10-Q 1 gsb0602.txt GSB6/30/02 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 -------------------------------------------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM N/A to N/A -------------------------------------------------- Commission File Number: 000-29654 --------------------------------------------------------- GOLDEN STATE BANCORP INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-4642135 -------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 135 Main Street, San Francisco,CA 94105 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 415-904-1100 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) N/A -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X YES No ----- ----- The number of shares outstanding of registrant's $1.00 par value common stock, as of the close of business on July 31, 2002: 137,341,206 shares. Page 1 GOLDEN STATE BANCORP INC. SECOND QUARTER 2002 REPORT ON FORM 10-Q TABLE OF CONTENTS PAGE PART I. FINANCIAL INFORMATION ---- --------------------- Item 1. Consolidated Financial Statements Unaudited Consolidated Balance Sheets June 30, 2002 and December 31, 2001................................3 Unaudited Consolidated Statements of Income Six Months Ended June 30, 2002 and 2001............................4 Unaudited Consolidated Statements of Income Three Months Ended June 30, 2002 and 2001..........................5 Unaudited Consolidated Statements of Comprehensive Income Six Months Ended June 30, 2002 and 2001............................6 Unaudited Consolidated Statements of Comprehensive Income Three Months Ended June 30, 2002 and 2001..........................7 Unaudited Consolidated Statement of Stockholders' Equity Six Months Ended June 30, 2002.....................................8 Unaudited Consolidated Statements of Cash Flows Six Months Ended June 30, 2002 and 2001............................9 Notes to Unaudited Consolidated Financial Statements..............11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.....................33 Critical Accounting Policies......................................33 Item 3. Quantitative and Qualitative Disclosures About Market Risk........69 PART II. OTHER INFORMATION ----------------- Item 1. Legal Proceedings.................................................70 Item 2. Changes in Securities.............................................72 Item 3. Defaults Upon Senior Securities...................................72 Item 4. Submission of Matters to a Vote of Security Holders...............73 Item 5. Other Information.................................................73 Item 6. Exhibits and Reports on Form 8-K..................................73 Glossary of Defined Terms..................................................74 Signatures.................................................................77 Page 2 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 2002 AND DECEMBER 31, 2001 (Unaudited) (dollars in thousands, except per share data)

See accompanying notes to unaudited consolidated financial statements. Page 3 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (Unaudited) (dollars in thousands, except per share data)

See accompanying notes to unaudited consolidated financial statements. Page 4 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED JUNE 30, 2002 AND 2001 (Unaudited) (dollars in thousands, except per share data)

See accompanying notes to unaudited consolidated financial statements. Page 5 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (Unaudited) (in thousands)

See accompanying notes to unaudited consolidated financial statements. Page 6 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME THREE MONTHS ENDED JUNE 30, 2002 AND 2001 (Unaudited) (in thousands)

See accompanying notes to unaudited consolidated financial statements. Page 7 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 2002 (Unaudited) (dollars in thousands)

See accompanying notes to unaudited consolidated financial statements. GOLDEN STATE BANCORP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED) SIX MONTHS ENDED JUNE 30, 2002 (Unaudited) (dollars in thousands)

See accompanying notes to unaudited consolidated financial statements. Page 8 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (Unaudited) (in thousands)

See accompanying notes to unaudited consolidated financial statements. Page 9 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (Unaudited) (in thousands)

See accompanying notes to unaudited consolidated financial statements. Page 10 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION --------------------- These financial statements are in accordance with GAAP for interim financial information and Regulation S-X, Article 10. They are unaudited and exclude some of the disclosures for complete financial statements. Management believes it has made all adjustments necessary so that the financial statements are presented fairly. The results of operations for the three and six months ended June 30, 2002 may not indicate future results. Certain prior period amounts have been reclassified to conform to current presentation. These financial statements should be read with the consolidated financial statements of Golden State included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. A glossary of defined terms begins on page 74 of this document. All terms used but not defined in the glossary are clarified in the Company's Annual Report on Form 10-K. These unaudited consolidated financial statements include the accounts of the Company, which owns all of the common stock of GS Holdings, which owns all of the common and preferred stock of the Bank. All significant intercompany balances and transactions have been eliminated in consolidation. Minority interest: other represents amounts attributable to the REIT Preferred Stock of California Federal Preferred Capital Corporation, a wholly owned subsidiary of the Bank. (2) PENDING MERGER -------------- On May 21, 2002, Citigroup and Mercury Merger Sub, a wholly owned subsidiary of Citigroup, entered into a merger agreement with the Company whereby the Company will be merged with and into Mercury Merger Sub, with Mercury Merger Sub as the surviving company. The Merger, which is expected to close in the third quarter of 2002, is subject to regulatory and Golden State stockholder approvals. The Special Meeting of the Company's stockholders to vote on the Merger is scheduled on August 22, 2002. The value of the merger consideration per share of the Company's common stock will be the sum of (a) $16.40 and (b) 0.5234 fractional share of Citigroup common stock for each share of Golden State common stock delivered at closing. The Company's common stockholders will be entitled to elect to receive merger consideration in the form of cash or Citigroup common stock, subject to certain limitations. (3) RECLASSIFICATION OF SECURITIES ------------------------------ On January 1, 2001, the Company reclassified $1.1 billion and $85.0 million carrying value of mortgage-backed securities and U.S. government and agency securities, respectively, from securities held to maturity to their respective available-for-sale portfolios, as permitted upon the adoption of SFAS No. 133. The net unrealized loss related to these securities of $30.4 million, which was recorded in OCI upon their initial transfer to the held-to-maturity portfolio in April 2000, was reclassified from accumulated other comprehensive loss, and the securities were subsequently marked to market, in accordance with SFAS No. 115. Page 11 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (4) CASH, CASH EQUIVALENTS, AND STATEMENTS OF CASH FLOWS ----------------------------------------------------

(5) REDEMPTION OF FN HOLDINGS NOTES ------------------------------- On January 2, 2002, GS Holdings redeemed the remaining $250 thousand principal of the FN Holdings 10 5/8% Senior Notes for a redemption price of $263 thousand, including accrued interest. The premium paid in connection with the redemption was not material. Page 12 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (6) SEGMENT REPORTING ----------------- The Company derives most of its revenues from interest income, and interest expense is the most significant expense. Therefore, net interest income after provision for loan losses is presented for each segment. 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.

_____________ (a) Includes $47.6 million and $68.6 million for the six months ended June 30, 2002 and 2001, respectively, in earnings credit provided to FNMC by the Bank, primarily for custodial bank account balances generated by FNMC. Also includes $72.2 million and $134.1 million for the six months ended June 30, 2002 and 2001, respectively, in interest income and expense on intercompany loans. Includes $21.9 million and $39.0 million for the three months ended June 30, 2002 and 2001, respectively, in earnings credit provided to FNMC by the Bank, primarily for custodial bank account balances generated by FNMC. Also includes $32.3 million and $75.9 million for the three months ended June 30, 2002 and 2001, respectively, in interest income and expense on intercompany loans. (b) Includes $19.2 million and $15.5 million for the six months ended June 30, 2002 and 2001, respectively, in intercompany servicing fees. Also includes $9.6 million and $7.0 million for the three months ended June 30, 2002 and 2001, respectively, in intercompany servicing fees. (c) Includes $2.3 million for each of the six months ended June 30, 2002 and 2001, in intercompany noninterest expense. Also includes $1.2 million for each of the three months ended June 30, 2002 and 2001, in intercompany noninterest expense. (d) Includes $4.0 billion and $6.9 billion for 2002 and 2001, respectively, in intercompany borrowings and $48.4 million and $47.8 million for 2002 and 2001, respectively, in intercompany deposits maintained with the Bank. (e) Includes $1.7 billion for both 2002 and 2001, in MSRs and the related hedge. Page 13 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The following reconciles the above table to the amounts shown on the consolidated financial statements (in thousands):

Page 14 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (7) LOANS RECEIVABLE, NET --------------------- Loans receivable, net, included the following (in thousands):

___________ (a) $884 million, or 42% and $766 million, or 40% of this portfolio, represents prime product as of June 30, 2002 and December 31, 2001, respectively. (8) INTANGIBLE ASSETS ----------------- Upon adopting SFAS No. 142, management reviewed the records from the Company's various acquisitions. At June 30, 2002, the Company's goodwill and other intangible assets totalled $612.6 million. Of this amount, $564.6 million represents goodwill that is no longer being amortized as of January 1, 2002 pursuant to SFAS No. 142. The remaining $48.1 million represents other intangible assets that continue to be amortized. In addition, the Company held MSR balances in the amount of $1,539.6 million at June 30, 2002. The following table provides details on intangible assets including MSRs:

Page 15 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ____________ (a) After deducting $280.5 million and $153.3 million for the valuation allowance at June 30, 2002 and December 31, 2001, respectively. As of June 30, 2002, all of the Company's goodwill, totalling $564.6 million, is included in the community-banking reporting segment. During the second quarter of 2002, goodwill was reduced by the following: (a) $12.7 million representing California state tax refunds and pre-merger interest related to Old Cal Fed (b) $12.6 million related to a reversal of a portion of the deferred tax asset valuation allowance related to Old Cal Fed and adjustments for sales and use tax related to Old Glen Fed and (c) $0.6 million related to the reversal of a portion of the tax reserve based upon the status of Glendale Federal tax audits for 1991 through 1997. Intangible acquisitions during the period were as follows:

Page 16 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS In the first quarter of 2002, the Company reviewed the expected present value of future cash flows for all reporting units with recorded goodwill and determined that the carrying value of the goodwill was not impaired. Actual and estimated future amortization expense is as follows:

The impact of the adoption of SFAS No. 142 on earnings was as follows:

Page 17 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Page 18 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (9) DEPOSITS -------- A summary of the carrying value of deposits is as follows (dollars in thousands):

