September 10, 1998 Supplementing the Indenture, dated as of April 15, 1996, Between First Nationwide (Parent) Holdings Inc. and The Bank of New York, as Trustee ----------------------- THE BANK OF NEW YORK, AS TRUSTEE ----------------------- FIRST SUPPLEMENTAL INDENTURE, dated as of September 10, 1998 (the "First Supplemental Indenture"), among FIRST NATIONWIDE (PARENT) HOLDINGS INC., a Delaware corporation (the "Company"), and THE BANK OF NEW YORK (the "Trustee"), as Trustee under the Indenture referred to herein. WHEREAS, the Company and the Trustee heretofore executed and delivered an Indenture, dated as of April 15, 1996 (the "Indenture") in respect of the 12 1/2% Senior Exchange Notes due 2003 (the "Securities"); and WHEREAS, Section 5.01 of the Indenture provides that if First Nationwide Holdings Inc. ("FN Holdings") merges with or into any other person and FN Holdings is not the survivor in such merger that the survivor of the merger must expressly assume by supplemental indenture all of the obligations of the Company under the Securities and the Indenture and that such surviving person shall be the successor Company and shall succeed to, and be substituted for, the Company under the Indenture; and WHEREAS, Section 1.01 of the Indenture defines "FN Holdings" as FN Holdings and its successors; and WHEREAS, Section 4.07(a) of the Indenture requires that to the extent any shares of Capital Stock of FN Holdings are beneficially owned by the Permitted Holders that the Company shall not permit such shares of FN Holding to be held of record by any person other than the Company; and WHEREAS, pursuant to Sections 5.01 and 1.01 of the Indenture the surviving person in a merger with FN Holdings would become both the "Company" and "FN Holdings" for purposes of the Indenture and Section 4.07(a) does not make provision for the circumstance in which FN Holdings and the Company are the same entity as a result of compliance with Section 5.01 of the Indenture; and WHEREAS, the Company and the Trustee desire to cure such ambiguity, omission, defect or inconsistency in the Indenture; and WHEREAS, Section 9.01(1) of the Indenture provides that the Company and the Trustee may amend the Indenture and the Securities without notice to or consent of any Holders of the Securities in order to cure any ambiguity, omission, defect or inconsistency; and 2 WHEREAS, this First Supplemental Indenture has been duly authorized by all necessary corporate action on the part of the Company. NOW, THEREFORE, the Company and the Trustee agree as follows for the equal and ratable benefit of the Holders of the Securities: ARTICLE I AMENDMENT SECTION 1.1. Amendment to Section 4.07. Section 4.07(a) of the Indenture is hereby amended by adding the following at the end of the first sentence thereof: ; provided, however, that the foregoing shall have no application if, as a result of compliance with the provisions of Section 5.01 hereof, the Company and FN Holdings are the same Person. ARTICLE II MISCELLANEOUS SECTION 2.1. Interpretation. Upon execution and delivery of this First Supplemental Indenture, the Indenture shall be modified and amended in accordance with this First Supplemental Indenture, and all the terms and conditions of both shall be read together as though they constitute one instrument, except that, in case of conflict, the provisions of this First Supplemental Indenture will control. The Indenture, as modified and amended by this First Supplemental Indenture, is hereby ratified and confirmed in all respects and shall bind every Holder of Securities. In case of conflict between the terms and conditions contained in the Securities and those contained in the Indenture, as modified and amended by this First Supplemental Indenture, the provisions of the Indenture, as modified and amended by this First Supplemental Indenture, shall control. SECTION 2.2. Conflict with Trust Indenture Act. If any provision of this First Supplemental Indenture limits, qualifies or conflicts with any provision of the TIA that is required under the TIA to be part of and govern any provision of this First Supplemental Indenture, the provision of the TIA shall control. If any provi- 3 sion of this First Supplemental Indenture modifies or excludes any provision of the TIA that may be so modified or excluded, the provision of the TIA shall be deemed to apply to the Indenture as so modified or to be excluded by this First Supplemental Indenture, as the case may be. SECTION 2.3. Severability. In case any provision in this First Supplemental Indenture shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 2.4. Terms Defined in the Indenture. All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Indenture. SECTION 2.5. Headings. The Article and Section headings of this First Supplemental Indenture have been inserted for convenience of reference only, are not to be considered a part of this First Supplemental Indenture and shall in no way modify or restrict any of the terms or provisions hereof. SECTION 2.6. Benefits of First Supplemental Indenture, etc. Nothing in this First Supplemental Indenture or the Securities, express or implied, shall give to any Person, other than the parties hereto and thereto and their successors hereunder and thereunder and the Holders of the Securities, any benefit of any legal or equitable right, remedy or claim under the Indenture, this First Supplemental Indenture or the Securities. SECTION 2.7. Successors. All agreements of the Company in this First Supplemental Indenture shall bind its successors. All agreements of the Trustee in this First Supplemental Indenture shall bind its successors. SECTION 2.8. Trustee Not Responsible for Recitals. The recitals contained herein shall be taken as the statements of the Company and the Trustee assumes no responsibility for their correctness. SECTION 2.9. Certain Duties and Responsibilities of the Trustee. In entering into this First Supplemental Indenture, the Trustee shall be entitled to the benefit of every provision of the Indenture relating to the conduct or affecting the liability or affording protection to the Trustee, whether or not elsewhere herein so provided. 4 SECTION 2.10. Governing Law. This First Supplemental Indenture shall be governed by, and construed in accordance with, the laws of the State of New York but without giving effect to applicable principles of conflicts of law to the extent that the application of the laws of another jurisdiction would be required thereby. SECTION 2.11. Counterpart Originals. The parties may sign any number of copies of this First Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 5 IN WITNESS WHEREOF, the parties have caused this First Supplemental Indenture to be duly executed as of the date first written above. FIRST NATIONWIDE (PARENT) HOLDINGS INC. By: /s/ Glenn P. Dickes ---------------------------------------- Name: Glenn P. Dickes Title: Vice President and Secretary THE BANK OF NEW YORK, as Trustee By: _______________________________________ Name: Title: IN WITNESS WHEREOF, the parties have caused this First Supplemental Indenture to be duly executed as of the date first written above. FIRST NATIONWIDE (PARENT) HOLDINGS INC. By: -------------------------------------- Name: Glenn P. Dickes Title: Vice President and Secretary THE BANK OF NEW YORK, as Trustee By: /s/ THOMAS C. KNIGHT -------------------------------------- Name: THOMAS C. KNIGHT Title: ASSISTANT VICE PRESIDENT EX-4.5 5 FIRST NATIONWIDE HOLDINGS INC. --------------------------- FIRST NATIONWIDE HOLDINGS INC. 10 5/8% Senior Subordinated Exchange Notes Due 2003 --------------------------- SECOND SUPPLEMENTAL INDENTURE Dated as of September 11, 1998 Supplementing the Indenture, dated as of September 19, 1996, As Supplemented, Between First Nationwide Holdings Inc. and The Bank of New York, as Trustee --------------------------- THE BANK OF NEW YORK, AS TRUSTEE --------------------------- SECOND SUPPLEMENTAL INDENTURE, dated as of September 11, 1998 (the "Second Supplemental Indenture"), among FIRST NATIONWIDE HOLDINGS INC., a Delaware corporation (the "Company"), NEW FIRST NATIONWIDE HOLDINGS INC., a Delaware corporation to be renamed Golden State Holdings Inc. ("New FNH"), and THE BANK OF NEW YORK (the "Trustee"), as Trustee under the Indenture referred to herein. WHEREAS, the Company and the Trustee heretofore executed and delivered an Indenture, dated as of September 19, 1996, as supplemented by the First Supplemental Indenture dated as of January 3, 1997 (the "Indenture") in respect of the 10 5/8% Senior Subordinated Exchange Notes Due 2003 (the "Securities"); and WHEREAS, the Company and New FNH have entered into the Assignment and Assumption Agreement, dated as of September 11, 1998, pursuant to which the Company will transfer all of its assets to New FNH and New FNH will assume all of the liabilities of the Company (the "Asset Transfer"); and WHEREAS, Section 5.01(a) of the Indenture provides that if the Company transfers all or substantially all its assets to any other Person, such Person must expressly assume by supplemental indenture all of the obligations of the Company under the Securities and the Indenture and that such transferee Person shall be the successor Company and shall succeed to, and be substituted for, the Company under the Indenture; and WHEREAS, Section 10.01(2) of the Indenture provides that the Company and the Trustee may amend the Indenture and the Securities without notice to or consent of any Holders of the Securities in order to comply with Article V of the Indenture; and WHEREAS, this Second Supplemental Indenture has been duly authorized by all necessary corporate action on the part of each of the Company and New FNH. NOW, THEREFORE, the Company, the Trustee and New FNH agree as follows for the equal and ratable benefit of the Holders of the Securities: 2 ARTICLE I ASSUMPTION BY SUCCESSOR CORPORATION SECTION 1.1. Assumption of the Securities. New FNH, as the transferee Person in the Asset Transfer, hereby expressly assumes the due and punctual payment of the principal of and interest on the Securities and all obligations of the Company under the Securities and the Indenture and shall be the successor to the Company under the Indenture. SECTION 1.2. Release of the Company. Upon New FNH becoming the successor Company under the Indenture, the Company shall be discharged from all obligations and covenants under the Indenture and the Securities. SECTION 1.3. Trustee's Acceptance. The Trustee hereby accepts this Second Supplemental Indenture and agrees to perform the same under the terms and conditions set forth in the Indenture. ARTICLE II Miscellaneous SECTION 2.1. Effect of Supplemental Indenture. Upon the later to occur of (i) the execution and delivery of this Second Supplemental Indenture by the Company, New FNH and the Trustee and (ii) the consummation of the Asset Transfer, the Indenture shall be supplemented in accordance herewith, and this Second Supplemental Indenture shall form a part of the Indenture for all purposes, and every Holder of Securities heretofore or hereafter authenticated and delivered under the Indenture shall be bound thereby. SECTION 2.2. Indenture Remains in Full Force and Effect. Except as supplemented hereby, all provisions in the Indenture shall remain in full force and effect. SECTION 2.3. Indenture and Supplemental Indenture Construed Together. This Second Supplemental Indenture is an indenture supplemental to and 3 in implementation of the Indenture, and the Indenture and this Second Supplemental Indenture shall henceforth be read and construed together. SECTION 2.4. Confirmation and Preservation of Indenture. The Indenture as supplemented by this Second Supplemental Indenture is in all respects confirmed and preserved. SECTION 2.5. Conflict with Trust Indenture Act. If any provision of this Second Supplemental Indenture limits, qualifies or conflicts with any provision of the TIA that is required under the TIA to be part of and govern any provision of this Second Supplemental Indenture, the provision of the TIA shall control. If any provision of this Second Supplemental Indenture modifies or excludes any provision of the TIA that may be so modified or excluded, the provision of the TIA shall be deemed to apply to the Indenture as so modified or to be excluded by this Second Supplemental Indenture, as the case may be. SECTION 2.6. Severability. In case any provision in this Second Supplemental Indenture shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 2.7. Terms Defined in the Indenture. All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Indenture. SECTION 2.8. Headings. The Article and Section headings of this Second Supplemental Indenture have been inserted for convenience of reference only, are not to be considered a part of this Second Supplemental Indenture and shall in no way modify or restrict any of the terms or provisions hereof. SECTION 2.9. Benefits of Second Supplemental Indenture, etc. Nothing in this Second Supplemental Indenture or the Securities, express or implied, shall give to any Person, other than the parties hereto and thereto and their successors hereunder and thereunder and the Holders of the Securities, any benefit of any legal or equitable right, remedy or claim under the Indenture, this Second Supplemental Indenture or the Securities. SECTION 2.10. Successors. All agreements of New FNH and the Company in this Second Supplemental Indenture shall bind their respective succes- 4 sors. All agreements of the Trustee in this Second Supplemental Indenture shall bind its successors. SECTION 2.11. Trustee Not Responsible for Recitals. The recitals contained herein shall be taken as the statements of the Company and New FNH, and the Trustee assumes no responsibility for their correctness. SECTION 2.12. Certain Duties and Responsibilities of the Trustee. In entering into this Second Supplemental Indenture, the Trustee shall be entitled to the benefit of every provision of the Indenture relating to the conduct or affecting the liability or affording protection to the Trustee, whether or not elsewhere herein so provided. SECTION 2.13. Governing Law. This Second Supplemental Indenture shall be governed by, and construed in accordance with, the laws of the State of New York but without giving effect to applicable principles of conflicts of law to the extent that the application of the laws of another jurisdiction would be required thereby. SECTION 2.14. Counterpart Originals. The parties may sign any number of copies of this Second Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 5 IN WITNESS WHEREOF, the parties have caused this Second Supplemental Indenture to be duly executed as of the date first written above. FIRST NATIONWIDE HOLDINGS INC. By: /s/ Glenn P. Dickes --------------------------------------- Name: Glenn P. Dickes Title: Vice President and Secretary NEW FIRST NATIONWIDE HOLDINGS INC. By: /s/ Glenn P. Dickes --------------------------------------- Name: Glenn P. Dickes Title: Vice President and Secretary THE BANK OF NEW YORK, as Trustee By: --------------------------------------- Name: Title: IN WITNESS WHEREOF, the parties have caused this Second Supplemental Indenture to be duly executed as of the date first written above. FIRST NATIONWIDE HOLDINGS INC. By: --------------------------------------- Name: Title: NEW FIRST NATIONWIDE HOLDINGS INC. By: --------------------------------------- Name: Title: THE BANK OF NEW YORK, as Trustee By: /s/ THOMAS C. KNIGHT --------------------------------------- Name: THOMAS C. KNIGHT Title: ASSISTANT VICE PRESIDENT EX-4.6 6 GOLDEN STATE HOLDINGS INC. --------------------------- GOLDEN STATE HOLDINGS INC. 10 5/8% Senior Subordinated Exchange Notes Due 2003 --------------------------- THIRD SUPPLEMENTAL INDENTURE Dated as of September 14, 1998 Supplementing the Indenture dated as of September 19, 1996, as Supplemented, Between Golden State Holdings Inc. (formerly known as New First Nationwide Holdings Inc.), as successor to First Nationwide Holdings Inc., and The Bank of New York, as Trustee --------------------------- THE BANK OF NEW YORK, AS TRUSTEE --------------------------- THIRD SUPPLEMENTAL INDENTURE THIRD SUPPLEMENTAL INDENTURE, dated as of September 14, 1998 (the "Third Supplemental Indenture"), among GOLDEN STATE HOLDINGS INC. (formerly known as New First Nationwide Holdings Inc.), a Delaware corporation (the "Company"), as successor to First Nationwide Holdings Inc., and THE BANK OF NEW YORK (the "Trustee"), as Trustee under the Indenture referred to herein. WHEREAS, the Company and the Trustee heretofore executed and delivered an Indenture, dated as of September 19, 1996, as supplemented (the "Indenture"), in respect of the Company's $575 million aggregate principal amount of 10 5/8% Senior Subordinated Exchange Notes Due 2003 (the "Securities"); and WHEREAS, Section 10.02 of the Indenture provides that the Company and the Trustee may amend the Indenture with the consent of the Holders of at least a majority in aggregate principal amount of the Securities then outstanding; and WHEREAS, the Holders of at least 50% in aggregate principal amount of the Securities outstanding have consented to the amendments effected by this Third Supplemental Indenture; and WHEREAS, this Third Supplemental Indenture has been duly authorized by all necessary corporate action on the part of the Company. NOW, THEREFORE, the Company and the Trustee agree as follows for the equal and ratable benefit of the Holders of the Securities: ARTICLE I AMENDMENT Upon the commencement of the Offer (as such term is defined in the offer letter dated September 14, 1998 from the Company) each of the following shall occur: SECTION 1.1. Deletions. Sections 4.02, 4.03, 4.04, 4.05, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 6.01(5) and 6.01(8) of the Indenture are hereby amended by deleting all such sections and all references thereto in their entirety. 2 SECTION 1.2. Amendment to Section 5.01. Section 5.01 of the Indenture is hereby amended by deleting in its entirety subsection (iii) of Section 5.01. SECTION 1.3. Amendment to Section 6.03. Section 6.01(3) of the Indenture is hereby amended to read in its entirety as follows: the Company fails to comply with Section 4.06 (other than a failure to purchase Securities) and such failure continues for 30 days after the notice specified below; SECTION 1.4. Conforming Amendments. The form of Security and the outstanding Securities are hereby amended to make any and all changes that correspond to the amendments to the Indenture set forth in Sections 1.1 through 1.3 of this Third Supplemental Indenture. SECTION 1.5. Trustee's Acceptance. The Trustee hereby accepts this Third Supplemental Indenture and agrees to perform the same under the terms and conditions set forth in the Indenture. ARTICLE II Miscellaneous SECTION 2.1. Interpretation. Upon execution and delivery of this Third Supplemental Indenture, the Indenture shall be modified and amended in accordance with this Third Supplemental Indenture, and all the terms and conditions of both shall be read together as though they constitute one instrument, except that, in case of conflict, the provisions of this Third Supplemental Indenture will control. The Indenture, as modified and amended by this Third Supplemental Indenture, is hereby ratified and confirmed in all respects and shall bind every Holder of Securities. In case of conflict between the terms and conditions contained in the Securities and those contained in the Indenture, as modified and amended by this Third Supplemental Indenture, the provisions of the Indenture, as modified and amended by this Third Supplemental Indenture, shall control. SECTION 2.2. Conflict with Trust Indenture Act. If any provision of this Third Supplemental Indenture limits, qualifies or conflicts with any provision of the TIA that is required under the TIA to be part of and govern any provision of this Third Supplemental Indenture, the provision of the TIA shall control. If any provision of this 3 Third Supplemental Indenture modifies or excludes any provision of the TIA that may be so modified or excluded, the provision of the TIA shall be deemed to apply to the Indenture as so modified or to be excluded by this Third Supplemental Indenture, as the case may be. SECTION 2.3. Severability. In case any provision in this Third Supplemental Indenture shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 2.4. Terms Defined in the Indenture. All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Indenture. SECTION 2.5. Headings. The Article and Section headings of this Third Supplemental Indenture have been inserted for convenience of reference only, are not to be considered a part of this Third Supplemental Indenture and shall in no way modify or restrict any of the terms or provisions hereof. SECTION 2.6. Benefits of Third Supplemental Indenture, etc. Nothing in this Third Supplemental Indenture or the Securities, express or implied, shall give to any Person, other than the parties hereto and thereto and their successors hereunder and thereunder and the Holders of the Securities, any benefit of any legal or equitable right, remedy or claim under the Indenture, this Third Supplemental Indenture or the Securities. SECTION 2.7. Successors. All agreements of the Company in this Third Supplemental Indenture shall bind its successors. All agreements of the Trustee in this Third Supplemental Indenture shall bind its successors. SECTION 2.8. Trustee Not Responsible for Recitals. The recitals contained herein shall be taken as the statements of the Company and the Trustee assumes no responsibility for their correctness. SECTION 2.9. Certain Duties and Responsibilities of the Trustee. In entering into this Third Supplemental Indenture, the Trustee shall be entitled to the benefit of every provision of the Indenture relating to the conduct or affecting the liability or affording protection to the Trustee, whether or not elsewhere herein so provided. 4 SECTION 2.10. Governing Law. This Third Supplemental Indenture shall be governed by, and construed in accordance with, the laws of the State of New York but without giving effect to applicable principles of conflicts of law to the extent that the application of the laws of another jurisdiction would be required thereby. SECTION 2.11. Counterpart Originals. The parties may sign any number of copies of this Third Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 5 IN WITNESS WHEREOF, the parties hereto have executed this Third Supplemental Indenture as of the date first above written. GOLDEN STATE HOLDINGS INC. By: /s/ Richard H. Terzian ----------------------------------- Name: Richard H. Terzian Title: Chief Financial Officer THE BANK OF NEW YORK, as Trustee By: ----------------------------------- Name: Title: IN WITNESS WHEREOF, the parties hereto have executed this Third Supplemental Indenture as of the date first above written. GOLDEN STATE HOLDINGS INC. By: ----------------------------------- Name: Title: THE BANK OF NEW YORK, as Trustee By: /s/ THOMAS C. KNIGHT ----------------------------------- Name: THOMAS C. KNIGHT Title: ASSISTANT VICE PRESIDENT EX-4.8 7 FIRST NATIONWIDE HOLDINGS INC. --------------------------- FIRST NATIONWIDE HOLDINGS INC. 9 1/8% Senior Subordinated Exchange Notes Due 2003 --------------------------- FIRST SUPPLEMENTAL INDENTURE Dated as of September 11, 1998 Supplementing the Indenture, dated as of January 31, 1996, Between First Nationwide Holdings Inc. and The Bank of New York, as Trustee --------------------------- THE BANK OF NEW YORK, AS TRUSTEE --------------------------- FIRST SUPPLEMENTAL INDENTURE, dated as of September 11, 1998 (the "First Supplemental Indenture"), among FIRST NATIONWIDE HOLDINGS INC., a Delaware corporation (the "Company"), NEW FIRST NATIONWIDE HOLDINGS INC., a Delaware corporation to be renamed Golden State Holdings Inc. ("New FNH"), and THE BANK OF NEW YORK (the "Trustee"), as Trustee under the Indenture referred to herein. WHEREAS, the Company and the Trustee heretofore executed and delivered an Indenture, dated as of January 31, 1996 (the "Indenture") in respect of the 9 1/8% Senior Subordinated Exchange Notes Due 2003 (the "Securities"); and WHEREAS, the Company and New FNH have entered into the Assignment and Assumption Agreement, dated as of September 11, 1998, pursuant to which the Company will transfer all of its assets to New FNH and New FNH will assume all of the liabilities of the Company (the "Asset Transfer"); and WHEREAS, Section 5.01(i) of the Indenture provides that if the Company transfers all or substantially all its assets to any other Person, such Person must expressly assume by supplemental indenture all of the obligations of the Company under the Securities and the Indenture and that such transferee Person shall be the successor Company and shall succeed to, and be substituted for, the Company under the Indenture; and WHEREAS, Section 10.01(2) of the Indenture provides that the Company and the Trustee may amend the Indenture and the Securities without notice to or consent of any Holders of the Securities in order to comply with Article V of the Indenture; and WHEREAS, this First Supplemental Indenture has been duly authorized by all necessary corporate action on the part of each of the Company and New FNH. NOW, THEREFORE, the Company, the Trustee and New FNH agree as follows for the equal and ratable benefit of the Holders of the Securities: 2 ARTICLE I ASSUMPTION BY SUCCESSOR CORPORATION SECTION 1.1. Assumption of the Securities. New FNH, as the transferee Person in the Asset Transfer, hereby expressly assumes the due and punctual payment of the principal of and interest on the Securities and all obligations of the Company under the Securities and the Indenture and shall be the successor to the Company under the Indenture. SECTION 1.2. Release of the Company. Upon New FNH becoming the successor Company under the Indenture, the Company shall be discharged from all obligations and covenants under the Indenture and the Securities. SECTION 1.3. Trustee's Acceptance. The Trustee hereby accepts this First Supplemental Indenture and agrees to perform the same under the terms and conditions set forth in the Indenture. ARTICLE II Miscellaneous SECTION 2.1. Effect of Supplemental Indenture. Upon the later to occur of (i) the execution and delivery of this First Supplemental Indenture by the Company, New FNH and the Trustee and (ii) the consummation of the Asset Transfer, the Indenture shall be supplemented in accordance herewith, and this First Supplemental Indenture shall form a part of the Indenture for all purposes, and every Holder of Securities heretofore or hereafter authenticated and delivered under the Indenture shall be bound thereby. SECTION 2.2. Indenture Remains in Full Force and Effect. Except as supplemented hereby, all provisions in the Indenture shall remain in full force and effect. SECTION 2.3. Indenture and Supplemental Indenture Construed Together. This First Supplemental Indenture is an indenture supplemental to and in 3 implementation of the Indenture, and the Indenture and this First Supplemental Indenture shall henceforth be read and construed together. SECTION 2.4. Confirmation and Preservation of Indenture. The Indenture as supplemented by this First Supplemental Indenture is in all respects confirmed and preserved. SECTION 2.5. Conflict with Trust Indenture Act. If any provision of this First Supplemental Indenture limits, qualifies or conflicts with any provision of the TIA that is required under the TIA to be part of and govern any provision of this First Supplemental Indenture, the provision of the TIA shall control. If any provision of this First Supplemental Indenture modifies or excludes any provision of the TIA that may be so modified or excluded, the provision of the TIA shall be deemed to apply to the Indenture as so modified or to be excluded by this Second Supplemental Indenture, as the case may be. SECTION 2.6. Severability. In case any provision in this First Supplemental Indenture shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 2.7. Terms Defined in the Indenture. All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Indenture. SECTION 2.8. Headings. The Article and Section headings of this First Supplemental Indenture have been inserted for convenience of reference only, are not to be considered a part of this First Supplemental Indenture and shall in no way modify or restrict any of the terms or provisions hereof. SECTION 2.9. Benefits of First Supplemental Indenture, etc. Nothing in this First Supplemental Indenture or the Securities, express or implied, shall give to any Person, other than the parties hereto and thereto and their successors hereunder and thereunder and the Holders of the Securities, any benefit of any legal or equitable right, remedy or claim under the Indenture, this First Supplemental Indenture or the Securities. SECTION 2.10. Successors. All agreements of New FNH and the Company in this First Supplemental Indenture shall bind their respective successors. 4 All agreements of the Trustee in this First Supplemental Indenture shall bind its successors. SECTION 2.11. Trustee Not Responsible for Recitals. The recitals contained herein shall be taken as the statements of the Company and New FNH, and the Trustee assumes no responsibility for their correctness. SECTION 2.12. Certain Duties and Responsibilities of the Trustee. In entering into this First Supplemental Indenture, the Trustee shall be entitled to the benefit of every provision of the Indenture relating to the conduct or affecting the liability or affording protection to the Trustee, whether or not elsewhere herein so provided. SECTION 2.13. Governing Law. This First Supplemental Indenture shall be governed by, and construed in accordance with, the laws of the State of New York but without giving effect to applicable principles of conflicts of law to the extent that the application of the laws of another jurisdiction would be required thereby. SECTION 2.14. Counterpart Originals. The parties may sign any number of copies of this First Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 5 IN WITNESS WHEREOF, the parties have caused this First Supplemental Indenture to be duly executed as of the date first written above. FIRST NATIONWIDE HOLDINGS INC. By: /s/ Glenn P. Dickes ------------------------------------------- Name: Glenn P. Dickes Title: Vice President and Secretary NEW FIRST NATIONWIDE HOLDINGS INC. By: /s/ Glenn P. Dickes ------------------------------------------- Name: Glenn P. Dickes Title: Vice President and Secretary THE BANK OF NEW YORK, as Trustee By: ------------------------------------------- Name: Title: IN WITNESS WHEREOF, the parties have caused this First Supplemental Indenture to be duly executed as of the date first written above. FIRST NATIONWIDE HOLDINGS INC. By: ------------------------------------------- Name: Title: NEW FIRST NATIONWIDE HOLDINGS INC. By: ------------------------------------------- Name: Title: THE BANK OF NEW YORK, as Trustee By: /s/ THOMAS C. KNIGHT ------------------------------------------- Name: THOMAS C. KNIGHT Title: ASSISTANT VICE PRESIDENT EX-4.9 8 SECOND SUPPLEMENTAL INDENTURE --------------------------- GOLDEN STATE HOLDINGS INC. 9 1/8% Senior Subordinated Exchange Notes Due 2003 --------------------------- SECOND SUPPLEMENTAL INDENTURE Dated as of September 14, 1998 Supplementing the Indenture dated as of January 31, 1996, as Supplemented, Between Golden State Holdings Inc. (formerly known as New First Nationwide Holdings Inc.), as successor to First Nationwide Holdings Inc., and The Bank of New York, as Trustee --------------------------- THE BANK OF NEW YORK, AS TRUSTEE --------------------------- SECOND SUPPLEMENTAL INDENTURE SECOND SUPPLEMENTAL INDENTURE, dated as of September 14, 1998 (the "Second Supplemental Indenture"), among GOLDEN STATE HOLDINGS INC. (formerly known as New First Nationwide Holdings Inc.), a Delaware corporation (the "Company"), as successor to First Nationwide Holdings Inc., and THE BANK OF NEW YORK (the "Trustee"), as Trustee under the Indenture referred to herein. WHEREAS, the Company and the Trustee heretofore executed and delivered an Indenture, dated as of January 31, 1996, as supplemented (the "Indenture"), in respect of the Company's $140 million aggregate principal amount of 9 1/8% Senior Subordinated Exchange Notes Due 2003 (the "Securities"); and WHEREAS, Section 10.02 of the Indenture provides that the Company and the Trustee may amend the Indenture with the consent of the Holders of at least a majority in aggregate principal amount of the Securities then outstanding; and WHEREAS, the Holders of at least 50% in aggregate principal amount of the Securities outstanding have consented to the amendments effected by this Second Supplemental Indenture; and WHEREAS, this Second Supplemental Indenture has been duly authorized by all necessary corporate action on the part of the Company. NOW, THEREFORE, the Company and the Trustee agree as follows for the equal and ratable benefit of the Holders of the Securities: ARTICLE I AMENDMENT Upon the commencement of the Offer (as such term is defined in the offer letter dated September 14, 1998 from the Company) each of the following shall occur: SECTION 1.1. Deletions. Sections 4.02, 4.03, 4.04, 4.05, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 6.01(5) and 6.01(8) of the Indenture are hereby amended by deleting all such sections and all references thereto in their entirety. 2 SECTION 1.2. Amendment to Section 5.01. Section 5.01 of the Indenture is hereby amended by deleting in its entirety subsection (iii) of Section 5.01. SECTION 1.3. Amendment to Section 6.03. Section 6.01(3) of the Indenture is hereby amended to read in its entirety as follows: the Company fails to comply with Section 4.06 (other than a failure to purchase Securities) and such failure continues for 30 days after the notice specified below; SECTION 1.4. Conforming Amendments. The form of Security and the outstanding Securities are hereby amended to make any and all changes that correspond to the amendments to the Indenture set forth in Sections 1.1 through 1.3 of this Second Supplemental Indenture. SECTION 1.5. Trustee's Acceptance. The Trustee hereby accepts this Second Supplemental Indenture and agrees to perform the same under the terms and conditions set forth in the Indenture. ARTICLE II Miscellaneous SECTION 2.1. Interpretation. Upon execution and delivery of this Second Supplemental Indenture, the Indenture shall be modified and amended in accordance with this Second Supplemental Indenture, and all the terms and conditions of both shall be read together as though they constitute one instrument, except that, in case of conflict, the provisions of this Second Supplemental Indenture will control. The Indenture, as modified and amended by this Second Supplemental Indenture, is hereby ratified and confirmed in all respects and shall bind every Holder of Securities. In case of conflict between the terms and conditions contained in the Securities and those contained in the Indenture, as modified and amended by this Second Supplemental Indenture, the provisions of the Indenture, as modified and amended by this Second Supplemental Indenture, shall control. SECTION 2.2. Conflict with Trust Indenture Act. If any provision of this Second Supplemental Indenture limits, qualifies or conflicts with any provision of the TIA that is required under the TIA to be part of and govern any provision of this Second Supplemental Indenture, the provision of the TIA shall control. If any provision 3 of this Second Supplemental Indenture modifies or excludes any provision of the TIA that may be so modified or excluded, the provision of the TIA shall be deemed to apply to the Indenture as so modified or to be excluded by this Second Supplemental Indenture, as the case may be. SECTION 2.3. Severability. In case any provision in this Second Supplemental Indenture shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 2.4. Terms Defined in the Indenture. All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Indenture. SECTION 2.5. Headings. The Article and Section headings of this Second Supplemental Indenture have been inserted for convenience of reference only, are not to be considered a part of this Second Supplemental Indenture and shall in no way modify or restrict any of the terms or provisions hereof. SECTION 2.6. Benefits of Second Supplemental Indenture, etc. Nothing in this Second Supplemental Indenture or the Securities, express or implied, shall give to any Person, other than the parties hereto and thereto and their successors hereunder and thereunder and the Holders of the Securities, any benefit of any legal or equitable right, remedy or claim under the Indenture, this Second Supplemental Indenture or the Securities. SECTION 2.7. Successors. All agreements of the Company in this Second Supplemental Indenture shall bind its successors. All agreements of the Trustee in this Second Supplemental Indenture shall bind its successors. SECTION 2.8. Trustee Not Responsible for Recitals. The recitals contained herein shall be taken as the statements of the Company and the Trustee assumes no responsibility for their correctness. SECTION 2.9. Certain Duties and Responsibilities of the Trustee. In entering into this Second Supplemental Indenture, the Trustee shall be entitled to the benefit of every provision of the Indenture relating to the conduct or affecting the liability or affording protection to the Trustee, whether or not elsewhere herein so provided. 4 SECTION 2.10. Governing Law. This Second Supplemental Indenture shall be governed by, and construed in accordance with, the laws of the State of New York but without giving effect to applicable principles of conflicts of law to the extent that the application of the laws of another jurisdiction would be required thereby. SECTION 2.11. Counterpart Originals. The parties may sign any number of copies of this Second Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 5 IN WITNESS WHEREOF, the parties hereto have executed this Second Supplemental Indenture as of the date first above written. GOLDEN STATE HOLDINGS INC. By: /s/ Richard H. Terzian ---------------------------------------- Name: Richard H. Terzian Title: Chief Financial Officer THE BANK OF NEW YORK, as Trustee By: ---------------------------------------- Name: Title: IN WITNESS WHEREOF, the parties hereto have executed this Second Supplemental Indenture as of the date first above written. GOLDEN STATE HOLDINGS INC. By: -------------------------------------- Name: Title: THE BANK OF NEW YORK, as Trustee By: /s/ THOMAS C. KNIGHT -------------------------------------- Name: THOMAS C. KNIGHT Title: ASSISTANT VICE PRESIDENT EX-4.12 9 SECOND SUPPLEMENTAL INDENTURE --------------------------- FIRST NATIONWIDE HOLDINGS INC. 12 1/4% Senior Exchange Notes Due 2001 --------------------------- SECOND SUPPLEMENTAL INDENTURE Dated as of September 11, 1998 Supplementing the Indenture, dated as of July 15, 1994, As Supplemented, Between First Nationwide Holdings Inc. and State Street Bank and Trust Company (as successor to The First National Bank of Boston), as Trustee --------------------------- STATE STREET BANK AND TRUST COMPANY, AS TRUSTEE --------------------------- SECOND SUPPLEMENTAL INDENTURE, dated as of September 11, 1998 (the "Second Supplemental Indenture"), among FIRST NATIONWIDE HOLDINGS INC., a Delaware corporation (the "Company"), NEW FIRST NATIONWIDE HOLDINGS INC., a Delaware corporation to be renamed Golden State Holdings Inc. ("New FNH"), and STATE STREET BANK AND TRUST COMPANY (the "Trustee"), as Trustee under the Indenture referred to herein. WHEREAS, the Company and the Trustee heretofore executed and delivered an Indenture, dated as of July 15, 1994, as supplemented by the First Supplemental Indenture dated as of January 17, 1997 (the "Indenture"), in respect of the 12 1/4% Senior Exchange Notes Due 2001 (the "Securities"); and WHEREAS, the Company and New FNH have entered into the Assignment and Assumption Agreement, dated as of September 11, 1998, pursuant to which the Company will transfer all of its assets to New FNH and New FNH will assume all of the liabilities of the Company (the "Asset Transfer"); and WHEREAS, Section 5.01(i) of the Indenture provides that if the Company transfers all or substantially all its assets to any other Person, such Person must expressly assume by supplemental indenture all of the obligations of the Company under the Securities and the Indenture and that such transferee Person shall be the successor Company and shall succeed to, and be substituted for, the Company under the Indenture; and WHEREAS, Section 9.01(2) of the Indenture provides that the Company and the Trustee may amend the Indenture and the Securities without notice to or consent of any Holders of the Securities in order to comply with Article V of the Indenture; and WHEREAS, this Second Supplemental Indenture has been duly authorized by all necessary corporate action on the part of each of the Company and New FNH. NOW, THEREFORE, the Company, the Trustee and New FNH agree as follows for the equal and ratable benefit of the Holders of the Securities: 2 ARTICLE I ASSUMPTION BY SUCCESSOR CORPORATION SECTION 1.1. Assumption of the Securities. New FNH, as the transferee Person in the Asset Transfer, hereby expressly assumes the due and punctual payment of the principal of and interest on the Securities and all obligations of the Company under the Securities and the Indenture and shall be the successor to the Company under the Indenture. SECTION 1.2. Release of the Company. Upon New FNH becoming the successor Company under the Indenture, the Company shall be discharged from all obligations and covenants under the Indenture and the Securities. SECTION 1.3. Trustee's Acceptance. The Trustee hereby accepts this Second Supplemental Indenture and agrees to perform the same under the terms and conditions set forth in the Indenture. ARTICLE II Miscellaneous SECTION 2.1. Effect of Supplemental Indenture. Upon the later to occur of (i) the execution and delivery of this Second Supplemental Indenture by the Company, New FNH and the Trustee and (ii) the consummation of the Asset Transfer, the Indenture shall be supplemented in accordance herewith, and this Second Supplemental Indenture shall form a part of the Indenture for all purposes, and every Holder of Securities heretofore or hereafter authenticated and delivered under the Indenture shall be bound thereby. SECTION 2.2. Indenture Remains in Full Force and Effect. Except as supplemented hereby, all provisions in the Indenture shall remain in full force and effect. SECTION 2.3. Indenture and Supplemental Indenture Construed Together. This Second Supplemental Indenture is an indenture supplemental to and 3 in implementation of the Indenture, and the Indenture and this Second Supplemental Indenture shall henceforth be read and construed together. SECTION 2.4. Confirmation and Preservation of Indenture. The Indenture as supplemented by this Second Supplemental Indenture is in all respects confirmed and preserved. SECTION 2.5. Conflict with Trust Indenture Act. If any provision of this Second Supplemental Indenture limits, qualifies or conflicts with any provision of the TIA that is required under the TIA to be part of and govern any provision of this Second Supplemental Indenture, the provision of the TIA shall control. If any provision of this Second Supplemental Indenture modifies or excludes any provision of the TIA that may be so modified or excluded, the provision of the TIA shall be deemed to apply to the Indenture as so modified or to be excluded by this Second Supplemental Indenture, as the case may be. SECTION 2.6. Severability. In case any provision in this Second Supplemental Indenture shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 2.7. Terms Defined in the Indenture. All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Indenture. SECTION 2.8. Headings. The Article and Section headings of this Second Supplemental Indenture have been inserted for convenience of reference only, are not to be considered a part of this Second Supplemental Indenture and shall in no way modify or restrict any of the terms or provisions hereof. SECTION 2.9. Benefits of Second Supplemental Indenture, etc. Nothing in this Second Supplemental Indenture or the Securities, express or implied, shall give to any Person, other than the parties hereto and thereto and their successors hereunder and thereunder and the Holders of the Securities, any benefit of any legal or equitable right, remedy or claim under the Indenture, this Second Supplemental Indenture or the Securities. SECTION 2.10. Successors. All agreements of New FNH and the Company in this Second Supplemental Indenture shall bind their respective succes- 4 sors. All agreements of the Trustee in this Second Supplemental Indenture shall bind its successors. SECTION 2.11. Trustee Not Responsible for Recitals. The recitals contained herein shall be taken as the statements of the Company and New FNH, and the Trustee assumes no responsibility for their correctness. SECTION 2.12. Certain Duties and Responsibilities of the Trustee. In entering into this Second Supplemental Indenture, the Trustee shall be entitled to the benefit of every provision of the Indenture relating to the conduct or affecting the liability or affording protection to the Trustee, whether or not elsewhere herein so provided. SECTION 2.13. Governing Law. This Second Supplemental Indenture shall be governed by, and construed in accordance with, the laws of the State of New York but without giving effect to applicable principles of conflicts of law to the extent that the application of the laws of another jurisdiction would be required thereby. SECTION 2.14. Counterpart Originals. The parties may sign any number of copies of this Second Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 5 IN WITNESS WHEREOF, the parties have caused this Second Supplemental Indenture to be duly executed as of the date first written above. FIRST NATIONWIDE HOLDINGS INC. By: /s/ Glenn P. Dickes ---------------------------------------- Name: Glenn P. Dickes Title: Vice President and Secretary NEW FIRST NATIONWIDE HOLDINGS INC. By: /s/ Glenn P. Dickes ---------------------------------------- Name: Glenn P. Dickes Title: Vice President and Secretary STATE STREET BANK AND TRUST COMPANY, as Trustee By: ---------------------------------------- Name: Title: IN WITNESS WHEREOF, the parties have caused this Second Supplemental Indenture to be duly executed as of the date first written above. FIRST NATIONWIDE HOLDINGS INC. By: ---------------------------------------- Name: Glenn P. Dickes Title: Vice President and Secretary NEW FIRST NATIONWIDE HOLDINGS INC. By: ---------------------------------------- Name: Glenn P. Dickes Title: Vice President and Secretary STATE STREET BANK AND TRUST COMPANY, as Trustee By: /s/ GHC .C MA ---------------------------------------- Name: GHC .C MA Title: ASSISTANT VICE PRESIDENT EX-4.13 10 THIRD SUPPLEMENTAL INDENTURE ------------------------- GOLDEN STATE HOLDINGS INC. 12 1/4% Senior Exchange Notes Due 2001 ------------------------- THIRD SUPPLEMENTAL INDENTURE Dated as of September 14, 1998 Supplementing the Indenture dated as of July 15, 1994, as Supplemented, Between Golden State Holdings Inc. (formerly known as New First Nationwide Holdings Inc.), as successor to First Nationwide Holdings Inc., and State Street Bank and Trust Company (as successor to The First National Bank of Boston), as Trustee ------------------------- STATE STREET BANK AND TRUST COMPANY, AS TRUSTEE ------------------------- THIRD SUPPLEMENTAL INDENTURE THIRD SUPPLEMENTAL INDENTURE, dated as of September 14, 1998 (the "Third Supplemental Indenture"), among GOLDEN STATE HOLDINGS INC. (formerly known as New First Nationwide Holdings Inc.), a Delaware corporation (the "Company"), as successor to First Nationwide Holdings Inc., and STATE STREET BANK AND TRUST COMPANY (the "Trustee"), as Trustee under the Indenture referred to herein. WHEREAS, the Company and the Trustee heretofore executed and delivered an Indenture, dated as of July 15, 1994, as supplemented (the "Indenture"), in respect of the Company's $200 million aggregate principal amount of 12 1/4% Senior Exchange Notes Due 2001 (the "Securities"); and WHEREAS, Section 9.02 of the Indenture provides that the Company and the Trustee may amend the Indenture with the consent of the Holders of at least a majority in aggregate principal amount of the Securities then outstanding; and WHEREAS, the Holders of at least 50% in aggregate principal amount of the Securities outstanding have consented to the amendments effected by this Third Supplemental Indenture; and WHEREAS, this Third Supplemental Indenture has been duly authorized by all necessary corporate action on the part of the Company. NOW, THEREFORE, the Company and the Trustee agree as follows for the equal and ratable benefit of the Holders of the Securities: ARTICLE I AMENDMENT Upon the commencement of the Offer (as such term is defined in the offer letter dated September 14, 1998 from the Company) each of the following shall occur: SECTION 1.1. Deletions. Sections 4.02, 4.03, 4.04, 4.05, 4.07, 4.08, 4.09, 4.10, 4.11, 6.01(5) and 6.01(8) of the Indenture are hereby amended by deleting all such sections and all references thereto in their entirety. 2 SECTION 1.2. Amendment to Section 5.01. Section 5.01 of the Indenture is hereby amended by deleting in its entirety subsection (iii) of Section 5.01. SECTION 1.3. Amendment to Section 6.03. Section 6.01(3) of the Indenture is hereby amended to read in its entirety as follows: the Company fails to comply with Section 4.06 (other than a failure to purchase Securities) and such failure continues for 30 days after the notice specified below; SECTION 1.4. Conforming Amendments. The form of Security and the outstanding Securities are hereby amended to make any and all changes that correspond to the amendments to the Indenture set forth in Sections 1.1 through 1.3 of this Third Supplemental Indenture. SECTION 1.5. Trustee's Acceptance. The Trustee hereby accepts this Third Supplemental Indenture and agrees to perform the same under the terms and conditions set forth in the Indenture. ARTICLE II Miscellaneous SECTION 2.1. Interpretation. Upon execution and delivery of this Third Supplemental Indenture, the Indenture shall be modified and amended in accordance with this Third Supplemental Indenture, and all the terms and conditions of both shall be read together as though they constitute one instrument, except that, in case of conflict, the provisions of this Third Supplemental Indenture will control. The Indenture, as modified and amended by this Third Supplemental Indenture, is hereby ratified and confirmed in all respects and shall bind every Holder of Securities. In case of conflict between the terms and conditions contained in the Securities and those contained in the Indenture, as modified and amended by this Third Supplemental Indenture, the provisions of the Indenture, as modified and amended by this Third Supplemental Indenture, shall control. SECTION 2.2. Conflict with Trust Indenture Act. If any provision of this Third Supplemental Indenture limits, qualifies or conflicts with any provision of the TIA that is required under the TIA to be part of and govern any provision of this Third Supplemental Indenture, the provision of the TIA shall control. If any provision of this 3 Third Supplemental Indenture modifies or excludes any provision of the TIA that may be so modified or excluded, the provision of the TIA shall be deemed to apply to the Indenture as so modified or to be excluded by this Third Supplemental Indenture, as the case may be. SECTION 2.3. Severability. In case any provision in this Third Supplemental Indenture shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 2.4. Terms Defined in the Indenture. All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Indenture. SECTION 2.5. Headings. The Article and Section headings of this Third Supplemental Indenture have been inserted for convenience of reference only, are not to be considered a part of this Third Supplemental Indenture and shall in no way modify or restrict any of the terms or provisions hereof. SECTION 2.6. Benefits of Third Supplemental Indenture, etc. Nothing in this Third Supplemental Indenture or the Securities, express or implied, shall give to any Person, other than the parties hereto and thereto and their successors hereunder and thereunder and the Holders of the Securities, any benefit of any legal or equitable right, remedy or claim under the Indenture, this Third Supplemental Indenture or the Securities. SECTION 2.7. Successors. All agreements of the Company in this Third Supplemental Indenture shall bind its successors. All agreements of the Trustee in this Third Supplemental Indenture shall bind its successors. SECTION 2.8. Trustee Not Responsible for Recitals. The recitals contained herein shall be taken as the statements of the Company and the Trustee assumes no responsibility for their correctness. SECTION 2.9. Certain Duties and Responsibilities of the Trustee. In entering into this Third Supplemental Indenture, the Trustee shall be entitled to the benefit of every provision of the Indenture relating to the conduct or affecting the liability or affording protection to the Trustee, whether or not elsewhere herein so provided. 4 SECTION 2.10. Governing Law. This Third Supplemental Indenture shall be governed by, and construed in accordance with, the laws of the State of New York but without giving effect to applicable principles of conflicts of law to the extent that the application of the laws of another jurisdiction would be required thereby. SECTION 2.11. Counterpart Originals. The parties may sign any number of copies of this Third Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 5 IN WITNESS WHEREOF, the parties hereto have executed this Third Supplemental Indenture as of the date first above written. GOLDEN STATE HOLDINGS INC. By: /s/ Richard H. Terzian ------------------------------ Name: Richard H. Terzian Title: Chief Financial Officer STATE STREET BANK AND TRUST COMPANY, as Trustee By: ------------------------------ Name: Title: IN WITNESS WHEREOF, the parties hereto have executed this Third Supplemental Indenture as of the date first above written. GOLDEN STATE HOLDINGS INC. By: ------------------------------ Name: Title: STATE STREET BANK AND TRUST COMPANY, as Trustee By: /s/ GHI C. MAN ------------------------------ Name: GHI C. MAN Title: ASSISTANT VICE PRESIDENT EX-10.2 11 AMENDMENT NO.1 TO TAX SHARING AGREEMENT AMENDMENT NO.1 TO TAX SHARING AGREEMENT AMENDMENT NO. 1, dated as of September 11, 1998, by and among Mafco Holdings Inc., a Delaware corporation ("Parent"), Golden State Bancorp Inc., a Delaware corporation ("Golden State"), First Nationwide Holdings Inc., a Delaware corporation ("FNH"), California Federal Bank, A Federal Savings Bank, a federally chartered stock savings bank ("CFB"), and New First Nationwide Holdings Inc., a Delaware corporation to be renamed "Golden State Holdings Inc." ("New FNH," and together with Parent, Golden State, FNH and CFB, the "Parties"), to the Tax Sharing Agreement entered into as of January 1, 1994, by and among Parent, FNH and CFB, as successor to First Madison Bank, FSB (the "Tax Sharing Agreement"). WHEREAS, pursuant to Section 6.14 of the Agreement and Plan of Reorganization, dated as of February 4, 1998, as amended (the "Agreement"), by and among Golden State, FNH, Golden State Financial Corporation, a Delaware corporation, First Nationwide (Parent) Holdings Inc., a Delaware corporation, First Gibraltar Holdings Inc., a Delaware corporation, and Hunter's Glen/Ford, Ltd., a Texas limited partnership, the Parties desire to amend the Tax Sharing Agreement as set forth herein (capitalized terms used and not otherwise defined herein have the meanings assigned to them in the Agreement); NOW THEREFORE, in consideration of the foregoing, and intending to be legally bound hereby, the Parties hereby agree as follows: 1. For any taxable period commencing on or after the Effective Time, (i) Golden State shall, as of the Effective Time, replace Parent under the Tax Sharing Agreement and will assume all of the rights and obligations of Parent under the Tax Sharing Agreement with respect to such taxable periods; (ii) New FNH shall, as of the Effective Time, replace FNH under the Tax Sharing Agreement and will assume all of the rights and obligations of FNH under the Tax Sharing Agreement with respect to such taxable periods; and (iii) CFB shall continue to be bound by the Tax Sharing Agreement with respect to such taxable periods. 2. For any taxable period ending on or before the Effective Time, (i) New FNH shall, as of the Effective Time, be the successor to FNH under the Tax Sharing Agreement, and will assume all of the rights and obligations of FNH under the Tax Sharing Agreement with respect to any such taxable period, and (ii) CFB and Parent shall continue to be bound by the Tax Sharing Agreement with respect to any such taxable period. 3. All references to "this Agreement" in the Tax Sharing Agreement shall be deemed to refer to the Tax Sharing Agreement as amended hereby. 4. Except as expressly amended by this Amendment, the Tax Sharing Agreement is hereby ratified and confirmed in all respects. 5. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original and all of which shall be considered one and the same agreement, and shall become effective when counterparts have been signed by each of the Parties and delivered to the other Parties, it being understood that all Parties need not sign the same counterpart. IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the date first above written. MAFCO HOLDINGS INC. By: /s/ Glenn P. Dickes -------------------------------------------- Name: Glenn P. Dickes Title: Senior Vice President and Secretary GOLDEN STATE BANCORP INC. By: -------------------------------------------- Name: James R. Eller Title: Secretary FIRST NATIONWIDE HOLDINGS INC. By: /s/ Joram C. Salig -------------------------------------------- Name: Joram C. Salig Title: Vice President and Assistant Secretary NEW FIRST NATIONWIDE HOLDINGS INC. By: /s/ Joram C. Salig -------------------------------------------- Name: Joram C. Salig Title: Vice President and Assistant Secretary CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK By: -------------------------------------------- Name: Eric K. Kawamura Title: Senior Vice President IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the date first above written MAFCO HOLDINGS INC. By: -------------------------------------------- Name: Glenn P. Dickes Title: Senior Vice President and Secretary GOLDEN STATE BANCORP INC. By: /s/ James R. Eller -------------------------------------------- Name: James R. Eller Title: Secretary FIRST NATIONWIDE HOLDINGS INC. By: -------------------------------------------- Name: Joram C. Salig Title: Vice President and Assistant Secretary NEW FIRST NATIONWIDE HOLDINGS INC. By: -------------------------------------------- Name: Joram C. Salig Title: Vice President and Assistant Secretary CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK By: -------------------------------------------- Name: Eric K. Kawamura Title: Senior Vice President IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the date first above written. MAFCO HOLDINGS INC. By: -------------------------------------------- Name: Glenn P. Dickes Title: Senior Vice President and Secretary GOLDEN STATE BANCORP INC. By: -------------------------------------------- Name: James R. Eller Title: Secretary FIRST NATIONWIDE HOLDINGS INC. By: -------------------------------------------- Name: Joram C. Salig Title: Vice President and Assistant Secretary NEW FIRST NATIONWIDE HOLDINGS INC. By: -------------------------------------------- Name: Joram C. Salig Title: Vice President and Assistant Secretary CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK By: /s/ Eric K. Kawamura -------------------------------------------- Name: Eric K. Kawamura Title: Senior Vice President EX-10.3 12 TAX SHARING MODIFICATION AGREEMENT Tax Sharing Modification Agreement (Florida Branch Sale) Agreement made as of the 22nd day of December 1998 by and between Mafco Holdings Inc. ("Mafco") and Golden State Bancorp Inc. ("Golden State"). WHEREAS, pursuant to the Agreement and Plan of Reorganization dated as of February 4, 1998, as amended (the "Merger Agreement") Golden State is obligated to issue shares of its common stock (the "Florida Shares") to First Gibraltar Holdings Inc. and Hunter's Glen/Ford, Ltd. (collectively, the "Contingent Share Recipients") on account of any federal income tax savings resulting from the sale of the Florida Branches (the "Florida Branch Sale") of California Federal Bank ("Cal Fed"); WHEREAS, pursuant to the Merger Agreement, the amount of federal income tax savings resulting from the Florida Branch Sale is defined (the "Florida Tax Savings") to be an amount equal to (i) the product of the amount of the gain recognized by Cal Fed for federal income tax purposes as a result of the Florida Branch Sale and the highest marginal federal income tax rate applicable to corporations for the taxable year in which the Florida Branch Sale occurred less (ii) the amount of any federal income taxes actually paid by Cal Fed as a result of such sale, including any payment in lieu of federal income taxes under the Tax Sharing Agreement dated as of January 1, 1994 among Mafco, Cal Fed and others (the "Tax Sharing Agreement"); WHEREAS, as of November 1, 1998, Golden State has estimated the Florida Tax Savings to be $34,000,000 based upon, among other things, the estimated tax payment to be made under the Tax Sharing Agreement calculated at a two percent (2%) estimated rate (the "Estimated Tax Rate"); WHEREAS, Mafco has agreed if, at any time (i) it is determined that Cal Fed was subject to a tax rate higher than the Estimated Tax Rate and therefore should have made additional payments under the Tax Sharing Agreement as a result of the gain on the Florida Branch Sale and (ii) Golden State has issued the Florida Shares, then Mafco will waive its rights to any additional payment under the Tax Sharing Agreement as a consequence of the gain on the Florida Branch Sale; NOW, THEREFORE, subject to the next succeeding sentence, Mafco hereby waives its rights to any payment due it under the Tax Sharing Agreement as a consequence of the gain on the Florida Branch Sale being taxed at a rate in excess of the Estimated Tax Rate, such excess (the "Excess Amount") being for purposes of this Agreement (A) (i) the 1998 federal income tax payment due from Cal Fed under the Tax Sharing Agreement less (ii) the 1998 federal income tax payment due from Cal Fed under the Tax Sharing Agreement excluding the gain on the Florida Branch Sale IN EXCESS OF (B) the gain on the Florida Branch Sale times the Estimated Tax Rate. The Excess Amount will be reduced (and, accordingly, Mafco will remain entitled to payment under the Tax Sharing Agreement of the amount of such reduction) to the extent, but only to the extent, that the Contingent Share Recipients are required to make a payment to Golden State under Section 1.6(c)(iv) of the Merger Agreement as a result of any adjustment to the Florida Tax Savings. Golden State hereby agrees to the foregoing and, to the extent appropriate, will itself, and will cause its subsidiaries as successors under the Tax Sharing Agreement to, implement the provisions of this Agreement to the extent they modify or supercede the relevant provisions of the Tax Sharing Agreement. IN WITNESS WHEREOF, the parties have signed this Agreement as of the date first above written. MAFCO HOLDINGS INC. GOLDEN STATE BANCORP INC. By: /s/ Glenn P. Dickes By: /s/ Eric K. Kawamura ---------------------- ---------------------- Glenn P. Dickes Eric K. Kawamura Senior Vice President Senior Vice President -2- EX-10.25 13 EXECUTIVE EMPLOYMENT AGREEMENT RICHARD P. HODGE Executive Employment Agreement
o Term January 1, 1999 - December 31, 2001 o Base Salary $400,000 per year; if adjusted upward at sole discretion of Company, increased amount becomes Base Salary. o Benefits Standard employee benefits, additional life insurance coverage (two times Base Salary), executive medical, annual medical exam, automobile. o Death Estate gets 60% of Base Salary for balance of term. o Disability After six months, Company can terminate; employee gets 60% of Base Salary for balance of term; life and medical insurance continue for the shorter of employee's disability or until age 65. o Cause Upon gross neglect, conviction of felony, conviction of any crime relating to Company property, willful misconduct or material breach by employee or material prejudice to Company, Company can terminate without further liability. o Company Breach Employee receives Base Salary and all benefits for longer of balance of term; employee obligated to mitigate (minimum of one year base salary). o Other Provisions Protection of confidential information, non-compete during term, assignment of inventions, legal fees to employee if he prevails in action for breach or injunction; legal fees to Company if it prevails in action for injunction.