(10) ACCRUED TERMINATION AND FACILITIES COSTS ---------------------------------------- In connection with the Golden State Acquisition, the Company recorded liabilities resulting from: o branch consolidations due to duplicate facilities and o employee severance and termination benefits due to a planned reduction in force. The merger and integration plan relating to the Golden State Acquisition was in place on September 11, 1998. Certain of these costs were included in the allocation of purchase price and others were recognized in net income. The table below summarizes the activity in the liability for the costs related to the plan (in thousands): Severance and Branch Termination Consolidations Benefits Total -------------- ------------- ----- Balance at December 31, 2001 $14,208 $12,500 $26,708 Charges to liability account (2,492) -- (2,492) ------- ------- ------- Balance at June 30, 2002 $11,716 $12,500 $24,216 ======= ======= ======= Page 19 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (11) INCOME TAXES ------------ During the six months ended June 30, 2002, Golden State recorded gross income tax expense of $146.8 million, which was offset by a tax benefit of $37.1 million, for net income tax expense of $109.7 million. Based on the current status of Mafco Holdings' audits for the years 1991 through 1995 and anticipated reversal of deferred tax assets with established valuation allowance, management changed its judgment about the realizability of the Company's deferred tax assets and reduced its valuation allowance by $44 million. As a result of reducing the valuation allowance, income tax expense was reduced by $31.4 million and goodwill was reduced by $12.6 million. Because these tax benefits accrue to the previous owners of FN Holdings under the Golden State Merger agreement, minority interest: provision in lieu of income tax expense was increased by $31.4 million, an amount equal to the reduction in income tax expense. These adjustments had no impact on net income available to common shareholders. In addition, an accrued liability had been established in prior years for the purpose of satisfying assessments that may result from issues arising during audits with various state taxing authorities. As a result of recent documentation received pertaining to the California audit of Glendale Federal Bank for the years 1991 through 1997, management reduced its accrued state tax liability by $8.7 million during the six months ended June 30, 2002. Goodwill was reduced by $0.6 million in connection with this transaction. The Company also recorded additional Federal tax expense of $3.1 million due to the reduction of the state tax expense. During the six months ended June 30, 2001, Golden State recorded net income tax expense of $117.7 million, which included net tax benefits of $29.0 million. In prior years, an accrued liability was established for the purpose of satisfying assessments that may result from issues arising during audits with various state taxing authorities. As a result of the completion and settlement of audits in various state taxing jurisdictions, additional guidance on the deductibility of covered asset losses, and the current assessment of exposure for tax strategies employed for prior years, management reduced its accrued state tax liability by $39.7 million. The Company also recorded additional Federal tax expense of $13.9 million due to the reduction of the state tax expense. In addition, during the six months ended June 30, 2001, a provision in lieu of income taxes was recorded for $3.2 million due to the utilization of net operating losses of a subsidiary made available as a result of the subsidiary's liquidation into California Federal Bank. These net operating losses are tax benefits retained by the previous owners of FN Holdings pursuant to the Golden State Merger Agreement. (12) STOCKHOLDERS' EQUITY -------------------- COMMON STOCK At June 30, 2002 and December 31, 2001, there were 136,268,562 and 135,756,046 shares, respectively, of Golden State Common Stock issued and outstanding, (net of treasury stock), which included 160,056 and 202,365 shares, respectively, of restricted stock. The effect of these restricted shares is included in the calculation of diluted EPS. See note 15. During the six months ended June 30, 2002, stock options totalling 427,675 were exercised. See note 13. ISSUABLE SHARES During the six months ended June 30, 2002, the Company recorded $31.5 million in Issuable Shares related the reduction of the deferred tax asset valuation allowance (see note 11) and $2.4 million related to changes in pre-merger benefits, both payable to the former owners. Issuable Shares are included, as appropriate, in the calculation of basic and diluted earnings per share. See note 15. Page 20 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ADDITIONAL PAID-IN CAPITAL During the six months ended June 30, 2002, the Company increased paid-in capital by $10.3 million for the exercise of stock options and $2.5 million reflecting the impact of restricted stock. RETAINED EARNINGS At September 11, 1998, in connection with the Golden State Acquisition, certain assets were recorded representing the fair value of each of the Goodwill Litigation Assets that each of the former shareholder groups (pre-merger Golden State and GSB Investments and Hunter's Glen) were contributing to the merged entity. The Golden State Merger agreement contained a mechanism for proportionately allocating these values between the two groups. At September 11, 1998, the fair value of the Glendale Federal Goodwill Litigation Asset contributed by the former Golden State shareholders was $56.9 million, and the fair value of the California Federal Goodwill Litigation equalization adjustment due from GSB Investments and Hunter's Glen was $41.2 million. The $41.2 million, recorded as a contribution receivable, increased retained earnings during the year ended December 31, 1998 and fluctuates based upon the market value of the LTWTMs. At December 31, 2001, the equalization adjustment was recorded at its fair value of $21.2 million. At June 30, 2002, the inherent value of the amount to be contributed by GSB Investments and Hunter's Glen was $11.9 million, which resulted in decreases to both retained earnings and the contribution receivable of $9.3 million. TREASURY STOCK At June 30, 2002, the Company had 16,433,269 shares of its common stock in treasury at an aggregate cost of $19.30 per share. During the six months ended June 30, 2002, the Company repurchased 25,149 shares of common stock, at an aggregate purchase price of $691 thousand, or an average of $27.48 per share. DIVIDENDS On June 3, 2002 and March 1, 2002, Golden State paid a dividend of $0.10 per common share, totalling $13.6 million on each date, to stockholders of record as of May 3, 2002 and February 5, 2002, respectively. On June 1, 2001 and March 1, 2001, Golden State paid a dividend of $0.10 per common share, totalling $13.5 million on each date, to stockholders of record as of May 7, 2001 and February 2, 2001, respectively. (13) EXECUTIVE AND STOCK COMPENSATION -------------------------------- In the six months ended June 30, 2002, the Company granted to its employees non-qualified stock options equivalent to 884,000 shares of common stock at a weighted average price of $27.69 per share under the Stock Plan, all within the first quarter. During the three and six months ended June 30, 2001, the Company granted to its employees non-qualified stock options equivalent to 560,100 and 1,411,100 shares, respectively, of common stock at a weighted average price of $30.75 and $27.69, respectively. These shares generally vest over three years in one-third increments on the anniversary of the grant date. The options generally expire 10 years from the date of grant. No compensation cost was recognized by the Company for these stock options during the six months ended June 30, 2002, in accordance with the intrinsic value accounting methodology prescribed in APB Opinion No. 25, whereby compensation expense to employees is determined based upon the excess, if any, of the market price of the Company's common stock at the measurement date over the exercise price of the award. During the three and six months ended June 30, 2002, 319,909 and 427,675 options were exercised, and 9,917 and 42,597 options were cancelled or expired, respectively, under all plans. During the three and six months ended June 30, 2001, 91,101 and 154,617 options were exercised and 4,432 and 21,677 options, respectively, were cancelled or expired under all plans. Page 21 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS At June 30, 2002 and 2001, options to acquire an equivalent of 5,129,449 and 4,906,205 shares and 675,583 and 966,166 LTWTMs, respectively, remained outstanding under all plans. On January 22, 2002 and 2001, the Company awarded to certain of its employees 112,760 and 99,108 shares, respectively, of restricted stock under the Golden State Bancorp Inc. Omnibus Stock Plan. The market value on the date of the award was $27.65 and $26.38 per share, respectively. These shares generally vest over two years in one-half increments on the anniversary of the grant date, based upon the continued service of the employee. During the three and six months ended June 30, 2002, 152,299 restricted shares were vested and 2,770 restricted shares were cancelled. During the three and six months ended June 30, 2001, 5,911 and 115,045 restricted shares were vested, respectively, and none was cancelled. At June 30, 2002, a total of 160,056 restricted shares was outstanding. The compensation expense based on the stock price on the date of these awards was recognized on a straight-line basis over the vesting period for each service period tranche of the award with a corresponding increase to additional paid-in capital. In addition, dividends on restricted stock are recorded as compensation expense with a corresponding increase to additional paid-in capital. During the three and six months ended June 30, 2002, $0.5 million and $0.9 million, respectively, in compensation expense was recognized related to such awards. During the three and six months ended June 30, 2001, $0.5 million and $1.0 million, respectively, in compensation expense was recognized related to such awards. These restricted shares have full voting and dividend rights and are included in common shares outstanding and in the calculation of diluted EPS. See note 15. (14) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE --------------------------------------------------- On September 21, 2000, the EITF issued EITF No. 99-20. This document, which was effective on April 1, 2001, establishes guidance for (a) recognizing interest income (including amortization of premiums or discounts) on (i) all credit-sensitive mortgage and asset-backed securities and (ii) certain prepayment-sensitive securities including agency interest-only strips and (b) determining when these securities must be written down to fair value because of impairment. Existing GAAP did not provide interest recognition and impairment guidance for securities on which cash flows change as a result of both prepayments and credit losses and, in some cases, interest rate adjustments. On April 1, 2001, the Company identified a portfolio of securities with a total book value of $80.7 million which are subject to the impairment provisions of EITF No. 99-20. All of these securities had previously been reported as available-for-sale securities, with changes in fair value reflected in OCI. As a result of its implementation of EITF No. 99-20, the Company recorded a loss of $1.6 million, net of income tax credits of $1.1 million, representing the cumulative effect of a change in accounting principle. Page 22 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (15) EARNINGS PER SHARE INFORMATION ------------------------------ EPS of common stock is based on the weighted average number of common and common equivalent shares outstanding, excluding common shares in treasury. Information used to calculate basic and diluted EPS is as follows (in thousands, except per share data):

_____________ (a) 2002 and 2001 basic weighted average common shares outstanding exclude the effect of unvested restricted common stock awarded to employees of the Company. (b) 2002 total basic and diluted weighted average common shares outstanding include, as appropriate, the effect of the following shares estimated to be issuable to GSB Investments and Hunter's Glen: 2,625,961 and 2,736,946 shares based on the use of pre-merger tax benefits utilized in the year 2000 and 2001, respectively, and 2,491,054 shares of pre-merger tax benefits expected to be utilized in the year 2002 and subsequent tax periods. 2001 total basic and diluted weighted average common shares outstanding include, as appropriate, the effect of the following shares estimated to be issuable to GSB Investments and Hunter's Glen: 1,296,635 shares based on the use of pre-merger tax benefits during 2001; 7,159,055 shares based on the use of pre-merger tax benefits during 2000 and 1999; the effect of 497,381 shares issued to Hunter's Glen on January 23, 2001 for net tax benefits realized during 1999 and for a Federal tax refund and related interest associated with Old California Federal for periods prior to the Golden State Acquisition. (c) Golden State's diluted shares outstanding are not affected by the LTW(TM)s until they become exercisable 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. Page 23 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (16) COMMITMENTS, CONTINGENCIES AND OTHER OFF-BALANCE SHEET ACTIVITIES ----------------------------------------------------------------- CREDIT RELATED FINANCIAL INSTRUMENTS The Company is a party to credit related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Company's exposure to credit loss is represented by the contractual amount of these commitments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. Listed below are unfunded financial instruments whose contract amounts represent credit risk (in thousands): Contract Amounts at ----------------------------------- June 30, 2002 December 31, 2001 ------------- ----------------- Commitments to extend credit ---------------------------- Unutilized consumer lines $1,722,420 $1,467,625 Unutilized commercial lines of credit 264,524 263,682 Commercial and standby letters of credit 32,042 24,953 The contracts for the Company's commitments to extend credit expire as follows (in thousands):

The fair value of commitments to extend credit was not significant at either June 30, 2002 or December 31, 2001. Unutilized consumer lines of credit are commitments to extend credit. These lines are either secured or nonsecured and may be cancelled by the Company if certain conditions of the contract are not met. Many consumer line of credit customers are not expected to fully draw down their total lines of credit and, therefore, the total contractual amount of these lines does not necessarily represent future cash requirements. Unutilized commitments under commercial lines of credit are commitments for possible future extensions of credit to existing customers. These lines of credit are uncollateralized, usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed. Commercial and standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. All letters of credit issued have expiration dates within three years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company generally holds collateral supporting those commitments in an amount deemed to be necessary. Page 24 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OFF-BALANCE SHEET COMMITMENTS TO ORIGINATE, PURCHASE AND SELL LOANS The following is a summary of the Company's pipeline of loans in process and mandatory forward commitments to sell loans that have not been recorded in the Company's balance sheet as they do not meet the definition of a derivative financial instrument. These amounts exclude commitments to extend credit which are summarized above. For more information on derivative instruments, see note 17. Contract Amounts at ---------------------------------------- June 30, 2002 December 31, 2001 ------------- ----------------- (in thousands) Commitments to originate loans $2,770,634 $3,937,422 Commitments to purchase loans 995,883 3,791,436 Mandatory commitments to sell loans 317,569 679,182 The Company's pipeline of loans in process includes loan applications for both portfolio and non-portfolio loans in various stages of processing that do not meet the definition of a derivative financial instrument. Until all required documentation is provided and underwritten, there is no credit risk to the Company. There is no interest rate risk until a rate commitment is extended by the Company to a borrower. Some of these commitments will ultimately be denied by the Company or declined by the borrower and therefore the commitment amounts do not necessarily represent future cash requirements. 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 risk. Credit risk on these instruments is controlled through credit approvals, limits and monitoring procedures. To the extent that counterparties are not able to fulfill forward commitments, the Company is at risk for any fluctuations in the market value of the mortgage loans and locked pipeline. OFF-BALANCE SHEET EMBEDDED DERIVATIVE OPTIONS The Company also has off-balance sheet embedded options in borrowings as shown in the table below (in thousands):

The off-balance sheet embedded options in borrowings at June 30, 2002 are scheduled to expire as shown in the table below (in thousands):

Page 25 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS COMMITMENTS AND CONTINGENCIES At June 30, 2002, the Bank had pledged as collateral the securities as detailed below (in thousands):