Employment Agreement EMPLOYMENT AGREEMENT, dated as of January 1, 1999, between California Federal Bank, a Federal Savings Bank (the "Company") and Richard P. Hodge (the "Executive"). The Company wishes to employ the Executive, and the Executive wishes to accept such employment, on the terms and conditions set forth in this Agreement. Accordingly, the Company and the Executive hereby agree as follows: 1. Employment, Duties and Acceptance. 1.1 Employment, Duties. The Company hereby employs the Executive for the Term (as defined in Section 2.1), to render exclusive (except as otherwise provided herein) and full-time services to the Company as Executive Vice President or in such other executive position as may be mutually agreed upon by the Company and the Executive, and to perform such other duties consistent with such position as may be assigned to the Executive by the Board of Directors or any officer of the Company senior to the Executive. 1.2 Acceptance. The Executive hereby accepts such employment and agrees to render the services described above. During the Term, the Executive agrees to serve the Company faithfully and to the best of the Executive's ability, to devote the Executive's entire business time, energy and skill to such employment, and to use the Executive's best efforts, skill and ability to promote the Company's interests. The Executive further agrees to accept election, and to serve during all or any part of the Term, as an officer or director of the Company and of any subsidiary or affiliate of the Company, without any compensation therefor other than that specified in this Agreement, if elected to any such position by the shareholders or by the Board of Directors of the Company or of any subsidiary or affiliate, as the case may be. The Executive hereby represents and warrants that the Executive is not subject to any other agreement, including without limitation, any agreement not to compete or confidentiality agreement, which would be violated by the Executive's performance of services hereunder. 1.3 Location. The duties to be performed by the Executive hereunder shall be performed primarily at the office of the Company in Dallas, Texas, with up to one week per month at the office of the Company in San Francisco, California, in each case subject to reasonable other travel requirements on behalf of the Company. 2. Term of Employment; Certain Post-Term Benefits. 2.1 The Term. The term of the Executive's employment under this Agreement (the "Term") shall commence January 1, 1999 and shall end on December 31, 2001. 2.2 Special Curtailment. The Term shall end earlier than the original December 31, 2001 termination date provided in Section 2.1 if sooner terminated pursuant to Section 4. Non-extension of the Term shall not be deemed to be a wrongful termination of the Term or this Agreement by the Company pursuant to Section 4.4. 3. Compensation; Benefits. 3.1 Salary. As compensation for all services to be rendered pursuant to this Agreement, the Company agrees to pay the Executive during the Term a base salary, payable semi-monthly in arrears, at the annual rate of not less than $400,000, less such deductions or amounts to be withheld as required by applicable law and regulations (the "Base Salary"). In the event that the Company, in its sole discretion, from time to time determines to increase the Base Salary, such increased amount shall, from and after the effective date of the increase, constitute "Base Salary" for purposes of this Agreement. 3.2 Business Expenses. The Company shall pay or reimburse the Executive for all reasonable expenses actually incurred or paid by the Executive during the Term in the performance of the Executive's services under this Agreement, upon presentation of expense statements or vouchers or such other supporting information as the Company customarily may require of its officers provided, however, that the maximum amount available for such expenses during any period may be fixed in advance by the Chairman or Vice Chairman of the Board of Directors, the President of the Company, or the Board of Directors. The Company acknowledges that the Executive shall be permitted to travel first class when traveling on behalf of the Company. 3.3 Paid Time Off. During the Term, the Executive shall be entitled to paid time off ("PTO") of five weeks taken in accordance with the PTO policy of the Company during each year of the Term. 3.4 Fringe Benefits. During the Term, the Executive shall be entitled to all benefits for which the Executive shall be eligible under any qualified pension plan, 401(k) plan, group insurance or other so-called "fringe" benefit plan which the Company provides to its employees generally, together with executive medical benefits for the Executive, the Executive's spouse and the Executive's children as from time to time in effect for officers of the Company generally. 3.5 Additional Benefits. During the Term, the Executive shall be entitled to such other benefits as are specified in Appendix I to this Agreement. 2 4. Termination. 4.1 Death. If the Executive shall die during the Term, the Term shall terminate and no further amounts or benefits shall be payable hereunder, except that the Executive's legal representatives shall be entitled to receive continued payments in an amount equal to 60% of the Base Salary, in the manner specified in Section 3.1, until the end of the Term (as in effect immediately prior to the Executive's death). 4.2 Disability. If during the Term the Executive shall become physically or mentally disabled, whether totally or partially, such that the Executive is unable to perform the Executive's services hereunder for (I) a period of six consecutive months or (ii) for shorter periods aggregating six months during any twelve month period, the Company may at any time after the last day of the six consecutive months of disability or the day on which the shorter periods of disability shall have equaled an aggregate of six months, by written notice to the Executive (but before the Executive has recovered from such disability), terminate the Term and no further amounts or benefits shall be payable hereunder, except that the Executive shall be entitled to receive (I) continued payments in an amount equal to 60% of the Base Salary, in the manner specified in Section 3.1, until the end of the Term and (ii) such amounts and benefits, if any, specified in Paragraph 5 of Appendix I. If the Executive shall die before receiving all payments to be made by the Company in accordance with the foregoing, such payments shall be made to a beneficiary designated by the Executive on a form prescribed for such purpose by the Company, or in the absence of such designation to the Executive's legal representative. 4.3 Cause. In the event of gross neglect by the Executive of the Executive's duties hereunder, conviction of the Executive of any felony, conviction of the Executive of any lesser crime or offense involving the property of the Company or any of its subsidiaries or affiliates, willful misconduct by the Executive in connection with the performance of any material portion of the Executive's duties hereunder, breach by the Executive of any material provision of this Agreement, the Company's employment policies including the Code of Ethics, or any other conduct on the part of the Executive which would make the Executive's continued employment by the Company materially prejudicial to the best interests of the Company, the Company may at any time by written notice to the Executive terminate the Term and, upon such termination, this Agreement shall terminate and the Executive shall be entitled to receive no further amounts or benefits hereunder, except any as shall have been earned to the date of such termination. Termination for cause under the foregoing sentence shall also include the bases therefore set forth in the provisions of 12 C.F.R. Section 563.39(b)(1) or successor regulation defining termination for cause in employment agreements for employees of a savings association. 4.4 Company Breach. In the event of (a) the breach of any material provision of this Agreement by the Company, (b) the assignment to Executive of duties materially inconsistent with his status as Executive Vice President of the Company or an adverse alteration in the nature of Executive's responsibilities or (c) a reduction by the Company in the Executive's Base Salary or bonus or a failure by the Company to pay any such amounts when due, the 3 Executive shall be entitled to terminate the Term upon 60 days' prior written notice to the Company. Upon such termination, or in the event the Company terminates the Term or this Agreement other than pursuant to the provisions of Section 4.2 or 4.3, the Company shall continue to provide the Executive (I) payments of Base Salary in the manner and amounts specified in section 3.1 and (ii) fringe benefits and additional benefits in the manner and amounts specified in Sections 3.4 and 3.5, until the end of the Term (the "Damage Period"). The Company's obligations pursuant to this Section 4.4 are subject to the Executive's duty to mitigate damages by seeking other employment provided, however, that the Executive shall not be required to accept a position of lesser importance or of substantially different character than the position held with the Company immediately prior to the effective date of termination or in a location outside of the Dallas, Texas metropolitan area. To the extent that the Executive shall earn compensation during the Damage Period (without regard to when such compensation is paid), the Base Salary payments to be made by the Company pursuant to this Section 4.4 shall be correspondingly reduced. Notwithstanding anything in this Section 4.4 to the contrary, the total of all post-termination Base Salary payments to be made under this Section 4.4 shall not be less than the Executive's annual Base Salary at the date of termination. At the end of the Term the Company shall pay to Executive, subject to applicable withholding requirements, the amount due under the preceding sentence in a lump sum payment. 4.5 Termination Under Banking Laws. 4.5.1 If the Executive is suspended or temporarily prohibited from participating in the conduct of the Company's affairs by a notice served under Section 8(e)(3) or (g)(1) of Federal Deposit Insurance Act (the "FDIA") (12 U.S.C. 1818(e)(3) and (g)(1)) the Company's obligations under this Agreement shall be suspended as of the date of service unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Company may in its discretion (I) pay the Executive all or part of the compensation withheld while its obligations hereunder were suspended, and (ii) reinstate (in whole or in part) any of its obligations which were suspended. 4.5.2 If the Executive is removed or permanently prohibited from participating in the conduct of the Company's affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)), all obligations of the Company under this Agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. 4.5.3 If the Company is in default (as defined in Section 3(x)(1) of the FDIA), all obligations under this Agreement shall terminate as of the date of default, but this Section 4.5.3 shall not affect any vested rights of the Company or of the Executive. 4 4.5.4 All obligations of the Company under this Agreement may be terminated, except to the extent determined that continuation of this Agreement is necessary for the continued operation of the Company, (i) by the Director of the Office of Thrift Supervision (the "Director") or his or her designee, at the time Federal Deposit Insurance Corporation or Resolution Trust Corporation enters into an agreement to provide assistance to or on behalf of the Company under the authority contained in Section 13(c) of the FDIA; or (ii) by the Director or his or her designee, at the time the Director or his or her designee approves a supervisory merger to resolve problems related to operations of the Company or when the Company is determined by the Director to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. 4.6 Litigation Expenses. Except as provided for in Section 5.7. if the Company and the Executive become involved in any action, suit or proceeding relating to the alleged breach of this Agreement by the Company or the Executive, and if a judgment in such action, suit or proceeding is rendered in favor of the Executive, the Company shall reimburse the Executive for all expenses (including reasonable attorneys' fees) incurred by the Executive in connection with such action, suit or proceeding. Such costs shall be paid to the Executive promptly upon presentation of expense statements or other supporting information evidencing the incurrence of such expenses. 5. Protection of Confidential Information; Non-Competition. 5.1 In view of the fact that the Executive's work for the Company will bring the Executive into close contact with many confidential affairs of the Company not readily available to the public, and plans for future developments, the Executive agrees: 5.1.1 To keep and retain in the strictest confidence all confidential matters of the Company, including, without limitation, "know how," trade secrets, customer lists, pricing policies, operational methods, technical processes, formulae, inventions and research projects, other business affairs of the Company, and any information whatsoever concerning any director, officer, employee or agent of the Company or their respective family members learned by the Executive heretofore or hereafter, and not to disclose them to anyone outside of the Company, either during or after the Executive's employment with the Company, except in the course of performing the Executive's duties hereunder or with the Company's express written consent. The foregoing prohibitions shall include, without limitation, directly or indirectly publishing (or causing, participating in, assisting or providing any statement, opinion or information in connection with the publication of) any diary, memoir, letter, story, photograph, interview, article, essay, account or description (whether fictionalized or not) concerning any of the foregoing, publication being deemed to include any presentation or reproduction of any written, verbal or visual material in any communication medium, including any book, magazine, newspaper, theatrical production or movie, or television or radio programming or commercial; and 5 5.1.2 To deliver promptly to the Company on termination of the Executive's employment by the Company, or at any time the Company may so request, all memoranda, notes, records, reports, manuals, drawings, blueprints and other documents (and all copies thereof) relating to the Company's business and all property associated therewith, which the Executive may then possess or have under the Executive's control. 5.2 During the Term, the Executive shall not, directly or indirectly, enter the employ of, or render any services to, any person, firm or corporation engaged in any business competitive with the business of the Company or of any of its subsidiaries or affiliates; the Executive shall not engage in such business on the Executive's own account; and the Executive shall not become interested in any such business, directly or indirectly, as an individual, partner, shareholder, director, officer, principal, agent, employee, trustee, consultant, or in any other relationship or capacity provided, however, that nothing contained in this Section 5.2 shall be deemed to prohibit the Executive from acquiring, solely as an investment, up to five percent (5%) of the outstanding shares of capital stock of any public corporation. 5.3 If the Executive commits a breach, or threatens to commit a breach, of any of the provisions of Sections 5.1 or 5.2 hereof, the Company shall have the following rights and remedies: 5.3.1 The right and remedy to have the provisions of this Agreement specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Company and that money damages will not provide an adequate remedy to the Company; and 5.3.2 The right and remedy to require the Executive to account for and pay over to the Company all compensation, profits, monies, accruals, increments or other benefits (collectively "Benefits") derived or received by the Executive as the result of any transactions constituting a breach of any of the provisions of the preceding paragraph, and the Executive hereby agrees to account for and pay over such Benefits to the Company. Each of the rights and remedies enumerated above shall be independent of the other, and shall be severally enforceable, and all of such rights and remedies shall be in addition to, and not in lieu of, any other rights and remedies available to the Company under law or in equity. 5.4 If any of the covenants contained in Sections 5.1 or 5.2, or any part thereof, hereafter are construed to be invalid or unenforceable, the same shall not affect the remainder of the covenant or covenants, which shall be given full effect, without regard to the invalid portions. 5.5 If any of the covenants contained in Sections 5.1 or 5.2, or any part thereof, are held to be unenforceable because of the duration of such provision or the area covered thereby, the parties agree that the court making such determination shall have the power to 6 reduce the duration and/or area of such provision and in its reduced form, said provision shall then be enforceable. 5.6 The parties hereto intend to and hereby confer jurisdiction to enforce the covenants contained in Sections 5.1 and 5.2 upon the courts of any state within the geographical scope of such covenants. In the event that the courts of any one or more of such states shall hold such covenants wholly unenforceable by reason of the breadth of such covenants or otherwise, it is the intention of the parties hereto that such determination not bar or in any way affect the Company's right to the relief provided above in the courts of any other states within the geographical scope of such covenants as to breaches of such covenants in such other respective jurisdictions, the above covenants as they relate to each state being for this purpose severable into diverse and independent covenants. 5.7 In the event that any action, suit or other proceeding in law or in equity is brought to enforce the covenants contained in sections 5.1 and 5.2 or to obtain money damages for the breach thereof, and such action results in the award of a judgment for money damages or in the granting of any injunction in favor of the Company, all expenses (including reasonable attorneys' fees) of the Company in such action, suit or other proceeding shall (on demand of the Company) be paid by the Executive. In the event the Company fails to obtain a judgment for money damages or an injunction in favor of the Company, all expenses (including reasonable attorneys' fees) of the Executive in such action, suit or other proceeding shall (on demand of the Executive) be paid by the Company. 6. Inventions and Patents. 6.1 The Executive agrees that all processes, technologies and inventions (collectively, "Inventions"), including new contributions, improvements, ideas and discoveries, whether patentable or not, conceived, developed, invented or made by him during the Term shall belong to the Company, provided that such Inventions grew out of the Executive's work with the Company or any of its subsidiaries or affiliates, are related in any manner to the business (commercial or experimental) of the Company or any of its subsidiaries or affiliates or are conceived or made on the Company's time or with the use of the Company's facilities or materials. The Executive shall further: (a) promptly disclose such Inventions to the Company; (b) assign to the Company, without additional compensation, all patent and other rights to such Inventions for the United States and foreign countries; (c) sign all papers necessary to carry out the foregoing; and (d) give testimony in support of the Executive's inventorship. 6.2 If any Invention is described in a patent application or is disclosed to third parties, directly or indirectly, by the Executive within two years after the termination of the Executive's employment by the Company, it is to be presumed that the Invention was conceived or made during the Term. 7 6.3 The Executive agrees that the Executive will not assert any rights to any Invention as having been made or acquired by the Executive prior to the date of this Agreement, except for Inventions, if any, disclosed to the company in writing prior to the date hereof. 7. Intellectual Property. The Company shall be the sole owner of all the products and proceeds of the Executive's services hereunder, including, but not limited to, all materials, ideas, concepts, formats, suggestions, developments, arrangements, packages, programs and other intellectual properties that the Executive may acquire, obtain, develop or create in connection with and during the Term, free and clear of any claims by the Executive (or anyone claiming under the Executive) of any kind or character whatsoever (other than the Executive's right to receive payments hereunder). The Executive shall, at the request of the Company, execute such assignments, certificates or other instruments as the Company may from time to time deem necessary or desirable to evidence, establish, maintain, perfect, protect, enforce or defend its right, title or interest in or to any such properties. 8. Indemnification. The Company will indemnify the Executive, to the maximum extent permitted by applicable law, against all costs, charges and expenses incurred or sustained by the Executive in connection with any action, suit or proceeding to which the Executive may be made a party by reason of the Executive being an officer, director or employee of the Company or of any subsidiary or affiliate of the Company. 9. Notices. All notices, requests, consents and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if delivered personally, sent by overnight courier or mailed first class, postage prepaid, by registered or certified mail (notices mailed shall be deemed to have been given on the date mailed), as follows (or to such other address as either party shall designate by notice in writing to the other in accordance herewith): If to the Company, to: California Federal Bank, A Federal Savings Bank 200 Crescent Court: Suite 1350 Dallas, Texas 75201 Attention: Gerald J. Ford 8 with a copy to: MacAndrews & Forbes Holdings Inc. 35 East 62nd Street New York, New York 10021 Attention: General Counsel If to the Executive, to: Richard P. Hodge 3348 Remington Drive Plano, Texas 75023 10. General. 10.1 This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York applicable to agreements made and to be performed entirely in New York. 10.2 The section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 10.3 This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof, and supersedes all prior agreements, arrangements and understandings, written or oral, relating to the subject matter hereof, including, but not limited to, that employment agreement between the Executive and the Company dated February 1, 1995. No representation, promise or inducement has been made by either party that is not embodied in this Agreement, and neither party shall be bound by or liable for any alleged representation promise or inducement not so set forth. 10.4 This Agreement, and the Executive's rights and obligations hereunder, may not be assigned by the Executive. The Company may assign its rights, together with its obligations, hereunder (i) to any affiliate which has the financial resources to meet the Company's obligations hereunder or (ii) to third parties in connection with any sale, transfer or other disposition of all or substantially all of its business or assets; in any event the obligations of the Company hereunder shall be binding on its successors or assigns, whether by merger, consolidation or acquisition of all or substantially all of its business or assets. 10.5 This Agreement may be amended, modified, superseded, canceled, renewed or extended and the terms or covenants hereof may be waived, only by a written instrument executed by both of the parties hereto, or in the case of a waiver, by the party waiving 9 compliance. The failure of either party at any time or times to require performance of any provision hereof shall in no manner affect the right at a later time to enforce the same. 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 of any other term or covenant contained in this Agreement. 11. Subsidiaries and Affiliates. 11.1 As used herein, the term "subsidiary" shall mean any corporation or other business entity controlled directly or indirectly by the corporation or other business entity in question, and the term "affiliate" shall mean and include any corporation or other business entity directly or indirectly controlling, controlled by or under common control with the corporation or other business entity in question. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. CALIFORNIA FEDERAL BANK, A Federal Savings Bank By: /s/ Gerald J. Ford ------------------------ Gerald J. Ford Chairman of the Board /s/ Richard P. Hodge ------------------------ Richard P. Hodge 10 APPENDIX I Additional Benefits: 1. Medical Examination. The Executive shall be reimbursed by the Company for the reasonable cost of one annual medical examination upon presentation of an expense statement. 2. Automobile. The Company shall afford the Executive the right to use an automobile on a continuing basis and shall provide garaging near the Executive's office, all on the following basis. The Company shall pay, upon presentation of an expense statement, all reasonable expenses associated with the operation of such automobile and the rental of such garage space in the same manner as is, from time to time, in effect with respect to executive officers of the Company generally, including, without limitation, all reasonable maintenance and insurance expenses. The automobile furnished by the Company shall be a late model top-of-the-line luxury automobile to be reasonably selected by the Executive. Upon the expiration of the Term, the Executive promptly shall return the automobile to the Company. 3. Insurance. The Company agrees to provide the Executive with additional term life insurance coverage with a face amount of two (2) times the then current Base Salary, on the following basis. The Executive may select a plan of his choice and may designate the beneficiary of such plan. The Company shall pay, upon presentation of an expense statement, the periodic premiums relating to such additional term life insurance payable during the Term. 4. Club Membership. The company shall reimburse the Executive, upon presentation of an expense statement, for all reasonable initiation fees and periodic dues for membership in a golf or social club of the Executive's choice. 5. Disability. If the Company elects to terminate the Term pursuant to Section 4.2 of the Agreement, in addition to the amounts payable under such Section, for the shorter of the period the Executive remains disabled or until the Executive has attained the age of 65, the Company shall continue to provide benefits for the Executive under the corporate group life insurance plan and for the Executive, his spouse and children under the corporate group medical (including the executive medical plan) insurance plan, to the extent permitted by such plans and to the extent such benefits continue to be provided to the Company's employees or officers, as applicable, generally. 11 EX-10.54 14 PURCHASE AND ASSUMPTION AGREEMENT PURCHASE AND ASSUMPTION AGREEMENT dated as of October 30, 1998 between NORWEST BANK NEVADA, NATIONAL ASSOCIATION and CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK TABLE OF CONTENTS ARTICLE I CERTAIN DEFINITIONS 1.1 Certain Definitions 1.2 Accounting Terms 1.3 Interpretation ARTICLE 2 THE P&A TRANSACTION 2.1 Purchase and Sale of Assets 2.2 Assumption of Liabilities 2.3 Purchase Price 2.4 Assumption of IRA and Keogh Account Deposits 2.5 Sale and Transfer of Servicing and Escrows ARTICLE 3 CLOSING PROCEDURE; ADJUSTMENTS 3.1 Closing 3.2 Payment at Closing 3.3 Adjustment of Purchase Price 3.4 [intentionally omitted] 3.5 Proration; Other Closing Date Adjustments 3.6 Seller Deliveries 3.7 Purchaser Deliveries 3.8 Delivery of the Loan Documents 3.9 Collateral Assignments and Filing 3.10 Owned Real Property Filings 3.11 Title Policies ii ARTICLE 4 TRANSITIONAL MATTERS 4.1 Transitional Arrangements 4.2 Customers 4.3 Direct Deposits 4.4 Direct Debits 4.5 Escheat Deposits 4.6 Maintenance of Records 4.7 Interest Reporting and Withholding 4.8 Negotiable Instruments 4.9 ATM/Debit Cards; POS Cards 4.10 Leasing of Personal Property 4.11 Data Processing Conversion for the Branches and Handling of Certain Items 4.12 Information Regarding Mortgage Loans 4.13 Employee Training ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF SELLER 5.1 Corporate Organization and Authority 5.2 No Conflicts 5.3 Approvals and Consents 5.4 Tenants 5.5 Leases 5.6 [intentionally omitted] 5.7 Litigation and Undisclosed Liabilities 5.8 Regulatory Matters 5.9 Compliance with Laws 5.10 Loans 5.11 Financial and Deposit Data 5.12 Records 5.13 Title to Assets 5.14 Branch Leases 5.15 [intentionally omitted] 5.16 Deposits 5.17 Environmental Laws; Hazardous Substances 5.18 Brokers' Fees 5.19 Limitations on Representations and Warranties iii ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF PURCHASER 6.1 Corporate Organization and Authority 6.2 No Conflicts 6.3 Approvals and Consents 6.4 Regulatory Matters 6.5 Litigation and Undisclosed Liabilities 6.6 Operation of the Branches 6.7 Financing Available 6.8 Brokers' Fees ARTICLE 7 COVENANTS OF THE PARTIES 7.1 Activity in the Ordinary Course 7.2 Access and Confidentiality 7.3 Regulatory Approvals 7.4 Consents 7.5 Efforts to Consummate; Further Assurances 7.6 Solicitation of Accounts 7.7 Insurance 7.8 [intentionally omitted] 7.9 Servicing Prior to Closing Date ARTICLE 8 TAXES AND EMPLOYEE BENEFITS 8.1 Tax Representations 8.2 Proration of Taxes 8.3 Sales and Transfer Taxes 8.4 Information Returns 8.5 Payment of Amount Due under Article 8 8.55 Like Kind Exchange 8.6 Assistance and Cooperation 8.7 Transferred Employees 8.8 Branch Employee Representations iv ARTICLE 9 CONDITIONS TO CLOSING 9.1 Conditions to Obligations of Purchaser 9.2 Conditions to Obligations of Seller ARTICLE 10 ENVIRONMENTAL MATTERS 10.1 Environmental Matters ARTICLE 11 TERMINATION 11.1 Termination 11.2 Effect of Termination ARTICLE 12 INDEMNIFICATION AND OTHER REMEDIES 12.1 Indemnification 12.2 Loans 12.3 [intentionally omitted] 12.4 Exclusivity 12.5 AS-IS Sale; Waiver of Warranties v ARTICLE 13 MISCELLANEOUS 13.1 Survival 13.2 Assignment 13.3 Binding Effect 13.4 Public Notice 13.5 Notices 13.6 Expenses 13.7 Governing Law 13.8 Entire Agreement; Amendments 13.9 Third Party Beneficiaries 13.10 Counterparts 13.11 Headings 13.12 [intentionally omitted] 13.13 Severability vi List of Schedules Schedule 1.1(b) Branches/Real Properties Schedule 1.1(d) Excluded Deposits Schedule 1.1(e) Other Loans Schedule 2.1(a)(vii) Other Assets Schedule 2.2(a)(v) Accrued Liabilities Schedule 2.4(c) Excluded IRA/Keogh Account Deposits Schedule 3.6(a) Form of Deed Schedule 3.6(b) Form of Bill of Sale Schedule 3.6(c) Form of Assignment and Assumption Agreement Schedule 3.6(d) Form of Lease Assignment Schedule 3.6(e) Form of Landlord Consent Schedule 3.6(g) Form of Certificate of Officer [Seller] Schedule 3.7(d) Form of Certificate of Officer [Purchaser] Schedule 4.11 Schedule of Processing Fees Schedule 5.4 Tenant Leases Schedule 5.7 Litigation and Undisclosed Liabilities Schedule 5.10(a)(ix) Exceptions to Seller's Sole Ownership of Loans Schedule 5.10(f)(i) Form of Affidavit of Lost Note Schedule 5.10(k) Exceptions to Rights of Mortgagors Schedule 5.16 Deposits - Compliance with Laws and Contracts Schedule 5.17 Environmental Matters Schedule 8.1 Outstanding Tax Liabilities vii This PURCHASE AND ASSUMPTION AGREEMENT, dated as of October 30, 1998 ("Agreement"), between Norwest Bank Nevada, National Association ("Seller") and California Federal Bank, A Federal Savings Bank ("Purchaser"). RECITALS A. Seller. Seller is a national banking association, organized under the laws of the United States, with its principal office located in Las Vegas, Nevada. B. Purchaser. Purchaser is a federal savings bank, organized under the laws of the United States, with its principal office located in San Francisco, California. C. The Merger. Wells Fargo & Company, a Delaware corporation ("WFC"), has proposed to merge (the "Merger") with a wholly-owned subsidiary of Norwest Corporation, a Delaware corporation ("Norwest") pursuant to the terms of an Agreement and Plan of Merger, dated as of June 7, 1998 and amended and restated as of September 10, 1998, by and among WFC, Norwest and WFC Holding Corporation (the "Merger Agreement"). Following the Merger, Norwest will change its name to "Wells Fargo & Company". In connection with the consummation of the Merger, Purchaser desires to acquire from Seller, and Seller desires to transfer to Purchaser, certain banking operations in the State of Nevada, in accordance with and subject to the terms and conditions of this Agreement. Purchaser understands and acknowledges that if the P&A Transaction (as defined below) shall not be consummated on or before the one hundred eightieth (180th) day following the Merger, such banking operations will be transferred to an independent trustee for disposition. D. Continuation of Service. Purchaser and Seller each intend to continue providing retail and business banking services in the geographic regions served by the Branches (as defined below) to be acquired by Purchaser under this Agreement. NOW, THEREFORE, in consideration of the premises and the mutual promises and obligations set forth herein, the parties agree as follows: ARTICLE 1 CERTAIN DEFINITIONS 1.1 Certain Definitions. The terms set forth below are used in this Agreement with the following meanings: "Accrued Interest" means, as of any date, (a) with respect to a Deposit, interest which is accrued on such Deposit to but excluding such date and not yet posted to the relevant deposit account and (b) with respect to a Loan, interest which is accrued on such Loan to but excluding such date and not yet paid. "Accrued Liabilities" has the meaning set forth in Section 2.2(a). "ACH Direct Deposit Cut-Off Date" has the meaning set forth in Section 4.3. "Adjusted Payment Amount" has the meaning set forth in Section 3.3. "Adjustment Date" has the meaning set forth in Section 3.3. "Affiliate" means, with respect to any person, any other person directly or indirectly controlling, controlled by or under common control with such person. As used in this definition, the term "person" shall be broadly interpreted to include, without limitation, any corporation, company, partnership and individual or group. "Agreement" means this Purchase and Assumption Agreement, including all schedules, exhibits and addenda, each as amended from time to time in accordance with Section 13.8(b). "Asbestos Hazard" means the presence of asbestos in a parcel of Owned Real Property or the improvements thereon as of the date hereof which, under applicable laws, must be immediately remediated in order to allow continuation of the current operation of the Branch within such Owned Real Property using the current improvements thereon. "Assets" has the meaning set forth in Section 2.1(a). "Assignment and Assumption Agreement" has the meaning set forth in Section 3.6(c). "Branch Employees" means the employees of the Seller working at the Branches at the Closing Date (including, without limitation, those employees who on the Closing Date are on family and medical leave, military leave or personal, short-term disability or pregnancy leave and who are eligible to return to work under Seller's policies), subject to any transfers permitted pursuant to Section 7.1 and replacement in the ordinary course of business of employees who may leave Seller's employ between the date hereof and the Closing Date. "Branch Leases" means the leases under which Seller leases land and/or buildings used as Branches, including without limitation ground leases. 2 "Branches" means each of the banking offices of Seller at the locations identified on Schedule 1.1(b) hereto. "Burdensome Condition" has the meaning set forth in Section 9.1(a). "Business Day" means a day on which banks are generally open for business in Nevada and which is not a Saturday or Sunday. "Cash on Hand" means, as of any date, all petty cash, vault cash, teller cash, ATM cash, prepaid postage and cash equivalents held at a Branch. "Closing" and "Closing Date" refer to the closing of the P&A Transaction, which is to be held at such time and date as provided in Article 3 hereof. "Code" means the Internal Revenue Code of 1986, as amended. "Deposit-Related Loans" means all loans secured by a Deposit as of the close of business on the Closing Date that are linked to an open account and are not sixty (60) or more days delinquent as of the Closing Date. "Deposit(s)" means deposit liabilities with respect to deposit accounts booked by Seller at the Branches, as of the close of business of the day prior to the Closing Date, which constitute "deposits" for purposes of the Federal Deposit Insurance Act, 12 U.S.C. 1813, including collected and uncollected deposits and Accrued Interest, but excluding (a) deposit liabilities with respect to accounts booked by Seller at any Branch and under or pursuant to any judgment, decree or order of any court; (b) deposit liabilities with respect to accounts registered in the name of a trust for which Seller serves as trustee (other than IRA and Keogh Account deposit liabilities), (c) deposit liabilities with respect to accounts booked by Seller at any Branch for which Seller serves as guardian or custodian (other than IRA and Keogh Account deposit liabilities); (d) Excluded IRA/Keogh Account Deposits, and (e) other deposit liabilities, if any, designated as "Excluded Deposits" on Schedule 1.1(d) as updated thirty (30) days after the date hereof by agreement between Seller and Purchaser. "Draft Closing Statement" means a draft closing statement, prepared by Seller, as of the close of business of the third (3??rd??) business day preceding the Closing Date setting forth an estimated calculation of both the Purchase Price and the Estimated Payment Amount. "Encumbrances" means all mortgages, claims, charges, liens, encumbrances, easements, limitations, restrictions, commitments and security interests, except for statutory liens securing tax and/or other payments not yet due, liens incurred in the ordinary course of business, including without limitation liens in favor of mechanics or materialmen, and such other liens, charges, security 3 interests or encumbrances as do not materially detract from the value or materially and adversely affect the use of the properties or assets subject thereto or affected thereby or which otherwise do not materially impair the value of or business operations at such properties and except for obligations pursuant to applicable escheat and unclaimed property laws relating to the Escheat Deposits. "Environmental Consultant" has the meaning specified in Section 10.1(b). "Environmental Hazard" means the presence of any Hazardous Substance in violation of, and reasonably likely to require material remediation costs under, applicable Environmental Laws; provided, however, that the definition of Environmental Hazard shall not include asbestos and asbestos-containing materials. "Environmental Law" means any Federal or state law, statute, rule, regulation, code, order, judgment, decree, injunction or agreement with any Federal or state governmental authority, (a) relating to the protection, preservation or restoration of the environment (including, without limitation, air, water vapor, surface water, groundwater, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource) or to human health or safety or (b) the exposure to, or the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of hazardous substances, in each case as amended and now in effect. Environmental Laws include, without limitation, the Clean Air Act (42 USC 7401 et seq.); the Comprehensive Environmental Response Compensation and Liability Act (42 USC 9601 et seq.); the Resource Conservation and Recovery Act (42 USC 96901 et seq.); the Federal Water Pollution Control Act (33 USC 1251 et seq.); and the Occupational Safety and Health Act (29 USC 651 et seq.); provided, however, that the definition of "Environmental Law" shall not include any Federal or state law, statute, rule, regulation, code, order, judgment, decree, injunction or agreement with any governmental authority relating to asbestos or asbestos-containing materials. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Escheat Deposits" means, as of any date, Deposits and safe deposit box contents, in each case held on such date at the Branches which become subject to escheat, after the Closing Date and in the calendar year in which the Closing occurs, to any governmental authority pursuant to applicable escheat and unclaimed property laws. "Estimated Payment Amount" has the meaning set forth in Section 3.2(a). "Estimated Purchase Price" means the Purchase Price as set forth on the Draft Closing Statement. 4 "Excluded IRA/Keogh Account Deposits" has the meaning set forth in Schedule 2.4(c). "Excluded Deposits" means, if any, the deposit liabilities set forth in Schedule 1.1(d). "FDIA" means the Federal Deposit Insurance Act, as amended. "FDIC" means the Federal Deposit Insurance Corporation. "Federal Funds Rate" on any day means the per annum rate of interest (rounded upward to the nearest 1/100 of 1%) which is the weighted average of the rates on overnight federal funds transactions arranged on such day or, if such day is not a Business Day, the previous Business Day, by federal funds brokers computed and released by the Federal Reserve Bank of New York (or any successor) in substantially the same manner as such Federal Reserve Bank currently computes and releases the weighted average it refers to as the "Federal Funds Effective Rate" at the date of this Agreement. "Federal Reserve Board" means the Board of Governors of the Federal Reserve System. "FedWire Direct Deposit Cut-off Date" has the meaning set forth in Section 4.3. "Final Closing Statement" means a final closing statement, prepared by Seller, as of the thirtieth (30th) day following the Closing Date setting forth both the Purchase Price and the Adjusted Payment Amount. "Grant Deeds" has the meaning set forth in Section 3.6(a). "Hazardous Substance" means any substance, whether liquid, solid or gas (a) listed, identified or designated as hazardous or toxic to a level which requires remediation under any Environmental Law; (b) which, applying criteria specified in any Environmental Law, is hazardous or toxic; or (c) the use or disposal of which is regulated under Environmental Law; provided, however, that the definition of Hazardous Substance shall not include asbestos and asbestos-containing material. "IRA" means an "individual retirement account" or similar account created by a trust for the exclusive benefit of any individual or his beneficiaries in accordance with the provisions of Section 408 of the Code. "IRS" means the Internal Revenue Service. 5 "Keogh Account" means an account created by a trust for the benefit of employees (some or all of whom are owner-employees) and that complies with the provisions of Section 401 of the Code. "Landlord Consents" has the meaning set forth in Section 3.6(e). "Lease Agreement" means a lease entered into pursuant to Section 10.1(c) upon such specific terms and conditions as contemplated by such Section and such other commercially reasonable terms and conditions as are customary in a "triple net" lease of a bank branch facility. "Lease Assignment" has the meaning set forth in Section 3.6(d). "Liabilities" has the meaning set forth in Section 2.2. "Loans" means, collectively, the Deposit-Related Loans, Mortgage Loans, Overdraft Loans and Other Loans, excluding the interest of any participants in such Loans, as set forth in the magnetic media delivered to Purchaser on October 16, 1998 as further described as set forth in Schedule 1.1(e), as updated as of the Closing Date. "Loan Documents" means all documents included in Seller's file or imaging system with respect to a Loan including, without limitation, notes, security agreements, deeds of trust, mortgages, loan agreements, including building and loan agreements, guarantees, sureties and insurance policies (including title insurance policies) and all modifications, waivers and consents relating to any of the foregoing. "Loan Value" means, with respect to a Loan and as of a date, the unpaid principal balance of any such loan plus Accrued Interest thereon, net of the interest in such loan of any participant, as of such date. "Loss" means the amount of losses, liabilities, damages (including forgiveness or cancellation of obligations) and expenses (including reasonable expenses of investigation and reasonable attorneys' fees and expenses in connection with any action, suit or proceeding) incurred or suffered by the indemnified party or its Affiliates in connection with the matters described in Section 12.1, less the amount of the economic benefit (if any) to the indemnified party or its Affiliates occurring or reasonably anticipated to occur in connection with any such damage, loss, liability or expense (including Tax benefits obtainable under applicable law, amounts recovered under insurance policies net of deductibles, recovery by setoffs or counterclaims, and other economic benefits). "Material Adverse Effect" means (a) with respect to Seller, a material adverse effect on the business or direct economic results of operations of the 6 Branches, taken as a whole, or on the ability of Seller to timely consummate the P&A Transaction as contemplated by this Agreement, and (b) with respect to Purchaser, a material adverse effect on the business or operations of Purchaser or on the ability of Purchaser to perform any of its financial or other obligations under this Agreement, including the ability of Purchaser to timely consummate the P&A Transaction contemplated by this Agreement. In determining whether a Material Adverse Effect has occurred, the effect of any change in Federal or state banking laws or regulations, any change in GAAP or regulatory accounting principles, any adverse change in general economic conditions, including, without limitation, the interest rate environment, or in the depository institution industry generally shall be excluded. "Merger Approvals" means, collectively, all regulatory and stockholder approvals, authorizations, consents and waivers required to permit consummation of the Merger. "Mortgage" means a mortgage securing a Mortgage Loan. "Mortgagor" means a borrower under a Mortgage Loan. "Mortgage Loan" means a loan that is 100% owned by Seller and secured by a first mortgage on 1-4 family residential real property. "Mortgage Note" means the note evidencing the Mortgage Loan. "OCC" means the Office of the Comptroller of the Currency. "Order" has the meaning set forth in Section 9.1(b). "Original Purchaser Plans" has the meaning set forth in Section 12.1(a). "Other Assets" has the meaning set forth in Section 2.1(a). "Other Loans" means the loans to the borrowers described on Schedule 1.1(e) to be attached hereto (including loan commitments referred to thereon). "Overdraft Loans" means unsecured overdraft loans, including negotiable order of withdrawal line of credit accounts, relating to the Deposits, as of the close of business on the Closing Date, plus accrued interest, which do not exceed the applicable credit limit and are linked to any open account and are not sixty (60) or more days delinquent as of the Closing Date. "Owned Real Property" means Real Property where Seller owns both the real property and improvements thereon that are used for Branches. 7 "P&A Transaction" means the purchase and sale of Assets and the assumption of Liabilities described in Section 2.1 and 2.2 "Personal Property" means all of the personal property of Seller located in the Branches consisting of the trade fixtures, shelving, furniture, on-premises ATMs, equipment (other than (a) automated teller and platform equipment, (b) telephone equipment, and (c) Seller's training equipment), security systems, safe deposit boxes (exclusive of contents), vaults, sign structures (exclusive of signage containing any trade name, trademark or service mark, if any, of Seller, Norwest, WFC, or any of their respective Affiliates) and supplies excluding any items consumed or disposed of, but including new items acquired or obtained, in the ordinary course of the operation of the Branches through the Closing Date. If, prior to the Closing Date, an item of Personal Property is stolen, destroyed or otherwise lost, such item shall be excluded from the P&A Transaction, and the term "Personal Property" as used herein shall exclude such item. If, prior to the Closing Date, an item of Personal Property is damaged by fire or other casualty, such item, if reasonably repairable, shall be sold to Purchaser (in accordance with the provisions hereof) and the insurance proceeds relating to such item shall be assigned to Purchaser, it being understood that if such item is not reasonably repairable or is underinsured or uninsured, it shall be excluded from the P&A Transaction. Personal Property does not include any personal property or equipment subject to a Personal Property Lease. "Personal Property Leases" means the leases under which Seller leases certain Personal Property in the Branches. Seller shall cancel all such Personal Property Leases as of the Closing. "Purchase Price" has the meaning set forth in Section 2.3. "Real Property" means the parcels of real property on which the Branches listed on Schedule 1.1(b) are located, including any improvements thereon, which Schedule indicates whether or not such real property is Owned Real Property. "Records" means all records and original documents, or where reasonable and appropriate copies thereof, in Seller's possession that pertain to and are utilized by Seller to administer, reflect, monitor, evidence or record information respecting the business or conduct of the Branches (including transaction tickets through the Closing Date and all records for closed accounts located in Branches and excluding any other transaction tickets and records for closed accounts) and all such records and original documents, or where reasonable and appropriate copies thereof, regarding the Assets, or the Deposits, including all such records maintained on electronic or magnetic media in the electronic data base system of Seller reasonably accessible by Branch, or to comply with the applicable laws and governmental regulations to which the Deposits are subject, including but not limited to applicable unclaimed property and escheat laws. The parties understand and agree that it shall be reasonable and appropriate to provide copies 8 of all Records except notes and deeds of trust, which shall be provided in original or in whatever other form or medium then maintained by Seller, subject to the provisions relating to lost note affidavits in Sections 5.10. "Regulatory Approvals" means all approvals, authorizations, waivers or consents of or notices to any governmental agencies or authorities required for or in connection with consummation of the P&A Transaction, including the following: (i) approvals under Section 18(c) and 18(d) of the FDIA and, if applicable, under Section 10(e) of the Home Owners' Loan Act; (ii) any approval required under Nevada law; and (iii) expiration of the waiting period provided for in Section 18(c) of the FDIA. "Safe Deposit Agreements" means the agreements relating to safe deposit boxes located in the Branches. "Seller's knowledge" or other similar phrases means information that is actually known to any officer of Seller who holds the title of Senior Vice President or above and has responsibility with respect to management of operations conducted at the Branches. "Tax Returns" means any return or other report required to be filed with respect to any Tax, including declaration of estimated tax and information returns. "Taxes" means any federal, state, local, or foreign taxes, including but not limited to taxes on or measured by income, estimated income, franchise, capital stock, employee's withholding, non-resident alien withholding, backup withholding, social security, occupation, unemployment, disability, value added taxes, taxes on services, real property, personal property, sales, use, excise, transfer, gross receipts, inventory and merchandise, business privilege, and other taxes or governmental fees or charges or amounts required to be withheld and paid over to any government in respect of any tax or governmental fee or charge, including any interest, penalties, or additions to tax on the foregoing whether or not disputed. "Tenant Leases" means leases or subleases between Seller and tenants, if any, listed on Schedule 5.4. "Title Commitment" has the meaning set forth in Section 3.11. "Title Company" has the meaning set forth in Section 3.11. "Title Policy" has the meaning set forth in Section 3.11. "Transaction Account" means any account at a Branch in respect of which deposits therein are withdrawable in practice upon demand or upon which third 9 party drafts may be drawn by the depositor, including checking accounts, negotiable order of withdrawal accounts and money market deposit accounts. "Transferred Employees" means Employees who accept offers of employment from Purchaser or an Affiliate of Purchaser as contemplated in Section 8.7. 1.2 Accounting Terms. All accounting terms not otherwise defined herein shall have the respective meanings assigned to them in accordance with consistently applied generally accepted accounting principles as in effect from time to time in the United States of America ("GAAP"). 1.3 Interpretation. All references in this Agreement to Articles or Sections are references to Articles or Sections of this Agreement, unless some other reference is clearly indicated. The rule of construction against the draftsman shall not be applied in interpreting and construing this Agreement. ARTICLE 2 THE P&A TRANSACTION 2.1 Purchase and Sale of Assets. (a) Subject to the terms and conditions set forth in this Agreement, at the Closing, Seller shall grant, sell, convey, assign, transfer and deliver to Purchaser, and Purchaser shall purchase and accept from Seller, all of Seller's right, title and interest, as of the Closing Date, in and to the following (collectively, the "Assets"): (i) Cash on Hand; (ii) the Owned Real Property; (iii) the Personal Property; (iv) the Loans including Accrued Interest, and servicing rights related thereto pursuant to Section 2.5; (v) the Branch Leases and Tenant Leases; (vi) the Safe Deposit Agreements; (vii) Other Assets as described in Schedule 2.1(a)(vii); and (viii) the Records. 10 (b) Purchaser understands and agrees that it is purchasing only the Assets (and assuming only the Liabilities) specified in this Agreement and, except as may be expressly provided for in this Agreement, Purchaser has no interest in or right to any other business relationship which Seller may have with any customer of the Branches, including, without limitation: (i) any deposit account or other service of Seller at any other office of Seller which may be linked to the Deposits; (ii) any deposit account which sweeps from the Branch to a third party; (iii) any merchant card banking business; and (iv) any cash management service (e.g., sweep accounts, cash concentrator accounts, controlled disbursement accounts) which Seller may provide to any customer of the Branches. No credit card relationships are being sold. No right to the use of any sign, trade name, trademark or service mark, if any, of Seller, Norwest, WFC, or any of their respective Affiliates, is being sold. 2.2 Assumption of Liabilities. (a) Subject to the terms and conditions set forth in this Agreement, at the Closing, Purchaser shall assume, pay, perform and discharge all duties, responsibilities, obligations or liabilities of Seller (whether accrued, contingent or otherwise) to be discharged, performed, satisfied or paid on or after the Closing Date, with respect to the following (collectively, the "Liabilities"): (i) the Deposits together with Accrued Interest thereon, including IRA and Keogh Accounts to the extent contemplated by Section 2.4; (ii) the Branch Leases and Tenant Leases; (iii) the Safe Deposit Agreements; (iv) the Loans, and the servicing of the Loans pursuant to Section 2.5; and (v) the Accrued Liabilities, if any, described in Schedule 2.2(a)(v). (b) Notwithstanding anything to the contrary in this Agreement, Purchaser shall not assume or be bound by any duties, responsibilities, obligations or liabilities of Seller, or of any of Seller's Affiliates, of any kind or nature, known, unknown, contingent or otherwise, other than the Liabilities. 2.3 Purchase Price. The purchase price ("Purchase Price") for the Assets shall be the sum of: (a) An amount equal to 9.0% of the balance (including Accrued Interest) of the Deposits on the day prior to the Closing Date; (b) The aggregate amount of Cash on Hand as of the Closing Date; (c) The aggregate net book value of all the Assets, other than Cash on Hand and the Loans, as reflected on the books of Seller as of the close of business of the 11 month-end day most recently preceding the Closing Date, excluding the net book value of any Owned Real Property leased pursuant to Section 10.1(c); and (d) The aggregate Loan Value of the Loans as of the close of business of the day prior to the Closing Date. 2.4 Assumption of IRA and Keogh Account Deposits. (a) With respect to Deposits in IRAs, Seller will use reasonable efforts and will cooperate with Purchaser in taking any action reasonably necessary to accomplish either the appointment of Purchaser as successor custodian or the delegation to Purchaser (or to an Affiliate of Purchaser) of Seller's authority and responsibility as custodian of all such IRA deposits except self-directed IRA deposits, including, but not limited to, sending to the depositors thereof appropriate notices, cooperating with Purchaser (or such Affiliate) in soliciting consents from such depositors, and filing any appropriate applications with applicable regulatory authorities. If any such delegation is made to Purchaser (or such Affiliate), Purchaser (or such Affiliate) will perform all of the duties so delegated and comply with the terms of Seller's agreement with the depositor of the IRA deposits affected thereby. (b) With respect to Deposits in Keogh Accounts, Seller shall cooperate with Purchaser to invite depositors thereof to direct a transfer of each such depositor's Keogh Account and the related Deposits to Purchaser (or an Affiliate of Purchaser), as trustee thereof, and to adopt Purchaser's (or such Affiliate's) form of Keogh Master Plan as a successor to that of Seller. Purchaser (or such Affiliate) will assume no Keogh Accounts unless Purchaser (or such Affiliate) has received the documents necessary for such assumption at or before the Closing. With respect to any owner of a Keogh Account who does not adopt Purchaser's (or such Affiliate's) form of Keogh Master Plan, Seller will use reasonable efforts in order to enable Purchaser (or such Affiliate) to retain such Keogh Accounts at the Branches. (c) If, notwithstanding the foregoing, as of the Closing Date, Purchaser shall be unable to retain deposit liabilities in respect of an IRA or Keogh Account, such deposit liabilities shall be excluded from Deposits for purposes of this Agreement and shall constitute "Excluded IRA/Keogh Account Deposits." 2.5 Sale and Transfer of Servicing and Escrows. (a) The Loans shall be sold on a servicing-released basis. As of the Closing Date, all rights, obligations, liabilities and responsibilities with respect to the servicing of the Loans after the Closing Date will be assumed by Purchaser. Seller shall be discharged and indemnified by Purchaser from all liability with respect to servicing of the Loans after the Closing Date and Purchaser shall be discharged and indemnified by Seller from all liability with respect to servicing of the Loans on or prior to the Closing Date. To the extent permitted under the applicable documents, Seller shall assign to Purchaser Seller's rights under any participation or servicing agreement relating to the Loans. (b) As of the Closing Date, Purchaser will assume, and agrees to undertake and discharge, any and all obligations of the holder and servicer of Mortgage Loans as 12 such obligations may relate to the escrow, maintenance of escrow and payments from escrow of moneys paid by or on account of the applicable Mortgagor. On or before the fifth (5th) Business Day after the Closing Date, Seller shall remit by wire transfer of immediately available funds to Purchaser all funds held in escrow that were collected and received pursuant to a Mortgage Loan for the payment of taxes, assessments, hazard insurance premiums, primary mortgage insurance policy premiums, if applicable, or comparable items prior to the Closing Date plus any Accrued Interest. Seller makes no warranties or representations of any kind or nature as to the sufficiency of such sum to discharge any obligations with respect to Mortgage Loans, or as to the accuracy of such sum. ARTICLE 3 CLOSING PROCEDURES; ADJUSTMENTS 3.1 Closing. (a) The Closing will be held at the offices of Seller at 3300 West Sahara Avenue, Las Vegas, Nevada or such other place as may be agreed to by the parties. (b) The Closing Date shall be April 16, 1999, or, if the Closing cannot occur on such date, on a date and time as soon thereafter as practicable after receipt of all Regulatory Approvals. Unless the parties agree pursuant to Section 4.11(a) that the conversion of the data processing with respect to the Branches and the Assets and Liabilities will be performed on a date other than the Closing Date, the Closing Date shall be a Friday. 3.2 Payment at Closing. (a) At Closing, Seller shall pay to Purchaser the amount by which the aggregate balance (including Accrued Interest) of the Deposits and Accrued Liabilities exceed the Estimated Purchase Price (the "Estimated Payment Amount") or, Purchaser shall pay to Seller the amount by which the Estimated Purchase Price exceeds the aggregate balance (including Accrued Interest) of the Deposits and Accrued Liabilities, each as set forth on the Draft Closing Statement as agreed upon between Seller and Purchaser. In addition, Purchaser shall pay to Seller any sales tax due. (b) All payments to be made hereunder by one party to the other shall be made by wire transfer of immediately available funds (in all cases to an account specified in writing by Seller or Purchaser, as the case may be, to the other not later than the third (3rd) Business Day prior to the Closing Date) on or before 11:00 a.m. local time on the date of payment. If any payment to be made hereunder on the Closing Date (or any other date) shall not be made on or before 11:00 a.m. local time on such date, and the amount thereof shall have been agreed to in writing by the parties at the Closing Date (or such other payment date), the party responsible therefor may make such payment on or before 11:00 a.m. local time on the next Business Day together with interest thereon at the 13 Federal Funds Rate applicable from the Closing Date (or such other payment date) to the date such payment is actually made, which in no event shall be later than the fifth (5th) Business Day after such payment was due. (c) If any instrument of transfer contemplated herein shall be recorded in any public record before the Closing and thereafter the Closing is not completed, then at the request of such transferring party the other party will deliver (or execute and deliver) such instruments and take such other action as such transferring party shall reasonably request to revoke such purported transfer. 3.3 Adjustment of Purchase Price. (a) On or before 12:00 noon on the thirtieth (30th) day following the Closing Date (the "Adjustment Date"), Seller shall deliver to the Purchaser the Final Closing Statement and shall make available such work papers, schedules and other supporting data as may be reasonably requested by Purchaser to enable it to verify the amounts set forth in the Final Closing Statement. The Final Closing Statement shall also set forth the amount (the "Adjusted Payment Amount") by which the aggregate amount of Deposits (including Accrued Interest) and Accrued Liabilities shown on the Final Closing Statement differs from the Estimated Purchase Price. (b) The determination of the Adjusted Payment Amount shall be final and binding on the parties hereto unless within thirty (30) days after receipt by Purchaser of the Final Closing Statement, Purchaser shall notify the Seller in writing of its disagreement with any amount included therein or omitted therefrom, in which case, if the parties are unable to resolve the disputed items within ten (10) Business Days of the receipt by Seller of notice of such disagreement, such items shall be determined by an independent accounting firm selected by mutual agreement between Seller and Purchaser; provided, however, that in the event the fees of such firm as estimated by such firm would exceed fifty percent (50%) of the net amount in dispute, the parties agree that such firm will not be engaged by either party and that such net amount in dispute will be equally apportioned between Seller and Purchaser. Such accounting firm shall be instructed to resolve the disputed items within ten (10) Business Days of engagement, to the extent reasonably practicable. The determination of such accounting firm shall be final and binding on the parties hereto. The fees of any such accounting firm shall be divided equally between Seller and Purchaser. (c) On or before 12:00 noon on the tenth (10th) Business Day after the Adjustment Date or, in the case of a dispute, the date of the resolution of the dispute pursuant to subsection 3.3(b) above, Seller shall pay to Purchaser an amount equal to the amount by which the Adjusted Payment Amount exceeds the Estimated Payment Amount, plus interest on such excess amount from the Closing Date to but excluding the payment date, at the Federal Funds Rate or, if the Estimated Payment Amount exceeds the Adjusted Payment Amount, Purchaser shall pay to Seller an amount equal to such excess, plus interest on such excess amount from the Closing Date to but excluding the payment date, at the Federal Funds Rate. Any payments required by Section 3.5 shall be made contemporaneously with the foregoing payment. 14 3.4 [intentionally omitted] 3.5 Proration: Other Closing Date Adjustments. (a) Except as otherwise specifically provided in this Agreement, it is the intention of the parties that Seller will operate the Branches for its own account until 11:59 p.m., Nevada time, on the Closing Date, and that Purchaser shall operate the Branches, hold the Assets and assume the Liabilities for its own account after the Closing Date. Thus, except as otherwise specifically provided in this Agreement, items of income and expense, as defined herein, shall be prorated as of 11:59 p.m., Nevada time, on the Closing Date, and settled between Seller and Purchaser on the Closing Date, whether or not such adjustment would normally be made as of such time. Items of proration will be handled at Closing as an adjustment to the Purchase Price unless otherwise agreed by the parties hereto. (b) For purposes of this Agreement, items of proration and other adjustments shall include, without limitation: (i) rental payments and security deposits under the Branch Leases and the Tenant Leases; (ii) personal and real property taxes and assessments; (iii) FDIC deposit insurance assessments; (iv) wages, salaries and employee benefits and expenses; (v) trustee or custodian fees on IRA and Keogh Accounts; (vi) adjustments reflecting exclusions from the Personal Property as provided for in the definition thereof; (vii) other prepaid expenses and items and accrued but unpaid liabilities, as of the close of business on the day prior to the Closing Date. Safe deposit rental payments previously received by Seller shall not be prorated. 3.6 Seller Deliveries. At the Closing, Seller shall deliver to Purchaser: (a) Deeds in substantially the form of Schedule 3.6(a)(except as otherwise required by local state law), pursuant to which the Owned Real Property shall be transferred to Purchaser "AS IS", "WHERE IS" and with all faults (the "Grant Deeds"); (b) A bill of sale in substantially the form of Schedule 3.6(b)(except as otherwise required by local state law), pursuant to which the Personal Property shall be transferred to Purchaser "AS IS", "WHERE IS" and with all faults; (c) An assignment and assumption agreement in substantially the form of Schedule 3.6(c)(except as otherwise required by local state law), with respect to the Liabilities (the "Assignment and Assumption Agreement"); (d) Lease assignment and assumption agreements in substantially the form of Schedule 3.6(d)(except as otherwise required by local state law), with respect to each of the Branch Leases (the "Lease Assignments"); (e) Subject to the provisions of Section 7.4, such consents of landlords as shall be required pursuant to the terms of such Branch Leases, to the assignment of the Branch Leases to Purchaser in substantially the form of Schedule 3.6(e)(except as otherwise required by local state law), (the "Landlord Consents"); 15 (f) Subject to the provisions of Section 7.4, such consents as shall be required pursuant to the terms of such Tenant Leases in connection with the assignment thereof to Purchaser; (g) An Officer's Certificate in substantially the form of Schedule 3.6(g); (h) [intentionally left blank] (i) The Draft Closing Statement; (j) Seller's resignation as trustee or custodian, as applicable, with respect to each IRA or Keogh Account included in the Deposits and designation of Purchaser as successor trustee or custodian with respect thereto, as contemplated by Section 2.4; (k) All documentation required to exempt Seller from the withholding requirement of Section 1445 of the Code, if applicable, consisting of an affidavit from Seller to Purchaser upon penalty of perjury that Seller is not a foreign person and providing Seller's U.S. taxpayer identification number; and (l) Such other documents as the parties determine are reasonably necessary to consummate the P&A Transaction as contemplated hereby. 3.7 Purchaser Deliveries. At the Closing, Purchaser shall deliver to Seller: (a) The Assignment and Assumption Agreement; (b) Purchaser's acceptance of its appointment as successor trustee or custodian, as applicable, of the IRA and Keogh Accounts included in the Deposits and assumption of the fiduciary obligations of the trustee or custodian with respect thereto, as contemplated by Section 2.4; (c) The Lease Assignments and, as contemplated by Section 7.4, such other instruments and documents as any landlord under a Branch Lease may reasonably require as necessary or desirable for providing for the assumption by Purchaser of a Branch Lease, each such instrument and document in form and substance reasonably satisfactory to the parties and dated as of the Closing Date; (d) An Officer's Certificate in substantially the form of Schedule 3.7(d); (e) [intentionally left blank] (f) Such other documents as the parties determine are reasonably necessary to consummate the P&A Transaction as contemplated hereby. 16 3.8 Delivery of the Loan Documents. (a) As soon as reasonably practicable but not later than thirty (30) days after the Closing Date, Seller shall deliver to Purchaser or its designee the Loan Documents actually in the possession of Seller, in whatever other form or medium then maintained by Seller. Seller makes no representation or warranty to Purchaser regarding the condition of the Loan Documents or any single document included therein, or Seller's interest in any collateral securing any Loan, except as specifically set forth herein. Seller shall have no responsibility or liability for the Loan Documents from and after the time such files are delivered by Seller to an independent third party for shipment to Purchaser, the cost of which shall be the sole responsibility of Purchaser. Seller agrees that the Loan Documents shall include either an original note or a lost note affidavit for each Loan. (b) Promptly upon execution of this Agreement, Purchaser shall provide Seller with the exact name to which the Loans are to be endorsed, or whether any Loans should be endorsed in blank. Seller will complete such endorsements and deliver the Loan Documents within ninety (90) days after Closing: provided, however, with respect to specific Loan Documents, Seller may require additional time to effectively transfer title thereto and Purchaser shall not hold Seller liable for any reasonable delays in the delivery of such Loan Documents. 3.9 Collateral Assignments and Filing. Seller shall take all such reasonable actions as requested by Purchaser to assist Purchaser in obtaining the valid perfection of a lien or security interest in the collateral, if any, securing each Loan sold on the Closing Date in favor of Purchaser or its designated assignee as secured party. Any such action shall be at the sole expense of Purchaser, and Purchaser shall reimburse Seller for all reasonable costs incurred in connection therewith. 3.10 Owned Real Property Filings. On or prior to the Closing Date, Seller shall file or record, or cause to be filed or recorded, any and all documents necessary in order that the legal and equitable title to Owned Real Property shall be duly vested in Purchaser. Any expenses or documentary transfer taxes with respect to such filings and all escrow closing costs shall be shared equally by the parties. 3.11 Title Policies. (a) Within ten (10) days after execution of this Agreement, Seller, at Seller's expense, shall provide Purchaser with a preliminary title commitment (the "Title Commitment") to Purchaser's reasonable satisfaction for all the Owned Real Property issued by ATI Title Company (the "Title Company"). (b) Purchaser shall, at its own expense, obtain as of the Closing Date an ALTA (standard coverage) title insurance policy from the Title Company (a "Title Policy") with respect to all the Owned Real Property. Seller will cooperate with Purchaser in assisting Purchaser to obtain (at Purchaser's expense) an ALTA extended coverage owner's policy. 17 ARTICLE 4 TRANSITIONAL MATTERS 4.1 Transitional Arrangements. Seller and Purchaser agree to cooperate and to proceed as follows to effect the transfer of account record responsibility for the Branches: (a) Not later than thirty (30) days after the signing of this Agreement, Seller will meet with Purchaser to investigate, confirm and agree upon mutually acceptable transaction settlement procedures and specifications, files, procedures and schedules, for the transfer of account record responsibility; provided, however, that Seller is not obligated under this Agreement to provide Purchaser any information regarding Seller's relationship with the customers outside of the Branch (e.g., other customer products, householding information). (b) Not later than forty-five (45) days after the date of this Agreement, Seller shall deliver to Purchaser the specifications and conversion sample files. (c) From time to time prior to the Closing, after Purchaser has tested and confirmed the conversion sample files, Purchaser may request and Seller shall provide reasonable additional file-related information, including without limitation, complete name and address, account masterfile, ATM account number information, applicable transaction and stop/hold/caution information, account-to-account relationship information and any other related information with respect to the Deposits and the Other Loans. (d) Upon the reasonable request of Purchaser, Seller will cooperate with Purchaser and will make available from time to time prior to the Closing Date, at Purchaser's expense (at $75 per hour), a reasonable number of technical personnel for consultation with Purchaser concerning matters other than the matters referred to in this Article 4. 4.2 Customers. (a) Not later than thirty (30) days prior to the Closing Date (unless earlier required by law), (i) Seller will notify the holders of Deposits to be transferred on the Closing Date that, subject to the terms and conditions of this Agreement, Purchaser will be assuming liability for such Deposits; (ii) each of Seller and Purchaser shall provide, or join in providing where appropriate, all notices to customers of the Branches and other persons that Seller or Purchaser, as the case may be, is required to give under applicable law or the terms of any other agreement between Seller and any customer in connection with the transactions contemplated hereby; and 18 (iii) following or concurrently with the notice referred to in clause (i) above, Purchaser may communicate with and deliver information to depositors and other customers of the Branches concerning the P&A Transaction and the business of Purchaser. A party proposing to send or publish any notice or communication pursuant to any paragraph of this Section 4.2 shall furnish to the other party a copy of the proposed form of such notice or communication at least ten (10) days in advance of the proposed date of the first mailing, posting, or other dissemination thereof to customers, and shall not unreasonably refuse to amend such notice to incorporate any changes that the other such party proposes as necessary to comply with applicable law. All costs and expenses of any notice or communication sent or published by Purchaser or Seller shall be the responsibility of the party sending such notice or communication and all costs and expenses of any joint notice or communication shall be shared equally by Seller and Purchaser. As soon as reasonably practicable and in any event within forty-five (45) days of the date hereof, Seller shall provide to Purchaser a report of the names and addresses of the owners of the Deposits, the borrowers on the Loans and the lessees of the safe deposit boxes in connection with the mailing of such materials, which report shall be current as of the date hereof. (b) Following the giving of any notice described in paragraph (a) above, Purchaser and Seller shall deliver to each new customer at any of the Branches such notice or notices as may be reasonably necessary to notify such new customers of Purchaser's pending assumption of liability for the Deposits and to comply with applicable law. As soon as practicable after execution of this Agreement, Seller will provide Purchaser with account information, including complete mailing addresses for each of the depositors of the Deposits, as of a recent date, and upon reasonable request shall provide an updated version of such records; provided, however, that Seller shall not be obligated to provide such updated records more than twice. (c) Notwithstanding the provisions of Section 7.6, neither Purchaser nor Seller shall object to the use, by depositors of the Deposits, of payment orders issued to or ordered by such depositors on or prior to the Closing Date, which payment orders bear the name, or any logo, trademark, service mark or the proprietary mark of Seller, Norwest, WFC or any of their respective Affiliates. 4.3 Direct Deposits. Seller will use all reasonable efforts to transfer to Purchaser on the Closing Date all of those automated clearing house ("ACH") and FedWire direct deposit arrangements related (by agreement or other standing arrangement) to Deposits. For a period of three (3) months following the Closing, in the case of ACH direct deposits to accounts containing Deposits (the final Business Day of such period being the "ACH Direct Deposit Cut-Off Date"), Seller shall transfer to Purchaser all received ACH Direct Deposits at 9:00 a.m. Central Standard Time each Business Day. Such transfers shall contain Direct Deposits effective for that Business Day only. On each Business Day, for a period of thirty (30) days following the Closing Date (the final Business Day of such period being the "FedWire Direct Deposit Cut-Off 19 Date"), FedWires received by Seller shall be returned (as soon as is possible after receipt) to the originator with an indication of Purchaser's correct Wire Room contact information and an instruction that such wire should be sent to Purchaser. Compensation for ACH direct deposits or FedWire direct deposits not forwarded to Purchaser on the same Business Day as that on which Seller has received such deposits will be handled in accordance with the rules established by the United States Council on International Banking. After the respective ACH Direct Deposit Cut-Off Date or FedWire Direct Deposit Cut-Off Date, Seller may discontinue accepting and forwarding ACH and FedWire entries and funds and return such direct deposits to the originators marked "Account Closed." Seller shall not be liable for any overdrafts that may thereby be created. Purchaser and Seller shall agree on a reasonable period of time prior to the Closing during which Seller will no longer be obligated to accept new direct deposit arrangements related to the Branches. At the time of each ACH Direct Deposit Cut-Off Date, Purchaser will provide ACH originators with account numbers relating to the Deposits. 4.4 Direct Debits. As soon as practicable after execution of this Agreement and after the notice provided in Section 4.2(a), Purchaser will send appropriate notice to all customers having accounts constituting Deposits the terms of which provide for direct debit of such accounts by third parties, instructing such customers concerning the transfer of customer direct debit authorizations from Seller to Purchaser. Such notice shall be in a form agreed to by the parties. For a period of three (3) months following the Closing, Seller shall transfer to Purchaser all received direct debits on accounts constituting Deposits at 9:00 a.m. Central Standard Time each Business Day. Such transfers shall contain Direct Debits effective for that Business Day only. Thereafter, Seller may discontinue forwarding such entries and return them to the originators marked "Account Closed." Purchaser and Seller shall agree on a reasonable period of time prior to the Closing during which Seller will no longer be obligated to accept new direct debit arrangements related to the Branches. On the Closing Date, Purchaser will provide ACH originators of such Direct Debits with account numbers relating to the Deposits. 4.5 Escheat Deposits. No currently escheated deposits are being sold. After Closing, Purchaser shall be solely responsible for the proper reporting and transmission to the appropriate governmental entity of Escheat Deposits. 4.6 Maintenance of Records. Through the Closing Date, Seller will maintain the Records relating to the Assets and Liabilities in the same manner and with the same care that the Records have been maintained prior to the execution of this Agreement. Purchaser may, at its own expense, make such copies of and excerpts from the Records as it may deem desirable. All Records, whether held by Purchaser or Seller, shall be maintained for such periods as are required by law, unless the parties shall agree in writing to a longer period. From and after the Closing Date, each of the parties shall permit the other reasonable access to any applicable Records in its possession relating to matters arising on or before the Closing Date and reasonably necessary in connection with any claim, action, litigation or other proceeding involving the party requesting access to such Records or in connection with any legal obligation owed by such party to 20 any present or former depositor or other customer. Each party will notify the other party thirty (30) days prior to destroying any Records. 4.7 Interest Reporting and Withholding. (a) Unless otherwise agreed to by the parties, Seller will report to applicable taxing authorities and holders of Deposits, with respect to the period from January 1 of the year in which the Closing occurs through the Closing Date, all interest (including dividends and other distributions with respect to money market accounts) credited to, withheld from and any early withdrawal penalties imposed upon the Deposits. Purchaser will report to the applicable taxing authorities and holders of Deposits, with respect to all periods from the day after the Closing Date, all such interest credited to, withheld from and any early withdrawal penalties imposed upon the Deposits. Any amounts required by any governmental agencies to be withheld from any of the Deposits through the Closing Date will be withheld by Seller in accordance with applicable law or appropriate notice from any governmental agency and will be remitted by Seller to the appropriate agency on or prior to the applicable due date. Any such withholding required to be made subsequent to the Closing Date will be withheld by Purchaser in accordance with applicable law or appropriate notice from any governmental agency and will be remitted by Purchaser to the appropriate agency on or prior to the applicable due date. (b) Unless otherwise agreed by the parties, Seller shall be responsible for delivering to payees all IRS notices with respect to information reporting and tax identification numbers required to be delivered through the Closing Date with respect to the Deposits, and Purchaser shall be responsible for delivering to payees all such notices required to be delivered following the Closing Date with respect to the Deposits. Purchaser and Seller shall, prior to the Closing Date, consult and Seller shall take reasonable actions as are necessary to permit Purchaser to deliver such IRS notices required to be delivered following the Closing Date. (c) Unless otherwise agreed by the parties, Seller will make all required reports to applicable tax authorities and to obligors on Loans purchased on the Closing Date, with respect to the period from January 1 of the year in which the Closing occurs through the Closing Date, concerning all interest and points received by the Seller. Purchaser will make all required reports to applicable tax authorities and to obligors on Loans purchased on the Closing Date, with respect to all periods from the day after the Closing Date, concerning all such interest and points received. 4.8 Negotiable Instruments. Seller will remove any supply of Seller's money orders, official checks, gift checks, travelers' checks or any other negotiable instruments located at each of the Branches on the Closing Date. 4.9 ATM/Debit Cards; POS Cards. Seller will provide Purchaser with a list of ATM access/debit cards and Point-of-Sale ("POS") cards issued by Seller to depositors of any Deposits, and a record thereof in a format reasonably agreed to by the parties containing all addresses therefor, as soon as practicable and in no event later than forty-five (45) days after execution of this Agreement. At or promptly after the Closing, Seller 21 will provide Purchaser with a revised record through the Closing. In instances where a depositor of a Deposit made an assertion of error regarding an account pursuant to the Electronic Funds Transfer Act and Federal Reserve Board Regulation E, and Seller, prior to the Closing, recredited the disputed amount to the relevant account during the conduct of the error investigation, Purchaser agrees to comply with a written request from Seller to debit such account in a stated amount and remit such amount to Seller, to the extent of the balance of funds available in the accounts. Seller agrees to indemnify Purchaser for any claims or losses that Purchaser may incur as a result of complying with such request from Seller. Seller will not be required to disclose to Purchaser customers' PINs or algorithms or logic used to generate PINs. Purchaser shall reissue ATM access/debit cards to depositors of any Deposits prior to the Closing Date, which cards shall be effective as of the Closing Date. Purchaser and Seller agree to settle any and all ATM transactions and POS transactions effected on or before the Closing Date, but processed after the Closing Date, as soon as practicable. In addition, Purchaser assumes responsibility for and agrees to pay on presentation all POS transactions initiated before or after the Closing with POS cards issued by Seller to access Transaction Accounts. 4.10 Leasing of Personal Property. Seller shall cancel or terminate any Personal Property Lease as of the Closing Date. 4.11 Data Processing Conversion for the Branches and Handling of Certain Items. (a) The conversion of the data processing with respect to the Branches and the Assets and Liabilities will be completed on the Saturday and Sunday following the Closing Date unless otherwise agreed to by the parties. Seller and Purchaser agree to cooperate to facilitate the orderly transfer of data processing information in connection with the P&A Transaction. Within ten (10) days of the date of this Agreement, Purchaser and/or its representatives shall be permitted access (subject to the provisions of section 7.2(a)) to review each Branch for the purpose of installing automated equipment for use by Branch personnel. Following the receipt of all Regulatory Approvals (except for the expiration of statutory waiting periods), Purchaser shall be permitted, at its expense, to install and test communication lines, both internal and external, from each site and prepare for the installation of automated equipment on the Closing Date. (b) As soon as practicable and in no event more than five (5) business days after the Closing Date, Purchaser shall mail to each depositor in respect of a Transaction Account (i) a letter approved by the Seller requesting that such depositor promptly cease writing Seller's drafts against such Transaction Account and (ii) new drafts which such depositor may draw upon Purchaser against such Transaction Accounts. The parties hereto shall use their best efforts to develop procedures which cause Seller's drafts against Transaction Accounts which are received after the Closing Date to be cleared through Purchaser's then-current clearing procedures. During the sixty (60) day period after the Closing Date, if it is not possible to clear Transaction Account drafts through Purchaser's then-current clearing procedures, Seller shall forward to Purchaser as soon as practicable but in no event more than three (3) Business Days after receipt all Transaction Account drafts drawn against Transaction Accounts. Seller shall have no obligation to 22 pay such forwarded Transaction Account drafts. Upon the expiration of such sixty (60) day period, Seller shall cease forwarding drafts against Transaction Accounts. (c) Any items that were credited for deposit to or cashed against a Deposit prior to the Closing and are returned unpaid on or within sixty (60) days after the Closing Date ("Returned Items") will be handled as set forth herein. If Seller's bank account is charged for the Returned Item, Seller shall forward such Returned Item to Purchaser. If upon Purchaser's receipt of such Returned Item there are sufficient funds in the Deposit to which such Returned Item was credited or any other Deposit transferred at the Closing standing in the name of the party liable for such Returned Item, Purchaser will debit any or all of such Deposits an amount equal in the aggregate to the Returned Item, and shall repay that amount to Seller. If there are not sufficient funds in the Deposit because of Purchaser's failure to honor holds placed on such Deposit, Purchaser shall repay the amount of such Returned Item to Seller and Seller shall assign the Returned Item to Purchaser for collection. Any items that were credited for deposit to or cashed against an account at the Branches to be transferred at the Closing prior to the Closing and are returned unpaid more than sixty (60) days after the Closing will be the responsibility of Purchaser. 4.12 Information Regarding Mortgage Loans. Not later than forty-five (45) days after execution of this Agreement, Seller will provide to Purchaser information regarding the Mortgage Loans on a magnetic disk or other media acceptable to the parties, which shall contain the following fields of information: Current Principal Balance; Delinquency Status as of the Run Date; Paid to Date; Current Interest Rate; Total Monthly Payment; Next Interest Rate Change Date; and Next Payment Change Date. 4.13 Employee Training. Seller and Purchaser shall cooperate in order to permit Purchaser to train Seller's employees at the Branches who choose to accept employment with Purchaser, and Seller shall, as scheduled by Purchaser for reasonable periods of time and subject to Seller's reasonable approval, such that Seller's ongoing operations at the Branches shall not be materially disrupted, excuse such employees from their duties at the Branches for the purpose of training and orientation by Purchaser. Purchaser shall pay the full salary or wages of replacements of employees so excused for the periods during which such employees are so excused, where such replacements are reasonably determined by Seller to be needed to maintain ongoing operations at the branches without material disruption. 23 ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF SELLER Seller represents and warrants to Purchaser as follows: 5.1 Corporate Organization and Authority. Seller is a national banking association, duly organized and validly existing under the laws of the United States, and has the requisite power and authority to conduct the business now being conducted at the Branches. Seller has the requisite corporate power and authority and has taken all corporate action necessary in order to execute and deliver this Agreement and to consummate the transactions contemplated hereby. This Agreement is a valid and binding agreement of Seller enforceable in accordance with its terms subject, as to enforcement, to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. 5.2 No Conflicts. The execution, delivery and performance of this Agreement by Seller does not, and will not, (i) violate any provision of its charter or by-laws or (ii) violate or constitute a breach of, or default under, any law, rule, regulation, judgment, decree, ruling or order of any court, government or governmental agency to which Seller is subject or any agreement or instrument of Seller, or to which Seller is subject or by which Seller is otherwise bound, which violation, breach, contravention or default referred to in this clause (ii), individually or in the aggregate, would have a Material Adverse Effect (assuming the receipt of any required consents of lessors under the Branch Leases in respect of the transactions herein contemplated). Seller has all material licenses, franchises, permits, certificates of public convenience, orders and other authorizations of all federal, state and local governments and governmental authorities necessary for the lawful conduct of its business at each of the Branches as now conducted and all such licenses, franchises, permits, certificates of public convenience, orders and other authorizations, are valid and in good standing and, to Seller's knowledge, are not subject to any suspension, modification or revocation or proceedings related thereto. 5.3 Approvals and Consents. Other than Regulatory Approvals or as otherwise disclosed in writing to Purchaser by Seller prior to the date hereof, no notices, reports or other filings are required to be made by Seller with, nor are any consents, registrations, approvals, permits or authorizations required to be obtained by Seller from, any governmental or regulatory authorities of the United States or the several States in connection with the execution and delivery of this Agreement by Seller and the consummation of the transactions contemplated hereby by Seller, the failure to make or obtain any or all of which, individually or in the aggregate, would have a Material Adverse Effect. 5.4 Tenants. Except for the tenants listed on Schedule 5.4, there are no tenants of the Real Property. 24 5.5 Leases. Each Branch Lease and each Personal Property Lease is the valid and binding obligation of Seller, and to Seller's knowledge, of each other party thereto; and there does not exist with respect to Seller's obligations thereunder, or, to Seller's knowledge, with respect to the obligations of the lessor thereof, any material default, or event or condition which constitutes or, after notice or passage of time or both, would constitute a material default on the part of Seller or the lessor under any such Branch Lease or Personal Property Lease. As used in this Section, the term "lessor" includes any sub-lessor of the property to Seller. Each Branch Lease and each material Personal Property Lease is current and all rents, expenses and charges payable by Seller thereunder have been paid or accrued pursuant to the terms thereof (except for any payments not yet delinquent or as to which the obligation to make such payment is being contested in good faith). Accurate copies of each Branch Lease and each material Personal Property Lease have heretofore been made available to Purchaser. 5.6 [intentionally omitted] 5.7 Litigation and Undisclosed Liabilities. Except as set forth in Schedule 5.7, there are no actions, suits or proceedings that have a reasonable likelihood of an adverse determination pending or, to Seller's knowledge, threatened against Seller or any of the Branches, or obligations or liabilities (whether or not accrued, contingent or otherwise) or, to Seller's knowledge, facts or circumstances that could reasonably be expected to result in any claims against or obligations or liabilities of Seller that, individually or in the aggregate, would have a Material Adverse Effect. 5.8 Regulatory Matters. (a) Except as previously disclosed in writing to Purchaser, there are no pending or, to Seller's knowledge, threatened disputes or controversies between Seller and any federal, state or local governmental agency or authority that, individually or in the aggregate, would have a Material Adverse Effect. (b) Neither Seller nor any of its Affiliates has received any indication from any federal or state governmental agency or authority that such agency would oppose or refuse to grant a Regulatory Approval or impose a Burdensome Condition. (c) Seller is not a party to any written order, decree, agreement or memorandum of understanding with, or commitment letter or similar submission to, any federal or state regulatory agency or authority charged with the supervision or regulation of depository institutions, nor has Seller been advised by any such agency or authority that it is contemplating issuing or requesting any such order, decree, agreement, memorandum of understanding, commitment letter or submission, in each case which, individually or in the aggregate, would have a Material Adverse Effect. 5.9 Compliance with Laws. The banking business of the Branches has been conducted in compliance with all federal, state and local laws, regulations and ordinances applicable thereto, except for any failures to comply that would not, individually or in the aggregate, result in a Material Adverse Effect. 25 5.10 Loans. (a) An accurate list of the Loans as of September 30, 1998 is set forth on the magnetic media delivered to Purchaser on October 16, 1998. Such magnetic media will be updated to include an accurate list of the Loans as of the Closing Date (including the fields set forth on Schedule 1.1(e)) and delivered to Purchaser together with a hard copy printout thereof as soon as is reasonably practicable after the Closing Date. With respect to each Loan (other than Overdraft Loans): (i) Such Loan was solicited, originated and serviced in material compliance with all applicable requirements of federal, state, and local laws and regulations in effect at the time of such solicitation. origination and servicing; and there was no fraud on the part of the Seller or originator with respect to the origination of any Loan; (ii) Each note evidencing a Loan and any related security instrument (including, without limitation, any guaranty or similar instrument) constitutes a valid and legally binding obligation of the obligor thereunder enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfers, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles; (iii) The collateral for each secured Loan is (A) the collateral described in the related Loan Documents and (B) subject to a valid, enforceable and perfected lien; (iv) To Seller's knowledge, no claims or defenses to the enforcement of such Loan have been asserted and Seller is aware of no acts or omissions that would give rise to any claim or right of rescission, setoff, counterclaim or defense by a borrower, obligor, guarantor or any other person obligated to perform under any related Loan Documents; (v) As of the Closing Date, (A) if such Loan is a commercial loan, such loan will have a grade of "pass" or above according to Sellers' internal loan grading system and will be not more than thirty (30) days past due with respect to any payment of principal or interest; (B) if such Loan is a consumer loan, such Loan will be not more than sixty (60) days past due with respect to any payment of principal or interest; (C) if such Loan is a 1-4 unit residential mortgage loan, such Loan will be not more than sixty (60) days past due with respect to any payment of principal or interest and will not be in foreclosure; and (D), to Seller's knowledge, no obligor on such Loan is the subject of any proceeding in bankruptcy. (vi) Such Loan was made substantially in accordance with Seller's standard underwriting and documentation guidelines, which are consistent with prudent and customary industry standards, as in effect at the time of its origination and has been administered substantially in accordance with the Loan Documents 26 and Seller's standard loan servicing procedures, which are consistent with prudent and customary industry standards, as in effect from time to time; (vii) All information provided hereunder and in the magnetic tape delivered to Purchaser pertaining to such Loan is true and correct in all material respects; (viii) Each Loan was made in compliance with all applicable usury laws; (ix) Except as set forth in Schedule 5.10(a)(ix), immediately prior to the Closing the Seller will be the sole owner of each Loan, free and clear of any Encumbrance; and (x) The terms of the notes or the mortgages have not been altered, modified or waived in any material respect, except by a written instrument contained in the Loan Documents. (b) With respect to the Overdraft Loans, each: (i) has been administered in compliance in all material respects with all applicable laws; (ii) is a valid and legally binding obligation of the borrower enforceable against the borrower in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles; and (iii) is not subject to any defense, counterclaim or set-off of any kind. (c) The security interest in the Deposit account securing each Deposit-Related Loan is a legal, valid and binding obligation enforceable against the obligor subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. (d) From the date hereof through the Closing Date, Seller shall have adhered to a policy regarding the extension of terms on consumer loans consistent with past practice. (e) [intentionally omitted] (f) Except for home equity loans, a title insurance policy is in effect for each Loan secured by real property, and Seller is the sole owner of each such loan, except for such participations as are documented in the related Loan documents or other Records. 27 (g) With respect to each Mortgage Loan, the Loan Documents as of the Closing Date will include: (i) The original Mortgage Note, containing all intervening endorsements, if any, evidencing a complete chain of ownership from the originator of such Mortgage Loan to Seller (provided that up to ten percent (10%) of the aggregate principal balance of the Mortgage Loans may consist of lost note affidavits in substantially the form attached hereto as Schedule 5.10(f)(i)), duly endorsed by Seller without recourse in blank or to the order of Purchaser; (ii) The original Mortgage (or copies certified by Seller as being true and correct in those instances where the original is deemed lost) with evidence of recording indicated on such Mortgage, or a copy of such recorded Mortgage certified by the public recording office in those instances where the public recording office retains the original; (iii) An assignment of the Mortgage Loan signed by Seller in blank or to the order of Purchaser in recordable form; (iv) Any intervening assignments of the Mortgage or copies thereof; (v) All modifications to the Mortgage Note or Mortgage or copies thereof; (vi) The title insurance policy or a copy thereof on the related mortgage property; and (vii) Evidence of flood insurance in the event the mortgaged property is located in a federal flood hazard area. (h) Each Mortgage Loan is secured by a valid first lien. (i) Each Mortgage securing a Mortgage Loan requires the Mortgagor thereunder to maintain a fire and other hazard insurance policy covering such Losses as are covered under a standard extended coverage endorsement with mortgage rights and protections customary for mortgage lending practices in the locality in which the mortgaged property is located and such policies are in place. (j) With respect to each Mortgage Loan and home equity loan, there was no material violation of any law or regulation pertaining to truth-in-lending, consumer credit protection, equal credit opportunity or any similar law applicable to the origination of such Mortgage Loan at the time it was made, nor has the Seller taken any other action or omitted to take an action, which violation, act or omission would give rise to a valid defense or counterclaim, or right of rescission, set-off, abatement or diminution, on the part of the Mortgagor that would prevent the Purchaser from foreclosing upon the mortgaged property. 28 (k) No Mortgage Loan or home equity loan is secured by any real estate collateral except the Encumbrance of the related Mortgage, an assignment of the related leases, and any related security agreement. (l) Each Mortgage Loan and home equity loan has closed, the proceeds of each Mortgage Loan have been fully disbursed and, except as set forth in Schedule 5.10(k), no Mortgagor has any right under any Mortgage Loan or any Loan Documents pertaining to such Mortgage Loan to an advance of further proceeds under such Mortgage Loan, unless such right is conditional upon the Seller's performance of an underwriting evaluation with respect thereto. For purposes hereof, capitalization of interest pursuant to a negative amortization provision shall not be deemed an "advance" to the Mortgagor, and any escrow balances shall be deemed fully disbursed. (m) No Mortgage Note or Mortgage has been satisfied, canceled, subordinated to another mortgage or rescinded, in whole or in part, and no Mortgage property has been released from the Encumbrance of the related Mortgage, in whole or in part. (n) With respect to each Loan that is a home equity Loan: (i) The maximum original term on such Loan is three hundred sixty (360) months; (ii) No part of the property which is security for such Loan has been released; (iii) The transfer and assignment of such Loan and Loan Documents pertaining thereto will be in compliance with applicable law and regulations; (iv) A title insurance policy is in effect for any such Loan with an original principal amount in excess of $200,000; and (v) Such Loan is secured by a valid first, second or third lien. 5.11 Financial and Deposit Data. To Seller's knowledge, all written financial, Deposit and Loan information regarding the Assets and Liabilities provided to Purchaser by Seller was accurate in all material respects as of the date when provided; provided, however, that historical information contained in the foregoing may not reflect the allocation of Loans and certain Deposits to the Branches pursuant to Seller's understanding with the U.S. Department of Justice and the Nevada Department of Justice. 5.12 Records. The Records respecting the operations of the Branches and the Assets and Liabilities accurately reflect in all material respects the net book value of the Assets and Liabilities being transferred to Purchaser hereunder. The Records include all information reasonably necessary to service the Deposits and Loans on an ongoing basis, 29 and to otherwise operate the business being acquired under this Agreement in substantially the manner currently operated by Seller. 5.13 Title to Assets. Subject to the terms and conditions of this Agreement, on the Closing Date Purchaser will acquire, subject to Section 10.1(c), good and marketable title to all of the material Assets, free and clear of any Encumbrances; provided, however, that this representation does not cover Owned Real Property for which Purchaser has obtained a Title Policy pursuant to Section 3.11, Branch Leases or Tenant Leases. 5.14 Branch Leases. The Branch Leases give Seller the right to occupy the building and land comprising the related Branch. Accurate copies of all Branch Leases and all attachments, amendments and addenda thereto have heretofore been made available to Purchaser. To Seller's knowledge, the Branch Leases constitute valid and legally binding leasehold interests of Seller. Except as described on Schedule 5.4, there are no subleases relating to any Branch created or suffered to exist by Seller, or to Seller's knowledge, created or suffered to exist by any other person. 5.15 [intentionally omitted] 5.16 Deposits. Except as set forth in Schedule 5.16, all of the Deposit accounts have been administered and, to Seller's knowledge, originated, in compliance with the documents governing the relevant type of Deposit account and all applicable laws. The Deposit accounts are insured by the Bank Insurance Fund or the Savings Association Insurance Fund of the FDIC up to the current applicable maximum limits, and no action is pending or, to Seller's knowledge, threatened by the FDIC with respect to the termination of such insurance. 5.17 Environmental Laws; Hazardous Substances. Except as disclosed on Schedule 5.17, or as would not, individually or in the aggregate, have a Material Adverse Effect, each parcel of Real Property: (i) has been operated by Seller in compliance with all applicable Environmental Laws; (ii) is not the subject of any pending written notice from any governmental authority alleging the violation of any applicable Environmental Laws; (iii) is not currently subject to any court order, administrative order or decree arising under any Environmental Law; (iv) has not been used for the disposal of Hazardous Substances and is not contaminated with any Hazardous Substances requiring remediation under any applicable Environmental Law; and 30 (v) has not had any emissions or discharges of Hazardous Substances except as permitted under applicable Environmental Laws. 5.18 Brokers' Fees. Seller has not employed any broker or finder or incurred any liability for any brokerage fees, commission or finders' fees in connection with the transactions contemplated by this Agreement. 5.19 Limitations on Representations and Warranties. Notwithstanding anything to the contrary contained herein, Seller makes no representations or warranties to Purchaser in this Agreement or in any agreement, instrument or other document executed in connection with any of the transactions contemplated hereby or provided or prepared pursuant hereto or in connection with any of the transactions contemplated hereby: (a) As to title to Owned Real Property or as to the physical condition of the Branches or Personal Property, all of which are being sold "AS IS", "WHERE IS" and with all faults at the Closing Date; (b) As to whether, or the length of time during which, any accounts will be maintained by the depositors at the Branches after the Closing Date; or (c) Except to the extent otherwise set forth in this Agreement, as to the creditworthiness, credit history or financial condition of any obligor. ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser represents and warrants to Seller as follows: 6.1 Corporate Organization and Authority. Purchaser is a federal savings bank, duly organized and validly existing under the laws of the United States, and has the requisite power and authority to conduct the business conducted at the Branches substantially as currently conducted by Seller. Purchaser has the requisite corporate power and authority and has taken all corporate action necessary in order to execute and deliver this Agreement and to consummate the transactions contemplated hereby. This Agreement is a valid and binding agreement of Purchaser enforceable in accordance with its terms subject, as to enforcement, to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. 6.2 No Conflicts. The execution, delivery and performance of this Agreement by Purchaser does not, and will not, (i) violate any provision of its charter or by-laws or (ii) violate or constitute a breach of, or default under, any law, rule, regulation, judgment, decree, ruling or order of any court, government or governmental authority to which Purchaser is subject or any agreement or instrument of Purchaser, or to which Purchaser 31 is subject or by which Purchaser is otherwise bound, which violation, breach, contravention or default referred to in this clause (ii), individually or in the aggregate, would have a Material Adverse Effect. 6.3 Approvals and Consents. Other than Regulatory Approvals, no notices, reports or other filings are required to be made by Purchaser with, nor are any consents, registrations, approvals, permits or authorizations required to be obtained by Purchaser from, any governmental or regulatory authorities of the United States or the several States in connection with the execution and delivery of this Agreement by Purchaser and the consummation of the transactions contemplated hereby by Purchaser, the failure to make or obtain any or all of which, individually or in the aggregate, would have a Material Adverse Effect. 6.4 Regulatory Matters. (a) Except as previously disclosed in writing to Seller, there are no pending or, to Purchaser's knowledge, threatened disputes or controversies between Purchaser and any federal, state or local governmental agency or authority that, individually or in the aggregate, would have a Material Adverse Effect. (b) Neither Purchaser nor any of its Affiliates has received any indication from any federal or state governmental agency or authority that such agency would oppose or refuse to grant a Regulatory Approval or impose a Burdensome Condition. (c) Purchaser is not a party to any written order, decree, agreement or memorandum of understanding with, or commitment letter or similar submission to, any federal or state regulatory agency or authority charged with the supervision or regulation of depository institutions, nor has Purchaser been advised by any such agency or authority that it is contemplating issuing or requesting any such order, decree, agreement, memorandum of understanding, commitment letter or submission, in each case which, individually or in the aggregate, would have a Material Adverse Effect. (d) Purchaser is, and on a pro forma basis giving effect to the P&A Transaction, will be (i) at least "adequately capitalized", as defined for purposes of the FDIA, and (ii) in compliance with all capital requirements, standards and ratios required by each state or federal bank regulator with jurisdiction over Purchaser, including without limitation, any such higher requirement, standard or ratio as shall apply to institutions engaging in the acquisition of insured institution deposits, assets or branches, and no such regulator is likely to, or has indicated that it will, condition any of the Regulatory Approvals upon an increase in Purchaser's capital or compliance with any capital requirement, standard or ratio. (e) Purchaser has no knowledge that it will be required to divest deposit liabilities, branches, loans or any business or line of business as a condition to the receipt of any of the Regulatory Approvals. (f) Each of the subsidiaries or Affiliates of Purchaser that is an insured depository institution was rated "Satisfactory" or "Outstanding" following its most recent 32 Community Reinvestment Act examination by the regulatory agency responsible for its supervision. Purchaser has received no notice of and has no knowledge of any planned or threatened objection by any community group to the transactions contemplated hereby. 6.5 Litigation and Undisclosed Liabilities. There are no actions, suits or proceedings that have a reasonable likelihood of an adverse determination pending or, to Purchaser's knowledge, threatened against Purchaser, or obligations or liabilities (whether or not accrued, contingent or otherwise) or, to Purchaser's knowledge, facts or circumstances that could reasonably be expected to result in any claims against or obligations or liabilities of Purchaser that, individually or in the aggregate, would have a Material Adverse Effect. 6.6 Operation of the Branches. Purchaser intends to continue to provide retail and business banking services in the geographical area served by the Branches. 6.7 Financing Available. Not later than the Closing Date, Purchaser will have available sufficient cash or other liquid assets or financing pursuant to binding agreements or commitments which may be used to fund the P&A Transaction. Purchaser's ability to consummate the transactions contemplated by this Agreement is not contingent on raising any equity capital, obtaining specific financing therefor, consent of any lender or any other matter. 6.8 Brokers' Fees. Purchaser has not employed any broker or finder or incurred any liability for any brokerage fees, commission or finders' fees in connection with the transactions contemplated by this Agreement, except for fees and commissions for which Purchaser shall be solely liable. ARTICLE 7 COVENANTS OF THE PARTIES 7.1 Activity in the Ordinary Course. Until the Closing Date, except as may be required in connection with the Merger, (a) Seller shall conduct the business of the Branches (including, without limitation, filling open positions at the Branches and job posting in the Branches for open positions at other offices of Seller) in the ordinary and usual course of business consistent with past practice and (b) Seller shall not, without the prior written consent of Purchaser: (i) Increase or agree to increase the salary, remuneration or compensation of any Branch Employee (or make any material increase or decrease in the number of such persons, or transfer such persons to or from any Branch) other than in accordance with Seller's existing customary policies generally applicable to employees having similar rank or duties, or pay or agree to pay any uncommitted bonus to any Branch Employee other than regular bonuses 33 granted in the ordinary course of Seller's business (which bonuses, in any event, shall be the responsibility of Seller); or, except at the request of such Branch Employee, transfer any Branch Employee to another branch or office of Seller or any of its Affiliates; (ii) Offer interest rates or terms on any category of deposits at a Branch except as determined in a manner consistent with Seller's practice with respect to its branches which are not being sold; (iii) Transfer to or from any Branch to or from any of Seller's other operations or branches any material Assets or any Deposits, except (A) in the ordinary course of business or as contemplated by this Agreement, (B) upon the unsolicited request of a depositor or customer, or (C) if such Deposit is pledged as security for a loan or other obligation that is not a Loan; (iv) Sell, transfer, assign, encumber or otherwise dispose of or enter into any contract, agreement or understanding to sell, transfer, assign, encumber or dispose of any of the Assets existing on the date hereof, except in the ordinary course of business and in an immaterial aggregate amount; provided, however, that in any event, Seller shall not knowingly take any action that would create any Encumbrance on any of the Owned Real Property or the Branch Leases; (v) Sell, transfer, assign, encumber or otherwise dispose of or enter into any contract, agreement or understanding to sell, transfer, assign, encumber or dispose of any Loan; (vi) Make or agree to make any material improvements to the Owned Real Property, except with respect to commitments for such made on or before the date of this Agreement (and heretofore disclosed in writing to Purchaser) and normal maintenance or refurbishing purchased or made in the ordinary course of business; (vii) File any application or give any notice to relocate or close any Branch or relocate or close any Branch; (viii) Amend, terminate or extend in any material respect any Branch Lease or Tenant Lease; provided, however, Seller may extend any Branch Lease or Tenant Lease if, in its reasonable business judgment, Seller determines such extension is necessary to deliver the Branch on the Closing Date as a fully operative branch banking operation; (ix) Except as permitted by this Section 7.1, take, or permit its Affiliates to take, any action (A) impairing Purchaser's rights in any Deposit or Asset, (B) impairing in any way the ability of Purchaser to collect upon any Loan, or (C) except in the ordinary course of servicing, waiving any material right, whether in equity or at law, that it has with respect to any Loan; or 34 (x) Agree with, or commit to, any person to do any of the things described in clauses (i) through (ix) except as contemplated hereby. 7.2 Access and Confidentiality. (a) Until the Closing Date, Seller shall afford to Purchaser and its officers and authorized agents and representatives reasonable access to the properties, books, records, contracts, documents, files (including loan files) and other information of or relating to the Assets and Liabilities. In addition, Seller will use reasonable efforts to arrange for Purchaser to have reasonable access to similar information held by third parties, if any, for or on Seller's behalf. Purchaser and Seller each will identify to the other, within ten (10) days after the date hereof, a selected group of their respective salaried personnel that shall constitute a "transition group" who will be available to Seller and Purchaser, respectively, at reasonable times (limited to normal operating hours) to provide information and assistance in connection with Purchaser's investigation of matters relating to the Assets and Liabilities. Seller shall cause other personnel to be reasonably available during normal business hours, to an extent not disruptive of ongoing operations, for the same purposes. Seller shall furnish Purchaser with such additional financial and operating data and other information about its business operations at the Branches as may be reasonably necessary for the orderly transfer of the business operations of the Branches. Any investigation pursuant to this Section 7.2 shall be conducted in such manner as not to interfere unreasonably with the conduct of the Seller's business. Notwithstanding the foregoing, Seller shall not be required to provide access to or disclose information where such access or disclosure would impose an unreasonable burden on Seller, or any employee of Seller or would violate or prejudice the rights of customers, jeopardize any attorney-client privilege or contravene any law, rule, regulation, order, judgment, decree, fiduciary duty or binding agreement entered into prior to the date of this Agreement. The parties hereto shall make appropriate substitute disclosure arrangements under circumstances in which the restrictions of the preceding sentence apply. (b) Each party to this Agreement shall hold, and shall cause its respective directors, officers, employees, agents, consultants and advisors to hold, in strict confidence, unless disclosure to a bank regulatory authority is necessary or desirable in connection with any Regulatory Approval or unless compelled to disclose by judicial or administrative process or, in the written opinion of its counsel, by other requirements of law or the applicable requirements of any regulatory agency or relevant stock exchange, all non-public records, books, contracts, instruments, computer data and other data and information (collectively, "Information") concerning the other party (or, if required under a contract with a third party, such third party) furnished it by such other party or its representatives pursuant to this Agreement (except to the extent that such information can be shown to have been (i) previously known by such party on a non-confidential basis, (ii) in the public domain through no fault of such party or (iii) later lawfully acquired from other sources by the party to which it was furnished), and neither party shall release or disclose such Information to any other person, except its auditors, attorneys, financial advisors, bankers, other consultants and advisors and, to the extent permitted above, to bank regulatory authorities. 35 7.3 Regulatory Approvals. (a) As soon as practicable and in no event later than thirty (30) days after the date of this Agreement, Purchaser shall prepare and file any applications, notices and filing required in order to obtain the Regulatory Approvals. Purchaser shall use all reasonable efforts to obtain each such approval as promptly as reasonably practicable and, to the extent possible, in order to permit the Closing to occur not later than April 30, 1999. Seller will cooperate in connection therewith (including the furnishing of any information and any reasonable undertaking or commitments which may be required to obtain the Regulatory Approvals). Each party will provide the other with copies of any applications and all correspondence relating thereto prior to filing, other than material filed in connection therewith under a claim of confidentiality. Purchaser also agrees to furnish any reasonable undertaking or commitment that may be required in order for Norwest or WFC to obtain the Merger Approvals. If any regulatory authority shall require the modification of any of the terms and provisions of this Agreement as a condition to granting any Regulatory Approval or the Merger Approvals, the parties hereto will negotiate in good faith to seek a mutually agreeable adjustment to the terms of the transaction contemplated hereby, such agreement not to be unreasonably withheld. 7.4 Consents. Seller agrees to use reasonable efforts (such efforts not to include making payments to third parties) to obtain from lessors and any other parties to any Branch Leases any required consents to the assignment of the Branch Leases to Purchaser on the Closing Date; provided, however, the Seller shall not be obligated to incur any monetary obligations or expenditures to the parties whose consent is requested in connection with the utilization of its reasonable efforts to obtain any such required consents. If any such required consent cannot be obtained, notwithstanding any other provision hereof, the Assets and Liabilities associated with the subject Branch, other than any such Branch Lease as to which consent cannot be obtained, shall nevertheless be transferred to Purchaser at the Closing and the parties shall negotiate in good faith and Seller shall use reasonable efforts (such efforts not to include making payments to third parties) to make alternative arrangements reasonably satisfactory to Purchaser. In such event, Seller shall not be obligated to deliver physical possession of the subject Branch or Personal Property to Purchaser at the Closing. 7.5 Efforts to Consummate; Further Assurances. (a) Purchaser and Seller agree to use all reasonable efforts to satisfy or cause to be satisfied as soon as practicable their respective obligations hereunder and the conditions precedent to the Closing. (b) Seller will duly execute and deliver such assignments, bills of sale, deeds, acknowledgments and other instruments of conveyance and transfer as shall at any time be necessary or appropriate to vest in Purchaser the full legal and equitable title to the Assets. (c) Subject to Section 4.3, on and after the Closing Date, each party will promptly deliver to the other all mail and other communications properly addressable or deliverable to the other as a consequence of the P&A Transaction; and without limitation 36 of the foregoing, on and after the Closing Date, Seller shall promptly forward any mail, communications or other material relating to the Deposits or the Assets transferred on the Closing Date, including, but not limited to, that portion of any IRS "B" tapes that relates to such Deposits, to such employees of Purchaser at such addresses as may from time to time be specified by Purchaser in writing. (d) The costs incurred by a party in performing its obligations to the other (x) under Section 7.5(a) and (c) shall be borne by the initial recipient and (y) otherwise under this Section 7.5 shall be borne by Purchaser. Seller will cooperate with Purchaser to minimize the costs referred to in clause (y). 7.6 Solicitation of Accounts. (a) Until the Closing Date and for an additional twelve (12) months following the Closing Date, Seller agrees that it will not solicit deposits, loans, mutual fund purchases, or other investment products or other business from or to persons or entities who were depositors or borrowers at the Branches on the date hereof with respect to Deposits by personal contact, by telephone, by facsimile, by mail or other similar solicitation, or in any other way except for general solicitations and solicitations that are not directed primarily to persons or entities who were depositors of the Branches on the date hereof; provided, however, Seller may solicit depositors who as of the date of this Agreement have existing accounts or loans originating at branches or other offices of Seller or its Affiliates other than the Branches pursuant to solicitations which arise from their status as a customer at such other branches or offices; and provided, further, that Seller may solicit major or statewide depositors (such as, for example, a company with more than one location or the state government or any agency or instrumentality thereof) without restrictions hereunder. (b) Prior to the Closing Date, Purchaser agrees that it will not attempt to directly solicit Branch customers through advertising nor transact its business in a way which would induce such Branch customers to close any account and open accounts directly with Purchaser or would otherwise result in a transfer of all or a portion of an existing account from Seller to Purchaser or its Affiliates. Notwithstanding the foregoing sentence, Purchaser and its Affiliates shall be permitted to (i) engage in advertising, solicitations or marketing campaigns not primarily directed to or targeted at such Branch customers, (ii) engage in lending, deposit, safe deposit, trust or other financial services relationships existing as of the date hereof with such Branch customers through other branch offices of Purchaser, (iii) respond to unsolicited inquiries by such Branch customers with respect to banking or other financial services, and (iv) provide notices or communications relating to the transactions contemplated hereby in accordance with the provisions hereof. 7.7 Insurance. Seller will maintain in effect until the Closing Date all casualty and public liability policies relating to the Branches and maintained by Seller on the date hereof or procure comparable replacement coverage and maintain such policies or replacement coverage in effect until the Closing Date. Purchaser shall provide all casualty and public liability insurance for the Branches subsequent to the Closing Date. 37 7.8 [intentionally omitted] 7.9 Servicing Prior to Closing Date. With respect to each of the Loans from the date hereof until the Closing Date, Seller shall provide servicing of such Loans generally consistent with customary prudent industry servicing standards of service of similar loans. Further, without the prior written consent of Purchaser (which consent shall not be unreasonably withheld or delayed), Seller shall not (a) except as required by law or the terms of the Loan Documents, release any collateral or any party from any liability on or with respect to any of the Loans; (b) compromise or settle any claims of any kind or character with respect to the Loans; or (c) amend or waive any of the material terms of any Loan as set forth in the Loan Documents. ARTICLE 8 TAXES AND EMPLOYEE BENEFITS 8.1 Tax Representations. Seller represents and warrants to Purchaser as follows: (a) Except as set forth in Schedule 8.1, all Tax Returns with respect to the Assets or income therefrom, the Liabilities or payments in respect thereof or the operation of the Branches, that are required to be filed (taking into account any extension of time within which to file) on or before the Closing Date, have been or will be duly filed, and all Taxes shown to be due on such Tax Returns have been or will be paid in full. (b) With respect to the Deposits, Seller is in compliance with the Code and regulations thereunder relative to obtaining from depositors of the Deposits executed IRS Forms W-8 and W-9. With respect to the Deposits opened after December 31, 1983, Seller has either obtained a properly completed Form W-8 or W-9 (or a substitute form meeting applicable requirements) or is back-up withholding on such account, if so required. 8.2 Proration of Taxes. Except as otherwise agreed to by the parties, whenever it is necessary to determine the liability for Taxes for a portion of a taxable year or period that begins before and ends after the Closing Date, the determination of the Taxes for the portion of the year or period ending on, and the portion of the year or period beginning after the Closing Date shall be determined by assuming that the taxable year or period ended at 11:59 p.m. Nevada time on the day prior to the Closing Date. 8.3 Sales and Transfer Taxes. Unless otherwise provided, all excise, sales, use and transfer taxes that are payable or that arise as a result of the consummation of the P&A Transaction shall be paid by Purchaser and Purchaser shall indemnify and hold Seller harmless from and against any such taxes. 38 8.4 Information Returns. At the Closing or as soon thereafter as is practicable, Seller shall provide Purchaser with a list of all Deposits for which Seller has not received a properly completed Form W-8 or W-9 (or a substitute form meeting applicable requirements) or on which Seller is back-up withholding as of the Closing Date. 8.5 Payment of Amount Due under Article 8. Any payment by Seller to Purchaser, or to Seller from Purchaser, under this Article 8 (other than payments required by Section 8.3) to the extent due at the Closing may be offset against any payment due the other party at the Closing. All subsequent payments under this Article 8 shall be made as soon as determinable and shall be made and bear interest from the date due to the date of payment as provided in Section 3.2(b). 8.55 Like Kind Exchange. Purchaser acknowledges that the Seller may desire to complete one or more like kind exchanges (including transactions which are intended to qualify under Section 1031 of the Code). If requested by Seller, Purchaser shall cooperate to the extent reasonably necessary in order to accomplish such like kind exchanges and shall execute all documents and provide all consents reasonably necessary to complete such like kind exchanges including, without limitation, an amendment to or an assignment of this Agreement: provided, however, that (a) Purchaser's obligations under this Agreement shall not be increased, (b) Seller's representations, warranties, covenants and obligations under this Agreement shall continue in full force and effect and (c) the total Purchase Price will not change as a result of this assignment. 8.6 Assistance and Cooperation. After the Closing Date, each of Seller and Purchaser shall: (a) Make available to the other and to any taxing authority as reasonably requested all relevant information, records, and documents relating to taxes with respect to the Assets or income therefrom, the Liabilities or payments in respect thereof, or the operation of the Branches; (b) Provide timely notice to the other in writing of any pending or proposed tax audits (with copies of all relevant correspondence received from any taxing authority in connection with any tax audit or information request) or tax assessments with respect to the Assets or income therefrom, the Liabilities or payments in respect thereof, or the operation of the Branches for taxable periods for which the other may have a liability under this Article 8; and (c) The party requesting assistance or cooperation shall bear the other party's out-of-pocket expenses in complying with such request to the extent that those expenses are attributable to fees and other costs of unaffiliated third party service providers. 