At June 30, 2002, $25.2 billion in residential loans, $3.8 billion in multifamily loans and $1.6 billion in commercial real estate loans were pledged as collateral for FHLB advances. At June 30, 2002, loans receivable included approximately $4.6 billion of loans that had the potential to experience negative amortization. (17) ON-BALANCE SHEET DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -------------------------------------------------------------- INTEREST RATE RISK MANAGEMENT - RISK MANAGEMENT POLICIES - CASH FLOW HEDGING INSTRUMENTS AND FAIR VALUE HEDGING INSTRUMENTS The Company monitors the sensitivity of its NPV and net income under various interest rate scenarios and manages this risk. Quarterly, the Company simulates the NPV and net income expected to be earned over the next twelve months. Market interest rates are projected at various levels to estimate the impact on interest-earning assets, interest-bearing liabilities and mortgage prepayment speeds (which affect the MSR asset). The Company may use derivatives to reduce the volatility of NPV and net income within certain ranges of projected changes in interest rates. The Company evaluates the effectiveness of a derivative by measuring the cost of such an agreement in relation to the reduction in NPV and net income volatility within an assumed range of interest rates. Page 26 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS INTEREST RATE RISK MANAGEMENT - CASH FLOW HEDGING INSTRUMENTS - BALANCE SHEET HEDGES OBJECTIVES AND CONTEXT ---------------------- The Company uses variable-rate debt including FHLB advances and Repos as a source of funds for lending and investment activities and other general business purposes. Interest payments on this debt may change if interest rates change. If interest rates increase, interest expense increases. Conversely, if interest rates decrease, interest expense decreases. Management hedges a significant portion of its variable-rate interest payments to limit the effect of changing interest rates. STRATEGIES ---------- Management enters into derivative instruments agreements to manage fluctuations in cash flows resulting from interest rate risk. These instruments include interest rate swaps. The interest rate swaps change the variable-rate cash flow exposure on the short-term FHLB advances and Repos to fixed-rate cash flows by entering into receive-variable, pay-fixed interest rate swaps. Under the interest rate swaps, the Company receives variable interest rate payments and makes fixed interest rate payments, thereby creating fixed-rate FHLB advances and Repos. RESULTS ------- Hedges of FHLB advances and Repos were 100% effective for the three and six months ended June 30, 2002. The Company hedges the entire amount of the change in fair value of the liabilities with the entire amount of the change in fair value of the derivative instruments. Fair value changes in interest rate swap hedging instruments relating to cash flows associated with FHLB advances and Repos are reported in OCI. These amounts are then reclassified into interest expense as a yield adjustment in the same period in which the related interest on the FHLB advances and Repos affects earnings. The net amount of OCI reclassified into interest expense during the three and six months ended June 30, 2002 was $45.1 million and $86.9 million, respectively, while $14.7 million and $20.1 million was reclassified during the three and six months ended June 30, 2001, respectively. As of June 30, 2002 and 2001, approximately $96.6 million and $30.4 million of losses reported in OCI related to the interest rate swaps were expected to be reclassified into interest expense as a yield adjustment of the hedged FHLB advances and Repos during the twelve month period ending June 30, 2003 and 2002, respectively. INTEREST RATE RISK MANAGEMENT - FAIR VALUE HEDGING INSTRUMENTS - MORTGAGE SERVICING RIGHTS HEDGES OBJECTIVES AND CONTEXT ---------------------- The Company purchases and originates MSRs as a source of fee income. MSRs expose the Company to the variability of their fair value due to changes in the assumed level of prepayments and other variables. The carrying value of MSRs are first adjusted by the calculated change in the fair value of the MSRs being hedged and are then recorded at the lesser of their amortized cost or fair value. Management limits the variability in the fair value of a portion of its MSR asset by hedging the change in fair value of the servicing rights asset associated with fixed-rate, non-prepayment penalty loans for which it has recorded MSRs. The Company determines appropriate coverage levels, given anticipated or existing interest rate levels and other market considerations, as well as the relationship of change in this asset to other assets of the Company. Page 27 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS STRATEGIES ---------- The Company utilizes interest rate swaps, PO swaps, interest rate floors, and swaptions to hedge the change in value of the mortgage servicing portfolio due to expected prepayment risk assumption changes. Although the Company hedges the change in value of its MSRs, its hedge coverage ratio does not equal 100%. The Company keeps hedge coverage ratios at acceptable risk levels, which may vary depending on current and expected interest rate movement. Interest rate swap agreements are contracts to exchange quarterly or semi-annual floating rate payments for fixed-rate payments. The notional amount of the contracts, on which the payments are based, are not exchanged. The primary risks associated with interest rate swaps are the ability of the counterparties to meet the terms of the contract and the possibility that swap rates may not move in an inverse manner or in an amount equal to mortgage rate movements. PO swap agreements simulate the ownership of a PO strip, the value of which is affected directly by prepayment rates themselves in an inverse manner to the servicing rights, which act in a manner similar to IO strips. Under a PO swap agreement, the counterparty to the transaction purchases a PO strip and places the PO strip in a trust. The contracts executed prior to December 31, 1998 call for the Company to pay floating interest to the counterparty based on: (a) an index tied to one month LIBOR and (b) the amortized notional balance of the swap. The contracts call for the Company to receive cash from the counterparty based on the cash flows received from the PO strip. For PO swap agreements executed after December 31, 1998, the agreement also requires the PO swap to be marked to market value. A decrease in the market value of the PO swap requires the Company to increase the amount paid to the counterparty and an increase in the market value requires the counterparty to increase its payment to the Company. The amounts to be paid and to be received are then netted together each month. The nature of this instrument results in increased cash flows and positive changes in the value of the PO swap during a declining interest rate environment. This positive change in the value of the PO swap is highly correlated to prepayment activity. PO swap agreements present yield curve risk to the extent that short term interest rates (which impact the cash amount that the Company pays on the PO swap to the counterparty) rise while long term rates (which drive prepayment rates) stay the same. A third type of risk associated with PO swaps is the ability of the counterparties to meet the terms of the contract. Interest rate floors are interest rate protection instruments that involve payment from the seller to the buyer of an interest differential. This differential is the difference between a long-term rate (e.g., 10-year Constant Maturity Swaps in 2002 and 2001) and an agreed-upon rate, the strike rate, applied to a notional principal amount. By purchasing a floor, the Company will be paid the differential on a monthly basis by a counterparty, when the current long-term rate falls below the strike level of the agreement. The fair value of interest rate floor agreements is included in derivative assets or liabilities. Interest rate floors are subject to basis risk because of differences in movements of mortgage and LIBOR rates, market volatility and the impact of changes in the yield curve. In addition, a credit risk associated with purchased interest rate floor agreements is the ability of the counterparties to meet the terms of the contract. A swaption is an over-the-counter option that provides the right, but not the obligation, to enter into an interest rate swap agreement at predetermined terms at a specified time in the future. Swaptions are subject to basis risk because of differences in movements of mortgage and LIBOR rates, market volatility and the impact of changes in the yield curve. In addition, credit risk associated with swaptions is the ability of the counterparties to meet the terms of the contract. Page 28 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS RESULTS ------- Risk management results related to the hedging of MSRs are summarized below and are included in the caption entitled "Loan servicing fees, net" in the accompanying consolidated statements of income (in thousands). The net gain or loss represents the ineffectiveness of the hedges.

INTEREST RATE RISK MANAGEMENT - FAIR VALUE HEDGING INSTRUMENTS - WAREHOUSE LOANS OBJECTIVES AND CONTEXT ---------------------- The Company, as part of its traditional real estate lending activities, originates fixed-rate 1-4 unit residential loans for sale in the secondary market. At the time of origination, management identifies loans it plans to sell. These warehoused loans have been classified as loans held for sale, net, in the consolidated balance sheet and are carried at fair market value, less the values associated with servicing (for those loans which are hedged) or at the lower of aggregate amortized cost or fair market value (for those loans which are not hedged). These loans expose the Company to the variability of their fair value due to changes in interest rates. If interest rates increase, the value of the loans decreases. Conversely, if interest rates decrease, the value of the loans increases. Management limits the variability of a major portion of the change in fair value of its loans held for sale by hedging substantially all of its warehoused loans held for sale to third parties. STRATEGIES ---------- Management employs forward loan sale hedging techniques to minimize the interest rate and pricing risks associated with the origination and sale of such warehoused loans. The forward loan sales lock in the price for the sale of either specific loans held for sale or a generic group of loans held for sale. RESULTS ------- Risk management results related to the hedging of warehouse loans are summarized below and are included in the caption entitled "Gain on sale, settlement and transfer of loans, net" in the accompanying consolidated statements of income (in thousands):

Page 29 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS DERIVATIVE INSTRUMENTS NOT DESIGNATED AS HEDGING INSTRUMENTS PURPOSE - INTEREST RATE LOCK COMMITMENTS AND FORWARD LOAN SALE ------------------------------------------------------------------------- COMMITMENTS ----------- The Company enters into rate lock commitments to extend credit to borrowers for generally a 30-day period for the origination and/or purchase of loans. Some of these rate lock commitments will ultimately expire without being completed. To the extent that a loan is ultimately granted and the borrower ultimately accepts the terms of the loan, these rate lock commitments expose the Company to variability in their fair value due to changes in interest rates. If interest rates increase, the value of these rate lock commitments decreases. Conversely, if interest rates decrease, the value of these rate lock commitments increases. To mitigate the effect of this interest rate risk, the Company enters into offsetting derivative contracts, primarily forward loan sale commitments. The forward loan sale commitments lock in an interest rate and price for the sale of loans similar to the specific rate lock loan commitments classified as derivatives. Both the rate lock commitments and the forward loan sale commitments are undesignated derivatives, and accordingly are marked to market through earnings. Risk management results related to the undesignated hedging of interest rate lock commitments with undesignated forward loan sale commitments are summarized below and are included in the caption entitled "Gain on sale, settlement and transfer of loans, net" in the consolidated statements of income (in thousands):

NOTIONAL AMOUNTS OF DERIVATIVES Information pertaining to the notional amounts of the Company's derivative financial instruments utilized in both MSR and balance sheet hedging is as follows (in thousands). The fair values of these derivative financial instruments were recorded in the Company's balance sheet in accordance with SFAS No. 133.

______________ (1) Credit risk represents the amount of unrealized gain included in derivative assets which is subject to counterparty credit risk. It reflects the effect of master netting agreements and excludes $187.2 million and $95.2 million cash collateral held by the Bank at June 30, 2002 and December 31, 2001, respectively. Page 30 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Derivative financial instruments used for other-than-trading purposes at June 30, 2002 are scheduled to mature as follows (in thousands):