8.7 Transferred Employees. (a) As soon as reasonably practicable and in any event within thirty (30) days of the date hereof, Seller shall deliver to Purchaser a true and complete list of all Branch Employees by name, date of hire and position, as of the date hereof Seller shall not release any other personnel information without having first 39 obtained the written consent of the respective Branch Employee. Purchaser may, at its discretion, interview any and all Branch Employees. Purchaser shall make employment available to all Branch Employees on the Closing Date upon the terms and conditions described below. On and after the Closing Date, Branch Employees employed by Purchaser shall be defined as "Transferred Employees" for purposes of this Agreement. Subject to the provisions of this Section 8.7, Transferred Employees shall be subject to the employment terms, conditions and rules applicable to other employees of Purchaser. Nothing contained in this Agreement shall be construed as an employment contract between Purchaser and any Branch Employee or Transferred Employee. (b) Purchaser may interview Branch Employees during normal working hours. Purchaser shall be solely responsible for any activity in connection with interviewing Branch Employees. Purchaser shall indemnify and hold Seller harmless from and against any claim, liability, loss, costs or expenses, including reasonable attorneys' fees, resulting or arising from Purchaser's acts or omissions in connection with such interviews. (c) Subject to the conditions set forth in Section 4.13 of this Agreement relating to employee training and orientation, Seller agrees that Purchaser shall have the right to conduct orientation sessions with Branch Employees as soon as reasonably practicable and in any event within 30 days after execution of this Agreement. The orientation sessions may include personal appearances by Purchase's senior management and will cover subject such as Purchaser's Compensation and Benefits Programs, including a Business Retention and Sales Incentive Program specifically designed for Branch Employees who become Transferred Employees on the date after the Closing Date. (d) Each Transferred Employee shall be provided employment subject to the following terms and conditions: (i) Base salary shall be at least equivalent to the rate of base salary paid by Seller to such Transferred Employee as of the close of business on the day prior to the Closing Date. (ii) Except as otherwise specifically provided herein, Transferred Employees shall be provided employee benefits that are no less favorable in the aggregate than those provided to similarly situated employees of Purchaser. Purchaser shall provide each Transferred Employees with credit for such Transferred Employee's period of service with Seller (including any service credited from predecessors by merger or acquisition to Seller) towards the calculation of eligibility and vesting for such purposes as vacation, severance and other benefits and participation and vesting in Purchaser's qualified pension and/or profit sharing 401(k) plans, as such plans may exist (but, except as set forth in (v) below and for vacation, not for purposes of benefit accruals, including, without limitation, funding of accrued pension or profit sharing plans for such Transferred Employee with respect to any period prior to the Closing Date). 40 (iii) Each Transferred Employee shall be eligible to participate in the medical, dental, or other welfare plans of Purchaser, as such plans may exist, on and after the Closing Date, and, subject to insurance company approval, any pre-existing conditions provisions of such plans shall be waived with respect to any such Transferred Employees; provided, however, that if Purchaser's relevant health or disability insurance policy or plan has a pre-existing condition limitation and a Transferred Employee's condition is being excluded (as a pre-existing condition) under Seller's plan as of the Closing Date, Purchaser may treat such condition as a pre-existing condition for the period such condition would have been treated as a pre-existing condition under Seller's plan. (iv) With respect to any Transferred Employee on short-term disability or temporary leave of absence, upon conclusion of his or her short-term disability or temporary leave of absence, subject to the terms and conditions of the Purchaser's plans and policies and applicable law, each Transferred Employee on such leave shall receive the salary and vacation benefits in effect when he or she went on leave, shall otherwise be treated as a Transferred Employee, and, to the extent practicable, shall be offered by the Purchaser the same or a substantially equivalent position to his or her position with Seller prior to having gone on leave. (v) Purchaser shall be responsible for all severance obligations arising out of the termination of any Transferred Employee's employment after the Closing Date in accordance with Purchaser's severance plan, policies and procedures with credit for the period of years of credited service with Seller towards the calculation of benefits; provided, however, if, before the one year anniversary of the Closing Date, any Transferred Employee experiences a reduction in base salary, a worksite relocation of more than 30 miles or a termination of employment by Purchaser for any reason other than cause (as defined by Purchaser's personnel policies and procedures), such Transferred Employee shall be entitled to severance pay in an amount at least equivalent to the severance pay the Transferred Employee would have received under Seller's severance plan had such employee been eligible for payments under such plan. (e) Except as provided herein, Seller shall pay, discharge, and be responsible for (i) all salary and wages arising out of employment of the Transferred Employees through the Closing Date, and (ii) any employee benefits (including, but not limited to, accrued vacation) arising under Seller's employee benefit plans and employee programs prior to the Closing Date (but not including medical benefits, if any, to Transferred Employees who retire after the Closing Date), including benefits with respect to claims incurred prior to the Closing Date but reported after the Closing Date. From and after the Closing Date, Purchaser shall pay, discharge, and be responsible for all salary, wages, and benefits arising out of or relating to the employment of the Transferred Employees by Purchaser from and after the Closing Date, including, without limitation, all claims for welfare benefits plans incurred after the Closing Date. Claims are incurred as of the date 41 services are provided or disability payments are accrued, notwithstanding when the injury or illness may have occurred. (f) To the extent permitted under Purchaser's 401(k) plan, Seller and Purchaser shall cooperate in arranging for the transfer to Purchaser's 401(k) plan, as soon as practicable after the Closing Date and in a manner that satisfies sections 414(l) and 411(d)(6) of the Code, of those accounts held under Seller's 401(k) plan on behalf of Transferred Employees, subject to receipt of any necessary consents and approvals of the Transferred Employees. (g) For a period of twelve (12) months following the Closing Date, Seller will not directly solicit any Transferred Employee hired by Purchaser as of the Closing Date to again become an employee of Seller; provided, however, that Seller shall not be prohibited from hiring a Transferred Employee if such Transferred Employee contacts Seller or an Affiliate of Seller to seek hiring or retention, whether in response to general advertising or otherwise, or if a Transferred Employee is terminated by Purchaser. 8.8 Branch Employee Representations. (a) Seller represents and warrants to Purchaser, to Seller's knowledge, as follows: (i) none of the Branch Employees are represented by any labor union; (ii) Seller is not a party to any individual contract, written or oral, express or implied, for the employment of any Branch Employee, and Seller is not subject to any collective bargaining arrangement with respect to any Branch Employee; (iii) Seller's 401(k) Plan is in compliance in all material respects with applicable law; (iv) no liabilities exist or are reasonably expected to exist under any employee benefit plan of Seller that, individually or in the aggregate, would have a Material Adverse Effect; and (v) Seller has not entered into any individual agreement or otherwise made any individual commitment to any Branch Employee with respect to continued employment with Purchaser. (b) Seller shall indemnify and hold Purchaser harmless from and against any claims, losses, damages or expenses (including attorney's fees) suffered as a result of any failure to give any notice to the Branch Employees required by the Worker Adjustment and Retraining Notification Act (the "WARN Act"), provided such notice is required as a result of action by Seller prior to the Closing Date. 42 ARTICLE 9 CONDITIONS TO CLOSING 9.1 Conditions to Obligations of Purchaser. Unless waived in writing by Purchaser, the obligation of Purchaser to consummate the P&A Transaction is conditioned upon satisfaction of each of the following conditions: (a) Regulatory Approvals. All consents, approvals and authorizations required to be obtained prior to the Closing from governmental and regulatory authorities in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby to be consummated at the Closing, including the Regulatory Approvals, shall have been made or obtained, and shall remain in full force and effect, and all waiting periods applicable to the consummation of the P&A Transaction shall have expired or been terminated; provided, however, that no Regulatory Approval shall have imposed any condition or requirement (a "Burdensome Condition") that would (i) result in any Material Adverse Effect or (ii) require Purchaser to effect any divestiture that would constitute a substantial portion of the business or properties of the Branches, taken as a whole. (b) Orders. No court or governmental authority of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, judgment, decree, injunction or other order (whether temporary, preliminary or permanent)(any of the foregoing, an "Order") which is in effect and which prohibits or makes illegal the consummation of the P&A Transaction or would otherwise result in a Material Adverse Effect. (c) Representations and Warranties; Covenants. Each of the representations and warranties of Seller contained in this Agreement shall be true in all material respects when made and as of the Closing Date, with the same effect as though such representations and warranties had been made on and as of the Closing Date (except that representations and warranties relating to Assets and Liabilities transferred at the Closing Date shall only be made, and need only be true in all material respects, on and as of the Closing Date). Purchaser shall have received at Closing a certificate to that effect dated as of such Closing Date and executed by the President or any Executive Vice President of Seller. Each of the covenants and agreements of Seller to be performed on or prior to the Closing Date shall have been duly performed in all material respects. Purchaser shall have received at Closing a certificate to that effect dated as of such Closing Date and executed by the President or any Executive Vice President of Seller. Notwithstanding any other provision of this Agreement, if there shall be a failure of any condition specified in this Section 9.1 to the obligations of Purchaser in respect of the acquisition of any specific Branch or Branches the aggregate Deposits of which as of the date hereof shall constitute less than 25% of the Deposits in all of the Branches as of the date hereof. Purchaser nevertheless shall be obligated to consummate the P&A Transaction but may, upon written notice to Seller, exclude from the transaction the 43 Branch or Branches in respect of which the failure of condition shall exist, in which case, appropriate adjustment shall be made in the schedules hereto and the other documents to be delivered pursuant hereto so as to duly reflect the deletion of such Branch or Branches from the transactions contemplated hereby (and, consequently, to the calculation of the Estimated Purchase Price, Estimated Payment Amount, Purchase Price and Adjusted Payment Amount). If any Branch is excluded from this Agreement or if Purchaser nevertheless elects to purchase any Branch which would otherwise be so excluded and such Branch is transferred to Purchaser at the Closing (subject to Purchaser's rights under Section 12.1(a)), any event that would otherwise constitute a breach of warranty or failure of condition in respect of such Branch arising solely from or relating to the operation of this paragraph shall not constitute a breach of warranty or failure of consideration. 9.2 Conditions to Obligations of Seller. Unless waived in writing by Seller, the obligation of Seller to consummate the P&A Transaction is conditioned upon satisfaction of each of the following conditions: (a) Regulatory Approvals. All consents, approvals and authorizations required to be obtained prior to the Closing from governmental and regulatory authorities in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby to be consummated at the Closing, including the Regulatory Approvals, shall have been made or obtained, and shall remain in full force and effect, and all waiting periods applicable to the consummation of the P&A Transaction shall have expired or been terminated. (b) Orders. No Order shall be in effect that prohibits or makes illegal the consummation of the P&A Transaction. (c) Representations and Warranties; Covenants. Each of the representations and warranties of Purchaser contained in this Agreement shall be true in all material respects when made and as of the Closing Date, with the same effect as though such representations and warranties had been made on and as of the Closing Date (except that representations and warranties as of a specific date need be true in all material respects only as of such date). Seller shall have received at Closing a certificate to that effect dated as of such Closing Date and executed by the President or any Executive Vice President of Purchaser. Each of the covenants and agreements of Purchaser to be performed on or prior to the Closing Date shall have been duly performed in all material respects. Seller shall have received at Closing a certificate to that effect dated as of such Closing Date and executed by the President or any Executive Vice President of Purchaser. (d) Consummation of the Merger. The Merger shall have been consummated in accordance with the terms of the Merger Agreement. 44 ARTICLE 10 ENVIRONMENTAL MATTERS 10.1 Environmental Matters. (a) Seller has provided to Purchaser and Purchaser hereby acknowledges receipt of copies of Phase I environmental site assessments for all Owned Real Property and asbestos reports with respect to all the Real Property, except for Real Property where the improvements have been completed after December 31, 1978. Such Phase I environmental site assessments for all Owned Real Property have been dated (or supplemented) on or after September 1, 1998. (b) If such Phase I site assessments and asbestos reports reasonably indicate the necessity or desirability of further investigation to determine whether or not an Environmental Hazard or an Asbestos Hazard exists at such Real Property, Purchaser may elect, not later than ten (10) days after the signing of this Agreement, to have an environmental consultant reasonably acceptable to Seller (the "Environmental Consultant"), to the extent reasonable and appropriate, conduct Phase II environmental site assessments and additional asbestos investigations, the cost of which shall be paid by Purchaser. Any such further investigation or testing shall be conducted in such a manner so as not to interfere with the normal operation of the Branch(es) involved. All such Phase II environmental site assessments and additional asbestos reports shall be treated as information subject to Section 7.2(b) and shall be completed not more than ninety (90) days after the signing of this Agreement. (c) In the event that the Environmental Consultant has discovered an Environmental Hazard, and/or Asbestos Hazard, during any such Phase II environmental site assessments and additional asbestos investigation at any single parcel of Owned Real Property, the remediation of which, in the reasonable judgment of the Environmental Consultant, is or would be the responsibility of Seller, or Purchaser should it acquire such Owned Real Property, and will cost $100,000 or more for such single parcel of Owned Real Property, Purchaser shall lease from Seller such single parcel of Owned Real Property pursuant to a Lease Agreement that shall provide as follows: (i) Such Lease Agreement shall be for a term of two (2) years, with no obligation or right to renew (it being the intention of Seller that Purchaser locate an alternative branch site during such two years), at a rental equal to a fair market rental value; (ii) Seller may sell such Owned Real Property to any person, subject to such Lease Agreement, for any price; (iii) During the term of such Lease Agreement, in the event Seller shall deliver to Purchaser a report of qualified environmental engineer or consultant stating that in the opinion of the Environmental Engineer the Environmental Hazard, and/or Asbestos Hazard, at or on any such leased parcel of Owned Real Property has been remediated to the extent required under applicable 45 Environmental Laws, Purchaser shall be required to purchase such parcel of Owned Real Property at the net book value as of the close of business of the month-end day most recently preceding the Closing Date; (iv) Other terms and conditions of the Lease Agreement shall be typical of such branch leases in the market as negotiated between Seller and Purchaser; and (v) Seller shall be responsible for all remediation costs related to such Owned Real Property except for remediation costs caused solely by Purchaser's use or disposal of Hazardous Substances at the site and Seller shall otherwise indemnify and hold Purchaser harmless from third party claims. If the remediation cost is less than $100,000 for any single parcel of Owned Real Property, Purchaser shall acquire such parcel and such cost shall be borne by Purchaser without indemnity or price adjustment under this Agreement. (d) Purchaser agrees that it and its Environmental Consultant shall conduct any Phase II environmental site assessments or other investigations pursuant to this Section with reasonable care and subject to customary practices among environmental consultants and engineers, including, without limitation, following completion thereof, the restoration of any site to the extent practicable to its condition prior to such site assessment or investigation and the removal of all monitoring wells. (e) Any lease of a parcel of Owned Real Property under Section 10.1(c) shall in no way affect the transfer of any Assets or Liabilities, other than such parcel of Owned Real Property, to the Purchaser at the Closing. ARTICLE 11 TERMINATION 11.1 Termination. This Agreement may be terminated at any time prior to the Closing Date: (a) By the mutual written agreement of Purchaser and Seller; (b) By Seller or Purchaser, in the event of a material breach by the other of any representation, warranty or agreement contained herein which is not cured or cannot be cured within thirty (30) days after written notice of such termination has been delivered to the breaching party; provided, however, that termination pursuant to this Section 11.1(b) shall not relieve the breaching party of liability arising out of or related to such breach; 46 (c) By Seller or Purchaser, in the event the Closing has not occurred by April 30, 1999 unless the failure to so consummate is due to a breach of this Agreement by the party seeking to terminate; (d) By Seller or Purchaser if the Merger shall have been abandoned; (e) By Seller, if the Merger has been consummated but the Closing has not occurred within six months thereafter; (f) By Seller or Purchaser at any time after the denial or revocation of any Regulatory Approval or by Purchaser if any such approval has been obtained which contains a Burdensome Condition; or (g) By Seller if, at any time prior to the Closing Date, an appropriate official of any governmental agency or authority whose consent, approval or authorization is required in order for Purchaser to consummate the transactions contemplated hereby shall have advised that such authority will not grant such consent, approval or authorization or will grant the same only subject to a Burdensome Condition (unless Purchaser shall have waived the condition provided for in the proviso to Section 9.1(a)), or where there shall be in effect any Order, or if there shall exist any proceeding which, in Seller's reasonable judgment, would result in an Order; provided, however, that Purchaser shall have fifteen (15) days following receipt of notice from Seller to remedy any such situation or to provide assurances reasonably acceptable to Seller that such situation will be remedied by the Closing Date. 11.2 Effect of Termination. In the event of termination of this Agreement and abandonment of the transactions contemplated hereby pursuant to Section 11.1, no party hereto (or any of its directors, officers, employees, agents or Affiliates) shall have any liability or further obligation to any other party, except as provided in Section 7.2(b) and except that nothing herein will relieve any party from liability for any breach of this Agreement. ARTICLE 12 INDEMNIFICATION 12.1 Indemnification. (a) Subject to Sections 12.2 and 13.1, Seller shall indemnify and hold harmless Purchaser and any person directly or indirectly controlling Purchaser from and against any and all Losses which Purchaser may suffer, incur or sustain arising out of or attributable to: (i) any breach of any representation or warranty (excluding the representations and warranties contained in Section 5.10 and Section 5.11 as it relates to information regarding Loans, the sole and exclusive remedy for breach of which is set forth in Section 12.2) made by Seller in this Agreement; 47 (ii) any material breach of any covenant or agreement to be performed by Seller pursuant to this Agreement; (iii) any claim, penalty asserted, legal action or administrative proceeding based upon any action taken or omitted to be taken by Seller or conditions existing prior to the Closing Date, relating in any such case to the operation of the Branches, the Assets or the Liabilities; or (iv) any liability, obligation or duty of Seller that is not a Liability. (b) Subject to Section 13.1, Purchaser shall indemnify and hold harmless Seller and any person directly or indirectly controlling Seller from and against any and all Losses which Seller may suffer, incur or sustain arising out of: (i) any breach of any representation or warranty made by Purchaser in this Agreement; (ii) any material breach of any covenant or agreement to be performed by Purchaser pursuant to this Agreement; (iii) any claim, penalty asserted, legal action or administrative proceeding based upon any action taken or omitted to be taken by Purchaser on or after the Closing Date, relating in any such case to the operation of the Branches or the Assets; (iv) physical damage caused solely by Purchaser or the Environmental Consultant in connection with any environmental site assessment or investigation pursuant to Article 10; or (v) the Liabilities. (c) To exercise its indemnification rights under this Section 12.1 as a result of the assertion against it of any claim or potential liability for which indemnification is provided, the indemnified party shall promptly notify the indemnifying party of the assertion of such claim, discovery of any such potential liability or the commencement of any action or proceeding in respect of which indemnity may be sought hereunder (including, with respect to claims arising from a breach of representation or warranty made in Article 8, the commencement of an audit, administrative investigation or judicial proceeding by any governmental authority); provided, however, that in no event shall notice of original claim for indemnification under this Agreement shall be given later than the expiration of one (1) year from the Closing Date (excluding only claims for indemnification under Section 12.1(a)(iii), which shall be within three (3) years of the Closing Date, and Section 12.1(a)(iv), which may be given at any time). The indemnified party shall advise the indemnifying party of all facts relating to such assertion within the knowledge of the indemnified party, and shall afford the indemnifying party the 48 opportunity, at the indemnifying party's sole cost and expense, to defend against such claims for liability. In any such action or proceeding, the indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at its own expense unless (i) the indemnifying party and the indemnified party mutually agree to the retention of such counsel or (ii) the named parties to any such suit, action, or proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party, and in the reasonable judgment of the indemnified party, representation of the indemnifying party and the indemnified party by the same counsel would be inadvisable due to actual or potential differing defenses or conflicts of interests between them. (d) The indemnified party shall have the right to settle or compromise any claim or liability subject to indemnification under this Section, and to be indemnified from and against all Losses resulting therefrom, unless the indemnifying party, within sixty (60) calendar days after receiving written notice of the claim or liability in accordance with Section 12.1(c) above, notifies the indemnified party that it intends to defend against such claim or liability and undertakes such defense, or, if required in a shorter time than sixty (60) calendar days, the indemnifying party makes the requisite response to such claim or liability asserted. (e) Notwithstanding anything to the contrary contained in this Agreement, an indemnifying party shall not be liable under this Section 12.1 for any Losses sustained by the indemnified party unless and until the aggregate amount of all indemnifiable Losses sustained by the indemnified party shall exceed $50,000, in which event the indemnifying party shall provide indemnification hereunder in respect of all such indemnifiable Losses in excess of $50,000; provided, however, that the aggregate amount of indemnification payments payable pursuant to this Section 12.1, shall not exceed the amount of the Purchase Price. An indemnifying party shall not be liable under this Section 12.1 for any settlement effected, without its consent, of any claim or liability or proceeding for which indemnity may be sought hereunder except in the case of a settlement in an amount which does not exceed $50,000. In no event shall either party hereto be entitled to consequential or punitive damages or damages for lost profits in any action relating to the subject matter of this Agreement. 12.2 Loans. (a) Notwithstanding anything to the contrary contained in this Agreement, subject to Section 12.3 and 12.4, in order for Purchaser to claim a breach of a representation or warranty of Seller under Section 5.10 or under Section 5.11 insofar as such claimed breach may relate to one or more Loans, Purchaser shall deliver to Seller, within thirty (30) days following Purchaser's discovery of such breach but in no event later than the one hundred eightieth (180th) day following the Closing Date, a certificate (a "Certificate of Defective Loan"), setting forth the identity of the affected Loan, the exact nature of such claimed breach, the subsection or subsections of Section 5.10, as applicable, under which such breach is claimed and reasonable evidence of the existence of such breach. 49 (b) If Purchaser delivers a Certificate of Defective Loan to Seller, Seller shall have the option, in its sole and absolute discretion, to correct or cure such breach with respect to such affected Loan within sixty (60) days following the receipt of the Certificate (the "Cure Period") or to repurchase any such affected Loan on a whole loan servicing-released basis within sixty (60) days following receipt of the Certificate for an amount equal to the Loan Value thereof as of the date of repurchase (the "Repurchase Price"). If Seller elects to attempt to cure or correct any material breach with respect to any Loan but fails to cure or correct such material breach on or before the expiration of the Cure Period, then Seller shall repurchase such Loan on a whole loan servicing-released basis within thirty (30) days following the expiration of the Cure Period for the Repurchase Price, subject to Sections 12.2(d). (c) In connection with any repurchase of a Loan by Seller pursuant to this Section 12.2, and as a condition to the payment by Seller to Purchaser of the Repurchase Price thereof, Purchaser shall deliver to Seller all Loan Documents (and, if applicable, any collateral deposit account associated with such Loan) with respect to such Loan previously delivered to Purchaser pursuant to this Agreement, and each document that constitutes a part of the Loan Documents which was endorsed or assigned to Purchaser shall be endorsed or assigned to Seller in the same manner as provided in Sections 3.6 and 5.10. (d) Notwithstanding anything to the contrary contained herein, Seller shall have no obligation hereunder to correct or cure any material breach or to repurchase any Loan pursuant to this Section 12.2, if after the Closing Date, (i) Purchaser or its permitted assignee is not the owner of such Loan or does not have the full right to sell and assign such Loan hereunder (it being understood that the rights under this Section 12.2 shall not survive any sale, conveyance, assignment or transfer of the subject Loan by Purchaser to an unaffiliated third party); (ii) any lien, pledge, charge or security interest of any nature exists with respect to such Loan as of the time of repurchase; (iii) the related security interests or mortgages, if any, have been waived, modified, altered, satisfied, canceled, rescinded or subordinated in any respect, or the related collateral has been released from its obligations under such security interests or mortgages, in whole or in part, in a manner which materially interferes with the benefits of the security intended to be provided by such mortgages or the use, enjoyment, value or marketability of such collateral for the purposes specified in such mortgages; or (iv) Purchaser has otherwise altered, amended or modified the terms of such Loan. 12.3 [intentionally omitted] 12.4 Exclusivity. After the Closing, Article 12 will provide the exclusive remedy for any misrepresentation, breach of warranty, covenant or other agreement or other claim arising out of this Agreement or the transactions contemplated hereby; provided, however, that Section 12.2 shall be Purchaser's sole and exclusive remedy or any breach of Seller's representations or warranties under Section 5.10. In no event shall Purchaser have any such claim with respect to any Loan which is paid in full on or before the one hundred twentieth (120th) day after the Closing Date. 50 12.5 AS-IS Sale; Waiver of Warranties. Except as set forth in Article 5 and Sections 8.1 and 8.8, Purchaser acknowledges that the Assets and Liabilities are being sold and accepted on an "AS-IS-WHERE-IS" basis, and are being accepted without any representation or warranty. As part of Purchaser's agreement to purchase and accept the Assets and Liabilities AS-IS-WHERE-IS, and not as a limitation on such agreement, TO THE FULLEST EXTENT PERMITTED BY LAW, SELLER HEREBY DISCLAIMS AND PURCHASER HEREBY UNCONDITIONALLY AND IRREVOCABLY WAIVES AND RELEASES ANY AND ALL ACTUAL OR POTENTIAL RIGHTS PURCHASER MIGHT HAVE AGAINST SELLER OR ANY PERSON DIRECTLY OR INDIRECTLY CONTROLLING SELLER REGARDING ANY FORM OF WARRANTY, EXPRESS OR IMPLIED, OF ANY KIND OR TYPE, RELATING TO THE ASSETS AND LIABILITIES INCLUDING, BUT NOT LIMITED TO, THE LOANS AND/OR THE COLLATERAL THEREFOR EXCEPT THOSE SET FORTH IN ARTICLE 5 AND SECTIONS 8.1 AND 8.8. SUCH WAIVER AND RELEASE IS, TO THE FULLEST EXTENT PERMITTED BY LAW, ABSOLUTE, COMPLETE, TOTAL AND UNLIMITED IN EVERY WAY. SUCH WAIVER AND RELEASE INCLUDES TO THE FULLEST EXTENT PERMITTED BY LAW, BUT IS NOT LIMITED TO, A WAIVER AND RELEASE OF EXPRESS WARRANTIES (EXCEPT THOSE SET FORTH IN ARTICLE 5 AND SECTIONS 8.1 AND 8.8), IMPLIED WARRANTIES, WARRANTIES OF FITNESS FOR A PARTICULAR USE, WARRANTIES OF MERCHANTABILITY, WARRANTIES OF HABITABILITY, STRICT LIABILITY RIGHTS AND CLAIMS OF EVERY KIND AND TYPE, INCLUDING BUT NOT LIMITED TO CLAIMS REGARDING DEFECTS WHICH WERE NOT OR ARE NOT DISCOVERABLE, ALL OTHER EXTANT OR LATER CREATED OR CONCEIVED OF STRICT LIABILITY OR STRICT LIABILITY TYPE CLAIMS AND RIGHTS. ARTICLE 13 MISCELLANEOUS 13.1 Survival. (a) The parties' respective representations and warranties contained in this Agreement shall survive until the first anniversary of the Closing Date, and thereafter neither party may claim any Loss in relation to a breach thereof; provided, however, that each of the representations and warranties of Seller set forth in Section 5.10 and in Section 5.11 insofar as such Section may relate to one or more Loans, shall survive the Closing Date for a period of one hundred eighty (180) days, and thereafter neither party may claim any damage for breach thereof. The agreements and covenants contained in this Agreement shall not survive the Closing except to the extent expressly set forth herein. (b) No claim based on any breach of any representation or warranty shall be valid or made unless notice with respect thereto is given to Seller in accordance with this Agreement on or before the date specified in Section 12.1(c). 51 13.2 Assignment. Except as otherwise provided in Section 8.55, neither this Agreement nor any of the rights, interests or obligations of either party may be assigned by either party hereto without the prior written consent of the other party, and any purported assignment in contravention of this Section 13.2 shall be void. Purchaser further agrees not to sell, transfer or assign any of the Loans prior to the Closing Date. 13.3 Binding Effect. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. 13.4 Public Notice. Prior to the Closing Date, neither Purchaser nor Seller shall directly or indirectly make or cause to be made any press release for general circulation, public announcement or disclosure or issue any notice or general communication to employees with respect to any of the transactions contemplated hereby without the prior written consent of the other party (which consent shall not be unreasonably withheld or delayed). Purchaser agrees that, without Seller's prior written consent, it shall not release or disclose any of the terms or conditions of the transactions contemplated herein to any other person. Notwithstanding the foregoing, each party may make such public disclosure as, in the opinion of its counsel, may be required by law or as necessary to obtain the Regulatory Approvals. 13.5 Notices. All notices, requests, demands, consents and other communications given or required to be given under this Agreement and under the related documents shall be in writing and delivered to the applicable party at the address indicated below: If to Seller: Norwest Bank Nevada, National Association 3300 West Sahara Avenue Las Vegas, Nevada 89102 Attention: Laura Schulte, President Fax: 702-765-3903 With a copy to: Norwest Corporation Norwest Center Sixth and Marquette Minneapolis, MN 55479-1026 Attention: Secretary Fax: 612-667-4399 If to Purchaser: California Federal Bank, A Federal Savings Bank 135 Main Street, 20th Floor San Francisco, California 94105-1817 Attention: Scott A. Kisting, EVP Fax: 415-904-0416 52 With a copy to: California Federal Bank 135 Main Street, 4th Floor San Francisco, California 94105-1817 Attention: Bill Primozic, Esq. Fax: 415-904-0203 or, as to each party at such other address as shall be designated by such party in a written notice to the other party complying as to delivery with the terms of this Section. Any notices shall be in writing, including telegraphic or facsimile communication, and may be sent by registered or certified mail, return receipt requested, postage prepaid, or by fax, or by overnight delivery service. Notice shall be effective upon actual receipt thereof. 13.6 Expenses. Except as expressly provided otherwise in this Agreement, each party shall bear any and all costs and expenses which it incurs, or which may be incurred on its behalf, in connection with the preparation of this Agreement and consummation of the transactions described herein, and the expenses, fees, and costs necessary for any approvals of the appropriate regulatory authorities. 13.7 Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the State of Nevada. 13.8 Entire Agreement; Amendment. (a) This Agreement contains the entire understanding of and all agreements between the parties hereto with respect to the subject matter hereof and supersedes any prior or contemporaneous agreement or understanding, oral or written, pertaining to any such matters which agreements or understandings shall be of no force or effect for any purpose; provided, however, that the terms of any confidentiality agreement between the parties hereto previously entered into, to the extent not inconsistent with any provisions of this Agreement, shall continue to apply. (b) This Agreement may not be amended or supplemented in any manner except by mutual agreement of the parties and as set forth in a writing signed by the parties hereto or their respective successors in interest. The waiver of any beach of any provision under this Agreement by any party shall not be deemed to be waiver of any preceding or subsequent breach under this Agreement. No such waiver shall be effective unless in writing. 13.9 Third Party Beneficiaries. Except as expressly provided in Section 12.1 or 12.2, this Agreement shall not benefit or create any right or cause of action in or on behalf of any person other than Seller and Purchaser. 13.10 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 53 13.11 Headings. The headings used in this Agreement are inserted for purposes of convenience of reference only and shall not limit or define the meaning of any provisions of this Agreement. 13.12 [intentionally omitted] 13.13 Severability. If any provision of this Agreement, as applied to any party or circumstance, shall be judged by a court of competent jurisdiction to be void, invalid or unenforceable, the same shall in no way effect any other provision of this Agreement, the application of any such provision and any other circumstances or the validity or enforceability of the other provisions of this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers as of the date and year first above written. NORWEST BANK NEVADA, NATIONAL ASSOCIATION By: /s/ Laura Schulte ---------------------------- Name: Laura Schulte Title: President & CEO CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK By: /s/ Peter K. Thomson ---------------------------- Name: Peter K. Thomson Title: EVP 54 SCHEDULE 1.1(b) BRANCHES/REAL PROPERTIES NORWEST BANK NEVADA, NATIONAL ASSOCIATION Branch Name Branch Address Lease/Own ----------- -------------- --------- 1 Carson City 201 West Telegraph Street Owned Carson City, NV 89703 2 Elko 852 Idaho Street Owned Elko, NV 3 Desert Inn/Topaz 2625 East Desert Inn Road Leased Las Vegas, NV 89121 4 Lakes 9325 West Sahara Avenue Leased Las Vegas, NV 89117 5 Tropicana/Pecos 3333 East Tropicana Avenue Leased Las Vegas, NV 89121 6 Rainbow/Westcliff 103 South Rainbow Owned Las Vegas, NV 89128 7 Henderson 546 South Boulder Highway Leased Henderson, NV 89105 8 Virginia Cadillac 2375 South Virginia Street Owned Reno, NV 89502 9 Booth/Reno Village 595 Booth Street Owned Reno, NV 89509 10 Winnemucca 311 South Bridge Street Owned Winnemucca, NV 89445 SCHEDULE 1.1(d) EXCLUDED DEPOSITS NONE SCHEDULE 1.1(e) OTHER LOANS See Magnetic Media delivered to Purchaser October 16, 1998 SCHEDULE 2.1(a)(vii) OTHER ASSETS See Attached NORWEST CORPORATION NEVADA SCHEDULES 2.1(A) (VII) OTHER ASSETS AS OF SEPTEMBER 30,1998
OTHER ASSET COST CENTER COMMON NAME TOTAL SCHEDULE DETAIL OF OTHER ASSETS TOTAL - --------------------------------------------------------------------------------- ---------------- CC: 1013 Reno Village $ 870 Safe Deposit Wash Acct. (75) Annual Fees Rec-LCA 850 Insurance Prem Rec - LCA 13 Late Charges Rec - ILA 82 ----------------------------------------------------------------- $ 870 = $ 870 ============= ============ - --------------------------------------------------------------------------------------------------- CC: 1021 Virginia/Cadillac $ 2,464 Safe Deposit Wash Acct. (165) Late Charges Rec - LCA 35 Annual Fees Rec-LCA 1,725 Insurance Prem Rec - LCA 379 Late Charges Rec - ILA 490 ----------------------------------------------------------------- $ 2,464 = $ 2,464 ============= ============== - --------------------------------------------------------------------------------------------------- CC: 2011 Carson City $ 1,424 Safe Deposit Wash Acct. (210) Late Charges Rec - LCA 14 Annual Fees Rec-LCA 1,212 Insurance Prem Rec - LCA 96 Late Charges Rec - ILA 312 ----------------------------------------------------------------- $ 1,424 = $ 1,424 ============= ============== - --------------------------------------------------------------------------------------------------- CC: 2041 Elko $ 1,312 Safe Deposit Wash Acct. (45) Late Charges Rec - LCA 5 Annual Fees Rec-LCA 550 Insurance Prem Rec - LCA 116 Late Charges Rec - ILA 686 ----------------------------------------------------------------- $ 1,312 = $ 1,312 ============= ============== - --------------------------------------------------------------------------------------------------- CC: 2042 Winnemucca $ 601 Safe Deposit Wash Acct. (20) Late Charges Rec - LCA 15 Annual Fees Rec-LCA 375 Insurance Prem Rec - LCA 102 Late Charges Rec - ILA 249 Br Suspense A/C (FIWI) (120) ----------------------------------------------------------------- $ 601 = $ 601 ============= ============== - --------------------------------------------------------------------------------------------------- NORWEST CORPORATION NEVADA SCHEDULES 2.1(A) (VII) OTHER ASSETS AS OF SEPTEMBER 30,1998 OTHER ASSET COST CENTER COMMON NAME TOTAL SCHEDULE DETAIL OF OTHER ASSETS TOTAL - --------------------------------------------------------------------------------- ------------- CC: 3011 Desert Inn/Topaz $ 1,014 Insurance Prem Rec - LCA 25 Br Suspense A/C (FIWI) 698 Late Charges Rec - ILA 259 Svc Chg Rec Daily Neg Coll B 32 ----------------------------------------------------------------- $ 1,014 = $ 1,014 ============== ================ - --------------------------------------------------------------------------------------------------- CC: 3013 Trop/Pecos $ 1,648 Safe Deposit Wash Acct. (120) Annual Fees Rec-LCA 1,300 Insurance Prem Rec - LCA 62 Late Charges Rec - ILA 406 ----------------------------------------------------------------- $ 1,648 = $ 1,648 ============= ============== - --------------------------------------------------------------------------------------------------- CC: 3021 Henderson $ 1,984 Safe Deposit Wash Acct. (30) Annual Fees Rec-LCA 1,475 Insurance Prem Rec - LCA 23 Unamort Prem - Consmr Lns 29 Late Charges Rec - ILA 483 Service Charge Rec Daily Neg 4 ----------------------------------------------------------------- $ 1,984 = $ 1,984 ============= ============== - --------------------------------------------------------------------------------------------------- CC: 3054 Lakes/West $ 10,853 Safe Deposit Wash Acct. (105) Insurance Prem Rec - LCA 275 Late Charges Rec - ILA 292 Br Suspense A/C (FIWI) 10,391 ----------------------------------------------------------------- $ 10,853 = $ 10,853 ============= ============== - --------------------------------------------------------------------------------------------------- CC: 3059 Rainbow/Westcliff $ 3,849 Safe Deposit Wash Acct. (195) Annual Fees Rec-LCA 1,450 Insurance Prem Rec - LCA 199 Late Charges Rec - ILA 395 Br Suspense A/C (FIWI) 2,000 ----------------------------------------------------------------- $ 3,849 = $ 3,849 ============= ============== - --------------------------------------------------------------------------------------------------- SCHEDULE 2.2(a)(v) ACCRUED LIABILITIES See Attached NORWEST CORPORATION NEVADA SCHEDULES 2.2 (A) (V) ACCRUAL LIABILITIES AS OF SEPTEMBER 30,1998 OTHER LIABILITIES COST CENTER COMMON NAME TOTAL SCHEDULE DETAIL OF OTHER ASSETS TOTAL - ---------------------------------------------------------------------------------------- ------------- CC: 1013 Reno Village $ (6,805) LCA Insurance Payable 46 Difference Account (6,851) ------------------------------------------------------------------------ $ (6,805) = $ (6,805) =================== ============ - ---------------------------------------------------------------------------------------------------------- CC: 1021 Virginia/Cadillac $ (6,726) Credit Life/A&H Pay - ILA (6,841) LCA Insurance Payable 326 Difference Account (211) ------------------------------------------------------------------------ $ (6,726) = $ (6,726) =================== ============ - ---------------------------------------------------------------------------------------------------------- CC: 2011 Carson City $ (11,992) Credit Life/A&H Pay - ILA (13,917) LCA Insurance Payable 100 Difference Account 1,825 ------------------------------------------------------------------------ $ (11,992) = $ (11,992) =================== ============ - ---------------------------------------------------------------------------------------------------------- CC: 2041 Elko $ 9,136 Real Estate Taxes Payable (2,016) Credit Life/A&H Pay - ILA 10,955 LCA Insurance Payable 187 Difference Account 10 ------------------------------------------------------------------------ $ 9,136 = $ 9,136 =================== ============ - ---------------------------------------------------------------------------------------------------------- CC: 2042 Winnemucca $ 7,053 Credit Life/A&H Pay - ILA 6,657 LCA Insurance Payable 195 Difference Account 201 ------------------------------------------------------------------------ $ 7,053 = $ 7,053 =================== ============ - ---------------------------------------------------------------------------------------------------------- CC: 3011 Desert Inn/Topaz $ 5,463 Credit Life/A&H Pay - ILA 4,867 LCA Insurance Payable 5 Difference Account 591 ------------------------------------------------------------------------ $ 5,463 = $ 5,463 =================== ============ - ---------------------------------------------------------------------------------------------------------- CC: 3013 Trop/Pecos $ (585) Credit Life/A&H Pay - ILA (1,811) LCA Insurance Payable 1,717 Difference Account (491) ------------------------------------------------------------------------ $ (585) = $ (585) =================== ============ - ---------------------------------------------------------------------------------------------------------- CC: 3021 Henderson $ (3,928) Credit Life/A&H Pay - ILA (3,917) LCA Insurance Payable 32 Difference Account (43) ------------------------------------------------------------------------ $ (3,928) = $ (3,928) =================== ============ - ---------------------------------------------------------------------------------------------------------- NORWEST CORPORATION NEVADA SCHEDULES 2.2 (A) (V) ACCRUAL LIABILITIES AS OF SEPTEMBER 30,1998 OTHER LIABILITIES COST CENTER COMMON NAME TOTAL SCHEDULE DETAIL OF OTHER ASSETS TOTAL - ---------------------------------------------------------------------------------------- ------------- CC: 3054 Lakes/West $ 1,943 Credit Life/A&H Pay - ILA 961 LCA Insurance Payable (22) Difference Account 1,004 ------------------------------------------------------------------------ $ 1,943 = $ 1,943 =================== ============ - ---------------------------------------------------------------------------------------------------------- CC: 3059 Rainbow/Westcliff $ 7,435 Credit Life/A&H Pay - ILA 6,153 LCA Insurance Payable 205 Difference Account 1,077 ------------------------------------------------------------------------ $ 7,435 = $ 7,435 =================== ============ - ----------------------------------------------------------------------------------------------------------
SCHEDULE 2.4(c) EXCLUDED IRA/KEOGH ACCOUNT DEPOSITS [TO COME] SCHEDULE 3.6(a) FORM OF DEED Recording Requested by: When Recorded Mail to: DOCUMENT TRANSFER TAX $______ ( ) COMPUTED ON FULL VALUE OF PROPERTY CONVEYED, OR ( ) COMPUTED ON FULL VALUE LESS LIENS AND ENCUMBRANCES REMAINING THEREON AT TIME OF SALE. Signature of declarant or agent determining tax -- Firm Name ( ) Unincorporated Area ( ) City of _______________ Assessor's parcel No. ______________ __________________________________________ with its principal office located in ______________________, _______________, the undersigned grantor, for a valuable consideration, receipt of which is hereby acknowledged, does hereby remise, release and forever grant, bargain, sell and convey to [NAME OF GRANTEE(S)] a __________________ _______________, with its principal office located in ______________________, all of the real property in the City of __________________, County of ________________, State of ______ _______________, described in Attachment A hereto. Date: _______________________ ______________________________ ____________________ By: ___________________________ Name: Title: MAIL TAX STATEMENTS TO GRANTEE AT ADDRESS ABOVE Attachment A Property 2 SCHEDULE 3.6(b) FORM OF BILL OF SALE BILL OF SALE, dated as of ______________, _____ by ______________________________ ________________________, with its principal office located in _________________________, _________________ ("Seller"), to _____________________________________________, with its principal office located in _______________________________________________, ("Purchaser"). Capitalized terms not otherwise defined herein shall have the same meanings as set forth in the Purchase and Assumption Agreement, dated as of ___________________________, _____ (the "P&A Agreement"), between Seller and Purchaser, unless the context herein otherwise requires. W I T N E S S E T H: WHEREAS, subject to the terms and conditions set forth in the P&A Agreement, Seller has agreed to transfer to Purchaser the Assets; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller does hereby convey, grant, bargain, sell, transfer, set over, assign, alienate, remise, release, deliver and confirm unto Purchaser, its successors and assigns, forever, all of Seller's right, title, interest and claim in and to the Personal Property (including without limitation, the items described in Attachment A hereto), as of 11:59 p.m., ___________ time, the day prior to the date hereof TO HAVE AND TO HOLD all and singular of the foregoing (the "Transferred Properties") unto Purchaser, its successors and assigns, to its and their own use and enjoyment forever. SELLER FURTHER COVENANTS AND AGREES AS FOLLOWS: 1. This instrument shall not constitute an assignment of any covenant, obligation, liability, contract, agreement, license, lease or commitment pertaining to the Transferred Properties if an attempted assignment thereof without the consent of any other party thereto or with an interest therein would constitute a breach thereof or would materially and adversely affect the rights of Seller thereunder. If any such consent is not obtained with respect to any such covenant, obligation, liability, contract, agreement, license, lease or commitment, or if an attempted assignment with respect thereto would be ineffective or would impair the rights of Seller thereunder so that Purchaser would not in fact receive the benefit of all such rights, then Seller, its successors and assigns, shall act as Purchaser's agent in order to obtain for Purchaser, its successors and assigns, the benefits thereunder, and Seller will cooperate with Purchaser in any other reasonable arrangement designed to provide such benefits for Purchaser. 2. The Transferred Properties are being delivered "AS IS," "WHERE IS" and with all faults. 3. From time to time, Seller, its successor and assigns, shall execute and deliver all such further bills of sale, assignments or other instruments of conveyance and transfer as Purchaser, its successors or assigns, may reasonably request more effectively to transfer to and vest in Purchaser all of Seller's interest in the Transferred Properties. 4. This Bill of Sale is made pursuant to the provisions of the P&A Agreement, and, except as herein otherwise provided, the transfer of property hereunder is made subject to the terms and provisions of the P&A Agreement. 5. This Agreement shall be governed by and interpreted in accordance with the laws of the State of ______________ applicable to contracts made and to be performed entirely within such State. IN WITNESS WHEREOF, Seller has duly executed and delivered this Bill of Sale as of the day and year first above written. _______________________________________ By: ___________________________________ Name: Title: PURCHASER: By: ___________________________________ Name: Title: 2 Attachment A Personal Property [To be provided] 3 SCHEDULE 3.6(c) FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT ASSIGNMENT AND ASSUMPTION AGREEMENT, dated as of _____________________, ______ (the "Agreement"), between __________________________________________, organized under the laws of _________________________, with its principal office located in ___________________________, _______________ ("Seller"), and __________________________________________, with its principal office located in ________________________, ______________________ ("Purchaser"). Capitalized terms not otherwise defined herein shall have the meanings set forth in the Purchase and Assumption Agreement, dated as of __________________________, (the "P&A Agreement"), between Seller and Purchaser, unless the context herein otherwise requires. W I T N E S S E T H: WHEREAS, subject to the terms and conditions set forth in the P&A Agreement, Seller has agreed to assign, and Purchaser has agreed to assume, the Liabilities; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Seller hereby sells, assigns, conveys transfers and delivers, and Purchaser assumes, without warranty or representation, express or implied, or recourse to, Seller, except as expressly provided in the P&A Agreement, the Liabilities, other than the Branch Leases, as set forth in the P&A Agreement. 2. Seller hereby (a) resigns as the trustee or custodian of each Deposit in an IRA or Keogh Account of which it is the trustee or custodian, and (b) to the extent permitted by the documentation governing such IRA or Keogh Account, appoints Purchaser as successor trustee or custodian of each such IRA or Keogh Account, and Purchaser hereby accepts each such trusteeship or custodianship and assumes all fiduciary obligations with respect thereto. 3. This Agreement shall not constitute an assignment or assumption of any covenant, fiduciary or other obligation, liability, contract, agreement, license, lease or commitment pertaining to any Liability if an attempted assignment or assumption thereof without the consent of any other party thereto or with an interest therein would constitute a breach thereof or would materially and adversely affect the rights of Seller thereunder. If any such consent is not obtained with respect to any such covenant, fiduciary or other obligation, liability, contract, agreement, license, lease or commitment, or if an attempted assignment or assumption of any covenant, fiduciary or other obligation, liability, contract, agreement, license, lease or commitment pertaining to any Liability would be ineffective or would impair the rights of Seller thereunder so that Purchaser would not in fact receive the benefit of all such rights, then Seller, its successors an assigns shall act as Purchaser's agent in order to obtain for Purchaser, its successors and assigns, the benefits thereunder, and Seller will cooperate with Purchaser in any other reasonable arrangement designed to provide such benefits for Purchaser. 4. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors and permitted assigns; provided, that neither this Agreement nor any of the rights, interests or obligations of either party may be assigned by either party hereto without the prior written consent of the other party, and any purported assignment in contradiction of this Section 4 shall be void. 5. This Agreement is made pursuant to the provisions of the P&A Agreement and, except as herein otherwise provided, the assignment and assumption of any other Liabilities hereunder are made subject to the terms and provisions of the P&A Agreement. 6. Except as otherwise provided herein, all of the transactions provided for herein shall be effective as of 11:59 p.m., __________________ time, the day prior to the date hereof. 7. This Agreement shall be governed by and interpreted in accordance with the laws of the State of ______________________ applicable to contracts made and to be performed entirely within such State. IN WITNESS WHEREOF, the parties herein have duly executed and delivered this Agreement as of the day and year first above written. __________________________________________ By: ______________________________________ Name: Title: [PURCHASER] By: ______________________________________ Name: Title: 2 SCHEDULE 3.6(d) FORM OF ASSIGNMENT OF LEASE AND ASSUMPTION KNOW THAT ___________________________________________, a ______________________, organized under the laws of the ___________________, having its principal office in __________________, ____________ ("Assignor"), in consideration of One Dollar ($1.00) and other good and valuable consideration paid by ____________________ _____________________, with its principal office located in _______________________, ("Assignee"), hereby sells, transfers and assigns unto the Assignee all of Assignor's right, title and interest as tenant under a certain lease more particularly described on Attachment A hereto, covering premises described on such attachment and in such Lease (the "Lease") including any security deposits, prepaid rentals and other deposits, if any. TO HAVE AND TO HOLD the same unto Assignee, its successors and assigns from and after 8:00 a.m. on the date hereof (the "Effective Time"), subject to the terms, covenants, conditions and provisions set forth in the Lease. ASSIGNEE hereby assumes, effective as of the Effective Time, the performance of all terms, covenants and obligations of the Lease on the part of Assignor to be performed under the Lease accruing from and after the Effective Time. This Assignment may be executed in any number of counterparts. Each such counterpart hereof shall be deemed an original, but all counterparts shall constitute but one agreement. This Assignment shall inure to the benefit of and shall be binding upon the parties hereto and their respective successors and assigns. IN WITNESS WHEREOF, Assignor and Assignee have executed this Agreement as of the ________ day of ____________________________, ______. __________________________________________ By: _______________________________________ Name: Title: CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK By: _______________________________________ Name: Title: 2 Attachment A Lease 3 SCHEDULE 3.6(e) FORM OF LANDLORD CONSENT CONSENT, dated as of __________________, ______, of ____________________ ________, with its principal office located in ________________________________ ("Landlord"), in favor of _____________________________________________ organized under the laws of the _____ _______________, with its principal office located in ________________, _______________ ("Seller"). W I T N E S S E T H: WHEREAS, Landlord is the owner of certain premises and a party to a certain lease, each described on Attachment A hereto (the "Lease"); and WHEREAS, Seller desires to assign its entire interest (including without limitation, renewal rights, if any) in the Lease to ___________________________________, with its principal office located in _________________________, ("Purchaser"); and WHEREAS, Seller has requested Landlord's consent to said assignment and to Purchaser's use of said premises as a banking office and for all other purposes authorized under the Lease for the balance of the term of the Lease and Landlord desires to consent to the same for all purposes required under the Lease. NOW, THEREFORE, 1. Subject to the limitations set forth below, Landlord hereby consents to the assignment of the Lease by Seller to Purchaser and to Purchaser's use of said premises as a banking office and for all other purposes authorized under the Lease for the balance of the term of the Lease; provided that Purchaser shall agree to assume all of the obligations of Seller arising under the Lease from and after the effective date of the assignment. 2. Except for the aforementioned assignment by Seller to Purchaser, nothing contained herein shall constitute a waiver of the obligation, if any, of the holder of the leasehold interest created under the Lease to obtain Landlord's consent to future assignments of the Lease or a sublease of the premises demised thereunder. 3. Nothing contained herein shall be construed to obligate Seller to assign the Lease to Purchaser, it being understood and acknowledged by Landlord that the execution and delivery of this Consent is in anticipation of said assignment, which may or may not be effected. If said assignment shall be effected, Seller or Purchaser shall promptly provide to Landlord a fully executed counterpart of said assignment and notify Landlord of the effective date thereof. 4. Landlord acknowledges and certified that, except for the conditions contained herein, all conditions set forth in the Lease, if any, to the effectiveness of the aforementioned assignment or to the consent of Landlord contained herein have been either waived by Landlord or satisfied. IN WITNESS WHEREOF, the undersigned has duly executed and delivered this instrument as of the day and year first above written. [LANDLORD] By: ___________________________ Name: Title: 2 Attachment A Lease 3 SCHEDULE 3.6(g) FORM OF CERTIFICATE OF OFFICER The undersigned, the __[title of officer]__ of _________________________________, a ______________________, organized under the laws of the ____________________, with its principal office located in _______________, ______________________ ("Seller"), hereby certifies, to the best of [his] [her] knowledge after reasonable inquiry, as follows: 1. Each of the representations and warranties made by Seller in the Purchase and Assumption Agreement, dated as of __________________, ______, (the "P&A Agreement"), between Seller and ___________________________________, with its principal office located in ____________________, California, are true and all material respects, as of the date hereof. 2. Each of the covenants and agreements of Seller to be performed on or prior to the date hereof have been duly performed in all material respects. 3. Attached hereto are true and correct copies of the resolutions of the Seller's Board of Directors, dated as of ____________________, ______, authorizing the execution, delivery and performance of the transactions contemplated by the P&A Agreement, which resolutions were duly adopted and, as of the date hereof, remain in full force and effect without amendment or modification. IN WITNESS WHEREOF, I have hereunto subscribed my name this _____ day of _________________, _____. __________________________________________ By: ______________________________________ Name: Title: SCHEDULE 3.7(d) FORM OF CERTIFICATE OF OFFICER The undersigned, the __[title of officer]__ of _________________________________, with its principal office located in ______________________________, ("Purchaser"), hereby certifies, to the best of [his] [her] knowledge after reasonable inquiry, as follows: 1. Each of the representations and warranties made by Purchaser in the Purchase and Assumption Agreement, dated as of __________________, ______ (the "P&A Agreement"), between Purchaser and ___________________________________, organized under the laws of ________________, with its principal office located in ______________________, _____________, are true in all material respects, as of the date hereof (except for representations and warranties that are made as of a specific date). 2. Each of the covenants and agreements of Purchaser to be performed on or prior to the date hereof have been duly performed in all material respects. 3. Attached hereto are true and correct copies of the resolutions of the Purchaser's Board of Directors, dated as of _________________________, ______, authorizing the execution, delivery and performance of the transactions contemplated by the P&A Agreement, which resolutions were duly adopted and, as of the date hereof, remain in full force and effect without amendment or modification. IN WITNESS WHEREOF, I have hereunto subscribed my name this _____ day of ______________________, _____. [PURCHASER]: By: ______________________________________ Name: Title: SCHEDULE 4.11 SCHEDULE OF PROCESSING FEES See Attached SCHEDULE 4.11 SCHEDULE OF COST FROM OPERATIONS FOR DIVESTITURE
|------------------------------------------------|-----------------------------------------------------| | Daily Cash Letter | $25.00 per letter | |------------------------------------------------|-----------------------------------------------------| | Return Deposited Items | $2.50 per item | |------------------------------------------------|-----------------------------------------------------| | ACH File | $35.00 per transmitted file | |------------------------------------------------|-----------------------------------------------------| | Photocopies (per item) | $3.00 per item | |------------------------------------------------|-----------------------------------------------------| | Research Request (per item) | $20.00 per hour, $20.00 minimum | |------------------------------------------------|-----------------------------------------------------| | Courier | Dedicated in-city run (time sensitive) $35 per run | | | Non-Dedicated in-city run $25 per run | |------------------------------------------------|-----------------------------------------------------|
This is the best we could do given the short time frame to get the numbers. I did check with the Texas folks and we are not charging Crane for any of these items. I assume it because Crane is small compared to this one. SCHEDULE 5.4 TENANT LEASES See Attached NORWEST BANK NEVADA LISTING OF BRANCH TENANTS
BRANCH SUBTENANT NAME ADDRESS SUITE# RSF GROSS RENT START EXPIRATION ------ -------------- ------- ------ --- ---------- ----- ---------- Carson City Carson Valley Chiropractic 308 North Curry St. Carson City NV B101 1050 $727 10/1/97 9/30/99 Carson City Citizens for Affordable Homes 308 North Curry St. Carson City NV 210 930 $0 11/1/98 10/31/99 Carson City Classic Travel, Inc. 308 North Curry St. Carson City NV 101 1240 $1,208 3/1/98 2/28/03 Carson City Michael Bertrand CPA 308 North Curry St. Carson City NV 201 612 $623 10/1/97 9/30/99 Carson City Norwest Mortgage, Inc. 308 North Curry St. Carson City NV 105 450 $428 1/1/98 12/31/98 Carson City NV Assoc. of Counties 308 North Curry St. Carson City NV 205 3276 $3,285 10/1/97 9/30/00 Carson City Operating Eng. Local 308 North Curry St. Carson City NV 103 465 $445 11/1/97 10/31/98 * Carson City Sylvan Learning Center 308 North Curry St. Carson City NV 100 1095 $0 10/1/97 9/30/98 * Winnemucca Herrera-Forgeron Law Offices 311 South Bridge St. Winnemucca NV E 673 $446 9/1/97 8/31/00 Winnemucca Lily Pad Floral & Boutique 311 South Bridge St. Winnemucca NV D 1300 $793 10/1/97 9/30/99 Winnemucca Morris Travel Services, LLC 311 South Bridge St. Winnemucca NV A 717 $467 11/15/97 11/14/98 * Winnemucca Nature's Corner 311 South Bridge St. Winnemucca NV F 285 $300 10/1/97 9/30/99 Winnemucca Rice Jewelers 311 South Bridge St. Winnemucca NV B 1506 $905 10/1/95 9/30/00
* Lease extension in process SCHEDULE 5.7 LITIGATION/UNDISCLOSED LIABILITIES NONE SCHEDULE 5.10(a)(ix) EXCEPTIONS TO SELLER'S SOLE OWNERSHIP OF LOANS NONE SCHEDULE 5.10(f)(i) FORM OF AFFIDAVIT OF LOST NOTE I, __________________________________, being duly sworn, do hereby state under oath that: 1. I, as __________________________ (title) of ____________________________, am authorized to make this Affidavit on behalf of _______________________________ (the "Lender"). 2. The Lender is the Payee under the following described mortgage note (the "Note"): Date: ______________________________ Loan No.: ______________________________ Borrower(s): ______________________________ Original Payee (if not the Lender): ______________________________ Original Amount: ______________________________ Rate of Interest: ______________________________ Address of Mortgaged Property: ______________________________ 3. The Lender is the lawful owner of the Note, and the Lender has not canceled, altered, assigned or hypothecated the Note. 4. The Note was not located after a thorough and diligent search which consisted of the following actions: _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ 5. The Note was sold to ____________________ by ____________________ pursuant to the terms and provisions of a ________________ Agreement dated and effective as of ____________________, ______. 6. Attached hereto is a true and correct copy of (i) the Note, endorsed in blank by Lender, and (ii) the Mortgage or Deed of Trust [strike one] which secures the Note, which Mortgage or Deed of Trust is recorded at: _______________________________________________________________________________ _______________________________________________________________________________ 7. _____________________________________________, hereby agrees to defend, indemnify and hold harmless ___________________________________________, its successors, and assigns, against any loss, liability or damage, including reasonable attorney's fees, resulting from the unavailability of any notes, including but not limited to any loss, liability or damage arising from (i) any false statement contained in this Affidavit, (ii) any claim of any party that it has already purchased a mortgage loan evidenced by a Lost Note or any interest in such loan, (iii) any claim of any borrower with respect to the existence or terms of a Mortgage Loan evidenced by a Lost Note, or (iv) any inability to enforce the Note according to its terms or inability to receive any related insurance proceeds due to the lack of an original Note. 8. This Affidavit is intended to be relied on by ______________________________, its successors, and assigns and ______________________________ represents and warrants that it has the authority to perform its obligations under this Affidavit of Lost Note. Date: _____________________________ By: ___________________________ Name: Title: 2 SCHEDULE 5.10(k) EXCEPTIONS TO RIGHTS OF MORTGAGORS NONE SCHEDULE 5.16 DEPOSITS - COMPLIANCE WITH LAWS AND CONTRACTS NONE SCHEDULE 5.17 ENVIRONMENTAL MATTERS NONE SCHEDULE 8.1 OUTSTANDING TAX LIABILITIES NONE EX-10.55 15 PURCHASE AND ASSUMPTION AGREEMENT PURCHASE AND ASSUMPTION AGREEMENT dated as of October 30, 1998 between WELLS FARGO BANK, NATIONAL ASSOCIATION and CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK TABLE OF CONTENTS ARTICLE I CERTAIN DEFINITIONS 1.1 Certain Definitions 1.2 Accounting Terms 1.3 Interpretation ARTICLE 2 THE P&A TRANSACTION 2.1 Purchase and Sale of Assets 2.2 Assumption of Liabilities 2.3 Purchase Price 2.4 Assumption of IRA and Keogh Account Deposits 2.5 Sale and Transfer of Servicing and Escrows ARTICLE 3 CLOSING PROCEDURE; ADJUSTMENTS 3.1 Closing 3.2 Payment at Closing 3.3 Adjustment of Purchase Price 3.4 [intentionally omitted] 3.5 Proration; Other Closing Date Adjustments 3.6 Seller Deliveries 3.7 Purchaser Deliveries 3.8 Delivery of the Loan Documents 3.9 Collateral Assignments and Filing 3.10 Owned Real Property Filings 3.11 Title Policies ii ARTICLE 4 TRANSITIONAL MATTERS 4.1 Transitional Arrangements 4.2 Customers 4.3 Direct Deposits 4.4 Direct Debits 4.5 Escheat Deposits 4.6 Maintenance of Records 4.7 Interest Reporting and Withholding 4.8 Negotiable Instruments 4.9 ATM/Debit Cards; POS Cards 4.10 Leasing of Personal Property 4.11 Data Processing Conversion for the Branches and Handling of Certain Items 4.12 Information Regarding Mortgage Loans 4.13 Employee Training ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF SELLER 5.1 Corporate Organization and Authority 5.2 No Conflicts 5.3 Approvals and Consents 5.4 Tenants 5.5 Leases 5.6 [intentionally omitted] 5.7 Litigation and Undisclosed Liabilities 5.8 Regulatory Matters 5.9 Compliance with Laws 5.10 Loans 5.11 Financial and Deposit Data 5.12 Records 5.13 Title to Assets 5.14 Branch Leases 5.15 [intentionally omitted] 5.16 Deposits 5.17 Environmental Laws; Hazardous Substances 5.18 Brokers' Fees 5.19 Limitations on Representations and Warranties iii ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF PURCHASER 6.1 Corporate Organization and Authority 6.2 No Conflicts 6.3 Approvals and Consents 6.4 Regulatory Matters 6.5 Litigation and Undisclosed Liabilities 6.6 Operation of the Branches 6.7 Financing Available 6.8 Brokers' Fees ARTICLE 7 COVENANTS OF THE PARTIES 7.1 Activity in the Ordinary Course 7.2 Access and Confidentiality 7.3 Regulatory Approvals 7.4 Consents 7.5 Efforts to Consummate; Further Assurances 7.6 Solicitation of Accounts 7.7 Insurance 7.8 [intentionally omitted] 7.9 Servicing Prior to Closing Date ARTICLE 8 TAXES AND EMPLOYEE BENEFITS 8.1 Tax Representations 8.2 Proration of Taxes 8.3 Sales and Transfer Taxes 8.4 Information Returns 8.5 Payment of Amount Due under Article 8 8.55 Like Kind Exchange 8.6 Assistance and Cooperation 8.7 Transferred Employees 8.8 Branch Employee Representations iv ARTICLE 9 CONDITIONS TO CLOSING 9.1 Conditions to Obligations of Purchaser 9.2 Conditions to Obligations of Seller ARTICLE 10 ENVIRONMENTAL MATTERS 10.1 Environmental Matters ARTICLE 11 TERMINATION 11.1 Termination 11.2 Effect of Termination ARTICLE 12 INDEMNIFICATION AND OTHER REMEDIES 12.1 Indemnification 12.2 Loans 12.3 [intentionally omitted] 12.4 Exclusivity 12.5 AS-IS Sale; Waiver of Warranties v ARTICLE 13 MISCELLANEOUS 13.1 Survival 13.2 Assignment 13.3 Binding Effect 13.4 Public Notice 13.5 Notices 13.6 Expenses 13.7 Governing Law 13.8 Entire Agreement; Amendments 13.9 Third Party Beneficiaries 13.10 Counterparts 13.11 Headings 13.12 [intentionally omitted] 13.13 Severability vi List of Schedules Schedule 1.1(b) Branches/Real Properties Schedule 1.1(d) Excluded Deposits Schedule 1.1(e) Other Loans Schedule 2.1(a)(vii) Other Assets Schedule 2.2(a)(v) Accrued Liabilities Schedule 2.4(c) Excluded IRA/Keogh Account Deposits Schedule 3.6(a) Form of Deed Schedule 3.6(b) Form of Bill of Sale Schedule 3.6(c) Form of Assignment and Assumption Agreement Schedule 3.6(d) Form of Lease Assignment Schedule 3.6(e) Form of Landlord Consent Schedule 3.6(g) Form of Certificate of Officer [Seller] Schedule 3.7(d) Form of Certificate of Officer [Purchaser] Schedule 4.11 Schedule of Processing Fees Schedule 5.4 Tenant Leases Schedule 5.7 Litigation and Undisclosed Liabilities Schedule 5.10(a)(ix) Exceptions to Seller's Sole Ownership of Loans Schedule 5.10(f)(i) Form of Affidavit of Lost Note Schedule 5.10(k) Exceptions to Rights of Mortgagors Schedule 5.16 Deposits - Compliance with Laws and Contracts Schedule 5.17 Environmental Matters Schedule 8.1 Outstanding Tax Liabilities vii This PURCHASE AND ASSUMPTION AGREEMENT, dated as of October 30, 1998 ("Agreement"), between Wells Fargo Bank, National Association ("Seller") and California Federal Bank, A Federal Savings Bank ("Purchaser"). RECITALS A. Seller. Seller is a national banking association, organized under the laws of the United States, with its principal office located in San Francisco, California. B. Purchaser. Purchaser is a federal savings bank, organized under the laws of the United States, with its principal office located in San Francisco, California. C. The Merger. Wells Fargo & Company, a Delaware corporation ("WFC"), has proposed to merge (the "Merger") with a wholly-owned subsidiary of Norwest Corporation, a Delaware corporation ("Norwest") pursuant to the terms of an Agreement and Plan of Merger, dated as of June 7, 1998 and amended and restated as of September 10, 1998, by and among WFC, Norwest and WFC Holding Corporation (the "Merger Agreement"). Following the Merger, Norwest will change its name to "Wells Fargo & Company". In connection with the consummation of the Merger, Purchaser desires to acquire from Seller, and Seller desires to transfer to Purchaser, certain banking operations in the State of Nevada, in accordance with and subject to the terms and conditions of this Agreement. Purchaser understands and acknowledges that if the P&A Transaction (as defined below) shall not be consummated on or before the one hundred eightieth (180th) day following the Merger, such banking operations will be transferred to an independent trustee for disposition. D. Continuation of Service. Purchaser and Seller each intend to continue providing retail and business banking services in the geographic regions served by the Branches (as defined below) to be acquired by Purchaser under this Agreement. NOW, THEREFORE, in consideration of the premises and the mutual promises and obligations set forth herein, the parties agree as follows: ARTICLE 1 CERTAIN DEFINITIONS 1.1 Certain Definitions. The terms set forth below are used in this Agreement with the following meanings: "Accrued Interest" means, as of any date, (a) with respect to a Deposit, interest which is accured on such Deposit to but excluding such date and not yet posted to the relevant deposit account and (b) with respect to a Loan, interest which is accrued on such Loan to but excluding such date and not yet paid. "Accrued Liabilities" has the meaning set forth in Section 2.2(a). "ACH Direct Deposit Cut-Off Date" has the meaning set forth in Section 4.3. "Adjusted Payment Amount" has the meaning set forth in Section 3.3. "Adjustment Date" has the meaning set forth in Section 3.3. "Affiliate" means, with respect to any person, any other person directly or indirectly controlling, controlled by or under common control with such person. As used in this definition, the term "person" shall be broadly interpreted to include, without limitation, any corporation, company, partnership and individual or group. "Agreement" means this Purchase and Assumption Agreement, including all schedules, exhibits and addenda, each as amended from time to time in accordance with Section 13.8(b). "Asbestos Hazard" means the presence of asbestos in a parcel of Owned Real Property or the improvements thereon as of the date hereof which, under applicable laws, must be immediately remediated in order to allow continuation of the current operation of the Branch within such Owned Real Property using the current improvements thereon. Assets" has the meaning set forth in Section 2.1(a). "Assignment and Assumption Agreement" has the meaning set forth in Section 3.6(c). "Branch Employees" means the employees of the Seller working at the Branches at the Closing Date (including, without limitation, those employees who on the Closing Date are on family and medical leave, military leave or personal, short-term disability or pregnancy leave and who are eligible to return to work under Seller's policies), subject to any transfers permitted pursuant to Section 7.1 and replacement in the ordinary course of business of employees who may leave Seller's employ between the date hereof and the Closing Date. "Branch Leases" means the leases under which Seller leases land and/or buildings used as Branches, including without limitation ground leases. 2 "Branches" means each of the banking offices of Seller at the locations identified on Schedule 1.1(b) hereto. "Burdensome Condition" has the meaning set forth in Section 9.1(a). "Business Day" means a day on which banks are generally open for business in Nevada and which is not a Saturday or Sunday. "Cash on Hand" means, as of any date, all petty cash, vault cash, teller cash, ATM cash, prepaid postage and cash equivalents held at a Branch. "Closing" and "Closing Date" refer to the closing of the P&A Transaction, which to be held at such time and date as provided in Article 3 hereof. "Code" means the Internal Revenue Code of 1986, as amended. "Deposit-Related Loans" means all loans secured by a Deposit as of the close of business on the Closing Date that are linked to an open account and are not sixty (60) or more days delinquent as of the Closing Date. "Deposit(s)" means deposit liabilities with respect to deposit accounts booked by Seller at the Branches, as of the close of business of the day prior to the Closing Date, which constitute "deposits" for purposes of the Federal Deposit Insurance Act, 12 U.S.C. 1813, including collected and uncollected deposits and Accrued Interest, but excluding (a) deposit liabilities with respect to accounts booked by Seller at any Branch and under or pursuant to any judgment, decree or order of any court; (b) deposit liabilities with respect to accounts registered in the name of a trust for which Seller serves as trustee (other than IRA and Keogh Account deposit liabilities), (c) deposit liabilities with respect to accounts booked by Seller at any Branch for which Seller serves as guardian or custodian (other than IRA and Keogh Account deposit liabilities); (d) Excluded IRA/Keogh Account Deposits, and (e) other deposit liabilities, if any, designated as "Excluded Deposits" on Schedule 1.1(d) as updated thirty (30) days after the date hereof by agreement between Seller and Purchaser. "Draft Closing Statement" means a draft closing statement, prepared by Seller, as of the close of business of the third (3rd) business day preceding the Closing Date setting forth an estimated calculation of both the Purchase Price and the Estimated Payment Amount. "Encumbrances" means all mortgages, claims, charges, liens, encumbrances, easements, limitations, restrictions, commitments and security interests, except for statutory liens securing tax and/or other payments not yet due, liens incurred in the ordinary course of business, including without limitation liens in favor of mechanics or materialmen, and such other liens, charges, security 3 interests or encumbrances as do not materially detract from the value or materially and adversely affect the use of the properties or assets subject thereto or affected thereby or which otherwise do not materially impair the value of or business operations at such properties and except for obligations pursuant to applicable escheat and unclaimed property laws relating to the Escheat Deposits. "Environmental Consultant" has the meaning specified in Section 10.1(b). "Environmental Hazard" means the presence of any Hazardous Substance in violation of, and reasonably likely to require material remediation costs under, applicable Environmental Laws; provided, however, that the definition of Environmental Hazard shall not include asbestos and asbestos-containing materials. "Environmental Law" means any Federal or state law, statute, rule, regulation, code, order, judgment, decree, injunction or agreement with any Federal or state governmental authority, (a) relating to the protection, preservation or restoration of the environment (including, without limitation, air, water vapor, surface water, groundwater, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource) or to human health or safety or (b) the exposure to, or the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of hazardous substances, in each case as amended and now in effect. Environmental Laws include, without limitation, the Clean Air Act (42 USC 7401 et seq.); the Comprehensive Environmental Response Compensation and Liability Act (42 USC 9601 et seq.); the Resource Conservation and Recovery Act (42 USC 96901 et seq.); the Federal Water Pollution Control Act (33 USC 1251 et seq.); and the Occupational Safety and Health Act (29 USC 651 et seq.); provided, however, that the definition of "Environmental Law" shall not include any Federal or state law, statute, rule, regulation, code, order, judgment, decree, injunction or agreement with any governmental authority relating to asbestos or asbestos-containing materials. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Escheat Deposits" means, as of any date, Deposits and safe deposit box contents, in each case held on such date at the Branches which become subject to escheat, after the Closing Date and in the calendar year in which the Closing occurs, to any governmental authority pursuant to applicable escheat and unclaimed property laws. "Estimated Payment Amount" has the meaning set forth in Section 3.2(a). "Estimated Purchase Price" means the Purchase Price as set forth on the Draft Closing Statement. 4 "Excluded IRA/Keogh Account Deposits" has the meaning set forth in Schedule 2.4(c). "Excluded Deposits" means, if any, the deposit liabilities set forth in Schedule 1.1(d). "FDIA" means the Federal Deposit Insurance Act, as amended. "FDIC" means the Federal Deposit Insurance Corporation. "Federal Funds Rate" on any day means the per annum rate of interest (rounded upward to the nearest 1/100 of 1%) which is the weighted average of the rates on overnight federal funds transactions arranged on such day or, if such day is not a Business Day, the previous Business Day, by federal funds brokers computed and released by the Federal Reserve Bank of New York (or any successor) in substantially the same manner as such Federal Reserve Bank currently computes and releases the weighted average it refers to as the "Federal Funds Effective Rate" at the date of this Agreement. "Federal Reserve Board" means the Board of Governors of the Federal Reserve System. "FedWire Direct Deposit Cut-off Date" has the meaning set forth in Section 4.3. "Final Closing Statement" means a final closing statement, prepared by Seller, as of the thirtieth (30th) day following the Closing Date setting forth both the Purchase Price and the Adjusted Payment Amount. "Grant Deeds" has the meaning set forth in Section 3.6(a). "Hazardous Substance" means any substance, whether liquid, solid or gas (a) listed, identified or designated as hazardous or toxic to a level which requires remediation under any Environmental Law: (b) which, applying criteria specified in any Environmental Law, is hazardous or toxic; or (c) the use or disposal of which is regulated under Environmental Law; provided, however, that the definition of Hazardous Substance shall not include asbestos and asbestos-containing material. "IRA" means an "individual retirement account" or similar account created by a trust for the exclusive benefit of any individual or his beneficiaries in accordance with the provisions of Section 408 of the Code. "IRS" means the Internal Revenue Service. 5 "Keogh Account" means an account created by a trust for the benefit of employees (some or all of whom are owner-employees) and that complies with the provisions of Section 401 of the Code. "Landlord Consents" has the meaning set forth in Section 3.6(e). "Lease Agreement" means a lease entered into pursuant to Section 10.1(c) upon such specific terms and conditions as contemplated by such Section and such other commercially reasonable terms and conditions as are customary in a "triple net" lease of a bank branch facility. "Lease Assignment" has the meaning set forth in Section 3.6(d). "Liabilities" has the meaning set forth in Section 2.2. "Loans" means, collectively, the Deposit-Related Loans, Mortgage Loans, Overdraft Loans and Other Loans, excluding the interest of any participants in such Loans, as set forth in the list delivered to Purchaser on October 22, 1998 as further described as set forth in Schedule 1.1(e), as updated as of the Closing Date. "Loan Documents" means all documents included in Seller's file or imaging system with respect to a Loan including, without limitation, notes, security agreements, deeds of trust, mortgages, loan agreements, including building and loan agreements, guarantees, sureties and insurance policies (including title insurance policies) and all modifications, waivers and consents relating to any of the foregoing. "Loan Value" means, with respect to a Loan and as of a date, the unpaid principal balance of any such loan plus Accrued Interest thereon, net of the interest in such loan of any participant, as of such date. "Loss" means the amount of losses, liabilities, damages (including forgiveness or cancellation of obligations) and expenses (including reasonable expenses of investigation and reasonable attorneys' fees and expenses in connection with any action, suit or proceeding) incurred or suffered by the indemnified party or its Affiliates in connection with the matters described in Section 12.1, less the amount of the economic benefit (if any) to the indemnified party or its Affiliates occurring or reasonably anticipated to occur in connection with any such damage, loss, liability or expense (including Tax benefits obtainable under applicable law, amounts recovered under insurance policies net of deductibles, recovery by setoffs or counterclaims, and other economic benefits). "Material Adverse Effect" means (a) with respect to Seller, a material adverse effect on the business or direct economic results of operations of the 6 Branches, taken as a whole, or on the ability of Seller to timely consummate the P&A Transaction as contemplated by this Agreement, and (b) with respect to Purchaser, a material adverse effect on the business or operations of Purchaser or on the ability of Purchaser to perform any of its financial or other obligations under this Agreement, including the ability of Purchaser to timely consummate the P&A Transaction contemplated by this Agreement. In determining whether a Material Adverse Effect has occurred, the effect of any change in Federal or state banking laws or regulations, any change in GAAP or regulatory accounting principles, any adverse change in general economic conditions, including, without limitation, the interest rate environment, or in the depository institution industry generally shall be excluded. "Merger Approvals" means, collectively, all regulatory and stockholder approvals, authorizations, consents and waivers required to permit consummation of the Merger. "Mortgage" means a mortgage securing a Mortgage Loan. "Mortgagor" means a borrower under a Mortgage Loan. "Mortgage Loan" means a loan that is 100% owned by Seller and secured by a first mortgage on 1-4 family residential real property. "Mortgage Note" means the note evidencing the Mortgage Loan. "OCC" means the Office of the Comptroller of the Currency. "Order" has the meaning set forth in Section 9.1(b). "Original Purchaser Plans" has the meaning set forth in Section 12.1(a). "Other Assets" has the meaning set forth in Section 2.1(a). "Other Loans" means the loans to the borrowers described on Schedule 1.1(e) to be attached hereto (including loan commitments referred to thereon). "Overdraft Loans" means unsecured overdraft loans, including negotiable order of withdrawal line of credit accounts, relating to the Deposits, as of the close of business on the Closing Date, plus accrued interest, which do not exceed the applicable credit limit and are linked to any open account and are not sixty (60) or more days delinquent as of the Closing Date. "Owned Real Property" means Real Property where Seller owns both the real property and improvements thereon that are used for Branches. 7 "P&A Transaction" means the purchase and sale of Assets and the assumption of Liabilities described in Sections 2.1 and 2.2 "Personal Property" means all of the personal property of Seller located in the Branches consisting of the trade fixtures, shelving, furniture, on-premises ATMs, equipment (other than (a) automated teller and platform equipment, (b) telephone equipment, and (c) Seller's training equipment), security systems, safe deposit boxes (exclusive of contents), vaults, sign structures (exclusive of signage containing any trade name, trademark or service mark, if any, of Seller, Norwest, WFC, or any of their respective Affiliates) and supplies excluding any items consumed or disposed of, but including new items acquired or obtained, in the ordinary course of the operation of the Branches through the Closing Date. If, prior to the Closing Date, an item of Personal Property is stolen, destroyed or otherwise lost, such item shall be excluded from the P&A Transaction, and the term "Personal Property" as used herein shall exclude such item. If, prior to the Closing Date, an item of Personal Property is damaged by fire or other casualty, such item, if reasonably repairable, shall be sold to Purchaser (in accordance with the provisions hereof) and the insurance proceeds relating to such item shall be assigned to Purchaser, it being understood that if such item is not reasonably repairable or is underinsured or uninsured, it shall be excluded from the P&A Transaction. Personal Property does not include any personal property or equipment subject to a Personal Property Lease. "Personal Property Leases" means the leases under which Seller leases certain Personal Property in the Branches. Seller shall cancel all such Personal Property Leases as of the Closing. "Purchase Price" has the meaning set forth in Section 2.3. "Real Property" means the parcels of real property on which the Branches listed on Schedule 1.1(b) are located, including any improvements thereon, which Schedule indicates whether or not such real property is Owned Real Property. "Records" means all records and original documents, or where reasonable and appropriate copies thereof, in Seller's possession that pertain to and are utilized by Seller to administer, reflect, monitor, evidence or record information respecting the business or conduct of the Branches (including transaction tickets through the Closing Date and all records for closed accounts located in Branches and excluding any other transaction tickets and records for closed accounts) and all such records and original documents, or where reasonable and appropriate copies thereof, regarding the Assets, or the Deposits, including all such records maintained on electronic or magnetic media in the electronic data base system of Seller reasonably accessible by Branch, or to comply with the applicable laws and governmental regulations to which the Deposits are subject, including but not limited to applicable unclaimed property and escheat laws. The parties understand and agree that it shall be reasonable and appropriate to provide copies 8 of all Records except notes and deeds of trust, which shall be provided in original or in whatever other form or medium then maintained by Seller, subject to the provisions relating to lost note affidavits in Sections 5.10. "Regulatory Approvals" means all approvals, authorizations, waivers or consents of or notices to any governmental agencies or authorities required for or in connection with consummation of the P&A Transaction, including the following: (i) approvals under Section 18(c) and 18(d) of the FDIA and, if applicable, under Section 10(e) of the Home Owners' Loan Act; (ii) any approval required under Nevada law; and (iii) expiration of the waiting period provided for in Section 18(c) of the FDIA. "Safe Deposit Agreements" means the agreements relating to safe deposit boxes located in the Branches. "Seller's knowledge" or other similar phrases means information that is actually known to any officer of Seller who holds the title of Senior Vice President or above and has responsibility with respect to management of operations conducted at the Branches. "Tax Returns" means any return or other report required to be filed with respect to any Tax, including declaration of estimated tax and information returns. "Taxes" means any federal, state, local, or foreign taxes, including but not limited to taxes on or measured by income, estimated income, franchise, capital stock, employee's withholding, non-resident alien withholding, backup withholding, social security, occupation, unemployment, disability, value added taxes, taxes on services, real property, personal property, sales, use, excise, transfer, gross receipts, inventory and merchandise, business privilege, and other taxes or governmental fees or charges or amounts required to be withheld and paid over to any government in respect of any tax or governmental fee or charge, including any interest, penalties, or additions to tax on the foregoing whether or not disputed. "Tenant Leases" means leases or subleases between Seller and tenants, if any, listed on Schedule 5.4. "Title Commitment" has the meaning set forth in Section 3.11. "Title Company" has the meaning set forth in Section 3.11. "Title Policy" has the meaning set forth in Section 3.11. "Transaction Account" means any account at a Branch in respect of which deposits therein are withdrawable in practice upon demand or upon which third 9 party drafts may be drawn by the depositor, including checking accounts, negotiable order of withdrawal accounts and money market deposit accounts. "Transferred Employees" means Employees who accept offers of employment from Purchaser or an Affiliate of Purchaser as contemplated in Section 8.7. 1.2 Accounting Terms. All accounting terms not otherwise defined herein shall have the respective meanings assigned to them in accordance with consistently applied generally accepted accounting principles as in effect from time to time in the United States of America ("GAAP"). 1.3 Interpretation. All references in this Agreement to Articles or Sections are references to Articles or Sections of this Agreement, unless some other reference is clearly indicated. The rule of construction against the draftsman shall not be applied in interpreting and construing this Agreement. ARTICLE 2 THE P&A TRANSACTION 2.1 Purchase and Sale of Assets. (a) Subject to the terms and conditions set forth in this Agreement, at the Closing, Seller shall grant, sell, convey, assign, transfer and deliver to Purchaser, and Purchaser shall purchase and accept from Seller, all of Seller's right, title and interest, as of the Closing Date, in and to the following (collectively, the "Assets"): (i) Cash on Hand; (ii) the Owned Real Property; (iii) the Personal Property; (iv) the Loans including Accrued Interest, and servicing rights related thereto pursuant to Section 2.5; (v) the Branch Leases and Tenant Leases; (vi) the Safe Deposit Agreements; (vii) Other Assets as described in Schedule 2.1(a)(vii); and (viii) the Records. 10 (b) Purchaser understands and agrees that it is purchasing only the Assets (and assuming only the Liabilities) specified in this Agreement and, except as may be expressly provided for in this Agreement, Purchaser has no interest in or right to any other business relationship which Seller may have with any customer of the Branches, including, without limitation: (i) any deposit account or other service of Seller at any other office of Seller which may be linked to the Deposits; (ii) any deposit account which sweeps from the Branch to a third party; (iii) any merchant card banking business or any deposit account associated with any merchant card relationship; (iv) any cash management service (e.g., sweep accounts, cash concentrator accounts, controlled disbursement accounts) which Seller may provide to any customer of the Branches, and (v) any business payroll processing service or any deposit account associated with any business payroll relationship. No credit card relationships are being sold. No right to the use of any sign, trade name, trademark or service mark, if any, of Seller, Norwest, WFC, or any of their respective Affiliates, is being sold. 2.2 Assumption of Liabilities. (a) Subject to the terms and conditions set forth in this Agreement, at the Closing, Purchaser shall assume, pay, perform and discharge all duties, responsibilities, obligations or liabilities of Seller (whether accrued, contingent or otherwise) to be discharged, performed, satisfied or paid on or after the Closing Date, with respect to the following (collectively, the "Liabilities"): (i) the Deposits together with Accrued Interest thereon, including IRA and Keogh Accounts to the extent contemplated by Section 2.4; (ii) the Branch Leases and Tenant Leases; (iii) the Safe Deposit Agreements; (iv) the Loans, and the servicing of the Loans pursuant to Section 2.5; and (v) the Accrued Liabilities, if any, described in Schedule 2.2(a)(v). (b) Notwithstanding anything to the contrary in this Agreement, Purchaser shall not assume or be bound by any duties, responsibilities, obligations or liabilities of Seller, or of any of Seller's Affiliates, of any kind or nature, known, unknown, contingent or otherwise, other than the Liabilities. 2.3 Purchase Price. The purchase price ("Purchase Price") for the Assets shall be the sum of: (a) An amount equal to 9.0% of the balance (including Accrued Interest) of the Deposits on the day prior to the Closing Date; (b) The aggregate amount of Cash on Hand as of the Closing Date; 11 (c) The aggregate net book value of all the Assets, other than Cash on Hand and the Loans, as reflected on the books of Seller as of the close of business of the month-end day most recently preceding the Closing Date, excluding the net book value of any Owned Real Property leased pursuant to Section 10.1(c); and (d) The aggregate Loan Value of the Loans as of the close of business of the day prior to the Closing Date. 2.4 Assumption of IRA and Keogh Account Deposits. (a) With respect to Deposits in IRAs, Seller will use reasonable efforts and will cooperate with Purchaser in taking any action reasonably necessary to accomplish either the appointment of Purchaser as successor custodian or the delegation to Purchaser (or to an Affiliate of Purchaser) of Seller's authority and responsibility as custodian of all such IRA deposits except self-directed IRA deposits, including, but not limited to, sending to the depositors thereof appropriate notices, cooperating with Purchaser (or such Affiliate) in soliciting consents from such depositors, and filing any appropriate applications with applicable regulatory authorities. If any such delegation is made to Purchaser (or such Affiliate), Purchaser (or such Affiliate) will perform all of the duties so delegated and comply with the terms of Seller's agreement with the depositor of the IRA deposits affected thereby. (b) With respect to Deposits in Keogh Accounts, Seller shall cooperate with Purchaser to invite depositors thereof to direct a transfer of each such depositor's Keogh Account and the related Deposits to Purchaser (or an Affiliate of Purchaser), as trustee thereof, and to adopt Purchaser's (or such Affiliate's) form of Keogh Master Plan as a successor to that of Seller. Purchaser (or such Affiliate) will assume no Keogh Accounts unless Purchaser (or such Affiliate) has received the documents necessary for such assumption at or before the Closing. With respect to any owner of a Keogh Account who does not adopt Purchaser's (or such Affiliate's) form of Keogh Master Plan, Seller will use reasonable efforts in order to enable Purchaser (or such Affiliate) to retain such Keogh Accounts at the Branches. (c) If, notwithstanding the foregoing, as of the Closing Date, Purchaser shall be unable to retain deposit liabilities in respect of an IRA or Keogh Account, such deposit liabilities shall be excluded from Deposits for purposes of this Agreement and shall constitute "Excluded IRA/Keogh Account Deposits." 2.5 Sale and Transfer of Servicing and Escrows. (a) The Loans shall be sold on a servicing-released basis. As of the Closing Date, all rights, obligations, liabilities and responsibilities with respect to the servicing of the Loans after the Closing Date will be assumed by Purchaser. Seller shall be discharged and indemnified by Purchaser from all liability with respect to servicing of the Loans after the Closing Date and Purchaser shall be discharged and indemnified by Seller from all liability with respect to servicing of the Loans on or prior to the Closing Date. To the extent permitted under the applicable documents, Seller shall assign to Purchaser Seller's rights under any participation or servicing agreement relating to the Loans. 12 (b) As of the Closing Date, Purchaser will assume, and agrees to undertake and discharge, any and all obligations of the holder and servicer of Mortgage Loans as such obligations may relate to the escrow, maintenance of escrow and payments from escrow of moneys paid by or on account of the applicable Mortgagor. On or before the fifth (5th) Business Day after the Closing Date, Seller shall remit by wire transfer of immediately available funds to Purchaser all funds held in escrow that were collected and received pursuant to a Mortgage Loan for the payment of taxes, assessments, hazard insurance premiums, primary mortgage insurance policy premiums, if applicable, or comparable items prior to the Closing Date plus any Accrued Interest. Seller makes no warranties or representations of any kind or nature as to the sufficiency of such sum to discharge any obligations with respect to Mortgage Loans, or as to the accuracy of such sum. ARTICLE 3 CLOSING PROCEDURES; ADJUSTMENTS 3.1 Closing. (a) The Closing will be held at the offices of Seller at 3300 West Sahara Avenue, Las Vegas, Nevada or such other place as may be agreed to by the parties. (b) The Closing Date shall be April 16, 1999, or, if the Closing cannot occur on such date, on a date and time as soon thereafter as practicable after receipt of all Regulatory Approvals. Unless the parties agree pursuant to Section 4.11(a) that the conversion of the data processing with respect to the Branches and the Assets and Liabilities will be performed on a date other than the Closing Date, the Closing Date shall be a Friday. 3.2 Payment at Closing. (a) At Closing, Seller shall pay to Purchaser the amount by which the aggregate balance (including Accrued Interest) of the Deposits and Accrued Liabilities exceed the Estimated Purchase Price (the "Estimated Payment Amount") or, Purchaser shall pay to Seller the amount by which the Estimated Purchase Price exceeds the aggregate balance (including Accrued Interest) of the Deposits and Accrued Liabilities, each as set forth on the Draft Closing Statement as agreed upon between Seller and Purchaser. In addition, Purchaser shall pay to Seller any sales tax due. (b) All payments to be made hereunder by one party to the other shall be made by wire transfer of immediately available funds (in all cases to an account specified in writing by Seller or Purchaser, as the case may be, to the other not later than the third (3rd) Business Day prior to the Closing Date) on or before 11:00 a.m. local time on the date of payment. If any payment to be made hereunder on the Closing Date (or any other date) shall not be made on or before 11:00 a.m. local time on such date, and the amount thereof shall have been agreed to in writing by the parties at the Closing Date (or such 13 other payment date), the party responsible therefor may make such payment on or before 11:00 a.m. local time on the next Business Day together with interest thereon at the Federal Funds Rate applicable from the Closing Date (or such other payment date) to the date such payment is actually made, which in no event shall be later than the fifth (5th) Business Day after such payment was due. (c) If any instrument of transfer contemplated herein shall be recorded in any public record before the Closing and thereafter the Closing is not completed, then at the request of such transferring party the other party will deliver (or execute and deliver) such instruments and take such other action as such transferring party shall reasonably request to revoke such purported transfer. 3.3 Adjustment of Purchase Price. (a) On or before 12:00 noon on the thirtieth (30th) day following the Closing Date (the "Adjustment Date"), Seller shall deliver to the Purchaser the Final Closing Statement and shall make available such work papers, schedules and other supporting data as may be reasonably requested by Purchaser to enable it to verify the amounts set forth in the Final Closing Statement. The Final Closing Statement shall also set forth the amount (the "Adjusted Payment Amount") by which the aggregate amount of Deposits (including Accrued Interest) and Accrued Liabilities shown on the Final Closing Statement differs from the Estimated Purchase Price. (b) The determination of the Adjusted Payment Amount shall be final and binding on the parties hereto unless within thirty (30) days after receipt by Purchaser of the Final Closing Statement, Purchaser shall notify the Seller in writing of its disagreement with any amount included therein or omitted therefrom, in which case, if the parties are unable to resolve the disputed items within ten (10) Business Days of the receipt by Seller of notice of such disagreement, such items shall be determined by an independent accounting firm selected by mutual agreement between Seller and Purchaser; provided, however, that in the event the fees of such firm as estimated by such firm would exceed fifty percent (50%) of the net amount in dispute, the parties agree that such firm will not be engaged by either party and that such net amount in dispute will be equally apportioned between Seller and Purchaser. Such accounting firm shall be instructed to resolve the disputed items within ten (10) Business Days of engagement, to the extent reasonably practicable. The determination of such accounting firm shall be final and binding on the parties hereto. The fees of any such accounting firm shall be divided equally between Seller and Purchaser. (c) On or before 12:00 noon on the tenth (10th) Business Day after the Adjustment Date or, in the case of a dispute, the date of the resolution of the dispute pursuant to subsection 3.3(b) above, Seller shall pay to Purchaser an amount equal to the amount by which the Adjusted Payment Amount exceeds the Estimated Payment Amount, plus interest on such excess amount from the Closing Date to but excluding the payment date, at the Federal Funds Rate or, if the Estimated Payment Amount exceeds the Adjusted Payment Amount, Purchaser shall pay to Seller an amount equal to such excess, plus interest on such excess amount from the Closing Date to but excluding the 14 payment date, at the Federal Funds Rate. Any payments required by Section 3.5 shall be made contemporaneously with the foregoing payment. 3.4 [intentionally omitted] 3.5 Proration; Other Closing Date Adjustments. (a) Except as otherwise specifically provided in this Agreement, it is the intention of the parties that Seller will operate the Branches for its own account until 11:59 p.m., Nevada time, on the Closing Date, and that Purchaser shall operate the Branches, hold the Assets and assume the Liabilities for its own account after the Closing Date. Thus, except as otherwise specifically provided in this Agreement, items of income and expense, as defined herein, shall be prorated as of 11:59 p.m., Nevada time, on the Closing Date, and settled between Seller and Purchaser on the Closing Date, whether or not such adjustment would normally be made as of such time. Items of proration will be handled at Closing as an adjustment to the Purchase Price unless otherwise agreed by the parties hereto. (b) For purposes of this Agreement, items of proration and other adjustments shall include, without limitation: (i) rental payments and security deposits under the Branch Leases and the Tenant Leases; (ii) personal and real property taxes and assessments; (iii) FDIC deposit insurance assessments; (iv) wages, salaries and employee benefits and expenses; (v) trustee or custodian fees on IRA and Keogh Accounts; (vi) adjustments reflecting exclusions from the Personal Property as provided for in the definition thereof; (vii) other prepaid expenses and items and accrued but unpaid liabilities, as of the close of business on the day prior to the Closing Date. Safe deposit rental payments previously received by Seller shall not be prorated. 3.6 Seller Deliveries. At the Closing, Seller shall deliver to Purchaser: (a) Deeds in substantially the form of Schedule 3.6(a)(except as otherwise required by local state law), pursuant to which the Owned Real Property shall be transferred to Purchaser "AS IS", "WHERE IS" and with all faults (the "Grant Deeds"); (b) A bill of sale in substantially the form of Schedule 3.6(b)(except as otherwise required by local state law), pursuant to which the Personal Property shall be transferred to Purchaser "AS IS", "WHERE IS" and with all faults; (c) An assignment and assumption agreement in substantially the form of Schedule 3.6(c)(except as otherwise required by local state law), with respect to the Liabilities (the "Assignment and Assumption Agreement"); (d) Lease assignment and assumption agreements in substantially the form of Schedule 3.6(d)(except as otherwise required by local state law), with respect to each of the Branch Leases (the "Lease Assignments"); (e) Subject to the provisions of Section 7.4, such consents of landlords as shall be required pursuant to the terms of such Branch Leases, to the assignment of the 15 Branch Leases to Purchaser in substantially the form of Schedule 3.6(e)(except as otherwise required by local state law), (the "Landlord Consents"); (f) Subject to the provisions of Section 7.4, such consents as shall be required pursuant to the terms of such Tenant Leases in connection with the assignment thereof to Purchaser; (g) An Officer's Certificate in substantially the form of Schedule 3.6(g); (h) [intentionally left blank] (i) The Draft Closing Statement; (j) Seller's resignation as trustee or custodian, as applicable, with respect to each IRA or Keogh Account included in the Deposits and designation of Purchaser as successor trustee or custodian with respect thereto, as contemplated by Section 2.4; (k) All documentation required to exempt Seller from the withholding requirement of Section 1445 of the Code, if applicable, consisting of an affidavit from Seller to Purchaser upon penalty of perjury that Seller is not a foreign person and providing Seller's U.S. taxpayer identification number; and (l) Such other documents as the parties determine are reasonably necessary to consummate the P&A Transaction as contemplated hereby. 3.7 Purchaser Deliveries. At the Closing, Purchaser shall deliver to Seller: (a) The Assignment and Assumption Agreement; (b) Purchaser's acceptance of its appointment as successor trustee or custodian, as applicable, of the IRA and Keogh Accounts included in the Deposits and assumption of the fiduciary obligations of the trustee or custodian with respect thereto, as contemplated by Section 2.4; (c) The Lease Assignments and, as contemplated by Section 7.4, such other instruments and documents as any landlord under a Branch Lease may reasonably require as necessary or desirable for providing for the assumption by Purchaser of a Branch Lease, each such instrument and document in form and substance reasonably satisfactory to the parties and dated as of the Closing Date; (d) An Officer's Certificate in substantially the form of Schedule 3.7(d); (e) [intentionally left blank] (f) Such other documents as the parties determine are reasonably necessary to consummate the P&A Transaction as contemplated hereby. 16 3.8 Delivery of the Loan Documents. (a) As soon as reasonably practicable but not later than thirty (30) days after the Closing Date, Seller shall deliver to Purchaser or its designee the Loan Documents actually in the possession of Seller, in whatever other form or medium then maintained by Seller. Seller makes no representation or warranty to Purchaser regarding the condition of the Loan Documents or any single document included therein, or Seller's interest in any collateral securing any Loan, except as specifically set forth herein. Seller shall have no responsibility or liability for the Loan Documents from and after the time such files are delivered by Seller to an independent third party for shipment to Purchaser, the cost of which shall be the sole responsibility of Purchaser. Seller agrees that the Loan Documents shall include either an original note or a lost note affidavit for each Loan. (b) Promptly upon execution of this Agreement, Purchaser shall provide Seller with the exact name to which the Loans are to be endorsed, or whether any Loans should be endorsed in blank. Seller will complete such endorsements and deliver the Loan Documents within ninety (90) days after Closing: provided, however, with respect to specific Loan Documents, Seller may require additional time to effectively transfer title thereto and Purchaser shall not hold Seller liable for any reasonable delays in the delivery of such Loan Documents. 3.9 Collateral Assignments and Filing. Seller shall take all such reasonable actions as requested by Purchaser to assist Purchaser in obtaining the valid perfection of a lien or security interest in the collateral, if any, securing each Loan sold on the Closing Date in favor of Purchaser or its designated assignee as secured party. Any such action shall be at the sole expense of Purchaser, and Purchaser shall reimburse Seller for all reasonable costs incurred in connection therewith. 3.10 Owned Real Property Filings. On or prior to the Closing Date, Seller shall file or record, or cause to be filed or recorded, any and all documents necessary in order that the legal and equitable title to Owned Real Property shall be duly vested in Purchaser. Any expenses or documentary transfer taxes with respect to such filings and all escrow closing costs shall be shared equally by the parties. 3.11 Title Policies. (a) Within ten (10) days after execution of this Agreement, Seller, at Seller's expense, shall provide Purchaser with a preliminary title commitment (the "Title Commitment") to Purchaser's reasonable satisfaction for all the Owned Real Property issued by ATI Title Company (the "Title Company"). (b) Purchaser shall, at its own expense, obtain as of the Closing Date an ALTA (standard coverage) title insurance policy from the Title Company (a "Title Policy") with respect to all the Owned Real Property. Seller will cooperate with Purchaser in assisting Purchaser to obtain (at Purchaser's expense) an ALTA extended coverage owner's policy. 17 ARTICLE 4 TRANSITIONAL MATTERS 4.1 Transitional Arrangements. Seller and Purchaser agree to cooperate and to proceed as follows to effect the transfer of account record responsibility for the Branches: (a) Not later than thirty (30) days after the signing of this Agreement, Seller will meet with Purchaser to investigate, confirm and agree upon mutually acceptable transaction settlement procedures and specifications, files, procedures and schedules, for the transfer of account record responsibility; provided, however, that Seller is not obligated under this Agreement to provide Purchaser any information regarding Seller's relationship with the customers outside of the Branch (e.g., other customer products, householding information). (b) Not later than forty-five (45) days after the date of this Agreement, Seller shall deliver to Purchaser the specifications and conversion sample files. (c) From time to time prior to the Closing, after Purchaser has tested and confirmed the conversion sample files, Purchaser may request and Seller shall provide reasonable additional file-related information, including without limitation, complete name and address, account masterfile, ATM account number information, applicable transaction and stop/hold/caution information, account-to-account relationship information and any other related information with respect to the Deposits and the Other Loans. (d) Upon the reasonable request of Purchaser, Seller will cooperate with Purchaser and will make available from time to time prior to the Closing Date, at Purchaser's expense (at $75 per hour), a reasonable number of technical personnel for consultation with Purchaser concerning matters other than the matters referred to in this Article 4. 4.2 Customers. (a) Not later than thirty (30) days prior to the Closing Date (unless earlier required by law), (i) Seller will notify the holders of Deposits to be transferred on the Closing Date that, subject to the terms and conditions of this Agreement, Purchaser will be assuming liability for such Deposits; (ii) each of Seller and Purchaser shall provide, or join in providing where appropriate, all notices to customers of the Branches and other persons that Seller or Purchaser, as the case may be, is required to give under applicable law or the terms of any other agreement between Seller and any customer in connection with the transactions contemplated hereby; and 18 (iii) following or concurrently with the notice referred to in clause (i) above, Purchaser may communicate with and deliver information to depositors and other customers of the Branches concerning the P&A Transaction and the business of Purchaser. A party proposing to send or publish any notice or communication pursuant to any paragraph of this Section 4.2 shall furnish to the other party a copy of the proposed form of such notice or communication at least ten (10) days in advance of the proposed date of the first mailing, posting, or other dissemination thereof to customers, and shall not unreasonably refuse to amend such notice to incorporate any changes that the other such party proposes as necessary to comply with applicable law. All costs and expenses of any notice or communication sent or published by Purchaser or Seller shall be the responsibility of the party sending such notice or communication and all costs and expenses of any joint notice or communication shall be shared equally by Seller and Purchaser. As soon as reasonably practicable and in any event within forty-five (45) days of the date hereof, Seller shall provide to Purchaser a report of the names and addresses of the owners of the Deposits, the borrowers on the Loans and the lessees of the safe deposit boxes in connection with the mailing of such materials, which report shall be current as of the date hereof. (b) Following the giving of any notice described in paragraph (a) above, Purchaser and Seller shall deliver to each new customer at any of the Branches such notice or notices as may be reasonably necessary to notify such new customers of Purchaser's pending assumption of liability for the Deposits and to comply with applicable law. As soon as practicable after execution of this Agreement, Seller will provide Purchaser with account information, including complete mailing addresses for each of the depositors of the Deposits, as of a recent date, and upon reasonable request shall provide an updated version of such records; provided, however, that Seller shall not be obligated to provide such updated records more than twice. (c) Notwithstanding the provisions of Section 7.6, neither Purchaser nor Seller shall object to the use, by depositors of the Deposits, of payment orders issued to or ordered by such depositors on or prior to the Closing Date, which payment orders bear the name, or any logo, trademark, service mark or the proprietary mark of Seller, Norwest, WFC or any of their respective Affiliates. 4.3 Direct Deposits. Seller will use all reasonable efforts to transfer to Purchaser on the Closing Date all of those automated clearing house ("ACH") and FedWire direct deposit arrangements related (by agreement or other standing arrangement) to Deposits. For a period of three (3) months following the Closing, in the case of ACH direct deposits to accounts containing Deposits (the final Business Day of such period being the "ACH Direct Deposit Cut-Off Date"), Seller shall transfer to Purchaser all received ACH Direct Deposits at 9:00 a.m. Central Standard Time each Business Day. Such transfers shall contain Direct Deposits effective for that Business Day only. On each Business Day, for a period of thirty (30) days following the Closing Date (the final Business Day of such period being the "FedWire Direct Deposit Cut-Off 19 Date"), FedWires received by Seller shall be returned (as soon as is possible after receipt) to the originator with an indication of Purchaser's correct Wire Room contact information and an instruction that such wire should be sent to Purchaser. Compensation for ACH direct deposits or FedWire direct deposits not forwarded to Purchaser on the same Business Day as that on which Seller has received such deposits will be handled in accordance with the rules established by the United States Council on International Banking. After the respective ACH Direct Deposit Cut-Off Date or FedWire Direct Deposit Cut-Off Date, Seller may discontinue accepting and forwarding ACH and FedWire entries and funds and return such direct deposits to the originators marked "Account Closed." Seller shall not be liable for any overdrafts that may thereby be created. Purchaser and Seller shall agree on a reasonable period of time prior to the Closing during which Seller will no longer be obligated to accept new direct deposit arrangements related to the Branches. At the time of each ACH Direct Deposit Cut-Off Date, Purchaser will provide ACH originators with account numbers relating to the Deposits. 4.4 Direct Debits. As soon as practicable after execution of this Agreement and after the notice provided in Section 4.2(a), Purchaser will send appropriate notice to all customers having accounts constituting Deposits the terms of which provide for direct debit of such accounts by third parties, instructing such customers concerning the transfer of customer direct debit authorizations from Seller to Purchaser. Such notice shall be in a form agreed to by the parties. For a period of three (3) months following the Closing, Seller shall transfer to Purchaser all received direct debits on accounts constituting Deposits at 9:00 a.m. Central Standard Time each Business Day. Such transfers shall contain Direct Debits effective for that Business Day only. Thereafter, Seller may discontinue forwarding such entries and return them to the originators marked "Account Closed." Purchaser and Seller shall agree on a reasonable period of time prior to the Closing during which Seller will no longer be obligated to accept new direct debit arrangements related to the Branches. On the Closing Date, Purchaser will provide ACH originators of such Direct Debits with account numbers relating to the Deposits. 4.5 Escheat Deposits. No currently escheated deposits are being sold. After Closing, Purchaser shall be solely responsible for the proper reporting and transmission to the appropriate governmental entity of Escheat Deposits. 4.6 Maintenance of Records. Through the Closing Date, Seller will maintain the Records relating to the Assets and Liabilities in the same manner and with the same care that the Records have been maintained prior to the execution of this Agreement. Purchaser may, at its own expense, make such copies of and excerpts from the Records as it may deem desirable. All Records, whether held by Purchaser or Seller, shall be maintained for such periods as are required by law, unless the parties shall agree in writing to a longer period. From and after the Closing Date, each of the parties shall permit the other reasonable access to any applicable Records in its possession relating to matters arising on or before the Closing Date and reasonably necessary in connection with any claim, action, litigation or other proceeding involving the party requesting access to such Records or in connection with any legal obligation owed by such party to 20 any present or former depositor or other customer. Each party will notify the other party thirty (30) days prior to destroying any Records. 4.7 Interest Reporting and Withholding. (a) Unless otherwise agreed to by the parties, Seller will report to applicable taxing authorities and holders of Deposits, with respect to the period from January 1 of the year in which the Closing occurs through the Closing Date, all interest (including dividends and other distributions with respect to money market accounts) credited to, withheld from and any early withdrawal penalties imposed upon the Deposits. Purchaser will report to the applicable taxing authorities and holders of Deposits, with respect to all periods from the day after the Closing Date, all such interest credited to, withheld from and any early withdrawal penalties imposed upon the Deposits. Any amounts required by any governmental agencies to be withheld from any of the Deposits through the Closing Date will be withheld by Seller in accordance with applicable law or appropriate notice from any governmental agency and will be remitted by Seller to the appropriate agency on or prior to the applicable due date. Any such withholding required to be made subsequent to the Closing Date will be withheld by Purchaser in accordance with applicable law or appropriate notice from any governmental agency and will be remitted by Purchaser to the appropriate agency on or prior to the applicable due date. (b) Unless otherwise agreed by the parties, Seller shall be responsible for delivering to payees all IRS notices with respect to information reporting and tax identification numbers required to be delivered through the Closing Date with respect to the Deposits, and Purchaser shall be responsible for delivering to payees all such notices required to be delivered following the Closing Date with respect to the Deposits. Purchaser and Seller shall, prior to the Closing Date, consult and Seller shall take reasonable actions as are necessary to permit Purchaser to deliver such IRS notices required to be delivered following the Closing Date. (c) Unless otherwise agreed by the parties, Seller will make all required reports to applicable tax authorities and to obligors on Loans purchased on the Closing Date, with respect to the period from January 1 of the year in which the Closing occurs through the Closing Date, concerning all interest and points received by the Seller. Purchaser will make all required reports to applicable tax authorities and to obligors on Loans purchased on the Closing Date, with respect to all periods from the day after the Closing Date, concerning all such interest and points received. 4.8 Negotiable Instruments. Seller will remove any supply of Seller's money orders, official checks, gift checks, travelers' checks or any other negotiable instruments located at each of the Branches on the Closing Date. 4.9 ATM/Debit Cards; POS Cards. Seller will provide Purchaser with a list of ATM access/debit cards and Point-of-Sale ("POS") cards issued by Seller to depositors of any Deposits, and a record thereof in a format reasonably agreed to by the parties containing all addresses therefor, as soon as practicable and in no event later than forty-five (45) days after execution of this Agreement. At or promptly after the Closing, Seller 21 will provide Purchaser with a revised record through the Closing. In instances where a depositor of a Deposit made an assertion of error regarding an account pursuant to the Electronic Funds Transfer Act and Federal Reserve Board Regulation E, and Seller, prior to the Closing, recredited the disputed amount to the relevant account during the conduct of the error investigation, Purchaser agrees to comply with a written request from Seller to debit such account in a stated amount and remit such amount to Seller, to the extent of the balance of funds available in the accounts . Seller agrees to indemnify Purchaser for any claims or losses that Purchaser may incur as a result of complying with such request from Seller. Seller will not be required to disclose to Purchaser customers' PINs or algorithms or logic used to generate PINs. Purchaser shall reissue ATM access/debit cards to depositors of any Deposits prior to the Closing Date, which cards shall be effective as of the Closing Date. Purchaser and Seller agree to settle any and all ATM transactions and POS transactions effected on or before the Closing Date, but processed after the Closing Date, as soon as practicable. In addition, Purchaser assumes responsibility for and agrees to pay on presentation all POS transactions initiated before or after the Closing with POS cards issued by Seller to access Transaction Accounts. 4.10 Leasing of Personal Property. Seller shall cancel or terminate any Personal Property Lease as of the Closing Date. 4.11 Data Processing Conversion for the Branches and Handling of Certain Items. (a) The conversion of the data processing with respect to the Branches and the Assets and Liabilities will be completed on the Saturday and Sunday following the Closing Date unless otherwise agreed to by the parties. Seller and Purchaser agree to cooperate to facilitate the orderly transfer of data processing information in connection with the P&A Transaction. Within ten (10) days of the date of this Agreement, Purchaser and/or its representatives shall be permitted access (subject to the provisions of section 7.2(a)) to review each Branch for the purpose of installing automated equipment for use by Branch personnel. Following the receipt of all Regulatory Approvals (except for the expiration of statutory waiting periods), Purchaser shall be permitted, at its expense, to install and test communication lines, both internal and external, from each site and prepare for the installation of automated equipment on the Closing Date. (b) As soon as practicable and in no event more than five (5) business days after the Closing Date, Purchaser shall mail to each depositor in respect of a Transaction Account (i) a letter approved by the Seller requesting that such depositor promptly cease writing Seller's drafts against such Transaction Account and (ii) new drafts which such depositor may draw upon Purchaser against such Transaction Accounts. The parties hereto shall use their best efforts to develop procedures which cause Seller's drafts against Transaction Accounts which are received after the Closing Date to be cleared through Purchaser's then-current clearing procedures. During the sixty (60) day period after the Closing Date, if it is not possible to clear Transaction Account drafts through Purchaser's then-current clearing procedures, Seller shall forward to Purchaser as soon as practicable but in no event more than three (3) Business Days after receipt all Transaction Account drafts drawn against Transaction Accounts. Seller shall have no obligation to 22 pay such forwarded Transaction Account drafts. Upon the expiration of such sixty (60) day period, Seller shall cease forwarding drafts against Transaction Accounts. (c) Any items that were credited for deposit to or cashed against a Deposit prior to the Closing and are returned unpaid on or within sixty (60) days after the Closing Date ("Returned Items") will be handled as set forth herein. If Seller's bank account is charged for the Returned Item, Seller shall forward such Returned Item to Purchaser. If upon Purchaser's receipt of such Returned Item there are sufficient funds in the Deposit to which such Returned Item was credited or any other Deposit transferred at the Closing standing in the name of the party liable for such Returned Item, Purchaser will debit any or all of such Deposits an amount equal in the aggregate to the Returned Item, and shall repay that amount to Seller. If there are not sufficient funds in the Deposit because of Purchaser's failure to honor holds placed on such Deposit, Purchaser shall repay the amount of such Returned Item to Seller and Seller shall assign the Returned Item to Purchaser for collection. Any items that were credited for deposit to or cashed against an account at the Branches to be transferred at the Closing prior to the Closing and are returned unpaid more than sixty (60) days after the Closing will be the responsibility of Purchaser. 4.12 Information Regarding Mortgage Loans. Not later than forty-five (45) days after execution of this Agreement, Seller will provide to Purchaser information regarding the Mortgage Loans on a magnetic disk or other media acceptable to the parties, which shall contain the following fields of information: Current Principal Balance; Delinquency Status as of the Run Date; Paid to Date; Current Interest Rate; Total Monthly Payment; Next Interest Rate Change Date; and Next Payment Change Date. 4.13 Employee Training. Seller and Purchaser shall cooperate in order to permit Purchaser to train Seller's employees at the Branches who choose to accept employment with Purchaser, and Seller shall, as scheduled by Purchaser for reasonable periods of time and subject to Seller's reasonable approval, such that Seller's ongoing operations at the Branches shall not be materially disrupted, excuse such employees from their duties at the Branches for the purpose of training and orientation by Purchaser. Purchaser shall pay the full salary or wages of replacements of employees so excused for the periods during which such employees are so excused, where such replacements are reasonably determined by Seller to be needed to maintain ongoing operations at the branches without material disruption. 