(18) RECENT ACCOUNTING PRONOUNCEMENTS -------------------------------- GOODWILL AND OTHER INTANGIBLE ASSETS On January 1, 2002, the Company adopted SFAS No. 142. SFAS No. 142 supersedes APB Opinion No. 17 and establishes new accounting standards for both identifiable and unidentifiable intangible assets acquired in a business combination, including goodwill, but does not address internally developed intangible assets. It requires recognition of goodwill as an asset but does not permit amortization of goodwill as previously required by APB Opinion No. 17. Instead, goodwill is tested for impairment at a level referred to as a reporting unit. A reporting unit is the same level as, or one level below, an operating segment (as that term is used in SFAS No. 131). Goodwill is tested for impairment annually and on an interim basis if an event or circumstance occurs between annual tests that might reduce the fair value of a reporting unit below its carrying value. An example of such an event or circumstance may include an adverse change in the business climate or market, a legal factor, an action by regulators, an introduction of competition, or a loss of key personnel. Goodwill would also be tested for impairment on an interim basis when: (a) a more-likely-than-not expectation exists that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of, (b) a significant asset group within a reporting unit is tested for recoverability under SFAS No. 121, or (c) a subsidiary of that reporting unit has recognized a goodwill impairment loss. The fair value of each reporting unit would not have to be recomputed every year if the components of the reporting unit had not changed since the previous fair value computation, the previous fair value amount exceeded the carrying amount of the reporting unit by a substantial margin, and no evidence exists indicating that the current fair value of the reporting unit may be less than its current carrying amount. Page 31 GOLDEN STATE BANCORP INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Goodwill is tested for impairment using a two-step approach. The first step is a comparison of the fair value of a reporting unit to its carrying amount, including goodwill. If the fair value of the reporting unit is greater than its carrying amount, goodwill is not considered impaired and no further work is required. If the fair value of the reporting unit is less than its carrying amount, the second step of the impairment test must be performed. The second step of the impairment test is a comparison of the implied fair value of goodwill to its carrying amount. If the implied fair value of goodwill is less than its carrying amount, goodwill is considered impaired and an impairment loss recognized. The impairment loss would be measured as the amount by which the carrying amount of goodwill exceeds its implied fair value. Acquired intangible assets other than goodwill are amortized over their useful economic life and reviewed for impairment in accordance with SFAS No. 144. The impact of the adoption of SFAS No. 142 increases GAAP earnings by $13.7 million per quarter in 2002. ACCOUNTING BY CERTAIN ENTITIES (INCLUDING ENTITIES WITH TRADE RECEIVABLES) THAT LEND TO OR FINANCE THE ACTIVITIES OF OTHERS In December 2001, the AICPA issued SOP 01-6. SOP 01-6 is effective for annual and interim financial statements issued for fiscal years beginning after December 15, 2001. SOP 01-6 reconciles the specialized accounting and financial reporting guidance established in the existing Banks and Savings Institutions Guide, Audits of Credit Unions Guide, and Audits of Finance Companies Guide. The SOP eliminates differences in accounting and disclosure established by the respective guides and carries forward accounting guidance for transactions determined to be unique to certain financial institutions. The adoption of this pronouncement has not had a material impact on the Company's results of operations or financial condition. RESCISSION OF SFAS NO. 4, 44, AND 64, AMENDMENT OF SFAS NO. 13, AND TECHNICAL CORRECTIONS SFAS No. 145 rescinds SFAS No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in Opinion No. 30 will now be used to classify those gains and losses. SFAS No. 64 amended SFAS No. 4, and is no longer necessary because SFAS No. 4 has been rescinded. The accounting, disclosure and financial statement provisions of SFAS No. 145 are effective for financial statements in fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in Opinion No. 30 for classification as an extraordinary item shall be reclassified. The implementation of SFAS No. 145 is not expected to impact the Company's financial condition or operating results. Page 32 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS. THIS QUARTERLY REPORT CONTAINS FORWARD-LOOKING STATEMENTS, WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, THAT PERTAIN TO OUR FUTURE OPERATING RESULTS. WORDS SUCH AS "ANTICIPATE," "BELIEVE," "EXPECT," "INTEND" AND OTHER SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY THESE STATEMENTS. FORWARD-LOOKING STATEMENTS ARE NOT HISTORICAL FACTS AND ARE INHERENTLY SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC AND COMPETITIVE UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND OUR CONTROL. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS DUE TO SUCH FACTORS AS (I) PORTFOLIO CONCENTRATIONS; (II) INTEREST RATE CHANGES, INCLUDING CHANGES IN SHORT-TERM INTEREST RATES, THE SHAPE OF THE YIELD CURVE AND THE TREASURY-EURODOLLAR SPREAD; (III) CHANGES IN ASSET PREPAYMENT SPEEDS; (IV) CHANGES IN OUR COMPETITIVE AND REGULATORY ENVIRONMENTS; AND (V) CHANGES IN THE AVAILABILITY OF NET OPERATING LOSS CARRYOVERS AND DEFERRED TAX LIABILITIES. SEE "BUSINESS--FACTORS THAT MAY AFFECT FUTURE RESULTS" IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001 FOR A DISCUSSION OF THESE FACTORS IN GREATER DETAIL. WE ASSUME NO OBLIGATION TO UPDATE ANY OF OUR FORWARD-LOOKING STATEMENTS. CRITICAL ACCOUNTING POLICIES In preparing its consolidated financial statements, the Company is required to make judgments and estimates that may have a significant impact upon its financial results. The Company's valuation of its MSRs and its determination of the adequacy of its allowance for loan losses are particularly subject to management's judgment and estimates. The accounting policies for these two areas are discussed at length in notes 2(m) and 2(e) of the Company's Notes to Consolidated Financial Statements, as well as in the "Mortgage Banking Activities" and "Allowance for Loan Losses" sections of the Company's Annual Report on Form 10-K for the year ended December 31, 2001. OVERVIEW Golden State Bancorp Inc. is a holding company whose only significant asset is all of the common stock of GS Holdings, formerly FN Holdings, which owns all of the common and preferred stock of the Bank. The Company, headquartered in San Francisco, California, provides diversified financial services to consumers and small businesses in California and Nevada, primarily: (a) retail branches that provide deposit products such as demand, transaction and savings accounts, and investment products such as mutual funds, annuities and insurance; and (b) mortgage banking activities, including originating and purchasing 1-4 unit residential loans for sale or retention, servicing loans for itself and others and, to a lesser extent, originating and/or purchasing commercial real estate, commercial and consumer loans for investment. The Company's revenues are derived from: (a) interest earned on loans and securities; (b) gains on sales of loans and other investments, fees received in connection with loan servicing and securities brokerage; and (c) other customer service transactions. Expenses primarily consist of interest on customer deposit accounts and borrowings, and general and administrative expenses including compensation and benefits, occupancy and equipment, professional fees and other general administrative expenses. Page 33 PENDING MERGER On May 21, 2002, Citigroup and Mercury Merger Sub, a wholly owned subsidiary of Citigroup, entered into a merger agreement with the Company whereby the Company will be merged with and into Mercury Merger Sub, with Mercury Merger Sub as the surviving company. The Merger, which is expected to close in the third quarter of 2002, is subject to regulatory and Golden State stockholder approvals. See note 2 of the Company's Notes to Unaudited Consolidated Financial Statements. NET INCOME Golden State reported net income of $204.4 million, or $1.41 per diluted share for the six months ended June 30, 2002, compared with net income of $197.0 million, or $1.37 per diluted share, for the corresponding period in 2001. Net income for the six months ended June 30, 2001 includes a loss of $1.6 million, net of tax, from the cumulative effect of change in accounting principle. Net income before the cumulative effect of change in accounting principle for the six months ended June 30, 2001 was $198.5 million, or $1.38 per diluted share. The Bank's efficiency ratio was 47.34% for the six months ended June 30, 2002, compared to 49.30% for the comparable period in 2001. Net interest income increased $91.3 million during the first six months of 2002 as compared to the year-ago period, primarily as a result of declining market interest rates reducing the costs of liabilities at a faster rate than the decline in the yield on assets. Lower-costing liabilities were the result of the replacement of higher-rate borrowings and deposits with lower-rate borrowings and deposits as these instruments came due or were repaid. In addition, during the six months ended June 30, 2002, $11.2 million of interest income was received in connection with a California income tax refund. Total noninterest income declined by $81.3 million, primarily in loan servicing fees, net due to higher MSR amortization and an increased MSR valuation provision. Total noninterest expense declined $16.1 million and includes a $27.5 million decrease due to the adoption of SFAS No. 142 on January 1, 2002. Golden State reported net income of $82.0 million, or $0.57 per diluted share for the three months ended June 30, 2002, compared with net income of $104.2 million, or $0.72 per diluted share, for the corresponding period in 2001. Net income for the three months ended June 30, 2001 includes a loss of $1.6 million, net of tax, from the cumulative effect of change in accounting principle. Net income before the cumulative effect of change in accounting principle for the three months ended June 30, 2001 was $105.7 million, or $0.73 per diluted share. The Bank's efficiency ratio was 47.06% for the three months ended June 30, 2002, compared to 46.27% for the comparable period in 2001. Net interest income increased $33.9 million during the three months ended June 30, 2002 as compared to the same period in 2001, primarily as a result of declining market interest rates reducing the costs of liabilities at a faster rate than the decline in the yield on assets. Lower-costing liabilities were the result of the replacement of higher-rate borrowings and deposits with lower-rate borrowings and deposits as these instruments came due or were repaid. In addition, during the three months ended June 30, 2002, $11.2 million of interest income was received in connection with a California income tax refund. Total noninterest income declined by $110.5 million, primarily in loan servicing fees, net due to higher MSR amortization and an increased MSR valuation provision. Total noninterest expense declined $17.9 million and includes a $13.8 million decrease due to the adoption of SFAS No. 142 on January 1, 2002. As noted above, the Company adopted SFAS No. 142 effective January 1, 2002, which requires that goodwill no longer be amortized. The effect of the adoption was to reduce goodwill amortization by $13.8 million and $27.5 million for the three and six months ended June 30, 2002, respectively, compared to the same period a year ago. Excluding the effect of the adoption of SFAS No. 142, net income for the three and six months ended June 30, 2001 was $117.9 million and $224.4 million and diluted EPS was $0.82 and $1.56, respectively. Excluding the effect of the adoption of SFAS No. 142, income before the cumulative effect of change in accounting principle for the three and six months ended June 30, 2001 was $119.4 million and $225.9 million and diluted EPS was $0.83 and $1.57, respectively. Page 34 FINANCIAL CONDITION During the six months ended June 30, 2002, consolidated total assets decreased to $51.9 billion from $56.5 billion and total liabilities decreased to $48.6 billion from $53.4 billion at December 31, 2001. Mortgage-backed securities, loans held for sale and loans receivable declined $2.4 billion, $1.3 billion and $0.7 billion, respectively, during the six month period. This shift in mortgage-backed securities and loans is primarily due to high repayment rates in light of the declining interest rate environment. Deposits decreased $833.5 million during the six months ended June 30, 2002, including decreases of $807.6 million in custodial accounts, $564.5 million in CDs and $55.5 million in Brokered Deposits, offset by a $602.7 million increase in transaction accounts. Total borrowings, including securities sold under agreements to repurchase, FHLB advances and other borrowings, declined $4.0 billion during the six months ended June 30, 2002. During the six months ended June 30, 2002, stockholders' equity increased $194.2 million to $2.8 billion. The increase in stockholders' equity is principally the result of $204.4 million in net income for the period, an Issuable Shares adjustment of $33.9 million related to the reversal of the deferred tax asset valuation allowance and changes in tax benefits due to former owners, $10.7 million from the exercise of stock options and $2.6 million due to the impact of restricted common stock. These amounts are partially offset by $27.2 million of common stock dividends, $16.9 million in net unrealized losses, after tax, on derivatives, $9.3 million from the goodwill litigation equalization adjustment and $3.3 million in net unrealized losses, after tax, on securities available for sale. Book value per diluted share increased $1.11 to $18.98 at June 30, 2002, from $17.87 at December 31, 2001. Tangible book value per share increased $1.36, or 10.1%, to $14.77 at June 30, 2002, from $13.41 at December 31, 2001. Common shares outstanding totalled 136.3 million and 135.8 million at June 30, 2002 and December 31, 2001, respectively. Diluted shares outstanding totalled 145.6 million at June 30, 2002 and 143.8 million at December 31, 2001. Golden State's non-performing assets, consisting of non-performing loans, net of purchase accounting adjustments, foreclosed real estate, net, and repossessed assets, decreased to $104.6 million at June 30, 2002 compared with $124.1 million at December 31, 2001. Total non-performing assets as a percentage of the Bank's total assets was 0.20% at June 30, 2002 compared with 0.22% at December 31, 2001. Page 35 RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2002 VERSUS SIX MONTHS ENDED JUNE 30, 2001 The following table shows the Company's consolidated average balance sheets, with the related interest income, interest expense and the average interest rates for the periods presented. Average balances are calculated on a daily basis.

Page 36

____________ (1) Non-performing assets are included in the average balances for the periods indicated. (2) Includes securities, interest-bearing deposits in other banks, securities purchased under agreements to resell, interest income on California income tax refund and other interest income. (3) Interest and average rate include the impact of interest rate swaps. (4) Interest rate spread represents the difference between the average rates of total interest-earning assets and total interest-bearing liabilities. Page 37 The following table shows the changes in interest income and expense due to changes in rate and volume. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to volume (change in average outstanding balance multiplied by the prior period's rate) and rate (change in average interest rate multiplied by the prior period's volume). Changes attributable to both volume and rate have been allocated proportionately.

INTEREST INCOME. Total interest income was $1.6 billion for the six months ended June 30, 2002, a decrease of $460.1 million from the six months ended June 30, 2001. Total interest-earning assets for the six months ended June 30, 2002 averaged $49.7 billion, compared to $57.1 billion for the corresponding period in 2001. The decrease in interest-earning assets is primarily a result of a decline in mortgage-backed securities, principally due to management's decision to sharply reduce purchases, and net loan run off, as well as decreased securities volume. These decreases were partially offset by an increase in loans held for sale due to heightened borrower refinancing activity in the declining interest rate environment. The yield on total interest-earning assets during the six months ended June 30, 2002 decreased to 6.55% from 7.31% for the six months ended June 30, 2001, primarily due to the repricing of loans and mortgage-backed securities available for sale at lower rates. At June 30, 2002, 11% of the Company's portfolio loans were tied to COFI indices, 12% to Treasury-based indices and 49% were "hybrid" ARMs - fixed for three to ten years and then adjusting annually. Twenty-three percent of the portfolio was fixed. The remaining 5% of the portfolio was in other adjustable-rate products. Golden State earned $1.3 billion of interest income on loans receivable for the six months ended June 30, 2002, a decrease of $250.0 million from the six months ended June 30, 2001. The average balance of loans receivable was $39.0 billion for six months ended June 30, 2002, compared to $41.1 billion for the same period in 2001. The weighted average yield on loans receivable decreased to 6.63% for the six months ended June 30, 2002 from 7.51% for the six months ended June 30, 2001. The decrease in the average balance reflects the sharp run off of residential loans during a period of high refinancing activity. The decrease in the weighted average yield reflects the repricing of variable-rate loans, a decrease in the prime rate on commercial banking loans and comparatively lower market interest rates during the six months ended June 30, 2002, partially offset by a higher yield on auto loans purchased after July 1, 2001, which are recorded on a gross-coupon basis, rather than a credit-adjusted yield basis. The impact of this change on net interest income during the six months ended June 30, 2002 was to increase interest income by $20.7 million. (See "--Allowance for Loan Losses.") Page 38 Loan production is detailed in the table below (in thousands): Six Months Ended June 30, ------------------------- 2002 2001 ---- ---- Loans funded: Residential real estate loans: Adjustable-rate $ 3,455,177 $ 3,854,221 Fixed-rate 10,369,569 7,459,609 ----------- ----------- Total residential real estate loans 13,824,746 11,313,830 Commercial real estate loans 903,169 886,836 Commercial loans 648,287 523,254 Consumer nonmortgage loans 526,246 393,648 Auto loans (a) 619,694 635,466 ----------- ----------- Total loans funded $16,522,142 $13,753,034 =========== =========== Residential real estate loans purchased $ 2,207,946 $ 1,723,576 =========== =========== ___________ (a) Approximately 50% and 41% of this volume was in prime product; 50% and 59% in sub-prime product for the six months ended June 30, 2002 and 2001, respectively. Golden State earned $70.7 million of interest income on loans held for sale for the six months ended June 30, 2002, an increase of $18.0 million from the six months ended June 30, 2001. The average balance of loans held for sale was $2.2 billion for the six months ended June 30, 2002, an increase of $0.7 billion from the comparable period in 2001, primarily attributed to increased originations of residential fixed-rate loans as a result of heightened borrower refinancing activity in the declining interest rate environment. Fixed-rate production for sale totalled $10.2 billion during the six months ended June 30, 2002, an increase of 46.5% over the $6.9 billion originated during the comparable period in 2001. The weighted average yield on loans held for sale decreased to 6.35% for the six months ended June 30, 2002 from 6.92% for the six months ended June 30, 2001, primarily due to declining market interest rates. Interest income on mortgage-backed securities available for sale was $168.5 million for the six months ended June 30, 2002, a decrease of $176.5 million from the six months ended June 30, 2001. The average portfolio balance decreased $4.8 billion, to $5.6 billion for the six months ended June 30, 2002 compared to the same period in 2001. The weighted average yield on these assets decreased from 6.64% for the six months ended June 30, 2001 to 6.02% for the six months ended June 30, 2002. The decrease in the volume is primarily attributed to management's decision to sharply reduce purchases, coupled with high repayments and sales of mortgage-backed securities. The decrease in the weighted average yield primarily reflects the repricing of variable-rate securities at lower rates. Interest income on mortgage-backed securities held to maturity was $39.7 million for the six months ended June 30, 2002, a decrease of $31.3 million from the six months ended June 30, 2001. The average portfolio balance decreased $0.4 billion, to $1.3 billion for the six months ended June 30, 2002 compared to the same period in 2001, primarily due to repayments. The weighted average yields for the six months ended June 30, 2002 and 2001 were 6.28% and 8.43%, respectively. The decrease in the weighted average yield is primarily the result of the repricing of variable-rate securities at lower rates. Interest income on securities, interest-bearing deposits in banks and other was $15.8 million for the six months ended June 30, 2002, a decrease of $15.8 million from the six months ended June 30, 2001. The average portfolio balance was $0.4 billion and $1.1 billion for the six months ended June 30, 2002 and 2001, respectively. The weighted average yield was 8.99% for the six months ended June 30, 2002 compared to 6.01% for the six months ended June 30, 2001. The decrease in the volume is primarily attributed to payments and maturities of securities. The increase in the weighted average yield reflects $11.2 million of interest income related to a California income tax refund for which there is no corresponding earning asset; if this amount is excluded, the weighted average yield for the six months ended June 30, 2002 would be 2.61%. The weighted average yield also Page 39 reflects a shift in the mix of securities, with lower average balances of higher rate securities held to maturity during the first six months of 2002. Dividends on FHLB stock were $40.8 million for the six months ended June 30, 2002, a decrease of $4.6 million from the six months ended June 30, 2001. The average balance outstanding was $1.3 billion and $1.4 billion for the six months ended June 30, 2002 and 2001, respectively. The weighted average dividend on FHLB stock declined to 6.24% for the six months ended June 30, 2002 from 6.58% for the six months ended June 30, 2001. INTEREST EXPENSE. Total interest expense was $888.5 million for the six months ended June 30, 2002, a decrease of $551.3 million from the six months ended June 30, 2001. The decrease is primarily due to declining market interest rates and a reduction in borrowings under FHLB advances and securities sold under agreements to repurchase, partially offset by additional deposits. Interest expense on deposits, including Brokered Deposits, was $260.9 million for the six months ended June 30, 2002, a decrease of $203.6 million from the six months ended June 30, 2001. The average balance of deposits outstanding increased from $24.0 billion for the six months ended June 30, 2001 to $24.7 billion for the six months ended June 30, 2002. The increase in the average balance is primarily attributed to increases in the average balances of money market accounts, retail customer checking accounts, custodial accounts and savings account balances, partially offset by a decline in CDs. The overall weighted average cost of deposits decreased to 2.13% for the six months ended June 30, 2002 from 3.91% for the six months ended June 30, 2001, primarily due to declining market interest rates and a shift in the mix of deposits, with higher average balances of lower rate money market, checking, custodial and savings accounts, and a lower average balance of higher rate CDs during the first half of 2002. Interest expense on securities sold under agreements to repurchase totalled $42.4 million for the six months ended June 30, 2002, a decrease of $79.0 million from the six months ended June 30, 2001. The average balance of such borrowings for the six months ended June 30, 2002 and 2001 was $2.2 billion and $4.0 billion, respectively. The decrease in the average balance is primarily the result of maturities, which were not renewed in light of the decline in interest-earning assets. The weighted average interest rate on these instruments decreased to 3.85% for the six months ended June 30, 2002 from 6.05% for the six months ended June 30, 2001, primarily due to maturities of higher fixed-rate borrowings and the repricing of variable-rate borrowings at lower rates. Interest expense on borrowings totalled $583.8 million for the six months ended June 30, 2002, a decrease of $270.1 million from the six months ended June 30, 2001. The average balance outstanding for the six months ended June 30, 2002 and 2001 was $22.5 billion and $28.8 billion, respectively. The weighted average interest rate on these instruments decreased to 5.22% for the six months ended June 30, 2002 from 5.96% for the six months ended June 30, 2001. The decrease in the average volume is primarily the result of maturities, which were not renewed in light of the decline in interest-earning assets, while the decrease in the weighted average rate is primarily due to declining market interest rates. NET INTEREST INCOME. Net interest income was $738.0 million for the six months ended June 30, 2002, an increase of $91.3 million from the six months ended June 30, 2001. The interest rate spread increased to 2.94% for the six months ended June 30, 2002 from 2.22% for the six months ended June 30, 2001, primarily as a result of declining market interest rates reducing costs of liabilities at a faster rate than the decline in the yield on assets. Lower-costing liabilities were the result of the replacement of higher-rate borrowings and deposits with lower-rate borrowings and deposits as these instruments came due or were repaid. The net interest margin increased to 2.96% for the six months ended June 30, 2002, up 71 bps from the 2.25% reported during the first half of 2001. Excluding the $11.2 million interest on the California income tax refund, the interest rate spread and net interest margin for the six months ended June 30, 2002 would be 2.90% and 2.91%, respectively. NONINTEREST INCOME. Total noninterest income, consisting primarily of loan servicing fees, customer banking fees, gain on sale, settlement and transfer of loans, net, gain on sale of assets, net and other income, was $87.1 million for the six months ended June 30, 2002, representing a decrease of $81.3 million from the six months ended June 30, 2001. Page 40 Loan servicing fees for the Company, were $(106.6) million for the six months ended June 30, 2002, compared to $(6.9) million the six months ended June 30, 2001. The following table details the components of loan servicing fees, net (in thousands):

As the table reflects, gross loan servicing fees increased $25.4 million from year-ago levels, which is primarily attributable to the growth of the Company's servicing portfolio and higher ancillary fees. The single-family residential loan servicing portfolio, excluding loans serviced for the Bank, increased from $83.3 billion at June 30, 2001 to $90.7 billion at June 30, 2002. The portfolio runoff rate, representing the percentage of the residential portfolio that has been paid off during the year, influences MSR amortization, which increased $65.6 million in the six months ended June 30, 2002 over the same period in 2001. MSR amortization was also affected by a higher average MSR balance for the six months ended June 30, 2002 compared to the same period in 2001. Pass-through Interest Expense increased $4.4 million or 27.0% year over year, also influenced by higher runoff rates. Total loan servicing fees, net for the six months ended June 30, 2002 and 2001 includes net pre-tax gains of $3.9 million and $9.0 million, respectively, from the impact of SFAS No. 133 pertaining to the MSR fair value hedges. After recording these gains in accordance with SFAS No. 133, the Company determined that the fair value of the MSR asset was less than its carrying value and recorded pre-tax valuation provisions on the MSRs of $127.1 million and $77.0 million during the six months ended June 30, 2002 and 2001, respectively. See "--Impact of SFAS No. 133" and "--Mortgage Banking Risk Management" for further discussion. Customer banking fees were $119.0 million for the six months ended June 30, 2002 compared to $105.8 million for the six months ended June 30, 2001. The following table details the components of customer banking fees and service charges (in thousands):