23 ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF SELLER Seller represents and warrants to Purchaser as follows: 5.1 Corporate Organization and Authority. Seller is a national banking association, duly organized and validly existing under the laws of the United States, and has the requisite power and authority to conduct the business now being conducted at the Branches. Seller has the requisite corporate power and authority and has taken all corporate action necessary in order to execute and deliver this Agreement and to consummate the transactions contemplated hereby. This Agreement is a valid and binding agreement of Seller enforceable in accordance with its terms subject, as to enforcement, to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. 5.2 No Conflicts. The execution, delivery and performance of this Agreement by Seller does not, and will not, (i) violate any provision of its charter or by-laws or (ii) violate or constitute a breach of, or default under, any law, rule, regulation, judgment, decree, ruling or order of any court, government or governmental agency to which Seller is subject or any agreement or instrument of Seller, or to which Seller is subject or by which Seller is otherwise bound, which violation, breach, contravention or default referred to in this clause (ii), individually or in the aggregate, would have a Material Adverse Effect (assuming the receipt of any required consents of lessors under the Branch Leases in respect of the transactions herein contemplated). Seller has all material licenses, franchises, permits, certificates of public convenience, orders and other authorizations of all federal, state and local governments and governmental authorities necessary for the lawful conduct of its business at each of the Branches as now conducted and all such licenses, franchises, permits, certificates of public convenience, orders and other authorizations, are valid and in good standing and, to Seller's knowledge, are not subject to any suspension, modification or revocation or proceedings related thereto. 5.3 Approvals and Consents. Other than Regulatory Approvals or as otherwise disclosed in writing to Purchaser by Seller prior to the date hereof, no notices, reports or other filings are required to be made by Seller with, nor are any consents, registrations, approvals, permits or authorizations required to be obtained by Seller from, any governmental or regulatory authorities of the United States or the several States in connection with the execution and delivery of this Agreement by Seller and the consummation of the transactions contemplated hereby by Seller, the failure to make or obtain any or all of which, individually or in the aggregate, would have a Material Adverse Effect. 5.4 Tenants. Except for the tenants listed on Schedule 5.4, there are no tenants of the Real Property. 24 5.5 Leases. Each Branch Lease and each Personal Property Lease is the valid and binding obligation of Seller, and to Seller's knowledge, of each other party thereto; and there does not exist with respect to Seller's obligations thereunder, or, to Seller's knowledge, with respect to the obligations of the lessor thereof, any material default, or event or condition which constitutes or, after notice or passage of time or both, would constitute a material default on the part of Seller or the lessor under any such Branch Lease or Personal Property Lease. As used in this Section, the term "lessor" includes any sub-lessor of the property to Seller. Each Branch Lease and each material Personal Property Lease is current and all rents, expenses and charges payable by Seller thereunder have been paid or accrued pursuant to the terms thereof (except for any payments not yet delinquent or as to which the obligation to make such payment is being contested in good faith). Accurate copies of each Branch Lease and each material Personal Property Lease have heretofore been made available to Purchaser. 5.6 [intentionally omitted] 5.7 Litigation and Undisclosed Liabilities. Except as set forth in Schedule 5.7, there are no actions, suits or proceedings that have a reasonable likelihood of an adverse determination pending or, to Seller's knowledge, threatened against Seller or any of the Branches, or obligations or liabilities (whether or not accrued, contingent or otherwise) or, to Seller's knowledge, facts or circumstances that could reasonably be expected to result in any claims against or obligations or liabilities of Seller that, individually or in the aggregate, would have a Material Adverse Effect. 5.8 Regulatory Matters. (a) Except as previously disclosed in writing to Purchaser, there are no pending or, to Seller's knowledge, threatened disputes or controversies between Seller and any federal, state or local governmental agency or authority that, individually or in the aggregate, would have a Material Adverse Effect. (b) Neither Seller nor any of its Affiliates has received any indication from any federal or state governmental agency or authority that such agency would oppose or refuse to grant a Regulatory Approval or impose a Burdensome Condition. (c) Seller is not a party to any written order, decree, agreement or memorandum of understanding with, or commitment letter or similar submission to, any federal or state regulatory agency or authority charged with the supervision or regulation of depository institutions, nor has Seller been advised by any such agency or authority that it is contemplating issuing or requesting any such order, decree, agreement, memorandum of understanding, commitment letter or submission, in each case which, individually or in the aggregate, would have a Material Adverse Effect. 5.9 Compliance with Laws. The banking business of the Branches has been conducted in compliance with all federal, state and local laws, regulations and ordinances applicable thereto, except for any failures to comply that would not, individually or in the aggregate, result in a Material Adverse Effect. 25 5.10 Loans. (a) An accurate list of the Loans as of September 30, 1998 is set forth on the list delivered to Purchaser on October 22, 1998. Such list will be updated to include an accurate list of the Loans as of the Closing Date (including the fields set forth on Schedule 1.1(e)) and delivered to Purchaser as soon as is reasonably practicable after the Closing Date. With respect to each Loan (other than Overdraft Loans): (i) Such Loan was solicited, originated and serviced in material compliance with all applicable requirements of federal, state, and local laws and regulations in effect at the time of such solicitation, origination and servicing; and there was no fraud on the part of the Seller or originator with respect to the origination of any Loan; (ii) Each note evidencing a Loan and any related security instrument (including, without limitation, any guaranty or similar instrument) constitutes a valid and legally binding obligation of the obligor thereunder enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfers, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles; (iii) The collateral for each secured Loan is (A) the collateral described in the related Loan Documents and (B) subject to a valid, enforceable and perfected lien; (iv) To Seller's knowledge, no claims or defenses to the enforcement of such Loan have been asserted and Seller is aware of no acts or omissions that would give rise to any claim or right of rescission, setoff, counterclaim or defense by a borrower, obligor, guarantor or any other person obligated to perform under any related Loan Documents; (v) As of the Closing Date, (A) if such Loan is a commercial loan, such loan will have a grade of "pass" or above according to Sellers' internal loan grading system and will be not more than thirty (30) days past due with respect to any payment of principal or interest; (B) if such Loan is a consumer loan, such Loan will be not more than sixty (60) days past due with respect to any payment of principal or interest; (C) if such Loan is a 1-4 unit residential mortgage loan, such Loan will be not more than sixty (60) days past due with respect to any payment of principal or interest and will not be in foreclosure; and (D), to Seller's knowledge, no obligor on such Loan is the subject of any proceeding in bankruptcy. (vi) Such Loan was made substantially in accordance with Seller's standard underwriting and documentation guidelines, which are consistent with prudent and customary industry standards, as in effect at the time of its origination and has been administered substantially in accordance with the Loan Documents and Seller's standard loan servicing procedures, which are consistent with prudent and customary industry standards, as in effect from time to time; 26 (vii) All information provided hereunder and in the magnetic tape delivered to Purchaser pertaining to such Loan is true and correct in all material respects; (viii) Each Loan was made in compliance with all applicable usury laws; (ix) Except as set forth in Schedule 5.10(a)(ix), immediately prior to the Closing the Seller will be the sole owner of each Loan, free and clear of any Encumbrance; and (x) The terms of the notes or the mortgages have not been altered, modified or waived in any material respect, except by a written instrument contained in the Loan Documents. (b) With respect to the Overdraft Loans, each: (i) has been administered in compliance in all material respects with all applicable laws; (ii) is a valid and legally binding obligation of the borrower enforceable against the borrower in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles; and (iii) is not subject to any defense, counterclaim or set-off of any kind. (c) The security interest in the Deposit account securing each Deposit-Related Loan is a legal, valid and binding obligation enforceable against the obligor subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. (d) From the date hereof through the Closing Date, Seller shall have adhered to a policy regarding the extension of terms on consumer loans consistent with past practice. (e) [intentionally omitted] (f) Except for home equity loans, a title insurance policy is in effect for each Loan secured by real property, and Seller is the sole owner of each such loan, except for such participations as are documented in the related Loan documents or other Records. (g) With respect to each Mortgage Loan, the Loan Documents as of the Closing Date will include: 27 (i) The original Mortgage Note, containing all intervening endorsements, if any, evidencing a complete chain of ownership from the originator of such Mortgage Loan to Seller (provided that up to ten percent (10%) of the aggregate principal balance of the Mortgage Loans may consist of lost note affidavits in substantially the form attached hereto as Schedule 5.10(f)(i)), duly endorsed by Seller without recourse in blank or to the order of Purchaser; (ii) The original Mortgage (or copies certified by Seller as being true and correct in those instances where the original is deemed lost) with evidence of recording indicated on such Mortgage, or a copy of such recorded Mortgage certified by the public recording office in those instances where the public recording office retains the original; (iii) An assignment of the Mortgage Loan signed by Seller in blank or to the order of Purchaser in recordable form; (iv) Any intervening assignments of the Mortgage or copies thereof; (v) All modifications to the Mortgage Note or Mortgage or copies thereof; (vi) The title insurance policy or a copy thereof on the related mortgage property; and (vii) Evidence of flood insurance in the event the mortgaged property is located in a federal flood hazard area. (h) Each Mortgage Loan is secured by a valid first lien. (i) Each Mortgage securing a Mortgage Loan requires the Mortgagor thereunder to maintain a fire and other hazard insurance policy covering such Losses as are covered under a standard extended coverage endorsement with mortgage rights and protections customary for mortgage lending practices in the locality in which the mortgaged property is located and such policies are in place. (j) With respect to each Mortgage Loan and home equity loan, there was no material violation of any law or regulation pertaining to truth-in-lending, consumer credit protection, equal credit opportunity or any similar law applicable to the origination of such Mortgage Loan at the time it was made, nor has the Seller taken any other action or omitted to take an action, which violation, act or omission would give rise to a valid defense or counterclaim, or right of rescission, set-off, abatement or diminution, on the part of the Mortgagor that would prevent the Purchaser from foreclosing upon the mortgaged property. 28 (k) No Mortgage Loan or home equity loan is secured by any real estate collateral except the Encumbrance of the related Mortgage, an assignment of the related leases, and any related security agreement. (l) Each Mortgage Loan and home equity loan has closed, the proceeds of each Mortgage Loan have been fully disbursed and, except as set forth in Schedule 5.10(k), no Mortgagor has any right under any Mortgage Loan or any Loan Documents pertaining to such Mortgage Loan to an advance of further proceeds under such Mortgage Loan, unless such right is conditional upon the Seller's performance of an underwriting evaluation with respect thereto. For purposes hereof, capitalization of interest pursuant to a negative amortization provision shall not be deemed an "advance" to the Mortgagor, and any escrow balances shall be deemed fully disbursed. (m) No Mortgage Note or Mortgage has been satisfied, canceled, subordinated to another mortgage or rescinded, in whole or in part, and no Mortgage property has been released from the Encumbrance of the related Mortgage, in whole or in part. (n) With respect to each Loan that is a home equity Loan: (i) The maximum original term on such Loan is three hundred sixty (360) months; (ii) No part of the property which is security for such Loan has been released; (iii) The transfer and assignment of such Loan and Loan Documents pertaining thereto will be in compliance with applicable law and regulations; (iv) A title insurance policy is in effect for any such Loan with an original principal amount in excess of $200,000; and (v) Such Loan is secured by a valid first, second or third lien. 5.11 Financial and Deposit Data. To Seller's knowledge, all written financial, Deposit and Loan information regarding the Assets and Liabilities provided to Purchaser by Seller was accurate in all material respects as of the date when provided; provided, however, that historical information contained in the foregoing may not reflect the allocation of Loans and certain Deposits to the Branches pursuant to Seller's understanding with the U.S. Department of Justice and the Nevada Department of Justice. 5.12 Records. The Records respecting the operations of the Branches and the Assets and Liabilities accurately reflect in all material respects the net book value of the Assets and Liabilities being transferred to Purchaser hereunder. The Records include all information reasonably necessary to service the Deposits and Loans on an ongoing basis, and to otherwise operate the business being acquired under this Agreement in substantially the manner currently operated by Seller. 29 5.13 Title to Assets. Subject to the terms and conditions of this Agreement, on the Closing Date Purchaser will acquire, subject to Section 10.1(c), good and marketable title to all of the material Assets, free and clear of any Encumbrances; provided, however, that this representation does not cover Owned Real Property for which Purchaser has obtained a Title Policy pursuant to Section 3.11, Branch Leases or Tenant Leases. 5.14 Branch Leases. The Branch Leases give Seller the right to occupy the building and land comprising the related Branch. Accurate copies of all Branch Leases and all attachments, amendments and addenda thereto have heretofore been made available to Purchaser. To Seller's knowledge, the Branch Leases constitute valid and legally binding leasehold interests of Seller. Except as described on Schedule 5.4, there are no subleases relating to any Branch created or suffered to exist by Seller, or to Seller's knowledge, created or suffered to exist by any other person. 5.15 [intentionally omitted] 5.16 Deposits. Except as set forth in Schedule 5.16, all of the Deposit accounts have been administered and, to Seller's knowledge, originated, in compliance with the documents governing the relevant type of Deposit account and all applicable laws. The Deposit accounts are insured by the Bank Insurance Fund or the Savings Association Insurance Fund of the FDIC up to the current applicable maximum limits, and no action is pending or, to Seller's knowledge, threatened by the FDIC with respect to the termination of such insurance. 5.17 Environmental Laws; Hazardous Substances. Except as disclosed on Schedule 5.17, or as would not, individually or in the aggregate, have a Material Adverse Effect, each parcel of Real Property: (i) has been operated by Seller in compliance with all applicable Environmental Laws; (ii) is not the subject of any pending written notice from any governmental authority alleging the violation of any applicable Environmental Laws; (iii) is not currently subject to any court order, administrative order or decree arising under any Environmental Law; (iv) has not been used for the disposal of Hazardous Substances and is not contaminated with any Hazardous Substances requiring remediation under any applicable Environmental Law; and (v) has not had any emissions or discharges of Hazardous Substances except as permitted under applicable Environmental Laws. 30 5.18 Brokers' Fees. Seller has not employed any broker or finder or incurred any liability for any brokerage fees, commission or finders' fees in connection with the transactions contemplated by this Agreement. 5.19 Limitations on Representations and Warranties. Notwithstanding anything to the contrary contained herein, Seller makes no representations or warranties to Purchaser in this Agreement or in any agreement, instrument or other document executed in connection with any of the transactions contemplated hereby or provided or prepared pursuant hereto or in connection with any of the transactions contemplated hereby: (a) As to title to Owned Real Property or as to the physical condition of the Branches or Personal Property, all of which are being sold "AS IS", "WHERE IS" and with all faults at the Closing Date; (b) As to whether, or the length of time during which, any accounts will be maintained by the depositors at the Branches after the Closing Date; or (c) Except to the extent otherwise set forth in this Agreement, as to the creditworthiness, credit history or financial condition of any obligor. ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser represents and warrants to Seller as follows: 6.1 Corporate Organization and Authority. Purchaser is a federal savings bank, duly organized and validly existing under the laws of the United States, and has the requisite power and authority to conduct the business conducted at the Branches substantially as currently conducted by Seller. Purchaser has the requisite corporate power and authority and has taken all corporate action necessary in order to execute and deliver this Agreement and to consummate the transactions contemplated hereby. This Agreement is a valid and binding agreement of Purchaser enforceable in accordance with its terms subject, as to enforcement, to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. 6.2 No Conflicts. The execution, delivery and performance of this Agreement by Purchaser does not, and will not, (i) violate any provision of its charter or by-laws or (ii) violate or constitute a breach of, or default under, any law, rule, regulation, judgment, decree, ruling or order of any court, government or governmental authority to which Purchaser is subject or any agreement or instrument of Purchaser, or to which Purchaser is subject or by which Purchaser is otherwise bound, which violation, breach, contravention or default referred to in this clause (ii), individually or in the aggregate, would have a Material Adverse Effect. 31 6.3 Approvals and Consents. Other than Regulatory Approvals, no notices, reports or other filings are required to be made by Purchaser with, nor are any consents, registrations, approvals, permits or authorizations required to be obtained by Purchaser from, any governmental or regulatory authorities of the United States or the several States in connection with the execution and delivery of this Agreement by Purchaser and the consummation of the transactions contemplated hereby by Purchaser, the failure to make or obtain any or all of which, individually or in the aggregate, would have a Material Adverse Effect. 6.4 Regulatory Matters. (a) Except as previously disclosed in writing to Seller, there are no pending or, to Purchaser's knowledge, threatened disputes or controversies between Purchaser and any federal, state or local governmental agency or authority that, individually or in the aggregate, would have a Material Adverse Effect. (b) Neither Purchaser nor any of its Affiliates has received any indication from any federal or state governmental agency or authority that such agency would oppose or refuse to grant a Regulatory Approval or impose a Burdensome Condition. (c) Purchaser is not a party to any written order, decree, agreement or memorandum of understanding with, or commitment letter or similar submission to, any federal or state regulatory agency or authority charged with the supervision or regulation of depository institutions, nor has Purchaser been advised by any such agency or authority that it is contemplating issuing or requesting any such order, decree, agreement, memorandum of understanding, commitment letter or submission, in each case which, individually or in the aggregate, would have a Material Adverse Effect. (d) Purchaser is, and on a pro forma basis giving effect to the P&A Transaction, will be (i) at least "adequately capitalized", as defined for purposes of the FDIA, and (ii) in compliance with all capital requirements, standards and ratios required by each state or federal bank regulator with jurisdiction over Purchaser, including without limitation, any such higher requirement, standard or ratio as shall apply to institutions engaging in the acquisition of insured institution deposits, assets or branches, and no such regulator is likely to, or has indicated that it will, condition any of the Regulatory Approvals upon an increase in Purchaser's capital or compliance with any capital requirement, standard or ratio. (e) Purchaser has no knowledge that it will be required to divest deposit liabilities, branches, loans or any business or line of business as a condition to the receipt of any of the Regulatory Approvals. (f) Each of the subsidiaries or Affiliates of Purchaser that is an insured depository institution was rated "Satisfactory" or "Outstanding" following its most recent Community Reinvestment Act examination by the regulatory agency responsible for its supervision. Purchaser has received no notice of and has no knowledge of any planned or threatened objection by any community group to the transactions contemplated hereby. 32 6.5 Litigation and Undisclosed Liabilities. There are no actions, suits or proceedings that have a reasonable likelihood of an adverse determination pending or, to Purchaser's knowledge, threatened against Purchaser, or obligations or liabilities (whether or not accrued, contingent or otherwise) or, to Purchaser's knowledge, facts or circumstances that could reasonably be expected to result in any claims against or obligations or liabilities of Purchaser that, individually or in the aggregate, would have a Material Adverse Effect. 6.6 Operation of the Branches. Purchaser intends to continue to provide retail and business banking services in the geographical area served by the Branches. 6.7 Financing Available. Not later than the Closing Date, Purchaser will have available sufficient cash or other liquid assets or financing pursuant to binding agreements or commitments which may be used to fund the P&A Transaction. Purchaser's ability to consummate the transactions contemplated by this Agreement is not contingent on raising any equity capital, obtaining specific financing therefor, consent of any lender or any other matter. 6.8 Brokers' Fees. Purchaser has not employed any broker or finder or incurred any liability for any brokerage fees, commission or finders' fees in connection with the transactions contemplated by this Agreement, except for fees and commissions for which Purchaser shall be solely liable. ARTICLE 7 COVENANTS OF THE PARTIES 7.1 Activity in the Ordinary Course. Until the Closing Date, except as may be required in connection with the Merger, (a) Seller shall conduct the business of the Branches (including, without limitation, filling open positions at the Branches and job posting in the Branches for open positions at other offices of Seller) in the ordinary and usual course of business consistent with past practice and (b) Seller shall not, without the prior written consent of Purchaser: (i) Increase or agree to increase the salary, remuneration or compensation of any Branch Employee (or make any material increase or decrease in the number of such persons, or transfer such persons to or from any Branch) other than in accordance with Seller's existing customary policies generally applicable to employees having similar rank or duties, or pay or agree to pay any uncommitted bonus to any Branch Employee other than regular bonuses granted in the ordinary course of Seller's business (which bonuses, in any event, shall be the responsibility of Seller); or, except at the request of such Branch 33 Employee, transfer any Branch Employee to another branch or office of Seller or any of its Affiliates; (ii) Offer interest rates or terms on any category of deposits at a Branch except as determined in a manner consistent with Seller's practice with respect to its branches which are not being sold; (iii) Transfer to or from any Branch to or from any of Seller's other operations or branches any material Assets or any Deposits, except (A) in the ordinary course of business or as contemplated by this Agreement, (B) upon the unsolicited request of a depositor or customer, or (C) if such Deposit is pledged as security for a loan or other obligation that is not a Loan; (iv) Sell, transfer, assign, encumber or otherwise dispose of or enter into any contract, agreement or understanding to sell, transfer, assign, encumber or dispose of any of the Assets existing on the date hereof, except in the ordinary course of business and in an immaterial aggregate amount; provided, however, that in any event, Seller shall not knowingly take any action that would create any Encumbrance on any of the Owned Real Property or the Branch Leases; (v) Sell, transfer, assign, encumber or otherwise dispose of or enter into any contract, agreement or understanding to sell, transfer, assign, encumber or dispose of any Loan; (vi) Make or agree to make any material improvements to the Owned Real Property, except with respect to commitments for such made on or before the date of this Agreement (and heretofore disclosed in writing to Purchaser) and normal maintenance or refurbishing purchased or made in the ordinary course of business; (vii) File any application or give any notice to relocate or close any Branch or relocate or close any Branch; (viii) Amend, terminate or extend in any material respect any Branch Lease or Tenant Lease; provided, however, Seller may extend any Branch Lease or Tenant Lease if, in its reasonable business judgment, Seller determines such extension is necessary to deliver the Branch on the Closing Date as a fully operative branch banking operation; (ix) Except as permitted by this Section 7.1, take, or permit its Affiliates to take, any action (A) impairing Purchaser's rights in any Deposit or Asset, (B) impairing in any way the ability of Purchaser to collect upon any Loan, or (C) except in the ordinary course of servicing, waiving any material right, whether in equity or at law, that it has with respect to any Loan; or 34 (x) Agree with, or commit to, any person to do any of the things described in clauses (i) through (ix) except as contemplated hereby. 7.2 Access and Confidentiality. (a) Until the Closing Date, Seller shall afford to Purchaser and its officers and authorized agents and representatives reasonable access to the properties, books, records, contracts, documents, files (including loan files) and other information of or relating to the Assets and Liabilities. In addition, Seller will use reasonable efforts to arrange for Purchaser to have reasonable access to similar information held by third parties, if any, for or on Seller's behalf. Purchaser and Seller each will identify to the other, within ten (10) days after the date hereof, a selected group of their respective salaried personnel that shall constitute a "transition group" who will be available to Seller and Purchaser, respectively, at reasonable times (limited to normal operating hours) to provide information and assistance in connection with Purchaser's investigation of matters relating to the Assets and Liabilities. Seller shall cause other personnel to be reasonably available during normal business hours, to an extent not disruptive of ongoing operations, for the same purposes. Seller shall furnish Purchaser with such additional financial and operating data and other information about its business operations at the Branches as may be reasonably necessary for the orderly transfer of the business operations of the Branches. Any investigation pursuant to this Section 7.2 shall be conducted in such manner as not to interfere unreasonably with the conduct of the Seller's business. Notwithstanding the foregoing, Seller shall not be required to provide access to or disclose information where such access or disclosure would impose an unreasonable burden on Seller, or any employee of Seller or would violate or prejudice the rights of customers, jeopardize any attorney-client privilege or contravene any law, rule, regulation, order, judgment, decree, fiduciary duty or binding agreement entered into prior to the date of this Agreement. The parties hereto shall make appropriate substitute disclosure arrangements under circumstances in which the restrictions of the preceding sentence apply. (b) Each party to this Agreement shall hold, and shall cause its respective directors, officers, employees, agents, consultants and advisors to hold, in strict confidence, unless disclosure to a bank regulatory authority is necessary or desirable in connection with any Regulatory Approval or unless compelled to disclose by judicial or administrative process or, in the written opinion of its counsel, by other requirements of law or the applicable requirements of any regulatory agency or relevant stock exchange, all non-public records, books, contracts, instruments, computer data and other data and information (collectively, "Information") concerning the other party (or, if required under a contract with a third party, such third party) furnished it by such other party or its representatives pursuant to this Agreement (except to the extent that such information can be shown to have been (i) previously known by such party on a non-confidential basis, (ii) in the public domain through no fault of such party or (iii) later lawfully acquired from other sources by the party to which it was furnished), and neither party shall release or disclose such Information to any other person, except its auditors, attorneys, financial advisors, bankers, other consultants and advisors and, to the extent permitted above, to bank regulatory authorities. 35 7.3 Regulatory Approvals. (a) As soon as practicable and in no event later than thirty (30) days after the date of this Agreement, Purchaser shall prepare and file any applications, notices and filing required in order to obtain the Regulatory Approvals. Purchaser shall use all reasonable efforts to obtain each such approval as promptly as reasonably practicable and, to the extent possible, in order to permit the Closing to occur not later than April 30, 1999. Seller will cooperate in connection therewith (including the furnishing of any information and any reasonable undertaking or commitments which may be required to obtain the Regulatory Approvals). Each party will provide the other with copies of any applications and all correspondence relating thereto prior to filing, other than material filed in connection therewith under a claim of confidentiality. Purchaser also agrees to furnish any reasonable undertaking or commitment that may be required in order for Norwest or WFC to obtain the Merger Approvals. If any regulatory authority shall require the modification of any of the terms and provisions of this Agreement as a condition to granting any Regulatory Approval or the Merger Approvals, the parties hereto will negotiate in good faith to seek a mutually agreeable adjustment to the terms of the transaction contemplated hereby, such agreement not to be unreasonably withheld. 7.4 Consents. Seller agrees to use reasonable efforts (such efforts not to include making payments to third parties) to obtain from lessors and any other parties to any Branch Leases any required consents to the assignment of the Branch Leases to Purchaser on the Closing Date; provided, however, the Seller shall not be obligated to incur any monetary obligations or expenditures to the parties whose consent is requested in connection with the utilization of its reasonable efforts to obtain any such required consents. If any such required consent cannot be obtained, notwithstanding any other provision hereof, the Assets and Liabilities associated with the subject Branch, other than any such Branch Lease as to which consent cannot be obtained, shall nevertheless be transferred to Purchaser at the Closing and the parties shall negotiate in good faith and Seller shall use reasonable efforts (such efforts not to include making payments to third parties) to make alternative arrangements reasonably satisfactory to Purchaser. In such event, Seller shall not be obligated to deliver physical possession of the subject Branch or Personal Property to Purchaser at the Closing. 7.5 Efforts to Consummate; Further Assurances. (a) Purchaser and Seller agree to use all reasonable efforts to satisfy or cause to be satisfied as soon as practicable their respective obligations hereunder and the conditions precedent to the Closing. (b) Seller will duly execute and deliver such assignments, bills of sale, deeds, acknowledgments and other instruments of conveyance and transfer as shall at any time be necessary or appropriate to vest in Purchaser the full legal and equitable title to the Assets. (c) Subject to Section 4.3, on and after the Closing Date, each party will promptly deliver to the other all mail and other communications properly addressable or deliverable to the other as a consequence of the P&A Transaction; and without limitation of the foregoing, on and after the Closing Date, Seller shall promptly forward any mail, 36 communications or other material relating to the Deposits or the Assets transferred on the Closing Date, including, but not limited to, that portion of any IRS "B" tapes that relates to such Deposits, to such employees of Purchaser at such addresses as may from time to time be specified by Purchaser in writing. (d) The costs incurred by a party in performing its obligations to the other (x) under Section 7.5(a) and (c) shall be borne by the initial recipient and (y) otherwise under this Section 7.5 shall be borne by Purchaser. Seller will cooperate with Purchaser to minimize the costs referred to in clause (y). 7.6 Solicitation of Accounts. (a) Until the Closing Date and for an additional twelve (12) months following the Closing Date, Seller agrees that it will not solicit deposits, loans, mutual fund purchases, or other investment products or other business from or to persons or entities who were depositors or borrowers at the Branches on the date hereof with respect to Deposits by personal contact, by telephone, by facsimile, by mail or other similar solicitation, or in any other way except for general solicitations and solicitations that are not directed primarily to persons or entities who were depositors of the Branches on the date hereof; provided, however, Seller may solicit depositors who as of the date of this Agreement have existing accounts or loans originating at branches or other offices of Seller or its Affiliates other than the Branches pursuant to solicitations which arise from their status as a customer at such other branches or offices; and provided, further, that Seller may solicit major or statewide depositors (such as, for example, a company with more than one location or the state government or any agency or instrumentality thereof) without restrictions hereunder. (b) Prior to the Closing Date, Purchaser agrees that it will not attempt to directly solicit Branch customers through advertising nor transact its business in a way which would induce such Branch customers to close any account and open accounts directly with Purchaser or would otherwise result in a transfer of all or a portion of an existing account from Seller to Purchaser or its Affiliates. Notwithstanding the foregoing sentence, Purchaser and its Affiliates shall be permitted to (i) engage in advertising, solicitations or marketing campaigns not primarily directed to or targeted at such Branch customers, (ii) engage in lending, deposit, safe deposit, trust or other financial services relationships existing as of the date hereof with such Branch customers through other branch offices of Purchaser, (iii) respond to unsolicited inquiries by such Branch customers with respect to banking or other financial services, and (iv) provide notices or communications relating to the transactions contemplated hereby in accordance with the provisions hereof. 7.7 Insurance. Seller will maintain in effect until the Closing Date all casualty and public liability policies relating to the Branches and maintained by Seller on the date hereof or procure comparable replacement coverage and maintain such policies or replacement coverage in effect until the Closing Date. Purchaser shall provide all casualty and public liability insurance for the Branches subsequent to the Closing Date. 7.8 [intentionally omitted] 37 7.9 Servicing Prior to Closing Date. With respect to each of the Loans from the date hereof until the Closing Date. Seller shall provide servicing of such Loans generally consistent with customary prudent industry servicing standards of service of similar loans. Further, without the prior written consent of Purchaser (which consent shall not be unreasonably withheld or delayed), Seller shall not (a) except as required by law or the terms of the Loan Documents, release any collateral or any party from any liability on or with respect to any of the Loans; (b) compromise or settle any claims of any kind or character with respect to the Loans; or (c) amend or waive any of the material terms of any Loan as set forth in the Loan Documents. ARTICLE 8 TAXES AND EMPLOYEE BENEFITS 8.1 Tax Representations. Seller represents and warrants to Purchaser as follows: (a) Except as set forth in Schedule 8.1, all Tax Returns with respect to the Assets or income therefrom, the Liabilities or payments in respect thereof or the operation of the Branches, that are required to be filed (taking into account any extension of time within which to file) on or before the Closing Date, have been or will be duly filed, and all Taxes shown to be due on such Tax Returns have been or will be paid in full. (b) With respect to the Deposits, Seller is in compliance with the Code and regulations thereunder relative to obtaining from depositors of the Deposits executed IRS Forms W-8 and W-9. With respect to the Deposits opened after December 31, 1983, Seller has either obtained a properly completed Form W-8 or W-9 (or a substitute form meeting applicable requirements) or is back-up withholding on such account, if so required. 8.2 Proration of Taxes. Except as otherwise agreed to by the parties, whenever it is necessary to determine the liability for Taxes for a portion of a taxable year or period that begins before and ends after the Closing Date, the determination of the Taxes for the portion of the year or period ending on , and the portion of the year or period beginning after the Closing Date shall be determined by assuming that the taxable year or period ended at 11:59 p.m. Nevada time on the day prior to the Closing Date. 8.3 Sales and Transfer Taxes. Unless otherwise provided, all excise, sales, use and transfer taxes that are payable or that arise as a result of the consummation of the P&A Transaction shall be paid by Purchaser and Purchaser shall indemnify and hold Seller harmless from and against any such taxes. 38 8.4 Information Returns. At the Closing or as soon thereafter as is practicable, Seller shall provide Purchaser with a list of all Deposits for which Seller has not received a properly completed Form W-8 or W-9 (or a substitute form meeting applicable requirements) or on which Seller is back-up withholding as of the Closing Date. 8.5 Payment of Amount Due under Article 8. Any payment by Seller to Purchaser, or to Seller from Purchaser, under this Article 8 (other than payments required by Section 8.3) to the extent due at the Closing may be offset against any payment due the other party at the Closing. All subsequent payments under this Article 8 shall be made as soon as determinable and shall be made and bear interest from the date due to the date of payment as provided in Section 3.2(b). 8.55 Like Kind Exchange. Purchaser acknowledges that the Seller may desire to complete one or more like kind exchanges (including transactions which are intended to qualify under Section 1031 of the Code). If requested by Seller, Purchaser shall cooperate to the extent reasonably necessary in order to accomplish such like kind exchanges and shall execute all documents and provide all consents reasonably necessary to complete such like kind exchanges including, without limitation, an amendment to or an assignment of this Agreement; provided, however, that (a) Purchaser's obligations under this Agreement shall not be increased, (b) Seller's representations, warranties, covenants and obligations under this Agreement shall continue in full force and effect and (c) the total Purchaser Price will not change as a result of this assignment. 8.6 Assistance and Cooperation. After the Closing Date, each of Seller and Purchaser shall: (a) Make available to the other and to any taxing authority as reasonably requested all relevant information, records, and documents relating to taxes with respect to the Assets or income therefrom, the Liabilities or payments in respect thereof, or the operation of the Branches; (b) Provide timely notice to the other in writing of any pending or proposed tax audits (with copies of all relevant correspondence received from any taxing authority in connection with any tax audit or information request) or tax assessments with respect to the Assets or income therefrom, the Liabilities or payments in respect thereof, or the operation of the Branches for taxable periods for which the other may have a liability under this Article 8; and (c) The party requesting assistance or cooperation shall bear the other party's out-of-pocket expenses in complying with such request to the extent that those expenses are attributable to fees and other costs of unaffiliated third party service providers. 8.7 Transferred Employees. (a) As soon as reasonably practicable and in any event within thirty (30) days of the date hereof, Seller shall deliver to Purchaser a true and complete list of all Branch Employees by name, date of hire and position, as of the date hereof Seller shall not release any other personnel information without having first 39 obtained the written consent of the respective Branch Employee. Purchaser may, at its discretion, interview any and all Branch Employees. Purchaser shall make employment available to all Branch Employees on the Closing Date upon the terms and conditions described below. On and after the Closing Date, Branch Employees employed by Purchaser shall be defined as "Transferred Employees" for purposes of this Agreement. Subject to the provisions of this Section 8.7, Transferred Employees shall be subject to the employment terms, conditions and rules applicable to other employees of Purchaser. Nothing contained in this Agreement shall be construed as an employment contract between Purchaser and any Branch Employee or Transferred Employee. (b) Purchaser may interview Branch Employees during normal working hours. Purchaser shall be solely responsible for any activity in connection with interviewing Branch Employees. Purchaser shall indemnify and hold Seller harmless from and against any claim, liability, loss, costs or expenses, including reasonable attorneys' fees, resulting or arising from Purchaser's acts or omissions in connection with such interviews. (c) Subject to the conditions set forth in Section 4.13 of this Agreement relating to employee training and orientation, Seller agrees that Purchaser shall have the right to conduct orientation sessions with Branch Employees as soon as reasonably practicable and in any event within 30 days after execution of this Agreement. The orientation sessions may include personal appearances by Purchase's senior management and will cover subject such as Purchaser's Compensation and Benefits Programs, including a Business Retention and Sales Incentive Program specifically designed for Branch Employees who become Transferred Employees on the date after the Closing Date. (d) Each Transferred Employee shall be provided employment subject to the following terms and conditions: (i) Base salary shall be at least equivalent to the rate of base salary paid by Seller to such Transferred Employee as of the close of business on the day prior to the Closing Date. (ii) Except as otherwise specifically provided herein, Transferred Employees shall be provided employee benefits that are no less favorable in the aggregate than those provided to similarly situated employees of Purchaser. Purchaser shall provide each Transferred Employees with credit for such Transferred Employee's period of service with Seller (including any service credited from predecessors by merger or acquisition to Seller) towards the calculation of eligibility and vesting for such purposes as vacation, severance and other benefits and participation and vesting in Purchaser's qualified pension and/or profit sharing 401(k) plans, as such plans may exist (but, except as set forth in (v) below and for vacation, not for purposes of benefit accruals, including, without limitation, funding of accrued pension or profit sharing plans for such Transferred Employee with respect to any period prior to the Closing Date). 40 (iii) Each Transferred Employee shall be eligible to participate in the medical, dental, or other welfare plans of Purchaser, as such plans may exist, on and after the Closing Date, and, subject to insurance company approval, any preexisting conditions provisions of such plans shall be waived with respect to any such Transferred Employees; provided, however, that if Purchaser's relevant health or disability insurance policy or plan has a pre-existing condition limitation and a Transferred Employee's condition is being excluded (as a pre-existing condition) under Seller's plan as of the Closing Date, Purchaser may treat such condition as a pre-existing condition for the period such condition would have been treated as a pre-existing condition under Seller's plan. (iv) With respect to any Transferred Employee on short-term disability or temporary leave of absence, upon conclusion of his or her short-term disability or temporary leave of absence, subject to the terms and conditions of the Purchaser's plans and policies and applicable law, each Transferred Employee on such leave shall receive the salary and vacation benefits in effect when he or she went on leave, shall otherwise be treated as a Transferred Employee, and, to the extent practicable, shall be offered by the Purchaser the same or a substantially equivalent position to his or her position with Seller prior to having gone on leave. (v) Purchaser shall be responsible for all severance obligations arising out of the termination of any Transferred Employee's employment after the Closing Date in accordance with Purchaser's severance plan, policies and procedures with credit for the period of years of credited service with Seller towards the calculation of benefits; provided, however, if, before the one year anniversary of the Closing Date, any Transferred Employee experiences a reduction in base salary, a worksite relocation of more than 30 miles or a termination of employment by Purchaser for any reason other than cause (as defined by Purchaser's personnel policies and procedures), such Transferred Employee shall be entitled to severance pay in an amount at least equivalent to the severance pay the Transferred Employee would have received under Seller's severance plan had such employee been eligible for payments under such plan. (e) Except as provided herein. Seller shall pay, discharge, and be responsible for (i) all salary and wages arising out of employment of the Transferred Employees through the Closing Date, and (ii) any employee benefits (including, but not limited to, accrued vacation) arising under Seller's employee benefit plans and employee programs prior to the Closing Date (but not including medical benefits, if any, to Transferred Employees who retire after the Closing Date), including benefits with respect to claims incurred prior to the Closing Date but reported after the Closing Date. From and after the Closing Date, Purchaser shall pay, discharge, and be responsible for all salary, wages, and benefits arising out of or relating to the employment of the Transferred Employees by Purchaser from and after the Closing Date, including, without limitation, all claims for welfare benefits plans incurred after the Closing Date. Claims are incurred as of the date 41 services are provided or disability payments are accrued, notwithstanding when the injury or illness may have occurred. (f) To the extent permitted under Purchaser's 401(k) plan, Seller and Purchaser shall cooperate in arranging for the transfer to Purchaser's 401(k) plan, as soon as practicable after the Closing Date and in a manner that satisfies sections 414(l) and 411(d)(6) of the Code, of those accounts held under Seller's 401(k) plan on behalf of Transferred Employees, subject to receipt of any necessary consents and approvals of the Transferred Employees. (g) For a period of twelve (12) months following the Closing Date, Seller will not directly solicit any Transferred Employee hired by Purchaser as of the Closing Date to again become an employee of Seller; provided, however, that Seller shall not be prohibited from hiring a Transferred Employee if such Transferred Employee contacts Seller or an Affiliate of Seller to seek hiring or retention, whether in response to general advertising or otherwise, or if a Transferred Employee is terminated by Purchaser. 8.8 Branch Employee Representations. (a) Seller represents and warrants to Purchaser, to Seller's knowledge, as follows: (i) none of the Branch Employees are represented by any labor union; (ii) Seller is not a party to any individual contract, written or oral, express or implied, for the employment of any Branch Employee, and Seller is not subject to any collective bargaining arrangement with respect to any Branch Employee; (iii) Seller's 401(k) Plan is in compliance in all material respects with applicable law; (iv) no liabilities exist or are reasonably expected to exist under any employee benefit plan of Seller that, individually or in the aggregate, would have a Material Adverse Effect; and (v) Seller has not entered into any individual agreement or otherwise made any individual commitment to any Branch Employee with respect to continued employment with Purchaser. (b) Seller shall indemnify and hold Purchaser harmless from and against any claims, losses, damages or expenses (including attorney's fees) suffered as a result of any failure to give any notice to the Branch Employees required by the Worker Adjustment and Retraining Notification Act (the "WARN Act"), provided such notice is required as a result of action by Seller prior to the Closing Date. 42 ARTICLE 9 CONDITIONS TO CLOSING 9.1 Conditions to Obligations of Purchaser. Unless waived in writing by Purchaser, the obligation of Purchaser to consummate the P&A Transaction is conditioned upon satisfaction of each of the following conditions: (a) Regulatory Approvals. All consents, approvals and authorizations required to be obtained prior to the Closing from governmental and regulatory authorities in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby to be consummated at the Closing, including the Regulatory Approvals, shall have been made or obtained, and shall remain in full force and effect, and all waiting periods applicable to the consummation of the P&A Transaction shall have expired or been terminated; provided, however, that no Regulatory Approval shall have imposed any condition or requirement (a "Burdensome Condition") that would (i) result in any Material Adverse Effect or (ii) require Purchaser to effect any divestiture that would constitute a substantial portion of the business or properties of the Branches, taken as a whole. (b) Orders. No court or governmental authority of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, judgment, decree, injunction or other order (whether temporary, preliminary or permanent)(any of the foregoing, an "Order") which is in effect and which prohibits or makes illegal the consummation of the P&A Transaction or would otherwise result in a Material Adverse Effect. (c) Representations and Warranties; Covenants. Each of the representations and warranties of Seller contained in this Agreement shall be true in all material respects when made and as of the Closing Date, with the same effect as though such representations and warranties had been made on and as of the Closing Date (except that representations and warranties relating to Assets and Liabilities transferred at the Closing Date shall only be made, and need only be true in all material respects, on and as of the Closing Date). Purchaser shall have received at Closing a certificate to that effect dated as of such Closing Date and executed by the President or any Executive Vice President of Seller. Each of the covenants and agreements of Seller to be performed on or prior to the Closing Date shall have been duly performed in all material respects. Purchaser shall have received at Closing a certificate to that effect dated as of such Closing Date and executed by the President or any Executive Vice President of Seller. Notwithstanding any other provision of this Agreement, if there shall be a failure of any condition specified in this Section 9.1 to the obligations of Purchaser in respect of the acquisition of any specific Branch or Branches the aggregate Deposits of which as of the date hereof shall constitute less than 25% of the Deposits in all of the Branches as of the date hereof, Purchaser nevertheless shall be obligated to consummate the P&A Transaction but may, upon written notice to Seller, exclude from the transaction the 43 Branch or Branches in respect of which the failure of condition shall exist, in which case, appropriate adjustment shall be made in the schedules hereto and the other documents to be delivered pursuant hereto so as to duly reflect the deletion of such Branch or Branches from the transactions contemplated hereby (and, consequently, to the calculation of the Estimated Purchase Price, Estimated Payment Amount, Purchase Price and Adjusted Payment Amount). If any Branch is excluded from this Agreement or if Purchaser nevertheless elects to purchase any Branch which would otherwise be so excluded and such Branch is transferred to Purchaser at the Closing (subject to Purchaser's rights under Section 12.1(a)), any event that would otherwise constitute a breach of warranty or failure of condition in respect of such Branch arising solely from or relating to the operation of this paragraph shall not constitute a breach of warranty or failure of consideration. 9.2 Conditions to Obligations of Seller. Unless waived in writing by Seller, the obligation of Seller to consummate the P&A Transaction is conditioned upon satisfaction of each of the following conditions: (a) Regulatory Approvals. All consents, approvals and authorizations required to be obtained prior to the Closing from governmental and regulatory authorities in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby to be consummated at the Closing, including the Regulatory Approvals, shall have been made or obtained, and shall remain in full force and effect, and all waiting periods applicable to the consummation of the P&A Transaction shall have expired or been terminated. (b) Orders. No Order shall be in effect that prohibits or makes illegal the consummation of the P&A Transaction. (c) Representations and Warranties; Covenants. Each of the representations and warranties of Purchaser contained in this Agreement shall be true in all material respects when made and as of the Closing Date, with the same effect as though such representations and warranties had been made on and as of the Closing Date (except that representations and warranties as of a specific date need be true in all material respects only as of such date). Seller shall have received at Closing a certificate to that effect dated as of such Closing Date and executed by the President or any Executive Vice President of Purchaser. Each of the covenants and agreements of Purchaser to be performed on or prior to the Closing Date shall have been duly performed in all material respects. Seller shall have received at Closing a certificate to that effect dated as of such Closing Date and executed by the President or any Executive Vice President of Purchaser. (d) Consummation of the Merger. The Merger shall have been consummated in accordance with the terms of the Merger Agreement. 44 ARTICLE 10 ENVIRONMENTAL MATTERS 10.1 Environmental Matters. (a) Seller has provided to Purchaser and Purchaser hereby acknowledges receipt of copies of Phase I environmental site assessments for all Owned Real Property and asbestos reports with respect to all the Real Property, except for Real Property where the improvements have been completed after December 31, 1978. Such Phase I environmental site assessments for all Owned Real Property have been dated (or supplemented) on or after September 1, 1998. (b) If such Phase I site assessments and asbestos reports reasonably indicate the necessity or desirability of further investigation to determine whether or not an Environmental Hazard or an Asbestos Hazard exists at such Real Property, Purchaser may elect, not later than ten (10) days after the signing of this Agreement, to have an environmental consultant reasonably acceptable to Seller (the "Environmental Consultant"), to the extent reasonable and appropriate, conduct Phase II environmental site assessments and additional asbestos investigations, the cost of which shall be paid by Purchaser. Any such further investigation or testing shall be conducted in such a manner so as not to interfere with the normal operation of the Branch(es) involved. All such Phase II environmental site assessments and additional asbestos reports shall be treated as information subject to Section 7.2(b) and shall be completed not more than ninety (90) days after the signing of this Agreement. (c) In the event that the Environmental Consultant has discovered an Environmental Hazard, and/or Asbestos Hazard, during any such Phase II environmental site assessments and additional asbestos investigation at any single parcel of Owned Real Property, the remediation of which, in the reasonable judgment of the Environmental Consultant, is or would be the responsibility of Seller, or Purchaser should it acquire such Owned Real Property, and will cost $100,000 or more for such single parcel of Owned Real Property, Purchaser shall lease from Seller such single parcel of Owned Real Property pursuant to a Lease Agreement that shall provide as follows: (i) Such Lease Agreement shall be for a term of two (2) years, with no obligation or right to renew (it being the intention of Seller that Purchaser locate an alternative branch site during such two years), at a rental equal to a fair market rental value; (ii) Seller may sell such Owned Real Property to any person, subject to such Lease Agreement, for any price; (iii) During the term of such Lease Agreement, in the event Seller shall deliver to Purchaser a report of qualified environmental engineer or consultant stating that in the opinion of the Environmental Engineer the Environmental Hazard, and/or Asbestos Hazard, at or on any such leased parcel of Owned Real Property has been remediated to the extent required under applicable 45 Environmental Laws, Purchaser shall be required to purchase such parcel of Owned Real Property at the net book value as of the close of business of the month-end day most recently preceding the Closing Date; (iv) Other terms and conditions of the Lease Agreement shall be typical of such branch leases in the market as negotiated between Seller and Purchaser; and (v) Seller shall be responsible for all remediation costs related to such Owned Real Property except for remediation costs caused solely by Purchaser's use or disposal of Hazardous Substances at the site and Seller shall otherwise indemnify and hold Purchaser harmless from third party claims. If the remediation cost is less than $100,000 for any single parcel of Owned Real Property, Purchaser shall acquire such parcel and such cost shall be borne by Purchaser without indemnity or price adjustment under this Agreement. (d) Purchaser agrees that it and its Environmental Consultant shall conduct any Phase II environmental site assessments or other investigations pursuant to this Section with reasonable care and subject to customary practices among environmental consultants and engineers, including, without limitation, following completion thereof, the restoration of any site to the extent practicable to its condition prior to such site assessment or investigation and the removal of all monitoring wells. (e) Any lease of a parcel of Owned Real Property under Section 10.1(c) shall in no way affect the transfer of any Assets or Liabilities, other than such parcel of Owned Real Property, to the Purchaser at the Closing. ARTICLE 11 TERMINATION 11.1 Termination. This Agreement may be terminated at any time prior to the Closing Date: (a) By the mutual written agreement of Purchaser and Seller; (b) By Seller or Purchaser, in the event of a material breach by the other of any representation, warranty or agreement contained herein which is not cured or cannot be cured within thirty (30) days after written notice of such termination has been delivered to the breaching party; provided, however, that termination pursuant to this Section 11.1(b) shall not relieve the breaching party of liability arising out of or related to such breach; 46 (c) By Seller or Purchaser, in the event the Closing has not occurred by April 30, 1999 unless the failure to so consummate is due to a breach of this Agreement by the party seeking to terminate; (d) By Seller or Purchaser if the Merger shall have been abandoned; (e) By Seller, if the Merger has been consummated but the Closing has not occurred within six months thereafter; (f) By Seller or Purchaser at any time after the denial or revocation of any Regulatory Approval or by Purchaser if any such approval has been obtained which contains a Burdensome Condition; or (g) By Seller if, at any time prior to the Closing Date, an appropriate official of any governmental agency or authority whose consent, approval or authorization is required in order for Purchaser to consummate the transactions contemplated hereby shall have advised that such authority will not grant such consent, approval or authorization or will grant the same only subject to a Burdensome Condition (unless Purchaser shall have waived the condition provided for in the proviso to Section 9.1(a)), or where there shall be in effect any Order, or if there shall exist any proceeding which, in Seller's reasonable judgment, would result in an Order; provided, however, that Purchaser shall have fifteen (15) days following receipt of notice from Seller to remedy any such situation or to provide assurances reasonably acceptable to Seller that such situation will be remedied by the Closing Date. 11.2 Effect of Termination. In the event of termination of this Agreement and abandonment of the transactions contemplated hereby pursuant to Section 11.1, no party hereto (or any of its directors, officers, employees, agents or Affiliates) shall have any liability or further obligation to any other party, except as provided in Section 7.2(b) and except that nothing herein will relieve any party from liability for any breach of this Agreement. ARTICLE 12 INDEMNIFICATION 12.1 Indemnification. (a) Subject to Sections 12.2 and 13.1, Seller shall indemnify and hold harmless Purchaser and any person directly or indirectly controlling Purchaser from and against any and all Losses which Purchaser may suffer, incur or sustain arising out of or attributable to: (i) any breach of any representation or warranty (excluding the representations and warranties contained in Section 5.10 and Section 5.11 as it relates to information regarding Loans, the sole and exclusive remedy for breach of which is set forth in Section 12.2) made by Seller in this Agreement; 47 (ii) any material breach of any covenant or agreement to be performed by Seller pursuant to this Agreement; (iii) any claim, penalty asserted, legal action or administrative proceeding based upon any action taken or omitted to be taken by Seller or conditions existing prior to the Closing Date, relating in any such case to the operation of the Branches, the Assets or the Liabilities; or (iv) any liability, obligation or duty of Seller that is not a Liability. (b) Subject to Section 13.1, Purchaser shall indemnify and hold harmless Seller and any person directly or indirectly controlling Seller from and against any and all Losses which Seller may suffer, incur or sustain arising out of: (i) any breach of any representation or warranty made by Purchaser in this Agreement; (ii) any material breach of any covenant or agreement to be performed by Purchaser pursuant to this Agreement; (iii) any claim, penalty asserted, legal action or administrative proceeding based upon any action taken or omitted to be taken by Purchaser on or after the Closing Date, relating in any such case to the operation of the Branches or the Assets; (iv) physical damage caused solely by Purchaser or the Environmental Consultant in connection with any environmental site assessment or investigation pursuant to Article 10; or (v) the Liabilities. (c) To exercise its indemnification rights under this Section 12.1 as a result of the assertion against it of any claim or potential liability for which indemnification is provided, the indemnified party shall promptly notify the indemnifying party of the assertion of such claim, discovery of any such potential liability or the commencement of any action or proceeding in respect of which indemnity may be sought hereunder (including, with respect to claims arising from a breach of representation or warranty made in Article 8, the commencement of an audit, administrative investigation or judicial proceeding by any governmental authority); provided, however, that in no event shall notice of original claim for indemnification under this Agreement shall be given later than the expiration of one (1) year from the Closing Date (excluding only claims for indemnification under Section 12.1(a)(iii), which shall be within three (3) years of the Closing Date, and Section 12.1(a)(iv), which may be given at any time). The indemnified party shall advise the indemnifying party of all facts relating to such assertion within the knowledge of the indemnified party, and shall afford the indemnifying party the 48 opportunity, at the indemnifying party's sole cost and expense, to defend against such claims for liability. In any such action or proceeding, the indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at its own expense unless (i) the indemnifying party and the indemnified party mutually agree to the retention of such counsel or (ii) the named parties to any such suit, action, or proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party, and in the reasonable judgment of the indemnified party, representation of the indemnifying party and the indemnified party by the same counsel would be inadvisable due to actual or potential differing defenses or conflicts of interests between them. (d) The indemnified party shall have the right to settle or compromise any claim or liability subject to indemnification under this Section, and to be indemnified from and against all Losses resulting therefrom, unless the indemnifying party, within sixty (60) calendar days after receiving written notice of the claim or liability in accordance with Section 12.1(c) above, notifies the indemnified party that it intends to defend against such claim or liability and undertakes such defense, or, if required in a shorter time than sixty (60) calendar days, the indemnifying party makes the requisite response to such claim or liability asserted. (e) Notwithstanding anything to the contrary contained in this Agreement, an indemnifying party shall not be liable under this Section 12.1 for any Losses sustained by the indemnified party unless and until the aggregate amount of all indemnifiable Losses sustained by the indemnified party shall exceed $50,000, in which event the indemnifying party shall provide indemnification hereunder in respect of all such indemnifiable Losses in excess of $50,000; provided, however, that the aggregate amount of indemnification payments payable pursuant to this Section 12.1, shall not exceed the amount of the Purchase Price. An indemnifying party shall not be liable under this Section 12.1 for any settlement effected, without its consent, of any claim or liability or proceeding for which indemnity may be sought hereunder except in the case of a settlement in an amount which does not exceed $50,000. In no event shall either party hereto be entitled to consequential or punitive damages or damages for lost profits in any action relating to the subject matter of this Agreement. 