The increase is primarily attributed to increased emphasis by management on transaction account growth and higher fee income on mutual fund, annuity and other investment and insurance product sales through CFI. 2002 also includes a $1.6 million reclassification to reflect gross revenues from customer check printing fees rather than net revenues. The offset is included in the "other expense" line of the income statement. Transaction accounts (including custodial accounts) as a percentage of retail deposits increased to 58.3% at June 30, 2002, from 53.2% at June 30, 2001. Page 41 Gain on sale, settlement and transfer of loans, net totalled $55.5 million for the six months ended June 30, 2002, an increase of $33.6 million from the six months ended June 30, 2001. During the six months ended June 30, 2002, the Company sold $11.9 billion in single-family mortgage loans with servicing rights retained as part of its ongoing mortgage banking operations at gains of $43.7 million compared to $5.6 billion of such sales for the corresponding period in 2001 at gains of $14.1 million. The overall increase in the volume of loans sold and the related gain is a result of the significant increase in fixed-rate loan originations due to the overall decline in market interest rates and increased mortgage refinancing. The results in 2002 and 2001 include unrealized gains of $7.3 million and $3.6 million, respectively, on the derivative rate locks, forward loan sale commitments and closed loan inventory from the application of SFAS No. 133. Gain on sale of assets, net totalled $8.4 million for the six months ended June 30, 2002, compared to a net gain of $12.1 million for the six months ended June 30, 2001. The gain during the first half of 2002 includes a $14.2 million gain on the sale of a real estate partnership interest, a $3.4 million gain on the sale of the Santa Barbara branch and a $2.0 million gain on the sale of $62.3 million in mortgage-backed securities, partially offset by an $11.3 million loss on the mark-to-market of the Company's portfolio of IO strip and "B" tranche mortgage securities pursuant to EITF No. 99-20. The gain during 2001 is primarily attributed to a $9.3 million gain on the sale of the Company's Concord EFS stock and a gain of $6.6 million on the sale of $298 million in mortgage-backed securities, partially offset by a write-down in the Company's equity securities portfolio. Other noninterest income for the six months ended June 30, 2001 included a gain of $20.7 million on the non-monetary exchange of Star Systems common stock for 634,520 shares of Concord EFS common stock as a result of Concord's acquisition of Star Systems in February 2001. NONINTEREST EXPENSE. Total noninterest expense was $466.1 million for the six months ended June 30, 2002, a decrease of $16.1 million compared to the six months ended June 30, 2001. Excluding the amortization of goodwill and other intangible assets, noninterest expense for the six months ended June 30, 2002 was $463.8 million, an increase of $11.4 million over the same period in the prior year. Noninterest expense for the six months ended June 30, 2002 included decreases of $27.5 million in amortization of intangible assets and $3.0 million in other noninterest expense. These decreases were partially offset by increases of $11.5 million in compensation expense, $2.3 million in occupancy and equipment expense and $1.5 million in professional fees. Compensation and employee benefits expense was $243.7 million for the six months ended June 30, 2002, an increase of $11.5 million from the six months ended June 30, 2001. The increase is primarily attributed to an increase in staff (from 8,030 FTE at June 30, 2001 to 8,200 at June 30, 2002) and temporary personnel, primarily in volume-related operating groups, as well as normal salary adjustments. Professional fees were $16.5 million for the six months ended June 30, 2002, an increase of $1.5 million from the six months ended June 30, 2001, primarily due to an overall increase in legal fees related to various legal cases. Amortization of intangible assets was $2.3 million for the six months ended June 30, 2002, a decrease of $27.5 million from the six months ended June 30, 2001, due to the adoption of SFAS No. 142 on January 1, 2002, which requires that goodwill no longer be amortized. Other noninterest expense was $111.1 million for the six months ended June 30, 2002 compared to $114.1 million in the same period of 2001. The decrease in expenses relates to decreases in a number of operating expense categories, including retail back office operations, marketing, judgments and settlements, employee travel expense and telephone. Page 42 PROVISION FOR INCOME TAX. During the six months ended June 30, 2002, Golden State recorded gross income tax expense of $146.8 million, which was offset by a tax benefit of $37.1 million, for net income tax expense of $109.7 million. Based on the current status of Mafco Holdings' audits for the years 1991 through 1995 and anticipated reversal of deferred tax assets with established valuation allowance, management changed its judgment about the realizability of the Company's deferred tax assets and reduced its valuation allowance by $44 million. As a result of reducing the valuation allowance, income tax expense was reduced by $31.4 million and goodwill was reduced by $12.6 million. Because these tax benefits accrue to the previous owners of FN Holdings under the Golden State Merger agreement, minority interest: provision in lieu of income tax expense was increased by $31.4 million, an amount equal to the reduction in income tax expense. These adjustments had no impact on net income available to common shareholders. In addition, an accrued liability had been established in prior years for the purpose of satisfying assessments that may result from issues arising during audits with various state taxing authorities. As a result of recent documentation received pertaining to the California audit of Glendale Federal Bank for the years 1991 through 1997, management reduced its accrued state tax liability by $8.7 million during the six months ended June 30, 2002. Goodwill was reduced by $0.6 million in connection with this transaction. The Company also recorded additional Federal tax expense of $3.1 million due to the reduction of the state tax expense. During the six months ended June 30, 2001, Golden State recorded net income tax expense of $117.7 million, which included net tax benefits of $29.0 million. In prior years, an accrued liability was established for the purpose of satisfying assessments that may result from issues arising during audits with various state taxing authorities. As a result of the completion and settlement of audits in various state taxing jurisdictions, additional guidance on the deductibility of covered asset losses, and the current assessment of exposure for tax strategies employed for prior years, management reduced its accrued state tax liability by $39.7 million. The Company also recorded additional Federal tax expense of $13.9 million due to the reduction of the state tax expense. In addition, during the six months ended June 30, 2001, a provision in lieu of income taxes was recorded for $3.2 million due to the utilization of net operating losses of a subsidiary made available as a result of the subsidiary's liquidation into California Federal Bank. These net operating losses are tax benefits retained by the previous owners of FN Holdings pursuant to the Golden State Merger Agreement. Golden State's effective gross federal tax rate was 36% during the six months ended June 30, 2002 and 42% during the six months ended June 30, 2001, while its federal statutory tax rate was 35% during both periods. In 2002, the difference between the effective and statutory rates was the result of additional federal tax liability recorded in conjunction with the reduction of the accrued state tax liability. In 2001, the difference between the effective and statutory rates was primarily the result of non-deductible goodwill amortization and additional federal tax liability recorded in conjunction with a reduction in the accrued state tax liability. Golden State's effective state tax rate was 3% and (6)% during the six months ended June 30, 2002 and 2001, respectively. The low effective state tax rate during 2002 and 2001 was the result of the previously discussed reduction in the accrued state tax liability. MINORITY INTEREST. During each of the six months ended June 30, 2002 and 2001, dividends on the REIT Preferred Stock were recorded totalling $13.5 million, net of income tax benefit, which will inure to the Company as a result of the deductibility of such dividends for income tax purposes. During the second quarter of 2002, the Company recorded $31.4 million due to the reversal of the deferred tax asset valuation allowance payable to the former owners. See "Provision for Income Taxes." Minority interest expense for the six months ended June 30, 2001 includes a $3.2 million provision in lieu of income taxes, representing pre-merger tax benefits retained by the previous owners of FN Holdings related to NOLs made available as a result of a subsidiary's liquidation into California Federal Bank. See "Provision for Income Taxes." Page 43 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Cumulative effect of change in accounting principle for the six months ended June 30, 2001 includes a write-down of $1.6 million, net of income taxes of $1.1 million, on certain securities as a result of the Company's implementation of EITF No. 99-20 on April 1, 2001. See note 14 of the Company's Notes to Unaudited Consolidated Financial Statements. IMPACT OF SFAS NO. 133. On January 1, 2001, the Company adopted SFAS No. 133. The pronouncement impacted several other areas of the financial statements. The table summarizes the activity during the six months ended June 30, 2002 and 2001 below (debit/(credit); in thousands):

The impact of SFAS No. 133 added $0.05 to diluted EPS during each of the six months ended June 30, 2002 and 2001. Page 44 RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2002 VERSUS THREE MONTHS ENDED JUNE 30, 2001 The following table shows the Company's consolidated average balance sheets, with the related interest income, interest expense and the average interest rates for the periods presented. Average balances are calculated on a daily basis.

Page 45

_______________ (1) Non-performing assets are included in the average balances for the periods indicated. (2) Includes securities, interest-bearing deposits in other banks, securities purchased under agreements to resell, interest income on California income tax refund and other interest income. (3) Interest and average rate include the impact of interest rate swaps. (4) Interest rate spread represents the difference between the average rates of total interest-earning assets and total interest-bearing liabilities. Page 46 The following table shows what portion of the changes in interest income and interest expense were due to changes in rate and volume. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to volume (change in average outstanding balance multiplied by the prior period's rate) and rate (change in average interest rate multiplied by the prior period's volume). Changes attributable to both volume and rate have been allocated proportionately.

INTEREST INCOME. Total interest income was $798.8 million for the three months ended June 30, 2002, a decrease of $228.7 million from the three months ended June 30, 2001. Total interest-earning assets for the three months ended June 30, 2002 averaged $48.6 billion, compared to $57.2 billion for the corresponding period in 2001. The decrease in interest-earning assets is primarily a result of a decline in mortgage-backed securities, principally due to management's decision to sharply reduce purchases, and net loan run off, as well as decreased securities volume and loans held for sale. The yield on total interest-earning assets during the three months ended June 30, 2002 decreased to 6.57% from 7.19% for the three months ended June 30, 2001, primarily due to the repricing of loans and mortgage-backed securities available for sale at lower rates. Golden State earned $641.8 million of interest income on loans receivable for the three months ended June 30, 2002, a decrease of $121.4 million from the three months ended June 30, 2001. The average balance of loans receivable was $38.9 billion for three months ended June 30, 2002, compared to $41.4 billion for the same period in 2001. The weighted average yield on loans receivable decreased to 6.60% for the three months ended June 30, 2002 from 7.38% for the three months ended June 30, 2001. The decrease in the average balance reflects the sharp run off of residential loans during a period of high refinancing activity resulting in a shift in the mix of loans, with a higher percentage of higher rate loans during the second quarter of 2002. The decrease in the weighted average yield reflects the repricing of variable-rate loans, a decrease in the prime rate on commercial banking loans and comparatively lower market interest rates during the three months ended June 30, 2002, partially offset by a higher yield on auto loans purchased after July 1, 2001, which are recorded on a gross-coupon basis, rather than a credit-adjusted yield basis. The impact of this change on net interest income during the three months ended June 30, 2002 was to increase interest income by $11.9 million. (See "--Allowance for Loan Losses.") Page 47 Loan production is detailed in the table below (in thousands): Three Months Ended June 30, --------------------------- 2002 2001 ---- ---- Loans funded: Residential real estate loans: Adjustable-rate $1,525,246 $2,253,890 Fixed-rate 4,073,907 4,968,232 ---------- ---------- Total residential real estate loans 5,599,153 7,222,122 Commercial real estate loans 462,597 555,456 Commercial loans 352,402 297,011 Consumer nonmortgage loans 289,429 215,374 Auto loans (a) 339,191 310,038 ---------- ---------- Total loans funded $7,042,772 $8,600,001 ========== ========== Residential real estate loans purchased $1,080,339 $ 558,081 ========== ========== _______________ (a) Approximately 49% and 36% of this volume was in prime product; 51% and 64% in sub-prime product for the three months ended June 30, 2002 and 2001, respectively. Golden State earned $28.9 million of interest income on loans held for sale for the three months ended June 30, 2002, a decrease of $3.7 million from the three months ended June 30, 2001. The average balance of loans held for sale was $1.8 billion for the three months ended June 30, 2002, a decrease of $0.2 billion from the comparable period in 2001, primarily attributed to increased originations of residential fixed-rate loans as a result of heightened borrower refinancing activity in the declining interest rate environment. Fixed-rate production for sale totalled $4.0 billion during the three months ended June 30, 2002, a decline of 14.7% over the $4.7 billion originated during the comparable period in 2001. The weighted average yield on loans held for sale decreased to 6.57% for the three months ended June 30, 2002 from 6.76% for the three months ended June 30, 2001, primarily due to declining market interest rates. Interest income on mortgage-backed securities available for sale was $75.9 million for the three months ended June 30, 2002, a decrease of $88.1 million from the three months ended June 30, 2001. The average portfolio balance decreased $4.9 billion, to $5.1 billion for the three months ended June 30, 2002 compared to the same period in 2001. The weighted average yield on these assets decreased from 6.56% for the three months ended June 30, 2001 to 5.96% for the three months ended June 30, 2002. The decrease in the volume is primarily attributed to management's decision to sharply reduce purchases, coupled with high repayments and sales of mortgage-backed securities. The decrease in the weighted average yield primarily reflects the repricing of variable-rate securities at lower rates. Interest income on mortgage-backed securities held to maturity was $18.3 million for the three months ended June 30, 2002, a decrease of $15.3 million from the three months ended June 30, 2001. The average portfolio balance decreased $0.4 billion, to $1.2 billion for the three months ended June 30, 2002 compared to the same period in 2001, primarily due to repayments. The weighted average yields for the three months ended June 30, 2002 and 2001 were 6.08% and 8.24%, respectively. The decrease in the weighted average yield is primarily the result of the repricing of variable-rate securities at lower rates. Interest income on securities, interest-bearing deposits in banks and other was $13.9 million for the three months ended June 30, 2002, an increase of $2.0 million from the three months ended June 30, 2001. The average portfolio balance was $0.4 billion and $0.8 billion for the three months ended June 30, 2002 and 2001, respectively. The weighted average yield of 12.65% for the three months ended June 30, 2002 compared to 5.85% for the three months ended June 30, 2001. The decrease in the volume is primarily attributed to payments and maturities of securities. The increase in the weighted average yield reflects $11.2 million of interest income related to a California income tax refund for which there is no corresponding earning asset; if this amount is excluded, the weighted average yield for the three months ended June 30, 2002 would be 2.44%. The weighted average yield also reflects a shift in Page 48 the mix of securities, with lower average balances of higher rate securities held to maturity during the second quarter of 2002. Dividends on FHLB stock were $20.0 million for the three months ended June 30, 2002, a decrease of $2.4 million from the three months ended June 30, 2001. The average balance outstanding was $1.2 billion and $1.4 billion for the three months ended June 30, 2002 and 2001, respectively. The weighted average dividend on FHLB stock increased to 6.42% for the three months ended June 30, 2002 from 6.39% for the three months ended June 30, 2001. INTEREST EXPENSE. Total interest expense was $428.5 million for the three months ended June 30, 2002, a decrease of $262.6 million from the three months ended June 30, 2001. The decrease is primarily due to declining market interest rates and a reduction in borrowings under FHLB advances and securities sold under agreements to repurchase, partially offset by a slight increase in average deposits. Interest expense on deposits, including Brokered Deposits, was $125.7 million for the three months ended June 30, 2002, a decrease of $97.9 million from the three months ended June 30, 2001. The average balance of deposits outstanding increased from $24.3 billion for the three months ended June 30, 2001 to $24.6 billion for the three months ended June 30, 2002. The increase in the average balance is primarily attributed to increases in the average balances of money market accounts, retail customer checking and savings accounts, partially offset by a decline in CDs and custodial accounts. The overall weighted average cost of deposits decreased to 2.05% for the three months ended June 30, 2002 from 3.69% for the three months ended June 30, 2001, primarily due to declining market interest rates and a shift in the mix of deposits, with higher average balances of lower rate money market, checking and savings accounts, and a lower average balance of higher rate CDs during the second quarter of 2002. Interest expense on securities sold under agreements to repurchase totalled $21.0 million for the three months ended June 30, 2002, a decrease of $32.4 million from the three months ended June 30, 2001. The average balance of such borrowings for the three months ended June 30, 2002 and 2001 was $2.1 billion and $3.8 billion, respectively. The decrease in the average balance is primarily the result of maturities, which were not renewed in light of the decline in interest-earning assets. The weighted average interest rate on these instruments decreased to 3.89% for the three months ended June 30, 2002 from 5.55% for the three months ended June 30, 2001, primarily due to maturities of higher fixed-rate borrowings and the repricing of variable-rate borrowings at lower rates. Interest expense on borrowings totalled $281.0 million for the three months ended June 30, 2002, a decrease of $133.0 million from the three months ended June 30, 2001. The average balance outstanding for the three months ended June 30, 2002 and 2001 was $21.3 billion and $28.8 billion, respectively. The weighted average interest rate on these instruments decreased to 5.27% for the three months ended June 30, 2002 from 5.75% for the three months ended June 30, 2001. The decrease in the average volume is primarily the result of maturities, which were not renewed in light of the decline in interest-earning assets, while the decrease in the weighted average rate is primarily due to declining market interest rates. NET INTEREST INCOME. Net interest income was $370.3 million for the three months ended June 30, 2002, an increase of $33.9 million from the three months ended June 30, 2001. The interest rate spread increased to 3.02% for the three months ended June 30, 2002 from 2.33% for the three months ended June 30, 2001, primarily as a result of declining market interest rates reducing costs of liabilities at a faster rate than the decline in the yield on assets. Lower-costing liabilities were the result of the replacement of higher-rate borrowings and deposits with lower-rate borrowings and deposits as these instruments came due or were repaid. The net interest margin increased to 3.05% for the three months ended June 30, 2002, up 69 bps from the 2.36% reported during the second quarter of 2001. Excluding the $11.2 million interest on the California income tax refund, the interest rate spread and net interest margin for the three months ended June 30, 2002 would be 2.93% and 2.95%, respectively. NONINTEREST INCOME. Total noninterest income, consisting primarily of loan servicing fees, customer banking fees, gain on sale, settlement and transfer of loans, net, gain on sale of assets, net and other income, was $(0.9) million for the three months ended June 30, 2002, representing a decrease of $110.5 million from the three months ended June 30, 2001. Page 49 Loan servicing fees for the Company, were $(97.8) million for the three months ended June 30, 2002, compared to $19.7 million the three months ended June 30, 2001. The following table details the components of loan servicing fees, net (in thousands):