12.2 Loans. (a) Notwithstanding anything to the contrary contained in this Agreement, subject to Section 12.3 and 12.4, in order for Purchaser to claim a breach of a representation or warranty of Seller under Section 5.10 or under Section 5.11 insofar as such claimed breach may relate to one or more Loans, Purchaser shall deliver to Seller, within thirty (30) days following Purchaser's discovery of such breach but in no event later than the one hundred eightieth (180th) day following the Closing Date, a certificate (a "Certificate of Defective Loan"), setting forth the identity of the affected Loan, the exact nature of such claimed breach, the subsection or subsections of Section 5.10, as applicable, under which such breach is claimed and reasonable evidence of the existence of such breach. 49 (b) If Purchaser delivers a Certificate of Defective Loan to Seller, Seller shall have the option, in its sole and absolute discretion, to correct or cure such breach with respect to such affected Loan within sixty (60) days following the receipt of the Certificate (the "Cure Period") or to repurchase any such affected Loan on a whole loan servicing-released basis within sixty (60) days following receipt of the Certificate for an amount equal to the Loan Value thereof as of the date of repurchase (the "Repurchase Price"). If Seller elects to attempt to cure or correct any material breach with respect to any Loan but fails to cure or correct such material breach on or before the expiration of the Cure Period, then Seller shall repurchase such Loan on a whole loan servicing-released basis within thirty (30) days following the expiration of the Cure Period for the Repurchase Price, subject to Sections 12.2(d). (c) In connection with any repurchase of a Loan by Seller pursuant to this Section 12.2, and as a condition to the payment by Seller to Purchaser of the Repurchase Price thereof, Purchaser shall deliver to Seller all Loan Documents (and, if applicable, any collateral deposit account associated with such Loan) with respect to such Loan previously delivered to Purchaser pursuant to this Agreement, and each document that constitutes a part of the Loan Documents which was endorsed or assigned to Purchaser shall be endorsed or assigned to Seller in the same manner as provided in Sections 3.6 and 5.10. (d) Notwithstanding anything to the contrary contained herein, Seller shall have no obligation hereunder to correct or cure any material breach or to repurchase any Loan pursuant to this Section 12.2, if after the Closing Date, (i) Purchaser or its permitted assignee is not the owner of such Loan or does not have the full right to sell and assign such Loan hereunder (it being understood that the rights under this Section 12.2 shall not survive any sale, conveyance, assignment or transfer of the subject Loan by Purchaser to an unaffiliated third party); (ii) any lien, pledge, charge or security interest of any nature exists with respect to such Loan as of the time of repurchase; (iii) the related security interests or mortgages, if any, have been waived, modified, altered, satisfied, canceled, rescinded or subordinated in any respect, or the related collateral has been released from its obligations under such security interests or mortgages, in whole or in part, in a manner which materially interferes with the benefits of the security intended to be provided by such mortgages or the use, enjoyment, value or marketability of such collateral for the purposes specified in such mortgages; or (iv) Purchaser has otherwise altered, amended or modified the terms of such Loan. 12.3 [intentionally omitted] 12.4 Exclusivity. After the Closing, Article 12 will provide the exclusive remedy for any misrepresentation, breach of warranty, covenant or other agreement or other claim arising out of this Agreement or the transactions contemplated hereby; provided, however, that Section 12.2 shall be Purchaser's sole and exclusive remedy or any breach of Seller's representations or warranties under Section 5.10. In no event shall Purchaser have any such claim with respect to any Loan which is paid in full on or before the one hundred twentieth (120th) day after the Closing Date. 50 12.5 AS-IS Sale; Waiver of Warranties. Except as set forth in Article 5 and Sections 8.1 and 8.8, Purchaser acknowledges that the Assets and Liabilities are being sold and accepted on an "AS-IS-WHERE-IS" basis, and are being accepted without any representation or warranty. As part of Purchaser's agreement to purchase and accept the Assets and Liabilities AS-IS-WHERE-IS, and not as a limitation on such agreement, TO THE FULLEST EXTENT PERMITTED BY LAW, SELLER HEREBY DISCLAIMS AND PURCHASER HEREBY UNCONDITIONALLY AND IRREVOCABLY WAIVES AND RELEASES ANY AND ALL ACTUAL OR POTENTIAL RIGHTS PURCHASER MIGHT HAVE AGAINST SELLER OR ANY PERSON DIRECTLY OR INDIRECTLY CONTROLLING SELLER REGARDING ANY FORM OF WARRANTY, EXPRESS OR IMPLIED, OF ANY KIND OR TYPE, RELATING TO THE ASSETS AND LIABILITIES INCLUDING, BUT NOT LIMITED TO, THE LOANS AND/OR THE COLLATERAL THEREFOR EXCEPT THOSE SET FORTH IN ARTICLE 5 AND SECTIONS 8.1 AND 8.8. SUCH WAIVER AND RELEASE IS, TO THE FULLEST EXTENT PERMITTED BY LAW, ABSOLUTE, COMPLETE, TOTAL AND UNLIMITED IN EVERY WAY. SUCH WAIVER AND RELEASE INCLUDES TO THE FULLEST EXTENT PERMITTED BY LAW, BUT IS NOT LIMITED TO, A WAIVER AND RELEASE OF EXPRESS WARRANTIES (EXCEPT THOSE SET FORTH IN ARTICLE 5 AND SECTIONS 8.1 AND 8.8), IMPLIED WARRANTIES, WARRANTIES OF FITNESS FOR A PARTICULAR USE, WARRANTIES OF MERCHANTABILITY, WARRANTIES OF HABITABILITY, STRICT LIABILITY RIGHTS AND CLAIMS OF EVERY KIND AND TYPE, INCLUDING BUT NOT LIMITED TO CLAIMS REGARDING DEFECTS WHICH WERE NOT OR ARE NOT DISCOVERABLE, ALL OTHER EXTANT OR LATER CREATED OR CONCEIVED OF STRICT LIABILITY OR STRICT LIABILITY TYPE CLAIMS AND RIGHTS. ARTICLE 13 MISCELLANEOUS 13.1 Survival. (a) The parties' respective representations and warranties contained in this Agreement shall survive until the first anniversary of the Closing Date, and thereafter neither party may claim any Loss in relation to a breach thereof; provided, however, that each of the representations and warranties of Seller set forth in Section 5.10 and in Section 5.11 insofar as such Section may relate to one or more Loans, shall survive the Closing Date for a period of one hundred eighty (180) days, and thereafter neither party may claim any damage for breach thereof. The agreements and covenants contained in this Agreement shall not survive the Closing except to the extent expressly set forth herein. (b) No claim based on any breach of any representation or warranty shall be valid or made unless notice with respect thereto is given to Seller in accordance with this Agreement on or before the date specified in Section 12.1(c). 51 13.2 Assignment. Except as otherwise provided in Section 8.55, neither this Agreement nor any of the rights, interests or obligations of either party may be assigned by either party hereto without the prior written consent of the other party, and any purported assignment in contravention of this Section 13.2 shall be void. Purchaser further agrees not to sell, transfer or assign any of the Loans prior to the Closing Date. 13.3 Binding Effect. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. 13.4 Public Notice. Prior to the Closing Date, neither Purchaser nor Seller shall directly or indirectly make or cause to be made any press release for general circulation, public announcement or disclosure or issue any notice or general communication to employees with respect to any of the transactions contemplated hereby without the prior written consent of the other party (which consent shall not be unreasonably withheld or delayed). Purchaser agrees that, without Seller's prior written consent, it shall not release or disclose any of the terms or conditions of the transactions contemplated herein to any other person. Notwithstanding the foregoing, each party may make such public disclosure as, in the opinion of its counsel, may be required by law or as necessary to obtain the Regulatory Approvals. 13.5 Notices. All notices, requests, demands, consents and other communications given or required to be given under this Agreement and under the related documents shall be in writing and delivered to the applicable party at the address indicated below: If to Seller: Wells Fargo Bank, National Association 420 Montgomery Street San Francisco, California 94163 Attention: __________________ Fax: _______________ With a copy to: Norwest Corporation Norwest Center Sixth and Marquette Minneapolis, MN 55479-1026 Attention: Secretary Fax: 612-667-4399 If to Purchaser: California Federal Bank, A Federal Savings Bank 135 Main Street, 20th Floor San Francisco, California 94105-1817 Attention: Scott A. Kisting, EVP Fax: 415-904-0416 52 With a copy to: California Federal Bank 135 Main Street, 4th Floor San Francisco, California 94105-1817 Attention: Bill Primozic, Esq. Fax: 415-904-0203 or, as to each party at such other address as shall be designated by such party in a written notice to the other party complying as to delivery with the terms of this Section. Any notices shall be in writing, including telegraphic or facsimile communication, and may be sent by registered or certified mail, return receipt requested, postage prepaid, or by fax, or by overnight delivery service. Notice shall be effective upon actual receipt thereof. 13.6 Expenses. Except as expressly provided otherwise in this Agreement, each party shall bear any and all costs and expenses which it incurs, or which may be incurred on its behalf, in connection with the preparation of this Agreement and consummation of the transactions described herein, and the expenses, fees, and costs necessary for any approvals of the appropriate regulatory authorities. 13.7 Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the State of Nevada. 13.8 Entire Agreement; Amendment. (a) This Agreement contains the entire understanding of and all agreements between the parties hereto with respect to the subject matter hereof and supersedes any prior or contemporaneous agreement or understanding, oral or written, pertaining to any such matters which agreements or understandings shall be of no force or effect for any purpose; provided, however, that the terms of any confidentiality agreement between the parties hereto previously entered into, to the extent not inconsistent with any provisions of this Agreement, shall continue to apply. (b) This Agreement may not be amended or supplemented in any manner except by mutual agreement of the parties and as set forth in a writing signed by the parties hereto or their respective successors in interest. The waiver of any beach of any provision under this Agreement by any party shall not be deemed to be waiver of any preceding or subsequent breach under this Agreement. No such waiver shall be effective unless in writing. 13.9 Third Party Beneficiaries. Except as expressly provided in Section 12.1 or 12.2, this Agreement shall not benefit or create any right or cause of action in or on behalf of any person other than Seller and Purchaser. 13.10 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 53 13.11 Headings. The headings used in this Agreement are inserted for purposes of convenience of reference only and shall not limit or define the meaning of any provisions of this Agreement. 13.12 [intentionally omitted] 13.13 Severability. If any provision of this Agreement, as applied to any party or circumstance, shall be judged by a court of competent jurisdiction to be void, invalid or unenforceable, the same shall in no way effect any other provision of this Agreement, the application of any such provision and any other circumstances or the validity or enforceability of the other provisions of this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers as of the date and year first above written. WELLS FARGO BANK, NATIONAL ASSOCIATION By: _____________________________ Name: ____________________ Title: ___________________ By: _____________________________ Name: ____________________ Title: ___________________ CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK By: _____________________________ Name: ____________________ Title: ___________________ 54 13.11 Headings. The headings used in this Agreement are inserted for purposes of convenience of reference only and shall not limit or define the meaning of any provisions of this Agreement. 13.12 (intentionally omitted) 13.13 Severability. If any provision of this Agreement, as applied to any party or circumstance, shall be judged by a court of competent jurisdiction to be void, invalid or unenforceable, the same shall in no way effect any other provision of this Agreement, the application of any such provision and any other circumstances or the validity or enforceability of the other provisions of this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement, to be executed by their duly authorized officers as of the date and year first above written. WELLS FARGO BANK, NATIONAL ASSOCIATION By: /s/ William Henderson --------------------------------- Name: William Henderson Title: Executive Vice President By: /s/ Patrick Yalung --------------------------------- Name: Patrick Yalung Title: Senior Vice President CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK By: --------------------------------- Name: _____________ Title: _______________ SCHEDULE 1.1(b) BRANCHES/REAL PROPERTIES WELLS FARGO BANK, NATIONAL ASSOCIATION Branch Name Branch Address Lease/Own 1 Fallon 1995 West Williams Leased Fallon, NV 89406 2 Yerington 14 South Main Street Owned Yerington, NV 89447 SCHEDULE 1.1(d) EXCLUDED DEPOSITS See Attached WELLS FARGO & CO WEST FALLON - AU 3729 SCHEDULE OF EXCLUDED DEPOSITS AS OF SEPTEMBER 30, 1998
BALANCE ACCOUNT 9/30/98 PRODUCT BRANCH CUSTOMER NAME CITY STATE ZIP 0832-247746 2,942.44 002 03729 NORM TRIGUEIRO FALLON NV 89406-7442 0832-260400 2,482.70 054 03729 SHAUNA L TRACY FALLON NV 89406-8146 0832-264881 76.27 054 03729 RACHEL A WINGATE YUBA CITY CA 95993-2229 0832-266860 3,642.45 054 03729 LINDA WIDMER FALLON NV 89406-7850 0895-320752 795.72 054 03729 TINA SLOWAN FALLON NV 89406-7214 6701-869026 60.00 201 03729 CHRISTOPHER S MALOY FALLON NV 89406-8430
WELLS FARGO & CO YERINGTON - AU 6504 SCHEDULE OF EXCLUDED DEPOSITS AS OF SEPTEMBER 30, 1998
BALANCE ACCOUNT 9/30/98 PRODUCT BRANCH CUSTOMER NAME CITY STATE ZIP 0832-093553 830.23 040 06504 MARY L MATTICE YERINGTON NV 89447 0871-829446 942.86 054 06504 NICHOLAS J RICE YERINGTON NV 89447-2242 6291-743540 457.84 210 06504 LISA M FITZPATRICK YERINGTON NV 89447-2936
SCHEDULE 1.1(e) OTHER LOANS See List delivered to Purchaser October 22, 1998 SCHEDULE 2.1(a)(vii) OTHER ASSETS NONE SCHEDULE 2.2(a)(v) ACCRUED LIABILITIES NONE SCHEDULE 2.4(c) EXCLUDED IRA/KEOGH ACCOUNT DEPOSITS [TO COME] SCHEDULE 3.6(a) FORM OF DEED Recording Requested by: When Recorded Mail to: DOCUMENT TRANSFER TAX $______ ( ) COMPUTED ON FULL VALUE OF PROPERTY CONVEYED, OR ( ) COMPUTED ON FULL VALUE LESS LIENS AND ENCUMBRANCES REMAINING THEREON AT TIME OF SALE. Signature of declarant or agent determining tax - Firm Name () Unincorporated Area () City of _______________________ Assessor's parcel No. ______________________ ________________________________________ with its principal office located in _______________________, _______________, the undersigned grantor, for a valuable consideration, receipt of which is hereby acknowledged, does hereby remise, release and forever grant, bargain, sell and convey to [NAME OF GRANTEE(S)] a ___________________ ________________, with its principal office located in _________________________, all of the real property in the City of _________________________, County of __________________, State of _____ ________________, described in Attachment A hereto. Date: ____________________________ ______________________________ _______________________ By: __________________________ Name: Title: MAIL TAX STATEMENTS TO GRANTEE AT ADDRESS ABOVE Attachment A Property 2 SCHEDULE 3.6(b) FORM OF BILL OF SALE BILL OF SALE, dated as of _________________, ______ by ____________________________ _________________________, with its principal office located in ___________________________, _______________ ("Seller"), to ______________________________________________, with its principal office located in __________________________________________________, ("Purchaser"). Capitalized terms not otherwise defined herein shall have the same meanings as set forth in the Purchase and Assumption Agreement, dated as of _______________________, _______ (the "P&A Agreement"), between Seller and Purchaser, unless the context herein otherwise requires. W I T N E S S E T H: WHEREAS, subject to the terms and conditions set forth in the P&A Agreement, Seller has agreed to transfer to Purchaser the Assets; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller does hereby convey, grant, bargain, sell, transfer, set over, assign, alienate, remise, release, deliver and confirm unto Purchaser, its successors and assigns, forever, all of Seller's right, title, interest and claim in and to the Personal Property (including without limitation, the items described in Attachment A hereto), as of 11:59 p.m., ____________ time, the day prior to the date hereof. TO HAVE AND TO HOLD all and singular of the foregoing (the "Transferred Properties") unto Purchaser, its successors and assigns, to its and their own use and enjoyment forever. SELLER FURTHER COVENANTS AND AGREES AS FOLLOWS: 1. This instrument shall not constitute an assignment of any covenant, obligation, liability, contract, agreement, license, lease or commitment pertaining to the Transferred Properties if an attempted assignment thereof without the consent of any other party thereto or with an interest therein would constitute a breach thereof or would materially and adversely affect the rights of Seller thereunder. If any such consent is not obtained with respect to any such covenant, obligation, liability, contract, agreement, license, lease or commitment, or if an attempted assignment with respect thereto would be ineffective or would impair the rights of Seller thereunder so that Purchaser would not in fact receive the benefit of all such rights, then Seller, its successors and assigns, shall act as Purchaser's agent in order to obtain for Purchaser, its successors and assigns, the benefits thereunder, and Seller will cooperate with Purchaser in any other reasonable arrangement designed to provide such benefits for Purchaser. 2. The Transferred Properties are being delivered "AS IS," "WHERE IS" and with all faults. 3. From time to time, Seller, its successor and assigns, shall execute and deliver all such further bills of sale, assignments or other instruments of conveyance and transfer as Purchaser, its successors or assigns, may reasonably request more effectively to transfer to and vest in Purchaser all of Seller's interest in the Transferred Properties. 4. This Bill of Sale is made pursuant to the provisions of the P&A Agreement, and, except as herein otherwise provided, the transfer of property hereunder is made subject to the terms and provisions of the P&A Agreement. 5. This Agreement shall be governed by and interpreted in accordance with the laws of the State of _______________ applicable to contracts made and to be performed entirely within such State. IN WITNESS WHEREOF, Seller has duly executed and delivered this Bill of Sale as of the day and year first above written. _________________________________________ By: _____________________________________ Name: Title: PURCHASER: By: _____________________________________ Name: Title: 2 Attachment A Personal Property [To be provided] 3 SCHEDULE 3.6(c) FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT ASSIGNMENT AND ASSUMPTION AGREEMENT, dated as of ______________, ______ (the "Agreement"), between ________________________________, organized under the laws of __________________________, with its principal office located in ______________________, ____________ ("Seller"), and ______________________________, with its principal office located in _________________________, ____________________ ("Purchaser"). Capitalized terms not otherwise defined herein shall have the meanings set forth in the Purchase and Assumption Agreement, dated as of _________________________, (the "P&A Agreement"), between Seller and Purchaser, unless the context herein otherwise requires. W I T N E S S E T H: WHEREAS, subject to the terms and conditions set forth in the P&A Agreement, Seller has agreed to assign, and Purchaser has agreed to assume, the Liabilities; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Seller hereby sells, assigns, conveys transfers and delivers, and Purchaser assumes, without warranty or representation, express or implied, or recourse to, Seller, except as expressly provided in the P&A Agreement, the Liabilities, other than the Branch Leases, as set forth in the P&A Agreement. 2. Seller hereby (a) resigns as the trustee or custodian of each Deposit in an IRA or Keogh Account of which it is the trustee or custodian, and (b) to the extent permitted by the documentation governing such IRA or Keogh Account, appoints Purchaser as successor trustee or custodian of each such IRA or Keogh Account, and Purchaser hereby accepts each such trusteeship or custodianship and assumes all fiduciary obligations with respect thereto. 3. This Agreement shall not constitute an assignment or assumption of any covenant, fiduciary or other obligation, liability, contract, agreement, license, lease or commitment pertaining to any Liability if an attempted assignment or assumption thereof without the consent of any other party thereto or with an interest therein would constitute a breach thereof or would materially and adversely affect the rights of Seller thereunder. If any such consent is not obtained with respect to any such covenant, fiduciary or other obligation, liability, contract, agreement, license, lease or commitment, or if an attempted assignment or assumption of any covenant, fiduciary or other obligation, liability, contract, agreement, license, lease or commitment pertaining to any Liability would be ineffective or would impair the rights of Seller thereunder so that Purchaser would not in fact receive the benefit of all such rights, then Seller, its successors and assigns shall act as Purchaser's agent in order to obtain for Purchaser, its successors and assigns, the benefits thereunder, and Seller will cooperate with Purchaser in any other reasonable arrangement designed to provide such benefits for Purchaser. 4. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors and permitted assigns; provided, that neither this Agreement nor any of the rights, interests or obligations of either party may be assigned by either party hereto without the prior written consent of the other party, and any purported assignment in contradiction of this Section 4 shall be void. 5. This Agreement is made pursuant to the provisions of the P&A Agreement and, except as herein otherwise provided, the assignment and assumption of any other Liabilities hereunder are made subject to the terms and provisions of the P&A Agreement. 6. Except as otherwise provided herein, all of the transactions provided for herein shall be effective as of 11:59 p.m., ____________________ time, the day prior to the date hereof. 7. This Agreement shall be governed by and interpreted in accordance with the laws of the State of ____________________ applicable to contracts made and to be performed entirely within such State. IN WITNESS WHEREOF, the parties herein have duly executed and delivered this Agreement as of the day and year first above written. ___________________________________________ By: _______________________________________ Name: Title: [PURCHASER] By: _______________________________________ Name: Title: 2 SCHEDULE 3.6(d) FORM OF ASSIGNMENT OF LEASE AND ASSUMPTION KNOW THAT __________________________________________________, a _____________________, organized under the laws of the ____________________, having its principal office in _________________, ______________ ("Assignor"), in consideration of One Dollar ($1.00) and other good and valuable consideration paid by ____________________ ____________________, with its principal office located in _________________________, ("Assignee"), hereby sells, transfers and assigns unto the Assignee all of Assignor's right, title and interest as tenant under a certain lease more particularly described on Attachment A hereto, covering premises described on such attachment and in such Lease (the "Lease") including any security deposits, prepaid rentals and other deposits, if any. TO HAVE AND TO HOLD the same unto Assignee, its successors and assigns from and after 8:00 a.m. on the date hereof (the "Effective Time"), subject to the terms, covenants, conditions and provisions set forth in the Lease. ASSIGNEE hereby assumes, effective as of the Effective Time, the performance of all terms, covenants and obligations of the Lease on the part of Assignor to be performed under the Lease accruing from and after the Effective Time. This Assignment may be executed in any number of counterparts. Each such counterpart hereof shall be deemed an original, but all counterparts shall constitute but one agreement. This Assignment shall inure to the benefit of and shall be binding upon the parties hereto and their respective successors and assigns. IN WITNESS WHEREOF, Assignor and Assignee have executed this Agreement as of the __________ day of ____________________, ______. _________________________________________ By: _____________________________________ Name: Title: CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK By: _____________________________________ Name: Title: 2 Attachment A Lease 3 SCHEDULE 3.6(e) FORM OF LANDLORD CONSENT CONSENT, dated as of __________________, ______, of ____________________ ________, with its principal office located in ________________________________ ("Landlord"), in favor of ____________________________________________ organized under the laws of the _____ ________________, with its principal office located in ________________, ______________ ("Seller"). W I T N E S S E T H: WHEREAS, Landlord is the owner of certain premises and a party to a certain lease, each described on Attachment A hereto (the "Lease"); and WHEREAS, Seller desires to assign its entire interest (including without limitation, renewal rights, if any) in the Lease to ________________________, with its principal office located in ______________________, ("Purchaser"); and WHEREAS, Seller has requested Landlord's consent to said assignment and to Purchaser's use of said premises as a banking office and for all other purposes authorized under the Lease for the balance of the term of the Lease and Landlord desires to consent to the same for all purposes required under the Lease. NOW, THEREFORE, 1. Subject to the limitations set forth below, Landlord hereby consents to the assignment of the Lease by Seller to Purchaser and to Purchaser's use of said premises as a banking office and for all other purposes authorized under the Lease for the balance of the term of the Lease; provided that Purchaser shall agree to assume all of the obligations of Seller arising under the Lease from and after the effective date of the assignment. 2. Except for the aforementioned assignment by Seller to Purchaser, nothing contained herein shall constitute a waiver of the obligation, if any, of the holder of the leasehold interest created under the Lease to obtain Landlord's consent to future assignments of the Lease or a sublease of the premises demised thereunder. 3. Nothing contained herein shall be construed to obligate Seller to assign the Lease to Purchaser, it being understood and acknowledged by Landlord that the execution and delivery of this Consent is in anticipation of said assignment, which may or may not be effected. If said assignment shall be effected, Seller or Purchaser shall promptly provide to Landlord a fully executed counterpart of said assignment and notify Landlord of the effective date thereof. 4. Landlord acknowledges and certified that, except for the conditions contained herein, all conditions set forth in the Lease, if any, to the effectiveness of the aforementioned assignment or to the consent of Landlord contained herein have been either waived by Landlord or satisfied. IN WITNESS WHEREOF, the undersigned has duly executed and delivered this instrument as of the day and year first above written. [LANDLORD] By: _____________________________ Name: Title: 2 Attachment A Lease 3 SCHEDULE 3.6(g) FORM OF CERTIFICATE OF OFFICER The undersigned, the [title of officer] of ___________________________, a ______________________, organized under the laws of the _____________________, with its principal office located in __________________, ______________________ ("Seller"), hereby certifies, to the best of [his] [her] knowledge after reasonable inquiry, as follows: 1. Each of the representations and warranties made by Seller in the Purchase and Assumption Agreement, dated as of __________________, ______, (the "P&A Agreement"), between Seller and _________________________________, with its principal office located in ____________________, California, are true and all material respects, as of the date hereof. 2. Each of the covenants and agreements of Seller to be performed on or prior to the date hereof have been duly performed in all material respects. 3. Attached hereto are true and correct copies of the resolutions of the Seller's Board of Directors, dated as of ____________________, ______, authorizing the execution, delivery and performance of the transactions contemplated by the P&A Agreement, which resolutions were duly adopted and, as of the date hereof, remain in full force and effect without amendment or modification. IN WITNESS WHEREOF, I have hereunto subscribed my name this ______ day of ______________________, _____. _________________________________ By: _____________________________ Name: Title: SCHEDULE 3.7(d) FORM OF CERTIFICATE OF OFFICER The undersigned, the [title of officer] of ____________________________, with its principal office located in _________________________, ("Purchaser"), hereby certifies, to the best of [his] [her] knowledge after reasonable inquiry, as follows: 1. Each of the representations and warranties made by Purchaser in the Purchase and Assumption Agreement, dated as of __________________, ______ (the "P&A Agreement"), between Purchaser and _______________________________________, organized under the laws of _______________, with its principal office located in ______________________, ______________, are true in all material respects, as of the date hereof (except for representations and warranties that are made as of a specific date). 2. Each of the covenants and agreements of Purchaser to be performed on or prior to the date hereof have been duly performed in all material respects. 3. Attached hereto are true and correct copies of the resolutions of the Purchaser's Board of Directors, dated as of ____________________, ______, authorizing the execution, delivery and performance of the transactions contemplated by the P&A Agreement, which resolutions were duly adopted and, as of the date hereof, remain in full force and effect without amendment or modification. IN WITNESS WHEREOF, I have hereunto subscribed my name this ______ day of ______________________, _____. [PURCHASER]: By: _____________________________ Name: Title: SCHEDULE 4.11 SCHEDULE OF PROCESSING FEES See Attached Schedule 4.11 Schedule of Cost from Operations for Divestiture
|---------------------------------------|-----------------------------------------------------| |Daily Cash Letter | $25.00 per letter | |---------------------------------------|-----------------------------------------------------| |Return Deposited Items | $2.50 per item | |---------------------------------------|-----------------------------------------------------| |ACH File | $35.00 per transmitted file | |---------------------------------------|-----------------------------------------------------| |Photocopies (per item) | $3.00 per item | |---------------------------------------|-----------------------------------------------------| |Research Request (per item) | $20.00 per hour, $20.00 minimum | |---------------------------------------|-----------------------------------------------------| |Courier |Dedicated in-city run (time sensitive) $35 per run | | |Non-Dedicated in-city run $25 per run | |---------------------------------------|-----------------------------------------------------|
This is the best we could do given the short time frame to get the numbers. I did check with the Texas folks and we are not charging Crane for any of these items. I assume it because Crane is small compared to this one. SCHEDULE 5.4 TENANT LEASES NONE SCHEDULE 5.7 LITIGATION/UNDISCLOSED LIABILITIES NONE SCHEDULE 5.10(a)(ix) EXCEPTIONS TO SELLER'S SOLE OWNERSHIP OF LOANS NONE SCHEDULE 5.10(f)(i) FORM OF AFFIDAVIT OF LOST NOTE I, ____________________________________, being duly sworn, do hereby state under oath that: 1. I, as ________________________ (title) of ____________________________, am authorized to make this Affidavit on behalf of ________________________________ (the "Lender"). 2. The Lender is the Payee under the following described mortgage note (the "Note"): Date: ___________________________ Loan No.: ___________________________ Borrower(s): ___________________________ Original Payee (if not the Lender): ___________________________ Original Amount: ___________________________ Rate of Interest: ___________________________ Address of Mortgaged Property: ___________________________ 3. The Lender is the lawful owner of the Note, and the Lender has not canceled, altered, assigned or hypothecated the Note. 4. The Note was not located after a thorough and diligent search which consisted of the following actions: _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ 5. The Note was sold to ______________________ by ____________________________ pursuant to the terms and provisions of a ____________________ Agreement dated and effective as of ______________________, _____. 6. Attached hereto is a true and correct copy of (i) the Note, endorsed in blank by Lender, and (ii) the Mortgage or Deed of Trust [strike one] which secures the Note, which Mortgage or Deed of Trust is recorded at: _______________________________________________________________________________ _______________________________________________________________________________ 7. ____________________________________________, hereby agrees to defend, indemnify and hold harmless __________________________________________, its successors, and assigns, against any loss, liability or damage, including reasonable attorney's fees, resulting from the unavailability of any notes, including but not limited to any loss, liability or damage arising from (i) any false statement contained in this Affidavit, (ii) any claim of any party that it has already purchased a mortgage loan evidenced by a Lost Note or any interest in such loan, (iii) any claim of any borrower with respect to the existence or terms of a Mortgage Loan evidenced by a Lost Note, or (iv) any inability to enforce the Note according to its terms or inability to receive any related insurance proceeds due to the lack of an original Note. 8. This Affidavit is intended to be relied on by ______________________________, its successors, and assigns and ________________________________ represents and warrants that it has the authority to perform its obligations under this Affidavit of Lost Note. Date: ________________________ By: ___________________________ Name: Title: 2 SCHEDULE 5.10(k) EXCEPTIONS TO RIGHTS OF MORTGAGORS NONE SCHEDULE 5.16 DEPOSITS - COMPLIANCE WITH LAWS AND CONTRACTS NONE SCHEDULE 5.17 ENVIRONMENTAL MATTERS NONE SCHEDULE 8.1 OUTSTANDING TAX LIABILITIES NONE EX-10.56 16 REIMBURSEMENT AND EXPENSE ALLOCATION AGREEMENT REIMBURSEMENT AND EXPENSE ALLOCATION AGREEMENT THIS REIMBURSEMENT AND EXPENSE ALLOCATION AGREEMENT, is entered into effective as of November 23, 1998 (this "Agreement"), by and between Golden State Bancorp Inc., a Delaware corporation ("GSB") and California Federal Bank, A Federal Savings Bank. ("CFB"). RECITALS WHEREAS, CFB is a wholly owned subsidiary of GSB, and GSB may, from time to time, incur expenses on behalf or for the direct benefit of CFB, and WHEREAS, CFB desires to reimburse GSB for such expenses incurred for the benefit of CFB in a manner consistent with the requirements of Section 23B of the Federal Reserve Act. AGREEMENTS NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I REIMBURSEMENT FOR SERVICES PROVIDED Section 1. Services. CFB shall reimburse GSB for all costs and out-of-pocket expenses incurred by GSB with respect to any services provided for the direct benefit of CFB. ARTICLE II PAYMENT Section 2.1 Payment. (a) GSB shall invoice CFB on or before the 30th day following each month for the costs and out-of-pocket expenses to be reimbursed pursuant to Section 1, annexing schedules in reasonable detail itemizing the charges so invoiced and the calculations thereof. Payment shall be due within 15 days of the receipt of each such invoice. (b) It is expressly agreed that the costs and out-of-pocket expenses incurred by GSB that are to be reimbursed pursuant to this Agreement shall not include any mark-up, overhead or profit factor for GSB. ARTICLE III TERM AND TERMINATION Section 3.1 Term and Termination. This Agreement shall remain in effect until terminated. Either party may terminate this Agreement on 90 days written notice to the other party. ARTICLE IV MISCELLANEOUS Section 4.1 Amendment and Modification; Waiver. This Agreement may be amended, modified or supplemented only by written agreement of the parties hereto. The failure of any of the parties hereto to comply with any obligation, covenant, agreement or condition herein may be waived by the party entitled to the benefit thereof only by a written instrument signed by the party granting such waiver, but such waiver or failure to insist upon strict compliance with such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. Section 4.2 Successors and Assigns; Parties in Interest; Assignment. This Agreement shall be binding upon and inure solely to the benefit of the parties hereto and their respective permitted successors and assigns, and nothing in this Agreement, express or implied, is intended to or shall confer upon any other person or persons any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto without the prior written consent of the other parties hereto. Section 4.3 Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given upon receipt by the respective parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to GSB, to: Golden State Bancorp Inc. 135 Main Street, 20th Floor San Francisco, CA 94105 Attention: General Counsel (b) if to CFB, to: California Federal Bank 135 Main Street, 20th Floor San Francisco, CA 94105 Attention: General Counsel Section 4.4 Expenses. Except as otherwise provided herein, all costs and expenses incurred in connection with this Agreement shall be paid by the party incurring such cost or expense. Section 4.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. Section 4.6 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 4.7 Entire Agreement. This Agreement constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes all other prior agreements, understandings and negotiations, both written and oral, among the parties with respect to the subject matter of this Agreement. Section 4.8 Captions. The captions herein are included for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. Section 4.9 Severability. This Agreement shall be deemed severable; the invalidity or unenforceability of any term or provision of this Agreement shall not affect the validity or enforceability of this Agreement or of any other term hereof, which shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. GOLDEN STATE BANCORP INC. By /s/ Eric K. Kawamura ------------------------------------------------ Name: Eric K. Kawamura Title: Senior Vice President CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK By: /s/ Renee Nichols Tucei ------------------------------------------------ Name: Renee Nichols Tucei Title: Senior Vice President and Controller EX-10.57 17 AGREEMENT FOR PROVISION OF SERVICES AGREEMENT FOR PROVISION OF SERVICES THIS AGREEMENT FOR THE PROVISION OF SERVICES (the "Agreement") is entered into effective November 23, 1998, between CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK ("Cal Fed") and Golden State Management Inc. ("GSM"), a Delaware corporation, in reference to the following facts and understandings: RECITALS WHEREAS, Cal Fed and GSM mutually benefit from performance of services by Cal Fed for Golden State Bancorp Inc.and its subsidiaries: NOW THEREFORE, in consideration of the foregoing, and of their mutual covenants herein, and intending to be legally bound thereby, the parties agree as follows: AGREEMENT 1. Services 1.1 Services Provided. Cal Fed shall, upon the request of GSM, and subject to the availability of resources and personnel on the part of the Cal Fed, provide GSM with such services as may be agreed between the parties in the manner set forth in this Agreement. All services between the parties that are not the subject of other separate written agreements between the parties shall be governed by the terms and conditions of this Agreement. 1.2 Compliance with Laws, Regulations, Policies and Procedures. The services provided by Cal Fed to GSM shall comply with all applicable laws and regulations, and, except as may be otherwise specifically agreed by the parties, shall conform to all of the internal policies and procedures of Cal Fed and GSM that are applicable to such services. 1.3 Operating Rules. The provision of services under this Agreement, to the extent not inconsistent with the terms of this Agreement, shall be governed by a set of "Operating Procedures," established by the mutual agreement of the parties, a copy of which is attached to this Agreement as Exhibit A. The Operating Procedures may be amended from time to time with the written agreement of all the parties. 2. Compensation. In consideration of the services provided pursuant to this Agreement, GSM shall pay Cal Fed fees in amounts and in such a manner as may be established under the Operating Procedures and such other documents and agreements adopted thereunder. 3. Independent Contractor. Cal Fed is, and shall be, considered for all purposes to be an independent contractor of GSM. Cal Fed recognizes and agrees that as an independent contractor, it, its employees, agents and representatives shall not be eligible to participate in any of GSM's employee benefits or similar programs, and the exclusive consideration payable by GSM to Cal Fed for the provision of products and services hereunder shall be as set forth in Section 2 of this Agreement. Cal Fed shall select its own employees, agents and representatives to provide services to GSM pursuant to this Agreement who shall be and act under the exclusive supervision and control of Cal Fed and who shall not be, or deemed for any purpose to be, employees or agents of GSM. Cal Fed is solely and exclusively responsible for determining and adhering to the terms and conditions of hiring, employment or engagement of itself, and its employees, agents and representatives, including hours of work, rates and payment of compensation and benefits, and the payment, reporting, collection, withholding and deduction of all federal, state and local taxes. 4. Powers of Attorney. Each party agrees to designate one or more of the employees, officers, or representatives of another party as its agent-in-fact under a limited power of attorney, in a form agreeable to both parties and their legal counsel, as may be necessary or appropriate to facilitate the performance of the services provided under this Agreement. 5. Indemnification. GSM shall defend and indemnify Cal Fed against and hold it harmless from any and all claims made by third parties for loss or damage arising directly or indirectly from any and all services and products provided by Cal Fed to GSM pursuant to this Agreement, except those claims that result from the knowing and willful misconduct of Cal Fed or the gross negligence of Cal Fed. In the foregoing sentence the words "loss or damage" include, but are not limited to: (1) loss or damage arising directly or indirectly from any actions or omissions of any employee or authorized representative of Cal Fed and; (2) the value of time spent, reasonable attorney's fees and other fees incurred in defending a claim. 6. Term of Agreement. This Agreement shall be effective for five (5) years from the date hereof. 7. Notices. Except as provided in the Operating Procedures, all notices, requests, demands, payments or other communications under this Agreement shall be in writing and shall be deemed to have been given upon personal delivery to a party's designated representative. 2 8. Confidentiality. All information disclosed by one party to another party under the terms of this Agreement, except such information as may be generally available to the public or the thrift and banking industries, is and will be kept confidential unless its disclosure is required by law or is required to be submitted to the regulatory supervisor(s) of the affected party. 9. Breach. Upon the breach of any obligation under this Agreement by either party, the aggrieved party shall give to the breaching party prompt written notice of such breach, which notice shall specify the exact nature of the breach. If this Agreement is terminated, the right of the aggrieved party to any damages for such breach shall not be prejudiced. 10. Integration: Amendments. This Agreement, including its attached exhibits, contains the entire agreement among the parties with respect to its subject matter, and supersedes all prior oral or written agreements, understandings, representation and communications. No amendments can be made to this Agreement except by a writing signed by both of the parties. 11. Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provisions were omitted. 12. Termination. Either party may terminate this Agreement upon at least 30 days prior written notice given to the other party. 13. Choice of Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 14. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be an original but all of which shall constitute one and the same instrument, and any party may execute this Agreement by signing any such counterpart. IN WITNESS WHEREOF, the parties have executed this Agreement effective on the date first above written by their duly authorized officers. CALIFORNIA FEDERAL BANK, GOLDEN STATE A Federal Savings Bank MANAGEMENT INC., A Delaware Corporation By: /s/ Eric K. Kawamura By: /s/ Renee Nichols Tucei ---------------------------- ---------------------------- 3 AGREEMENT FOR THE PROVISION OF SERVICES EXHIBIT A OPERATING PROCEDURES Effective November 23, 1998 The following Operating Procedures have been adopted by California Federal Bank, A Federal Savings Bank ("Cal Fed") and Golden State Management Inc. ("GSM"), a Delaware corporation, to the provisions of the AGREEMENT FOR THE PROVISION OF SERVICES (the "Agreement") dated effective on November 23, 1998. 1. GENERAL MATTERS The purpose of these Operating Procedures is to establish the procedural basis for the provision of services between the parties pursuant to the Agreement. While the majority of all services rendered will be provided pursuant to the Agreement and these Operating Procedures ("general services" arrangements), the parties acknowledge that certain services are and may be governed by separate written agreements and not by the Agreement and these Operating Procedures ("transactional" arrangements). The parties agree that all services that are not subject to separate written agreement shall be governed by the Agreement and these Operating Procedures. 2. SERVICE SCHEDULES Services provided under the Agreement shall be documented for each six-month period beginning on January 1 and July 1 of each calendar year.(1) The documentation shall consist of two schedules agreed to among the parties describing the services rendered and the amounts to be charged therefor. At the beginning of each six month period described above, the parties shall agree to a preliminary Services Schedule which shall set forth the parties' good faith agreed estimates for the services to be provided during such six month period and the estimated compensation to be paid for such services. As soon as practicable following the completion of such six month period, the parties shall agree to a final Services Schedule which shall describe the actual services provided during the six month period just ended and the agreed compensation therefor. - ------------------------------- (1) However, the initial services period shall cover the period from September 14, 1998 through June 30, 1999. 3. PROVISION OF SERVICES Unless specified in a Services Schedule or in a separate written agreement among the affected parties, the services described in a Services Schedule shall be performed in accordance with the terms, conditions, rules and procedures provided in these Operating Procedures and the Agreement. 4. APPROVALS Each preliminary and final Services Schedule must be approved by each party. 5. COMPENSATION FOR SERVICES 5.1 Payment for Services. On or before the first day of each calendar month during the period covered by the Services Schedule, GSM shall pay Cal Fed the amount identified in the preliminary Services Schedule to be due for services estimated to be provided as of the date of the payment. (Should a preliminary Services Schedule be unavailable for any particular month, the preliminary Services Schedule for the immediately preceding six month period shall be used.) On the date on which the parties agree to the final Services Schedule (as provided in Paragraph 2 above), GSM shall pay Cal Fed any remaining amount due under the final Services Schedule; or Cal Fed shall reimburse GSM for any overpayment. 5.3 Basis of Charges. Services shall be provided on terms and under circumstances, including credit standards, that are substantially the same, or at least as favorable to Cal Fed as those prevailing at the time for comparable transactions with or involving other nonaffiliated companies. In the absence of comparable transactions, services shall be provided on terms and under circumstances, including credit standards, that in good faith would be offered to, or would apply to, nonaffiliated companies. The parties expect that, in the absence of comparable transactions with other nonaffiliated companies, compensation terms will cover Cal Fed's costs and include a reasonable profit for Cal Fed. In all circumstances, GSM agrees to pay Cal Fed compensation sufficient to satisfy all applicable regulatory requirements, including, but not limited to, Section 11 of the Home Owners' Loan Act, Section 23A and 23B of the Federal Reserve Act, and Section 30 of the Federal Deposit Insurance Act. 5.4 Cost Allocation and Documentation. Where charges to GSM are based on the cost to Cal Fed, the allocation of the costs of the services provided under the Agreement by Cal Fed shall be governed, to the greatest extent practicable, by a specific accounting of the services provided to GSM and documented costs of providing such services. Appropriate measures for such allocations will depend on the nature of the services being provided, but might include, as appropriate, comparisons of numbers of employees or accounts served, number of transactions - 2 - performed, assets managed, time expended by staff on such services, or equipment costs attributable to providing such services. 6. REGULATORY OVERSIGHT Each party acknowledges that the arrangements governed by these Operating Procedures are subject to the regulatory oversight of the Department of the Treasury, Office of Thrift Supervision (the "OTS"), the Board of Governors of the Federal Reserve System (the "Board") and the Federal Deposit Insurance Corporation (the "FDIC"). Each of the parties agrees to cooperate in any regulatory inquiries into these arrangements. Further, each party agrees that it will consent to any adjustment to or reversal of any charges under the Agreement necessary or appropriate to comply with the authorized mandate of the OTS, the Board, or the FDIC. 8. AMENDMENTS These Operating Procedures may be amended from time to time by the mutual written agreement of the parties. A copy of all amendments to the Operating Procedures shall be attached to the Agreement. - 3 - EX-10.58 18 AGREEMENT FOR PROVISION OF SERVICES AGREEMENT FOR PROVISION OF SERVICES THIS AGREEMENT FOR THE PROVISION OF SERVICES (the "Agreement") is entered into effective January 1, 1999, between MAFCO HOLDINGS INC., a Delaware corporation ("Mafco") and GOLDEN STATE BANCORP INC. ("GSB"), a Delaware corporation, in reference to the following facts and understandings: RECITALS WHEREAS, GSB and its subsidiaries have and continue to benefit from certain services which have been and continue to be provided by Mafco for the benefit of GSB and its subsidiaries; WHEREAS, GSB desires to compensate Mafco for such services in a manner that is fair and equitable to both GSB and Mafco and to formally document such arrangements; NOW THEREFORE, in consideration of the foregoing, and of their mutual covenants herein, and intending to be legally bound thereby, the parties agree as follows: AGREEMENT 1. Services. Mafco shall, upon the request of GSB, provide GSB with such services as may be agreed between the parties in the manner set forth in Exhibit 1 to this Agreement. All services between the parties that are not the subject of other separate written agreements between the parties shall be governed by the terms and conditions of this Agreement. 2. Compensation. In consideration of the services provided pursuant to this Agreement, GSB shall pay Mafco a periodic fee in the sum of $125,000 per month during the term of this Agreement payable on the first day of each month during the Term. 3. Independent Contractor. Mafco is, and shall be, considered for all purposes to be an independent contractor of GSB. Mafco recognizes and agrees that as an independent contractor, it, its employees, agents and representatives shall not be eligible to participate in any of GSB's employee benefits or similar programs, and the exclusive consideration payable by GSB to Mafco for the provision of services hereunder shall be as set forth in Section 2 of this Agreement. Mafco shall select its own employees, agents and representatives to provide services to GSB pursuant to this Agreement who shall be and act under the exclusive supervision and control of Mafco and who shall not be, or deemed for any purpose to be, employees or agents of GSB. Mafco is solely and exclusively responsible for determining and adhering to the terms and conditions of hiring, employment or engagement of itself, and its employees, agents and representatives, including hours of work, rates and payment of compensation and benefits, and the payment, reporting, collection, withholding and deduction of all federal, state and local taxes. 4. Powers of Attorney. Each party agrees to designate one or more of the employees, officers, or representatives of another party as its agent-in-fact under a limited power of attorney, in a form agreeable to both parties and their legal counsel, as may be necessary or appropriate from time to time to facilitate the performance of the services provided under this Agreement. 5. Indemnification. Each party agrees to indemnify and defend the other party against, and hold it harmless from, any and all losses, costs (including reasonable attorney fees), liabilities, damages, claims and causes of actions resulting from the indemnifying party's negligence or willful misconduct and/or resulting from the indemnifying party's breach or default under this Agreement. 6. Term of Agreement. This Agreement shall be effective for one year from the date hereof. 7. Notices. All notices, requests, demands, payments or other communications under this Agreement shall be in writing and shall be deemed to have been given upon delivery to a party's designated representative. 8. Confidentiality. All information disclosed by one party to another party under the terms of this Agreement, except such information as may be generally available to the public, is and will be kept confidential unless its disclosure is required by law or is required to be submitted to the regulatory supervisor(s) of the affected party. 9. Breach. Upon the breach of any obligation under this Agreement by either party, the aggrieved party shall give to the breaching party prompt written notice of such breach, which notice shall specify the exact nature of the breach. If this Agreement is terminated, the right of the aggrieved party to any damages for such breach shall not be prejudiced. 10. Compliance with Laws, Regulations, Policies and Procedures. The services provided by Mafco to GSB shall comply with all applicable laws and regulations, and, except as may be otherwise specifically agreed by the parties, shall conform to all of the internal policies and procedures of Mafco and GSB that are applicable to such services. 11. Integration; Amendments. This Agreement, including its attached exhibits, contains the entire agreement among the parties with respect to its subject matter, and supersedes all prior oral or written agreements, understandings, representation and 2 communications. No amendments can be made to this Agreement except by a writing signed by both of the parties. 12. Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provisions were omitted. 13. Termination. Either party may terminate this Agreement upon at least 30 days prior written notice given to the other party. 14. Choice of Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. 15. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be an original but all of which shall constitute one and the same instrument, and any party may execute this Agreement by signing any such counterpart. IN WITNESS WHEREOF, the parties have executed this Agreement effective on the date first above written by their duly authorized officers. MAFCO HOLDINGS INC. GOLDEN STATE BANCORP INC. a Delaware corporation a Delaware corporation By: By: /s/ Eric K. Kawamura ------------------------- ------------------------- Eric K. Kawamura Senior Vice President 3 EXHIBIT 1 Schedule of Services Provided by Mafco to GSB 1. Services provided in support of Chairman and CEO of GSB. Office facilities, secretarial support, and office services at Mafco's offices located at 35 E. 62nd St., New York, New York. Transportation for Chairman and CEO in the New York metropolitan area. 2. Services provided in support of other GSB executives. Office facilities provided to an executive of GSB located at 625 Madison Ave., New York, New York. Office facilities, secretarial services and office support located in Washington, D.C. (particularly in support of certain litigation). 3. Insurance related services. Consulting services regarding corporate insurance matters, including assistance in soliciting and negotiating insurance coverage agreements. 4. Legal services. Legal support and consultation on general corporate, securities, litigation, tax and environmental matters. 5. Security matters. Consultation on security and ethics matters involving GSB and its customers. 6. Public relations. Consultation and services in support of public relations and investor relations functions. 7. Legislative services. Legislative and governmental relations support through Mafco's E. 62nd Street, New York and Washington, D.C. offices. 8. Airline and other travel services. Provide cost savings through use of airline, hotel and auto rental discounts negotiated by and available to Mafco. EX-10.59 19 ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT, dated effective as of December 1, 1998 (this "Agreement"), between Golden State Bancorp Inc., a Delaware corporation ("Buyer"), and Trans Network Insurance Services Inc., a Delaware corporation ("Seller"). WITNESSETH WHEREAS, Seller is engaged in the marketing of life, property and casualty insurance to California Federal Bank's retail and consumer loan customers (the "Business"); and WHEREAS, Buyer has agreed to acquire from Seller, and Seller has agreed to sell to Buyer, the Business, on the terms and subject to the conditions set forth herein. NOW THEREFORE, the parties agree as follows: ARTICLE I TRANSFER OF ASSETS AND LIABILITIES Section 1.1 Assets Transferred. Seller hereby transfers, assigns and conveys to Buyer, and Buyer hereby acquires and accepts from Seller, for the consideration set forth in Section 1.3 herein, all of Seller's rights, title and interest in and to its property, assets and rights of every kind, character and description, tangible and intangible, wherever located, related to the Business, including including those properties, assets and rights reflected on the balance sheet (the "Balance Sheet") of Seller at November 30, 1998 attached hereto as Annex I (the "Purchased Assets"). Buyer is not acquiring from Seller, and Seller shall retain ownership of all right, title and interest in and to, and exclude from sale hereunder, all of the assets, properties and rights, tangible or intangible, wherever located, of Seller, other than the Purchased Assets (collectively, the "Excluded Assets"). Section 1.2 Liabilities Assumed. Seller hereby assigns to Buyer, and Buyer hereby assumes from Seller and agrees to pay, perform and discharge, all of the liabilities and obligations of Seller (whether or not known, contingent, incurred or accrued) related to the Purchased Assets (the "Assumed Liabilities"). Buyer is not assuming from Seller, and Seller shall pay perform and discharge, all liabilities and obligations of Seller, other than the Assumed Liabilities (collectively, the "Excluded Liabilities"). 1 Section 1.3 Consideration; Purchase Price. In exchange for the transfer of the Purchased Assets, Buyer hereby (i) assumes the Assumed Liabilities and (ii) is paying Seller $56,019 in immediately available funds to an account designated in writing by Seller. Section 1.4 Closing. Upon the terms and subject to the conditions of this Agreement, the consummation of the transactions contemplated by this Agreement ("Closing") will take place on January 20, 1999 at 10:00 a.m., New York City time, at the offices of Seller, 625 Madison Avenue, New York, New York, or at such other time or such other place as shall be agreed upon by the parties. Section 1.5 Employees. Buyer shall offer employment to all employees of Seller engaged in activities related to the Business. Such offers of employment shall include compensation and employee benefit arrangements which, subject to the specific terms of the Buyer's existing benefit plans or arrangements, shall in the aggregate be substantially similar to those provided to such employees on the date hereof. Section 1.6 Deliveries by Buyer and Seller. In connection with the transactions contemplated hereby, contemporaneously herewith Buyer and Seller are taking the following actions: (a) Seller is duly executing and delivering to Buyer a bill of sale substantially in the form of Exhibit A hereto (the "Bill of Sale"). (b) Buyer is duly executing and delivering an instrument of assignment and assumption substantially in the form of Exhibit B hereto (the "Instrument of Assignment and Assumption"). (c) Buyer and Seller are duly executing and delivering all other documents, certificates or instruments reasonably requested by another party at or prior to the date hereof to effect the transactions contemplated hereby (such documents, certificates and instruments, collectively with the Bill of Sale and the Instrument of Assumption, the "Additional Instruments"). Section 1.7 Third Party Consents. Notwithstanding any other provisions of this Agreement, to the extent that any of the Purchased Assets to be conveyed under Section 1.1 are not assignable or transferable without the consent of another party (including any governmental authority) and such consent has not been obtained, this Agreement shall not constitute an assignment or transfer or an attempted assignment or transfer of such Purchased Assets if such assignment or transfer or attempted assignment or transfer would constitute a breach thereof. Seller agrees to use its best efforts to obtain the consent of such other party to such an assignment or transfer as promptly as practicable. In those cases where consents, releases or waivers have not been obtained to the sale, conveyance, assignment or transfer to Buyer of such Purchased Assets, this Agreement shall constitute an equitable 2 assignment by Seller to Buyer of all of Seller's rights, benefits, title and interest in and to such Purchased Assets, and where necessary or appropriate, Seller shall be deemed to be Buyer's agent for the purpose of completing, fulfilling and discharging all of Buyer's rights and liabilities arising after the date hereof with respect to such Purchased Assets. Seller shall take all necessary steps and actions to provide Buyer with the benefit of such Purchased Assets (including, but not limited to, (i) enforcing any rights of Seller arising with respect to any such Purchased Assets (including without limitation the right to terminate in accordance with the terms thereof upon the advice of Buyer) or (ii) permitting Buyer to enforce any rights arising with respect to Purchased Assets) as if they had been sold, conveyed, assigned or transferred to Buyer. Buyer shall, to the extent Buyer is provided with the benefits of such Purchased Assets, assume, perform and in due course pay and discharge all debts, obligations and liabilities of Seller with respect to such Purchased Assets. If and so long as Seller is acting as Buyer's agent pursuant to this Section 1.6, Buyer will indemnify and hold harmless Seller, its directors, officers and employees against any liabilities and obligations incurred by any of them in connection with Seller's continued performance as such agent, including the payment of any associated Assumed Liabilities. ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLER Seller represents and warrants to Buyer as follows: Section 2.1 Organization. Seller is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. Seller has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Seller is duly qualified or licensed and in good standing to do business in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except in such jurisdictions in which applicable law does not provide for such qualification, licensing or being in good standing and except in such jurisdictions where the failure to be so duly qualified or licensed and in good standing would not, in the aggregate, have a material adverse effect on the business, results of operations or financial or other condition or prospects (a "Material Adverse Effect") on the Business. Section 2.2 Authority. Seller has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated by this Agreement. This Agreement and each Additional Instrument to which Seller is party has been duly and validly executed and delivered by Seller and constitutes a valid and binding obligation of Seller enforceable against Seller in accordance with its terms except that (i) such enforcement may be subject to applicable bankruptcy, insolvency or other similar laws, now or hereafter in effect, affecting creditors rights generally, and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the 3 discretion of the court before which any proceeding therefor may be brought. Section 2.3 Consents and Approvals; No Violation. No filing with, and no permit, authorization, consent or approval of any court of competent jurisdiction, regulatory authority or other governmental authority, or any third party is necessary for the consummation by Seller of the transactions contemplated by this Agreement. Neither the execution and delivery of this Agreement by Seller nor the consummation by Seller of the transactions contemplated by this Agreement nor compliance by Seller with any of the provisions hereof will (i) conflict with or result in any breach of any provision of the certificate of incorporation or by-laws of Seller, (ii) without regard for the provisions of Section 1.6 hereof, result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, contract, agreement, permit, license, lease, purchase order, sales order, arrangement or other commitment or obligation (each a "Contract") to which Seller is a party or by which Seller or its assets or properties may be bound or (iii) violate any order, writ, injunction, decree, statute, treaty, rule or regulation (each an "Order") applicable to Seller or its assets or properties, except in the case of (ii) or (iii) for violations, breaches or defaults which would not, in the aggregate, have a Material Adverse Effect on the Business. Section 2.4 No Undisclosed Liabilities. No liabilities (absolute, accrued, contingent or otherwise) relating to the Business have been incurred, except liabilities relating to the Business incurred since the Balance Sheet Date in the ordinary course of business consistent with past practice, and liabilities incurred in connection with this Agreement. Section 2.5 No Default (a) Seller is not in default or violation (and no event has occurred which with notice or the lapse of time or both would constitute a default or violation) of any term, condition or provision of its certificate of incorporation or by-laws. (b) There exists no default or violation (and no event has occurred which with notice or lapse of time would constitute a default or violation) of any term, condition or provision of (i) any Contract or (ii) any Order except for violations, breaches or defaults which would not, in the aggregate, have a Material adverse Effect on the Business. Section 2.6 Contracts. Each Contract is in full force and effect, has not been modified or amended and constitutes the legal, valid and binding obligation of Seller, enforceable against Seller in accordance with the terms of such Contract. Seller has performed in all respects all obligations required to be performed by it to date under such Contract, except where such failure to perform would not have a Material Adverse Effect on the Business. 4 ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to Seller as follows: Section 3.1 Organization. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. Buyer has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Buyer is duly qualified or licensed and in good standing to do business in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except in such jurisdictions in which applicable law does not provide for such qualification, licensing or being in good standing and except in such jurisdictions where the failure to be so duly qualified or licensed and in good standing would not in the aggregate, have a Material Adverse Effect on Buyer and its subsidiaries, taken as a whole. Section 3.2 Authority. Buyer has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated by this Agreement. This Agreement and each Additional Instrument to which Buyer is a party has been duly and validly executed and delivered by Buyer and constitutes a valid and binding obligation of Buyer enforceable against Buyer in accordance with its terms except that (i) such enforcement may be subject to applicable bankruptcy, insolvency or other similar laws, now or hereafter in effect, affecting creditors rights generally, and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. Section 3.3 Consents and Approvals; No Violation. No filing with, and no permit, authorization, consent or approval of any court of competent jurisdiction, regulatory authority or other governmental authority, or any third party is necessary for the consummation by Buyer of the transactions contemplated by this Agreement. Neither the execution and delivery of this Agreement by Buyer nor the consummation by Buyer of the transactions contemplated by this Agreement nor compliance by Buyer with any of the provisions hereof will (i) conflict with or result in any breach of any provision of the certificate of incorporation or bylaws of Buyer, (ii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any Contract to which Buyer is a party or by which Buyer or its assets or properties may be bound or (iii) violate any Order applicable to Buyer or its assets or properties, except in the case of (ii) or (iii) for violations, breaches or defaults which would not, in the aggregate, have a Material Adverse Effect on Buyer and its subsidiaries, taken as a whole. 5 Section 3.4 No Default. (a) Buyer is not in default or violation (and no event has occurred which with notice or the lapse of time or both would constitute a default or violation) of any term, condition or provision of its certificate of incorporation or by-laws. (b) There exists no default or violation (and no event has occurred which with notice or lapse of time would constitute a default or violation) of any term, condition or provision of (i) any Contract or (ii) any Order except for violations, breaches or defaults which would not, in the aggregate, have a Material adverse Effect on the Buyer and its subsidiaries, taken as a whole. ARTICLE IV MISCELLANEOUS Section 4.1 Further Assurances. From time to time after the Closing, without additional consideration, each of Seller and Buyer will execute and deliver such further instruments and take such other action as may be necessary to make effective the transactions contemplated by this Agreement. Section 4.2 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given upon receipt if delivered personally, telecopied (which is confirmed) or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Seller, to: MacAndrews & Forbes Holdings Inc. 35 East 62nd Street New York, New York 10021 Attn: General Counsel (b) if to Buyer, to: Golden State Bancorp Inc. 135 Main Street, 20th Flr. San Francisco, CA 94105 Attn: General Counsel 6 Section 4.3 Expenses. Except as otherwise provided herein, (i) all costs and expenses associated with the transfer of assets and liabilities hereunder, including but not limited to filing fees, recording fees, value added taxes and other fees and taxes, shall be paid by Seller and (ii) all other costs and expenses incurred in connection with this Agreement shall be paid by the party incurring such cost or expense. Section 4.4 Headings. The headings herein are inserted for convenience only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. Section 4.5 Counterparts. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same instrument. Section 4.6 Amendment; Waiver. This Agreement may be amended, modified or waived at any time by the parties hereto, but only by an instrument in writing signed on behalf of each of the parties hereto. Neither the failure nor the delay on the part of any party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof. Section 4.7 Entire Agreement. This Agreement, the schedules hereto and the Additional Instruments constitutes the entire agreement among the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof. Section 4.8 Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of Delaware, without regard to any applicable principles of conflicts of law. Section 4.9 Specific Performance. The parties hereto agree that if any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached, irreparable damage would occur, no adequate remedy at law would exist and damages would be difficult to determine, and that the parties shall be entitled to specific performance or the terms hereof, in addition to any other remedy at law or equity. Section 4.10 Binding Nature. This Agreement shall be binding upon and inure solely to the benefit of each party hereto and their permitted successors and assigns, and nothing in this Agreement, express or implied, is intended to or shall confer upon an other person or persons any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement. Section 4.11 Severability. This Agreement shall be deemed severable; the invalidity or unenforceability of any term or provision of this Agreement shall not affect the validity or enforceability of this Agreement or of any other term hereof, which shall remain in 7 full force and effect. Section 4.12 Use of Intellectual Property and Corporate Name. The Seller agrees that following the Closing, the Seller will not use any intellectual property sold or conveyed herein. Within 30 days following the Closing, the Seller shall change its corporate name and such new name will not contain the words "Trans Network Insurance Services," or any variation thereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective authorized officers as of the day and year first above written. TRANS NETWORK INSURANCE SERVICES, INC. By: /s/ Glenn P. Dickes ----------------------------------- Glenn P. Dickes Vice President GOLDEN STATE BANCORP INC. By: /s/ Eric K. Kawamura ----------------------------------- Eric K. Kawamura Senior Vice President 8 Annex I Trans Network Insurance Services Inc. Balance Sheet November 30, 1998 Unaudited
Adjusted Balance FMV Balance 11/30/98 Adjustment 11/30/98 ------------------------------------------------- Cash, Wells Fargo Bank 95,872 95,872 Furniture and Equipment 10,023 10,023 Accumulated Depreciation (5,916) (5,916) Prepaid Expenses 5,404 5,404 Intangible Asset - Goodwill 410,506 410,506 Accumulated Amortization (35,919) (35,919) ------- ------- ------- Total Assets 105,383 374,587 479,970 ======= ======= ======= Accrued Payroll Taxes 4,613 4,613 Accrued Employee Benefits 5,594 5,594 Advance from MacAndrews 413,744 413,744 Common Equity 374,587 374,587 Retained Earnings (318,568) (318,568) -------- ------- -------- Total Liabilities & Capital 105,383 374,587 479,970 ======== ======= ========
Exhibit A BILL OF SALE The undersigned, Trans Network Insurance Services Inc., a Delaware corporation, ("Seller"), for and in consideration of One Dollar ($1.00) paid by Golden State Bancorp Inc. ("Buyer") and for other good and valuable consideration, receipt of which is hereby acknowledged, does on the date set forth below grant, convey, transfer, bargain, sell, assign, deliver and set over all of its right, title and interest in, the properties, assets and rights (whether or not reflected on the balance sheet of Seller at November 30, 1998) constituting the Business of Seller, as such term is defined in the Asset Purchase Agreement dated effective as of December 1, 1998 between Buyer and Seller. Dated: Effective as of December 1, 1998 TRANS NETWORK INSURANCE SERVICES INC. By: /s/ Glenn P. Dickes ------------------------------- Glenn P. Dickes Vice President Exhibit B THIS ASSIGNMENT and ASSUMPTION is made effective as of December 1, 1998 between Trans Network Insurance Services Inc., a Delaware corporation, ("Assignor") and Golden State Bancorp Inc., a Delaware corporation ("Assignee"). WHEREAS, Assignor and Assignee are parties to an Asset Purchase Agreement dated effective as of December 1, 1998 (the "Agreement"). WHEREAS, Assignor desires to assign all of the liabilities and obligations of Assignor (whether or not known, contingent, incurred or accrued) related to the Purchased Assets (as such term is defined in the Agreement) (the "Assumed Liabilities"), and Assignee is willing to accept such assignment of the Assumed Liabilities. NOW THEREFORE, intending to be legally bound hereby, Assignor and Assignee hereby agree as follows: 1. ASSIGNMENT. Effective as of the date hereof, Assignor hereby assigns all of the Assumed Liabilities to Assignee. 2. ACCEPTANCE OF ASSIGNMENT. Assignee hereby accepts such assignment and assumes all of the Assumed Liabilities. 3. GOVERNING LAW. This Assignment and Assumption shall be governed by the laws of the State of Delaware. IN WITNESS WHEREOF, the parties have duly executed this Assignment and Assumption. TRANS NETWORK INSURANCE GOLDEN STATE BANCORP INC. SERVICES INC. By: /s/ Glenn P. Dickes By: /s/ Eric K. Kawamura ------------------------------- ------------------------------ Glenn P. Dickes Eric K. Kawamura Vice President Senior Vice President THIS ASSIGNMENT and ASSUMPTION is made effective as of December 1, 1998 between Trans Network Insurance Services Inc., a Delaware corporation, ("Assignor") and Golden State Bancorp Inc., a Delaware corporation ("Assignee"). WHEREAS, Assignor and Assignee are parties to an Asset Purchase Agreement dated effective as of December 1, 1998 (the "Agreement"). WHEREAS, Assignor desires to assign all of the liabilities and obligations of Assignor (whether or not known, contingent, incurred or accrued) related to the Purchased Assets (as such term is defined in the Agreement) (the "Assumed Liabilities"), and Assignee is willing to accept such assignment of the Assumed Liabilities. NOW THEREFORE, intending to be legally bound hereby, Assignor and Assignee hereby agree as follows: 1. ASSIGNMENT. Effective as of the date hereof, Assignor hereby assigns all of the Assumed Liabilities to Assignee. 2. ACCEPTANCE OF ASSIGNMENT. Assignee hereby accepts such assignment and assumes all of the Assumed Liabilities. 3. GOVERNING LAW. This Assignment and Assumption shall be governed by the laws of the State of Delaware. IN WITNESS WHEREOF, the parties have duly executed this Assignment and Assumption. TRANS NETWORK INSURANCE GOLDEN STATE BANCORP INC. SERVICES INC. By: /s/ Glenn P. Dickes By: /s/ Eric K. Kawamura --------------------------- ----------------------------- Glenn P. Dickes Eric K. Kawamura Vice President Senior Vice President BILL OF SALE The undersigned, Trans Network Insurance Services Inc., a Delaware corporation, ("Seller"), for and in consideration of One Dollar ($1.00) paid by Golden State Bancorp Inc. ("Buyer") and for other good and valuable consideration, receipt of which is hereby acknowledged, does on the date set forth below grant, convey, transfer, bargain, sell, assign, deliver and set over all of its right, title and interest in, the properties, assets and rights (whether or not reflected on the balance sheet of Seller at November 30, 1998) constituting the Business of Seller, as such term is defined in the Asset Purchase Agreement dated effective as of December 1, 1998 between Buyer and Seller. Dated: Effective as of December 1, 1998 TRANS NETWORK INSURANCE SERVICES INC. By: /s/ Glenn P. Dickes -------------------------- Glenn P. Dickes Vice President EX-10.60 20 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT, dated as of October 7, 1998 ("Agreement"), by and between Golden State Management Inc., a Delaware corporation (the"Purchaser") and RGI Group Incorporated, a Delaware corporation (the "Seller"). WHEREAS, the Seller beneficially owns 1,000 shares of common stock, par value $1.00 per share ("Company Common Stock"), of GSB Aviation Inc. ("Company") representing 100% of the issued and outstanding capital stock of the Company; and WHEREAS, the Seller wishes to sell to the Purchaser, and the Purchaser wishes to purchase from the Seller, upon the terms and conditions hereinafter set forth herein, all of the Company Common Stock beneficially owned by the Seller. NOW, THEREFORE, in consideration of the foregoing and the mutual promises, representations, warranties, and agreements contained herein, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE 1. PURCHASE AND SALE OF THE SHARES Section 1.1 Purchase and Sale of the Shares. Upon the terms and subject to the conditions of this Agreement, at the Closing (as defined below in Section 1.3), the Seller shall sell, convey, assign, transfer and deliver to the Purchaser and the Purchaser shall purchase, acquire and accept from the Seller 1,000 shares of Company Common Stock ("Shares"). Section 1.2 Purchase Price. The purchase price for the Shares is $26,427.23 per share of Company Common Stock, or an aggregate purchase price of $26,427,230 ("Purchase Price"). Section 1.3 Closing. Upon the terms and subject to the conditions of this Agreement, the consummation of the transactions contemplated by this Agreement ("Closing") will take place on November 4, 1998, at 10:00 a.m., New York City time, at the offices of Seller, 625 Madison Avenue, New York, New York, or at such other time or such other place as shall be agreed upon by the parties. The date on which the Closing occurs is hereinafter referred to as the "Closing Date." Section 1.4 Delivery by the Seller. At the Closing, the Seller shall deliver or cause to be delivered to the Purchaser a stock certificate or certificates representing the Shares purchased by the Purchaser pursuant to this Agreement, accompanied by a stock power or powers duly executed in blank. Section 1.5 Delivery by the Purchaser. At the Closing, the Purchaser shall deliver or cause to be delivered to the Seller the Purchase Price payable by wire transfer in immediately available funds to an account specified in writing by the Seller. Immediately after the Closing, the Purchaser shall cause the removal of the directors and officers of the Company and the election of directors and officers selected by the Purchaser. ARTICLE 2. REPRESENTATIONS AND WARRANTIES OF THE SELLER Section 2.1 Ownership of Shares. The Seller is the record and beneficial owner, and has sole power to vote and dispose, of the Shares. On the date hereof, the Shares constitute all of the issued and outstanding shares of Company Common Stock and such shares are owned of record and beneficially by the Seller. Section 2.2 Authorization; Validity of Agreement; Necessary Action. The Seller has all necessary power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance by the Seller of this Agreement and the consummation by the Seller of the transactions contemplated hereby have been duly and validly authorized. This Agreement has been duly executed and delivered by the Seller, and constitutes a valid and binding obligation of the Seller, enforceable against it in accordance with its terms, except that (i) such enforcement may be subject to applicable bankruptcy, insolvency or other similar laws, now or hereafter in effect, affecting creditors' rights generally, and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. Section 2.3 No Violations. (a) (i) No filing with, and no permit, authorization, consent or approval of, any state or federal public body or authority is necessary for the execution of this Agreement by the Seller and the consummation by the Seller of the transactions contemplated hereby and (ii) neither the execution and delivery of this Agreement by the Seller does, nor the consummation by the Seller of the transactions contemplated hereby nor 2 compliance by the Seller with any of the provisions hereof will (x) conflict with or result in any breach of any applicable partnership agreement or other agreements or organizational documents applicable to the Seller, (y) result in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default (or give rise to any third party right of termination, cancellation, material modification or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, commitment, arrangement, understanding, agreement or other instrument or obligation of any kind to which the Seller is a party or by which the Seller or any of its properties or assets may be bound or (z) violate any order, writ, injunction, decree, judgment, statute, rule or regulation applicable to the Seller or any of its properties or assets. (b) The Shares and the certificates representing such Shares are held by the Seller, free and clear of all liens, claims, security interests, proxies, voting trusts or agreements, understandings or arrangements or any other encumbrances whatsoever. Seller currently has, and on the Closing Date shall sell, assign, transfer and deliver to the Purchaser at the Closing, and the Purchaser shall receive at the Closing, good, valid and marketable title to the Company Common Stock. ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER Section 3.1 Organization. The Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Section 3.2 Authorization; Validity of Agreement; Necessary Action. The Purchaser has all necessary power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance by the Purchaser of this Agreement and the consummation by the Purchaser of the transactions contemplated hereby have been duly and validly authorized. This Agreement has been duly executed and delivered by the Purchaser, and constitutes a valid and binding obligation of the Purchaser, enforceable against it in accordance with its terms, except that (i) such enforcement may be subject to applicable bankruptcy, insolvency or other similar laws, now or hereafter in effect, affecting creditors, rights generally, and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. 3 Section 3.3 No Violations. (i) No filing with, and no permit, authorization, consent or approval of, any state or federal public body or authority is necessary for the execution of this Agreement by the Purchaser and the consummation by it of the transactions contemplated hereby; and (ii) neither the execution and delivery of this Agreement by the Purchaser does, nor the consummation by it of the transactions contemplated hereby nor compliance by it with any of the provisions hereof will (x) conflict with or result in any breach of any organizational documents of the Purchaser, (y) result in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default (or give rise to any third party right of termination, cancellation, material modification or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, commitment, arrangement, understanding, agreement or other instrument or obligation of any kind to which the Purchaser is a party or by which the Purchaser or any of its properties or assets may be bound or (z) violate any order, writ, injunction, decree, judgment, statute, rule or regulation applicable to the Purchaser or any of its properties or assets. ARTICLE 4. CONDITIONS TO THE OBLIGATIONS OF BOTH PARTIES The respective obligation of each party to effect the transactions contemplated by this Agreement shall be subject to the satisfaction or waiver, at or prior to the Closing, of the following conditions: Section 4.1 Accuracy of Representations and Warranties. The representations and warranties of the Seller or the Purchaser, as the case may be, in this Agreement shall be true and correct as of the date hereof and at and as of the Closing with the same effect as though such representations and warranties had been made at and as of such time. Section 4.2 No Prohibition. No court, arbitrator or governmental body, agency or official shall have issued any order, decree or ruling (which shall not have been stayed or suspended pending appeal) and there shall not be any effective statute, rule or regulation, restraining, enjoining or prohibiting the Closing. ARTICLE 5. MISCELLANEOUS Section 5.1 Survival. All representation and warranties contained herein shall survive the Closing. 4 Section 5.2 Entire Agreement; Assignment. This Agreement (i) constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof and (ii) shall not be assigned by operation of law or otherwise without the prior written consent of the other party (except that the Purchaser may assign its rights, interests and obligations to any of its affiliates without the consent of the Seller provided no such assignment shall relieve the Purchaser of any liability for any breach by such assignee). Section 5.3 Amendments. This Agreement may not be modified, amended, altered or supplemented, except upon the execution and delivery of a written agreement executed by the parties hereto. Section 5.4 Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be deemed duly given when delivered or (unless specified otherwise) mailed by United States certified or registered mail, return, receipt, requested, addressed as follows: If to Seller: RGI Group Incorporated 625 Madison Avenue New York, New York 10022 Attn: General Counsel If to Buyer: Golden State Management Inc. 135 Main Street, 20th floor San Francisco, California 94105 Attn: General Counsel Section 5.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. 5 Section 5.6 Enforcement. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement. Section 5.7 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but both of which shall constitute one and the same Agreement. Section 5.8 Descriptive Headings. The descriptive headings used herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. RGI GROUP INCORPORATED By: /s/ Glenn P. Dickes ----------------------------------- Glenn P. Dickes Senior Vice President GOLDEN STATE MANAGEMENT INC. By: /s/ Charles W. Kay ----------------------------------- Name: Charles W. Kay Title: Senior Vice President 6 EX-10.61 21 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT, dated effective as of December 1, 1998 ("Agreement"), by and between Golden State Management Inc., a Delaware corporation (the"Purchaser") and Trans Network Insurance Services Inc., a Delaware corporation (the "Seller"). WHEREAS, the Seller beneficially owns 1,000 shares of common stock, par value $1.00 per share ("Company Common Stock"), of FGB Services Inc. ("Company") representing 100% of the issued and outstanding capital stock of the Company; and WHEREAS, the Seller wishes to sell to the Purchaser, and the Purchaser wishes to purchase from the Seller, upon the terms and conditions hereinafter set forth herein, all of the Company Common Stock beneficially owned by the Seller. NOW, THEREFORE, in consideration of the foregoing and the mutual promises, representations, warranties, and agreements contained herein, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE 1. PURCHASE AND SALE OF THE SHARES Section 1.1 Purchase and Sale of the Shares. Upon the terms and subject to the conditions of this Agreement, at the Closing (as defined below in Section 1.3), the Seller shall sell, convey, assign, transfer and deliver to the Purchaser and the Purchaser shall purchase, acquire and accept from the Seller 1,000 shares of Company Common Stock ("Shares"). Section 1.2 Purchase Price. The purchase price for the Shares is $149.10 per share of Company Common Stock, or an aggregate purchase price of $149,097 ("Purchase Price"). Section 1.3 Closing. Upon the terms and subject to the conditions of this Agreement, the consummation of the transactions contemplated by this Agreement ("Closing") will take place on January 20, 1999, at 10:00 a.m., New York City time, at the offices of Seller, 625 Madison Avenue, New York, New York, or at such other time or such other place as shall be agreed upon by the parties. The date on which the Closing occurs is hereinafter referred to as the "Closing Date." Section 1.4 Delivery by the Seller. At the Closing, the Seller shall deliver or cause to be delivered to the Purchaser a stock certificate or certificates representing the Shares purchased by the Purchaser pursuant to this Agreement, accompanied by a stock power or powers duly executed in blank. Section 1.5 Delivery by the Purchaser. At the Closing, the Purchaser shall deliver or cause to be delivered to the Seller the Purchase Price payable by wire transfer in immediately available funds to an account specified in writing by the Seller. Immediately after the Closing, the Purchaser shall cause the removal of the directors and officers of the Company and the election of directors and officers selected by the Purchaser. ARTICLE 2. REPRESENTATIONS AND WARRANTIES OF THE SELLER Section 2.1 Ownership of Shares. The Seller is the record and beneficial owner, and has sole power to vote and dispose, of the Shares. On the date hereof, the Shares constitute all of the issued and outstanding shares of Company Common Stock and such shares are owned of record and beneficially by the Seller. Section 2.2 Authorization; Validity of Agreement; Necessary Action. The Seller has all necessary power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance by the Seller of this Agreement and the consummation by the Seller of the transactions contemplated hereby have been duly and validly authorized. This Agreement has been duly executed and delivered by the Seller, and constitutes a valid and binding obligation of the Seller, enforceable against it in accordance with its terms, except that (i) such enforcement may be subject to applicable bankruptcy, insolvency or other similar laws, now or hereafter in effect, affecting creditors' rights generally, and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. Section 2.3 No Violations. (a) (i) No filing with, and no permit, authorization, consent or approval of, any state or federal public body or authority is necessary for the execution of this Agreement by the Seller and the consummation by the Seller of the transactions contemplated hereby and (ii) neither the execution and delivery of this Agreement by the Seller does, nor the consummation by the Seller of the transactions contemplated hereby nor compliance by the Seller with any of the provisions hereof will (x) conflict with or result in any breach of any applicable partnership agreement or other agreements or organizational documents applicable to the Seller, (y) result in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default (or give rise to any third party right of termination, cancellation, 2 material modification or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, commitment, arrangement, understanding, agreement or other instrument or obligation of any kind to which the Seller is a party or by which the Seller or any of its properties or assets may be bound or (z) violate any order, writ, injunction, decree, judgment, statute, rule or regulation applicable to the Seller or any of its properties or assets. (b) The Shares and the certificates representing such Shares are held by the Seller, free and clear of all liens, claims, security interests, proxies, voting trusts or agreements, understandings or arrangements or any other encumbrances whatsoever. Seller currently has, and on the Closing Date shall sell, assign, transfer and deliver to the Purchaser at the Closing, and the Purchaser shall receive at the Closing, good, valid and marketable title to the Company Common Stock. ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER Section 3.1 Organization. The Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Section 3.2 Authorization; Validity of Agreement; Necessary Action. The Purchaser has all necessary power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance by the Purchaser of this Agreement and the consummation by the Purchaser of the transactions contemplated hereby have been duly and validly authorized. This Agreement has been duly executed and delivered by the Purchaser, and constitutes a valid and binding obligation of the Purchaser, enforceable against it in accordance with its terms, except that (i) such enforcement may be subject to applicable bankruptcy, insolvency or other similar laws, now or hereafter in effect, affecting creditors, rights generally, and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. Section 3.3 No Violations. (i) No filing with, and no permit, authorization, consent or approval of, any state or federal public body or authority is necessary for the execution of this Agreement by the Purchaser and the consummation by it of the transactions contemplated hereby; and (ii) neither the execution and delivery of this Agreement by the Purchaser does, nor the consummation by it of the transactions contemplated hereby nor compliance by it with any of the provisions hereof will (x) conflict with or result in any breach 3 of any organizational documents of the Purchaser, (y) result in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default (or give rise to any third party right of termination, cancellation, material modification or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, commitment, arrangement, understanding, agreement or other instrument or obligation of any kind to which the Purchaser is a party or by which the Purchaser or any of its properties or assets may be bound or (z) violate any order, writ, injunction, decree, judgment, statute, rule or regulation applicable to the Purchaser or any of its properties or assets. ARTICLE 4. CONDITIONS TO THE OBLIGATIONS OF BOTH PARTIES The respective obligation of each party to effect the transactions contemplated by this Agreement shall be subject to the satisfaction or waiver, at or prior to the Closing, of the following conditions: Section 4.1 Accuracy of Representations and Warranties. The representations and warranties of the Seller or the Purchaser, as the case may be, in this Agreement shall be true and correct as of the date hereof and at and as of the Closing with the same effect as though such representations and warranties had been made at and as of such time. Section 4.2 No Prohibition. No court, arbitrator or governmental body, agency or official shall have issued any order, decree or ruling (which shall not have been stayed or suspended pending appeal) and there shall not be any effective statute, rule or regulation, restraining, enjoining or prohibiting the Closing. ARTICLE 5. MISCELLANEOUS Section 5.1 Survival. All representation and warranties contained herein shall survive the Closing. Section 5.2 Entire Agreement; Assignment. This Agreement (i) constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof and (ii) shall not be assigned by operation of law or otherwise without the prior written consent of the other party (except that the Purchaser may assign its rights, interests and obligations to any of its affiliates without the consent of the Seller provided no such assignment shall relieve the Purchaser of any liability for any breach by such assignee). 4 Section 5.3 Amendments. This Agreement may not be modified, amended, altered or supplemented, except upon the execution and delivery of a written agreement executed by the parties hereto. Section 5.4 Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be deemed duly given when delivered or (unless specified otherwise) mailed by United States certified or registered mail, return, receipt, requested, addressed as follows: If to Seller: Trans Network Insurance Services Inc. 35 East 62nd Street New York, New York 10021 Attn: General Counsel If to Buyer: Golden State Management Inc. 135 Main Street, 20th floor San Francisco, California 94105 Attn: General Counsel Section 5.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. Section 5.6 Enforcement. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement. Section 5.7 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but both of which shall constitute one and the same Agreement. Section 5.8 Descriptive Headings. The descriptive headings used herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. 5 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. TRANS NETWORK INSURANCE SERVICES INC. By: /s/ Glenn P. Dickes ---------------------------------- Glenn P. Dickes Vice President and Secretary GOLDEN STATE MANAGEMENT INC. By: /s/ Charles W. Kay ---------------------------------- Name: Charles W. Kay Title: Senior Vice President 6 EX-10.62 22 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT, dated effective as of December 1, 1998 ("Agreement"), by and between Golden State Management Inc., a Delaware corporation (the"Purchaser") and Trans Network Insurance Services Inc., a Delaware corporation (the "Seller"). WHEREAS, the Seller beneficially owns 1,000 shares of common stock, par value $1.00 per share ("Company Common Stock"), of First Nationwide Management Corp. ("Company") representing 100% of the issued and outstanding capital stock of the Company; and WHEREAS, the Seller wishes to sell to the Purchaser, and the Purchaser wishes to purchase from the Seller, upon the terms and conditions hereinafter set forth herein, all of the Company Common Stock beneficially owned by the Seller. NOW, THEREFORE, in consideration of the foregoing and the mutual promises, representations, warranties, and agreements contained herein, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE 1. PURCHASE AND SALE OF THE SHARES Section 1.1 Purchase and Sale of the Shares. Upon the terms and subject to the conditions of this Agreement, at the Closing (as defined below in Section 1.3), the Seller shall sell, convey, assign, transfer and deliver to the Purchaser and the Purchaser shall purchase, acquire and accept from the Seller 1,000 shares of Company Common Stock ("Shares"). Section 1.2 Purchase Price. The purchase price for the Shares is $1,114.98 per share of Company Common Stock, or an aggregate purchase price of $1,114,978 ("Purchase Price"). Section 1.3 Closing. Upon the terms and subject to the conditions of this Agreement, the consummation of the transactions contemplated by this Agreement ("Closing") will take place on January 20, 1999, at 10:00 a.m., New York City time, at the offices of Seller, 625 Madison Avenue, New York, New York, or at such other time or such other place as shall be agreed upon by the parties. The date on which the Closing occurs is hereinafter referred to as the "Closing Date." Section 1.4 Delivery by the Seller. At the Closing, the Seller shall deliver or cause to be delivered to the Purchaser a stock certificate or certificates representing the Shares purchased by the Purchaser pursuant to this Agreement, accompanied by a stock power or powers duly executed in blank. Section 1.5 Delivery by the Purchaser. At the Closing, the Purchaser shall deliver or cause to be delivered to the Seller the Purchase Price payable by wire transfer in immediately available funds to an account specified in writing by the Seller. Immediately after the Closing, the Purchaser shall cause the removal of the directors and officers of the Company and the election of directors and officers selected by the Purchaser. ARTICLE 2. REPRESENTATIONS AND WARRANTIES OF THE SELLER Section 2.1 Ownership of Shares. The Seller is the record and beneficial owner, and has sole power to vote and dispose, of the Shares. On the date hereof, the Shares constitute all of the issued and outstanding shares of Company Common Stock and such shares are owned of record and beneficially by the Seller. Section 2.2 Authorization; Validity of Agreement; Necessary Action. The Seller has all necessary power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance by the Seller of this Agreement and the consummation by the Seller of the transactions contemplated hereby have been duly and validly authorized. This Agreement has been duly executed and delivered by the Seller, and constitutes a valid and binding obligation of the Seller, enforceable against it in accordance with its terms, except that (i) such enforcement may be subject to applicable bankruptcy, insolvency or other similar laws, now or hereafter in effect, affecting creditors' rights generally, and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. Section 2.3 No Violations. (a) (i) No filing with, and no permit, authorization, consent or approval of, any state or federal public body or authority is necessary for the execution of this Agreement by the Seller and the consummation by the Seller of the transactions contemplated hereby and (ii) neither the execution and delivery of this Agreement by the Seller does, nor the consummation by the Seller of the transactions contemplated hereby nor compliance by the Seller with any of the provisions hereof will (x) conflict with or result in any breach of any applicable partnership agreement or other agreements or organizational documents applicable to the Seller, (y) result in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default (or give rise to any third party right of termination, cancellation, 2 material modification or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, commitment, arrangement, understanding, agreement or other instrument or obligation of any kind to which the Seller is a party or by which the Seller or any of its properties or assets may be bound or (z) violate any order, writ, injunction, decree, judgment, statute, rule or regulation applicable to the Seller or any of its properties or assets. (b) The Shares and the certificates representing such Shares are held by the Seller, free and clear of all liens, claims, security interests, proxies, voting trusts or agreements, understandings or arrangements or any other encumbrances whatsoever. Seller currently has, and on the Closing Date shall sell, assign, transfer and deliver to the Purchaser at the Closing, and the Purchaser shall receive at the Closing, good, valid and marketable title to the Company Common Stock. ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER Section 3.1 Organization. The Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Section 3.2 Authorization; Validity of Agreement; Necessary Action. The Purchaser has all necessary power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance by the Purchaser of this Agreement and the consummation by the Purchaser of the transactions contemplated hereby have been duly and validly authorized. This Agreement has been duly executed and delivered by the Purchaser, and constitutes a valid and binding obligation of the Purchaser, enforceable against it in accordance with its terms, except that (i) such enforcement may be subject to applicable bankruptcy, insolvency or other similar laws, now or hereafter in effect, affecting creditors, rights generally, and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. Section 3.3 No Violations. (i) No filing with, and no permit, authorization, consent or approval of, any state or federal public body or authority is necessary for the execution of this Agreement by the Purchaser and the consummation by it of the transactions contemplated hereby; and (ii) neither the execution and delivery of this Agreement by the Purchaser does, nor the consummation by it of the transactions contemplated hereby nor compliance by it with any of the provisions hereof will (x) conflict with or result in any breach 3 of any organizational documents of the Purchaser, (y) result in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default (or give rise to any third party right of termination, cancellation, material modification or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, commitment, arrangement, understanding, agreement or other instrument or obligation of any kind to which the Purchaser is a party or by which the Purchaser or any of its properties or assets may be bound or (z) violate any order, writ, injunction, decree, judgment, statute, rule or regulation applicable to the Purchaser or any of its properties or assets. ARTICLE 4. CONDITIONS TO THE OBLIGATIONS OF BOTH PARTIES The respective obligation of each party to effect the transactions contemplated by this Agreement shall be subject to the satisfaction or waiver, at or prior to the Closing, of the following conditions: Section 4.1 Accuracy of Representations and Warranties. The representations and warranties of the Seller or the Purchaser, as the case may be, in this Agreement shall be true and correct as of the date hereof and at and as of the Closing with the same effect as though such representations and warranties had been made at and as of such time. Section 4.2 No Prohibition. No court, arbitrator or governmental body, agency or official shall have issued any order, decree or ruling (which shall not have been stayed or suspended pending appeal) and there shall not be any effective statute, rule or regulation, restraining, enjoining or prohibiting the Closing. ARTICLE 5. MISCELLANEOUS Section 5.1 Survival. All representation and warranties contained herein shall survive the Closing. Section 5.2 Entire Agreement; Assignment. This Agreement (i) constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof and (ii) shall not be assigned by operation of law or otherwise without the prior written consent of the other party (except that the Purchaser may assign its rights, interests and obligations to any of its affiliates without the consent of the Seller provided no such assignment shall relieve the Purchaser of any liability for any breach by such assignee). 4 Section 5.3 Amendments. This Agreement may not be modified, amended, altered or supplemented, except upon the execution and delivery of a written agreement executed by the parties hereto. Section 5.4 Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be deemed duly given when delivered or (unless specified otherwise) mailed by United States certified or registered mail, return, receipt, requested, addressed as follows: If to Seller: Trans Network Insurance Services Inc. 35 East 62nd Street New York, New York 10021 Attn: General Counsel If to Buyer: Golden State Management Inc. 135 Main Street, 20th floor San Francisco, California 94105 Attn: General Counsel Section 5.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. Section 5.6 Enforcement. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement. Section 5.7 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but both of which shall constitute one and the same Agreement. Section 5.8 Descriptive Headings. The descriptive headings used herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. 5 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. TRANS NETWORK INSURANCE SERVICES INC. By: /s/ Glenn P. Dickes ------------------------------- Glenn P. Dickes Vice President and Secretary GOLDEN STATE MANAGEMENT INC. By: /s/ Charles W. Kay ------------------------------- Name: Charles W. Kay Title: Senior Vice President 6 EX-10.63 23 EQUITY PURCHASE AGREEMENT EQUITY PURCHASE AGREEMENT EQUITY PURCHASE AGREEMENT, dated as of January 19, 1999 ("Agreement"), by and between Golden State Management Inc., a Delaware corporation (the "Purchaser") and RGI Group Incorporated, a Delaware corporation (the "Seller"). WHEREAS, the Seller beneficially owns all of the equity interest (the "Company Equity") of GSB Aviation (Two) LLC ("Company"); and WHEREAS, the Seller wishes to sell to the Purchaser, and the Purchaser wishes to purchase from the Seller, upon the terms and conditions hereinafter set forth herein, all of the Company Equity beneficially owned by the Seller. NOW, THEREFORE, in consideration of the foregoing and the mutual promises, representations, warranties, and agreements contained herein, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE 1. PURCHASE AND SALE OF THE EQUITY Section 1.1 Purchase and Sale of the Equity. Upon the terms and subject to the conditions of this Agreement, at the Closing (as defined below in Section 1.3), the Seller shall sell, convey, assign, transfer and deliver to the Purchaser and the Purchaser shall purchase, acquire and accept from the Seller all of the Company Equity. Section 1.2 Purchase Price. The purchase price for the Company Equity is One Million Five Hundred Ninety Nine Thousand Six Hundred Thirty Three Dollars ($1,599,633) ("Purchase Price"). Section 1.3 Closing. Upon the terms and subject to the conditions of this Agreement, the consummation of the transactions contemplated by this Agreement ("Closing") will take place on February 1, 1999, at 10:00 a.m., New York City time, at the offices of Seller, 625 Madison Avenue, New York, New York, or at such other time or such other place as shall be agreed upon by the parties. The date on which the Closing occurs is hereinafter referred to as the "Closing Date." Section 1.4 Delivery by the Seller. At the Closing, the Seller shall deliver or cause to be delivered to the Purchaser a bill of sale evidencing transfer to the Purchaser of the Company Equity. Section 1.5 Delivery by the Purchaser. At the Closing, the Purchaser shall deliver or cause to be delivered to the Seller the Purchase Price payable by wire transfer in immediately available funds to an account specified in writing by the Seller. Immediately after the Closing, the Purchaser shall cause the removal of the officers of the Company and the election of officers selected by the Purchaser. ARTICLE 2. REPRESENTATIONS AND WARRANTIES OF THE SELLER Section 2.1 Ownership of Equity. The Seller is the beneficial owner, and has sole power to vote and dispose, of the Company Equity and such Company Equity is owned beneficially by the Seller. Section 2.2 Authorization; Validity of Agreement; Necessary Action. The Seller has all necessary power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance by the Seller of this Agreement and the consummation by the Seller of the transactions contemplated hereby have been duly and validly authorized. This Agreement has been duly executed and delivered by the Seller, and constitutes a valid and binding obligation of the Seller, enforceable against it in accordance with its terms, except that (i) such enforcement may be subject to applicable bankruptcy, insolvency or other similar laws, now or hereafter in effect, affecting creditors' rights generally, and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. Section 2.3 No Violations. (a) (i) No filing with, and no permit, authorization, consent or approval of, any state or federal public body or authority is necessary for the execution of this Agreement by the Seller and the consummation by the Seller of the transactions contemplated hereby and (ii) neither the execution and delivery of this Agreement by the Seller does, nor the consummation by the Seller of the transactions contemplated hereby nor compliance by the Seller with any of the provisions hereof will (x) conflict with or result in any breach of any applicable partnership agreement or other agreements or organizational documents applicable to the Seller, (y) result in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default (or give rise to any third party right of termination, cancellation, material modification or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, commitment, arrangement, understanding, agreement or other instrument or obligation of any kind to which the Seller is a party or by which the Seller or any of its properties or assets may be bound or (z) violate any order, writ, injunction, decree, judgment, statute, rule or regulation applicable to the Seller or any of its properties or assets. (b) The Company Equity is held by the Seller, free and clear of all liens, claims, security interests, proxies, voting trusts or agreements, understandings or arrangements or any other encumbrances whatsoever. Seller currently has, and on 2 the Closing Date shall sell, assign, transfer and deliver to the Purchaser at the Closing, and the Purchaser shall receive at the Closing, good, valid and marketable title to the Company Equity. ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER Section 3.1 Organization. The Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Section 3.2 Authorization; Validity of Agreement; Necessary Action. The Purchaser has all necessary power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance by the Purchaser of this Agreement and the consummation by the Purchaser of the transactions contemplated hereby have been duly and validly authorized. This Agreement has been duly executed and delivered by the Purchaser, and constitutes a valid and binding obligation of the Purchaser, enforceable against it in accordance with its terms, except that (i) such enforcement may be subject to applicable bankruptcy, insolvency or other similar laws, now or hereafter in effect, affecting creditors, rights generally, and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. Section 3.3 No Violations. (i) No filing with, and no permit, authorization, consent or approval of, any state or federal public body or authority is necessary for the execution of this Agreement by the Purchaser and the consummation by it of the transactions contemplated hereby; and (ii) neither the execution and delivery of this Agreement by the Purchaser does, nor the consummation by it of the transactions contemplated hereby nor compliance by it with any of the provisions hereof will (x) conflict with or result in any breach of any organizational documents of the Purchaser, (y) result in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default (or give rise to any third party right of termination, cancellation, material modification or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, commitment, arrangement, understanding, agreement or other instrument or obligation of any kind to which the Purchaser is a party or by which the Purchaser or any of its properties or assets may be bound or (z) violate any order, writ, injunction, decree, judgment, statute, rule or regulation applicable to the Purchaser or any of its properties or assets. 3 ARTICLE 4. CONDITIONS TO THE OBLIGATIONS OF BOTH PARTIES The respective obligation of each party to effect the transactions contemplated by this Agreement shall be subject to the satisfaction or waiver, at or prior to the Closing, of the following conditions: Section 4.1 Accuracy of Representations and Warranties. The representations and warranties of the Seller or the Purchaser, as the case may be, in this Agreement shall be true and correct as of the date hereof and at and as of the Closing with the same effect as though such representations and warranties had been made at and as of such time. Section 4.2 No Prohibition. No court, arbitrator or governmental body, agency or official shall have issued any order, decree or ruling (which shall not have been stayed or suspended pending appeal) and there shall not be any effective statute, rule or regulation, restraining, enjoining or prohibiting the Closing. ARTICLE 5. MISCELLANEOUS Section 5.1 Survival. All representations and warranties contained herein shall survive the Closing. Section 5.2 Entire Agreement; Assignment. This Agreement (i) constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof and (ii) shall not be assigned by operation of law or otherwise without the prior written consent of the other party (except that the Purchaser may assign its rights, interests and obligations to any of its affiliates without the consent of the Seller provided no such assignment shall relieve the Purchaser of any liability for any breach by such assignee). Section 5.3 Amendments. This Agreement may not be modified, amended, altered or supplemented, except upon the execution and delivery of a written agreement executed by the parties hereto. Section 5.4 Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be deemed duly given when delivered or (unless specified otherwise) mailed by United States certified or registered mail, return, receipt, requested, addressed as follows: 4 If to Seller: RGI Group Incorporated 35 East 62nd Street New York, New York 10021 Attn: General Counsel If to Buyer: Golden State Management Inc. 135 Main Street, 20th floor San Francisco, California 94105 Attn: General Counsel Section 5.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. Section 5.6 Enforcement. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement. Section 5.7 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but both of which shall constitute one and the same Agreement. 5 Section 5.8 Descriptive Headings. The descriptive headings used herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. RGI GROUP INCORPORATED By: /s/ Glenn P. Dickes ---------------------------------- Glenn P. Dickes Senior Vice President GOLDEN STATE MANAGEMENT INC. By: /s/ Charles W. Kay ---------------------------------- Name: Charles W. Kay Title: Senior Vice President 6 EX-12.1 24 RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND MINORITY INTEREST GOLDEN STATE BANCORP INC. AND SUBSIDIARIES RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND MINORITY INTEREST
Years Ended December 31, ------------------------------------------------------------ 1998 1997 1996 1995 1994 ------------------------------------------------------------ FIXED CHARGES (EXCLUDING INTEREST ON DEPOSITS): Interest on borrowings $1,028,433 $751,432 $429,120 $287,456 $98,888 Total fixed charges (excluding interest on deposits) 1,028,433 751,432 429,120 287,456 98,888 Rent interest factor 9,060 7,857 5,044 6,628 1,746 Income before income taxes, extraordinary item and minority interest 402,264 238,398 507,547 122,450 31,928 Earnings 1,439,757 997,687 941,711 416,534 132,562 Fixed charges (excluding interest on deposits) 1,037,493 759,289 434,164 294,084 100,634 Minority interest 110,527 102,135 48,045 34,584 0 Combined fixed charges (excluding interest on deposits) and minority interest 1,148,020 861,424 482,209 328,668 100,634 Ratio of earnings to combined fixed charges (excluding interest on deposits) and minority interest 1.25 x 1.16 x 1.95 x 1.27 x 1.32 x FIXED CHARGES (INCLUDING INTEREST ON DEPOSITS): Interest on deposits $791,112 $746,985 $419,174 $447,359 $100,957 Interest on borrowings 1,028,433 751,432 429,120 287,456 98,888 Total fixed charges (including interest on deposits) 1,819,545 1,498,417 848,294 734,815 199,845 Rent interest factor 9,060 7,857 5,044 6,628 1,746 Income before income taxes, extraordinary item and minority interest 402,264 238,398 507,547 122,450 31,928 Earnings 2,230,869 1,744,672 1,360,885 863,893 233,519 Fixed charges (including interest on deposits) 1,828,605 1,506,274 853,338 741,443 201,591 Minority interest 110,527 102,135 48,045 34,584 0 Combined fixed charges (including interest on deposits) and minority interest 1,939,132 1,608,409 901,383 776,027 201,591 Ratio of earnings to combined fixed charges (including interest on deposits) and minority interest 1.15 x 1.08 x 1.51 x 1.11 x 1.16 x
EX-21.1 25 SUBSIDIARIES OF GOLDEN STATE BANCORP INC. SUBSIDIARIES OF GOLDEN STATE BANCORP INC.
A. Golden State Financial Corporation (Delaware) (1) Golden State Holdings, Inc. (Delaware) (a) California Federal Bank, A Federal Savings Bank (Federally chartered) (1) Auto One Acceptance Corporation (Texas) (a) Auto Depot, Inc. (Texas) (2) Cal Fed Credit Inc. (California) (3) Cal Fed Enterprises (California) (4) Cal Fed Holdings, Inc. (California) (a) FGB Realty Advisors, Inc. (Texas) (b) First Prudential Corporation (Missouri) (c) FNB Real Estate Corp. (Texas) (d) Glenfed Properties, Inc. (Florida) (i) Glenco Executive Center (Florida) (ii) Oceanside Communities, Inc. (Florida) (d) Unified Mortgage Company (Texas) (i) Frederick Mortgage Corporation (Texas) (5) Cal Fed Investments dba Cal Fed Financial and Insurance Services (California) (a) Cal Fed Investments of Nevada (Nevada) (6) Cal Fed Mortgage Company (California) (7) Cal Fed Service Corporation (California) (8) Cal Fed Syndications (California) (9) California Communities, Inc. (California) (10) California Federal Preferred Capital Corporation (Maryland) (11) California Outlook, Inc. (California) (12) Capital Conveyance Company (California) (13) CF Management Corp. (California) (14) CF Recovery Corp. Two (California) (15) Development Credit Corporation (California) (16) EFT Services, Inc. (California) (17) Glendale Brokerage Services, Inc. (California) (18) FNB Mortgage Corp. (California) (19) First Nationwide Mortgage Corporation dba Cal Fed Lending (Delaware) (a) FNC Insurance Agency, Inc. (California) (i) Cal Fed Insurance Agency, Inc. (California) (b) Master Mortgage Company (California) (c) Verdugo Trustee Service Corporation (California) (20) First Estate Corporation (California) (a) Glenfed Development Corp. (California) (i) Glenfed Development Ventures Corp. (California) (b) Glenfed Investment Properties, Inc. (California) (c) Redlands Financial Services, Inc. (California) (d) Crescent Bay Diversified, Inc. (California) (21) Franciscan Financial Corporation (California) (a) San Francisco Auxiliary Corporation (California) (22) Glendale Investment Corporation (California) (a) Glenfed Capital Corp. (California) (b) Glenfed Financial Corporation (California) (c) Glenfed Reimbursement, Inc. (California) (23) Glenfed Service Corporation (California) (a) August Financial Corporation (California) (i) AGP, Inc. (California) (ii) August Advisors, Inc. (California) (iii) August Management, Inc. (California) (b) Esandel, Inc. (California) (24) United California Financial Company (California) (25) United California Funding Corporation (California) (26) United Resources Capital Corporation (California) (a) United Energy Finance Corporation (California) (27) XCF Acceptance Corporation (California) B. Golden State Management, Inc. (Delaware) (1) GSB Aviation, Inc. (Delaware) (2) GSB Aviation, II, LLC (Delaware) (3) First Nationwide Management Corp. (Delaware) (4) FGB Services, Inc. (Texas)
EX-23.1 26 CONSENT OF INDEPENDENT AUDITORS CONSENT OF INDEPENDENT AUDITORS The Board of Directors Golden State Bancorp Inc.: We consent to the incorporation by reference in the registration statements (No. 333-67837; 333-74615 on Form S-8 and in the registration statements (No. 333-49477; 333-28037) on Form S-3 of Golden State Bancorp Inc. of our report dated January 26, 1999, relating to the consolidated statements of financial condition of Golden State Bancorp Inc. as of December 31, 1998, and 1997, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998, which report appears in the December 31, 1998 annual report on Form 10-K of Golden State Bancorp Inc. KPMG LLP San Francisco, California March 23, 1999 EX-24.1 27 POWER OF ATTORNEY POWER OF ATTORNEY KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints each of Christie S. Flanagan, Renee Nichols Tucei, and Eric K. Kawamura or any of them, each acting alone, his true and lawful attorney-in-fact and agent, with full power of substitution for him and in his name, place and stead, in any and all capacities, in connection with the GOLDEN STATE BANCORP INC. (the "Corporation"), Annual Report on Form 10-K for the year ended December 31, 1998 under the Securities Exchange Act of 1934, as amended including, without limiting the generality of the foregoing, to sign the Form 10-K in the name and on behalf of the Corporation or on behalf of the undersigned as a director or officer of the Corporation, and any amendments to the Form 10-K and any instrument, contract, document or other writing, of or in connection with the Form 10-K or amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, including this power of attorney, with the Securities and Exchange Commission, the Office of Thrift Supervision, or other appropriate regulatory authority and any applicable securities exchange or securities self-regulatory body, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has signed these presents this 11th day of March 1999. /s/ Ronald O. Perelman ----------------------- Ronald O. Perelman EX-24.2 28 POWER OF ATTORNEY POWER OF ATTORNEY KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints each of Christie S. Flanagan, Renee Nichols Tucei, and Eric K. Kawamura or any of them, each acting alone, his true and lawful attorney-in-fact and agent, with full power of substitution for him and in his name, place and stead, in any and all capacities, in connection with the GOLDEN STATE BANCORP INC. (the "Corporation"), Annual Report on Form 10-K for the year ended December 31, 1998 under the Securities Exchange Act of 1934, as amended including, without limiting the generality of the foregoing, to sign the Form 10-K in the name and on behalf of the Corporation or on behalf of the undersigned as a director or officer of the Corporation, and any amendments to the Form 10-K and any instrument, contract, document or other writing, of or in connection with the Form 10-K or amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, including this power of attorney, with the Securities and Exchange Commission, the Office of Thrift Supervision, or other appropriate regulatory authority and any applicable securities exchange or securities self-regulatory body, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has signed these presents this ________ day of March 1999. /s/ Paul M. Bass, Jr. ---------------------------- Paul M. Bass, Jr. EX-24.3 29 POWER OF ATTORNEY POWER OF ATTORNEY KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints each of Christie S. Flanagan, Renee Nichols Tucei, and Eric K. Kawamura or any of them, each acting alone, his true and lawful attorney-in-fact and agent, with full power of substitution for him and in his name, place and stead, in any and all capacities, in connection with the GOLDEN STATE BANCORP INC. (the "Corporation"), Annual Report on Form 10-K for the year ended December 31, 1998 under the Securities Exchange Act of 1934, as amended including, without limiting the generality of the foregoing, to sign the Form 10-K in the name and on behalf of the Corporation or on behalf of the undersigned as a director or officer of the Corporation, and any amendments to the Form 10-K and any instrument, contract, document or other writing, of or in connection with the Form 10-K or amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, including this power of attorney, with the Securities and Exchange Commission, the Office of Thrift Supervision, or other appropriate regulatory authority and any applicable securities exchange or securities self-regulatory body, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has signed these presents this 9 day of March 1999. /s/ Gabrielle K. McDonald -------------------------------- Gabrielle K. McDonald EX-24.4 30 POWER OF ATTORNEY POWER OF ATTORNEY KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints each of Christie S. Flanagan, Renee Nichols Tucei, and Eric K. Kawamura or any of them, each acting alone, his true and lawful attorney-in-fact and agent, with full power of substitution for him and in his name, place and stead, in any and all capacities, in connection with the GOLDEN STATE BANCORP INC. (the "Corporation"), Annual Report on Form 10-K for the year ended December 31, 1998 under the Securities Exchange Act of 1934, as amended including, without limiting the generality of the foregoing, to sign the Form 10-K in the name and on behalf of the Corporation or on behalf of the undersigned as a director or officer of the Corporation, and any amendments to the Form 10-K and any instrument, contract, document or other writing, of or in connection with the Form 10-K or amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, including this power of attorney, with the Securities and Exchange Commission, the Office of Thrift Supervision, or other appropriate regulatory authority and any applicable securities exchange or securities self-regulatory body, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has signed these presents this 11th day of March 1999. /s/ Howard Gittis --------------------------- Howard Gittis EX-27.1 31 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from the consolidated balance sheets and statements of income found on pages 3 and 4 of the Company's audited financial statements for the year ended December 31, 1998. 0001019508 GOLDEN STATE BANCORP INC. 1,000 US$ 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1 854,954 52,671 0 0 13,718,739 3,021,877 3,076,715 32,647,527 588,533 54,868,984 24,620,066 14,045,658 1,459,750 12,568,294 0 0 128,688 1,453,090 54,868,984 1,855,008 693,805 0 2,548,813 791,112 1,819,545 729,268 40,000 1,131 764,003 402,264 398,088 150,333 0 247,755 3.11 3.04 7.23 226,188 0 31,937 86,340 418,674 46,126 5,971 588,533 17,561 0 570,972 Tag 17 - Loans includes Loans held for sale of $2,366,583 and Allowance for loan losses of $588,533
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