As the table reflects, gross loan servicing fees increased $13.3 million from year-ago levels, which is primarily attributable to the growth of the Company's servicing portfolio and higher ancillary fees. The single-family residential loan servicing portfolio, excluding loans serviced for the Bank, increased from $88.5 billion at March 31, 2002 to $90.7 billion at June 30, 2002. MSR amortization, which increased $9.7 million in the second quarter of 2002 over the same period in 2001, is affected by a higher average MSR balance for the three months ended June 30, 2002 over the same period in 2001, partially offset by a lower portfolio runoff rate, representing the percentage of the residential portfolio that has been paid off during the year. Pass-through Interest Expense decreased $0.8 million or 9% year over year, also influenced by lower runoff rates. Total loan servicing fees, net for the second quarter of 2002 and 2001 includes net pre-tax (loss) gain of $(15.3) million and $6.6 million, respectively, from the impact of SFAS No. 133 pertaining to the MSR fair value hedges. After recording these (losses) gains in accordance with SFAS No. 133, the Company determined that the fair value of the MSR asset was less than its carrying value and recorded a pre-tax valuation provision on the MSRs of $100.0 million during the three months ended June 30, 2002. See "--Impact of SFAS No. 133" and "--Mortgage Banking Risk Management" for further discussion. Customer banking fees were $60.9 million for the three months ended June 30, 2002 compared to $54.6 million for the three months ended June 30, 2001. The following table details the components of customer banking fees and service charges (in thousands):

The increase is primarily attributed to increased emphasis by management on transaction account growth and higher fee income on mutual fund, annuity and other investment and insurance product sales through CFI. Second quarter 2002 also includes a $0.8 million reclassification to reflect gross revenues from customer check printing fees rather than net revenues. The offset is included in the "other expense" line of the income statement. Page 50 Gain on sale, settlement and transfer of loans, net totalled $20.9 million for the three months ended June 30, 2002, an increase of $3.9 million from the three months ended June 30, 2001. During the three months ended June 30, 2002, California Federal sold $5.0 billion in single-family mortgage loans with servicing rights retained as part of its ongoing mortgage banking operations at gains of $22.1 million compared to $4.2 billion of such sales for the corresponding period in 2001 at gains of $10.5 million. The overall increase in the volume of loans sold and the related gain is a result of the significant increase in fixed-rate loan originations due to the overall decline in market interest rates and increased mortgage refinancing. The results in 2002 and 2001 include a $1.6 million unrealized loss and a $3.6 million unrealized gain, respectively, on the derivative rate locks, forward loan sale commitments and closed loan inventory from the application of SFAS No. 133. Gain on sale of assets, net totalled $10.3 million for the three months ended June 30, 2002, compared to a net gain of $11.7 million for the three months ended June 30, 2001. The gain during the second quarter of 2002 includes a $14.2 million gain on the sale of a real estate partnership interest and a $3.4 million gain on the sale of the Santa Barbara branch, partially offset by an $8.1 million loss on the mark-to-market of the Company's portfolio of IO strip and "B" tranche mortgage securities pursuant to EITF No. 99-20. The gain during 2001 is primarily attributed to a $9.3 million gain on the sale of the Company's Concord EFS stock and a gain of $6.6 million on the sale of $298 million in mortgage-backed securities, partially offset by a write-down in the Company's equity securities portfolio. NONINTEREST EXPENSE. Total noninterest expense was $229.0 million for the three months ended June 30, 2002, a decrease of $17.9 million compared to the three months ended June 30, 2001. Excluding the amortization of goodwill and other intangible assets, noninterest expense for the three months ended June 30, 2002 was $227.8 million, a decrease of $4.1 million over the same period in the prior year. Noninterest expense for the three months ended June 30, 2002 included decreases of $13.8 million in amortization of intangible assets, $6.8 million in other noninterest expense, $1.0 million in professional fees, $1.0 million in loan expense and $0.3 million in occupancy and equipment expense. These decreases were partially offset by increases of $4.4 million in compensation and employee benefits expense and $0.6 million in foreclosed real estate operations, net. Compensation and employee benefits expense was $118.3 million for the three months ended June 30, 2002, an increase of $4.4 million from the three months ended June 30, 2001. The increase is primarily attributed to an increase in staff (from 8,030 FTE at June 30, 2001 to 8,200 at June 30, 2002) and temporary personnel, primarily in volume-related operating groups, and normal salary adjustments. Professional fees were $9.0 million for the three months ended June 30, 2002, a decrease of $1.0 million from the three months ended June 30, 2001, primarily due to an overall decrease in legal fees related to various legal cases. Amortization of intangible assets was $1.2 million for the three months ended June 30, 2002, a decrease of $13.8 million from the three months ended June 30, 2001, due to the adoption of SFAS No. 142 on January 1, 2002, which requires that goodwill no longer be amortized. Other noninterest expense was $54.1 million for the three months ended June 30, 2002 compared to $60.9 million for the same period in 2001. The decrease in expenses relates to decreases in a number of operating expense categories, including retail back office operations, judgments and settlements, employee travel expense, telephone and marketing. PROVISION FOR INCOME TAX. During the three months ended June 30, 2002, Golden State recorded net income tax expense of $20.3 million, which included a tax benefit of $37.1 million, compared to $83.4 million, which included a tax benefit of $3.2 million, for the three months ended June 30, 2001. In prior years, an accrued liability was established for the purpose of satisfying assessments that may result from issues arising during audits with various state taxing authorities. As a result of recent documentation received pertaining to the California audit of Glendale Federal Bank for the years 1991 through 1997, management reduced its accrued state tax liability by $8.7 million during the three months ended June 30, 2002. Goodwill was reduced by $0.6 million in connection with this transaction. The Bank also recorded additional Federal tax expense of $3.0 million due to the reduction of the state tax expense. Page 51 A provision in lieu of income taxes was recorded for $31.4 million due to the reduction in the valuation allowance in the three months ended June 30, 2002, and $3.2 million was recorded due to the utilization of net operating losses of a subsidiary made available as a result of the subsidiary's liquidation into California Federal Bank during the three months ended June 30, 2001. These tax benefits are retained by the previous owners of FN Holdings pursuant to the Golden State Merger Agreement. Golden State's effective federal tax rate was 37% during the three months ended June 30, 2002 and 2001, while its federal statutory tax rate was 35% during both periods. In 2002, the difference between the effective and statutory rates was the result of additional federal tax liability recorded in conjunction with the reduction of the accrued state tax liability. In 2001, the difference between the effective and statutory rates was primarily the result of nondeductible goodwill amortization. Golden State's effective state tax rate was 0% and 6% during the three months ended June 30, 2002 and 2001, respectively. The effective state tax rate declined during 2002 as a result of a reduction in the accrued state tax liability. MINORITY INTEREST. During each of the three months ended June 30, 2002 and 2001, dividends on the REIT Preferred Stock were recorded totalling $6.7 million, net of income tax benefit, which will inure to the Company as a result of the deductibility of such dividends for income tax purposes. During the second quarter of 2002, the Company recorded $31.4 million due to the reversal of the deferred tax asset valuation allowance payable to the former owners. See "Provision for Income Taxes." Minority interest expense for the three months ended June 30, 2001 includes a $3.2 million provision in lieu of income taxes, representing pre-merger tax benefits retained by the previous owners of FN Holdings related to NOLs made available as a result of a subsidiary's liquidation into California Federal Bank. See "Provision for Income Taxes." CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Cumulative effect of change in accounting principle for the three months ended June 30, 2001 includes a write-down of $1.6 million, net of income taxes of $1.1 million, on certain securities as a result of the Company's implementation of EITF No. 99-20 on April 1, 2001. See note 14 of the Company's Notes to Unaudited Consolidated Financial Statements. Page 52 IMPACT OF SFAS NO. 133. On January 1, 2001, the Company adopted SFAS No. 133. The pronouncement impacted several other areas of the financial statements for the three months ended June 30, 2002 and 2001, as summarized below (debit/(credit); in thousands):

During the three months ended June 30, 2002, the impact of SFAS No. 133 reduced diluted EPS by $0.07 and increased diluted EPS by $0.04 in the same period in 2001. PROBLEM AND POTENTIAL PROBLEM ASSETS A loan is impaired when it is probable that the Company will be unable to collect all contractual amounts due (i.e., both principal and interest), based upon current information and events. 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. Loans collectively reviewed for impairment by the Company include all single-family loans, all auto loans, business banking loans under $100,000 and performing multi-family and commercial real estate loans under $500,000, excluding loans which have entered the work-out process. The measurement of impairment may be based on: (a) the present value of the expected future cash flows of the impaired loan discounted at the loan's original effective interest rate; (b) the observable market price of the impaired loan; or (c) the fair value of the collateral (less disposal costs) of a collateral-dependent loan. Page 53 The excess of the recorded investment of the loan over the impaired loan's value is recognized by recording a valuation allowance. Cash receipts on non-performing impaired loans are generally used to reduce the carrying value of the loan, unless the Company expects to recover the remaining principal balance of the loan. Impairment losses are included in the allowance for loan losses. Any loss of principal upon disposition is recorded through a charge-off to the allowance for loan losses. At June 30, 2002, loans that were considered to be impaired totalled $52.6 million (of which $19.1 million were on nonaccrual status). The average recorded investment in impaired loans during the three and six-month periods ended June 30, 2002 was approximately $53.8 million and $54.4 million. For the three and six-month periods ended June 30, 2002, Golden State recognized interest income on those impaired loans of $0.9 million and $1.9 million, respectively, which included $0.1 million and $0.2 million, respectively, of interest income recognized using the cash basis method of income recognition. The following table presents the Company's non-performing loans and impaired loans, foreclosed real estate and repossessed assets as of the dates indicated. These categories are not mutually exclusive; certain loans are included in more than one classification. Purchased auto loans are reflected in the table below using each individual loan's contractual UPB. June 30, 2002 -------------------------------- Non-performing Impaired -------------- -------- (in millions) Real Estate: 1-4 unit residential $ 60 $ 1 Multi-family residential -- 4 Commercial and other 5 29 ---- --- Total real estate 65 34 Non-real estate 22 19 ---- --- Total loans 87 (a) $53 (b) === Foreclosed real estate, net 14 Repossessed assets 4 ---- Total non-performing assets $105 ==== December 31, 2001 -------------------------------- Non-performing Impaired -------------- -------- (in millions) Real Estate: 1-4 unit residential $ 75 $ 1 Multi-family residential -- 9 Commercial and other 4 32 ---- --- Total real estate 79 42 Non-real estate 22 17 ---- --- Total loans 101 (a) $59 (b) === Foreclosed real estate, net 19 Repossessed assets 4 ---- Total non-performing assets $124 ==== ______________ (a) There were no loans securitized with recourse on non-performing status at June 30, 2002 or December 31, 2001. (b) Includes $19.1 million and $14.1 million of non-performing loans at June 30, 2002 and December 31, 2001, respectively. Page 54 There were no accruing loans contractually past due 90 days or more at June 30, 2002 or December 31, 2001. The Company's and the Bank's non-performing assets, consisting of nonaccrual loans, repossessed assets and foreclosed real estate, net, decreased to $105 million at June 30, 2002, from $124 million at December 31, 2001. Non-performing assets as a percentage of the Bank's total assets was 0.20% at June 30, 2002 and 0.22% at December 31, 2001. The following table presents non-performing real estate assets by geographic region of the country as of June 30, 2002:

___________ (1) Consists of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island and Vermont. (2) Net of purchase accounting adjustments. At June 30, 2002, the Company had one non-performing asset over $2 million in size with a balance of $2.3 million and 3,540 non-performing assets below $2 million in size, including 755 non-performing 1-4 unit residential assets. ALLOWANCE FOR LOAN LOSSES The Company's allowance absorbs losses inherent in the loan portfolio. Management periodically evaluates the adequacy of the allowance. Provisions for loan losses (charged to current earnings) and balances acquired through acquisitions increase the allowance, while charge-offs (net of recoveries) decrease it. The provision considers both specifically identified problem loans as well as credit risks not specifically identified in the loan portfolio. The Company recorded no provision for loan losses during the six months ended June 30, 2002 and 2001, respectively. Management believes that its present allowance for loan losses is adequate and it will continue to review its loan portfolio to determine the extent to which any changes in economic conditions and loss experience may require further provisions in the future. See "--Problem and Potential Problem Assets" for a discussion of the methodology used in determining the adequacy of the allowance for loan losses. Page 55 Activity in the allowance for loan losses is as follows (in thousands):

The current period reclassification relates to loans transferred to the held-for-sale portfolio. Net charge-offs for the six months ended June 30, 2002 totalled $28.2 million, up $17.9 million from the six months ended June 30, 2001. This level of charge-offs represents 7 bps on average loans in the six months ended June 30, 2002, compared to 3 bps of net charge-offs in the six months ended June 30, 2001. The increase was related to the Company's auto loan portfolio, but does not represent a significant increase in portfolio delinquency rates. Total delinquency rates on the portfolio were 4.88% at June 30, 2001 compared to 5.12% at June 30, 2002. The higher charge-offs resulted primarily from two other issues. First, the Company experienced higher losses due to lower proceeds on sales of its repossessed autos, which resulted in lower recoveries. The zero percent auto financing offers that were prevalent in late 2001 and early 2002 attracted buyers to new cars, which depressed the values of used cars. Management believes this to be a unique occurrence and, based on recovery rates experienced by the Company to date in 2002, the trend appears to be reversing. In addition, interest income on all auto loans originated after July 1, 2001 is recorded at the gross coupon vs. an effective (or credit adjusted) yield. Credit losses on these loans are no longer being amortized through the net interest margin but are charged to the loan loss allowance, resulting in higher net charge-offs. During the six months ended June 30, 2002, net charge-offs were $10.9 million higher as a result of this treatment. See "--Interest Income." The adequacy of the allowance is based on past loan loss experience, known and inherent risks in the loan portfolio, adverse unknown situations that have occurred that may affect the borrower's ability to repay, the estimated value of underlying collateral and economic conditions. Management's methodology for assessing the adequacy of the allowance includes the evaluation of the following three key elements: the formula allowance, specific allowances for identified problem loans, and the unallocated allowance. The formula allowance element considers losses embedded within the portfolios, but which have not yet been realized. Losses are recognized when: (a) available information indicates that it is probable that a loss has been incurred and (b) the amount of the loss can be reasonably estimated. Page 56 The Company has determined that borrowers are impacted by events that result in loan default and eventual loss which occur well in advance of a lender's knowledge of those events, and that the time-frame between the occurrence of such events and the resulting default and loss realization is between one and 2.5 years, depending upon the loan type. Examples of such loss-causing events for single family mortgage and other consumer loans would be borrower job loss, divorce, and medical crisis. An example for commercial real estate loans would be the loss of a major tenant. The specific allowances are established against individual loans, including impaired loans, in accordance with SFAS No. 114. Specific allowances are established against individual residential 1-4 mortgage loans, commercial loans and commercial and multi-family real estate loans for which management has performed analyses and concluded that, based on current information and events, it is probable that the Bank will be unable to collect all amounts contractually due. Generally, management believes that collectibility is improbable if a loan is severely delinquent or if it has been determined that borrower cash flow is inadequate for debt repayment. The amount of specific allowance is determined by estimating collateral deficiency, including consideration of collateral disposal costs. If the net book value exceeds the fair value, a specific allowance is established equal to the excess. Loans evaluated for specific allowance are excluded from the formula allowance analysis so as not to double-count loss exposure. The unallocated allowance is established for inherent losses which may not have been identified through the formula and specific portions of the allowance. The unallocated portion is necessarily more subjective and requires a high degree of management judgment and experience. Management has identified several factors that impact the potential for credit losses that are not considered in either the formula or the specific allowance segments. These factors consist of industry and geographic loan concentrations, changes in underwriting processes, and trends in problem loan and loss recovery rates. Geographic concentration is a particularly key component as there is evidence of deterioration in some real estate markets, especially in northern California. Statistics regarding California concentration of the Company's entire real estate-secured portfolio at June 30, 2002 are summarized below: % of Total Portfolio Concentration in -------------------------------------------- California Northern CA Southern CA ---------- ----------- ------------ Residential 77% 38% 39% Commercial Real Estate 88 27 61 Consumer (primarily Home Equity) 90 41 49 Each factor is analyzed and assigned a range of values. At this time, management has chosen an unallocated allowance amount at the mid-point of the range for each factor. At June 30, 2002, the allowance for loan losses was $469 million, consisting of a $369 million formula allowance, a $17 million specific allowance and an $83 million unallocated allowance. Although the loan loss allowance has been allocated by type of loan for internal valuation purposes, $452 million of the allowance is general in nature and is available to support any losses which may occur, regardless of type, in the Company's loan portfolio. Page 57 A summary of the activity in the total allowance for loan losses by loan type is as follows:

RISK MANAGEMENT The Company's risk management policies are established by the Bank's Asset/Liability Management Committee. 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 maintain 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. Banks are subject to interest rate risk to the degree that their interest-bearing liabilities 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 interest rate risk and liquidity 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. ASSET AND LIABILITY MANAGEMENT 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. After taking into consideration both the variability of rates and the maturities of various instruments, it evaluates strategies which may reduce the sensitivity of its earnings to interest rate and market value fluctuations. In order to reduce interest rate risk by increasing the percentage of interest-rate-sensitive assets, the Company continues to emphasize the origination of ARM products for its portfolio. Where possible, the Company seeks to originate real estate and other loans that on the whole adjust in accordance with the repricing of its liabilities. At June 30, 2002, 77% of the Company's net loan portfolio consisted of ARMs. One of the most important sources of the Bank'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. Page 58 ARMs have, from time to time, been offered with low initial interest rates as marketing inducements. In addition, most ARMs are 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. In order to reduce the negative impact of assets with periodic rate caps in a rising interest rate environment, the Bank issued liabilities whose rates are capped against rising rates. 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 UPB through negative amortization. Conversely, in a period of falling rates, ARMs can be subject to repayments as borrowers convert from floating-rate mortgages to low fixed-rate mortgages. As the ARMs reprice downward or are converted to low fixed-rate mortgages, the yield on interest-earning assets is reduced, thereby negatively impacting the net interest margin. The Bank seeks to manage this risk by structuring the maturity and repricing of its liabilities to best offset the impact on the net interest margin. 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. During a period of falling rates, the opposite would tend to occur. Page 59 The following table sets forth the projected contractual maturities adjusted for projected prepayments and "repricing mechanisms" (provisions for changes in the interest rates of assets and liabilities). Prepayment rates are assumed 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. Accordingly, such assets may not respond in the 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 June 30, 2002 was as follows:

Page 60 ___________ (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 June 30, 2002. The actual maturity and rate sensitivity of these assets could vary substantially if future prepayments differ from prepayment estimates. (2) Consists of $82.8 million of short-term investment securities and $0.1 million of interest-bearing deposits in other banks. (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 securities of $0.4 million. (5) Excludes allowance for loan losses of $469 million and non-performing loans of $87 million. (6) Fixed-rate deposits and deposits with fixed pricing intervals 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 June 30, 2002, Golden State's cumulative gap totalled $748 million. At December 31, 2001, Golden State's cumulative gap totalled $529 million. 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. However, the maturity/rate sensitivity analysis is a static view of the balance sheet with assets and liabilities grouped into certain defined time periods, and only partially depicts the dynamics of the Company's sensitivity to interest rate changes. Therefore, 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. Page 61 The Company's performance is highly dependent on the structure of the balance sheet and the relationship between assets and liabilities. Differences in maturity, coupon rates and rate indices between assets and liabilities have the potential to create variability in earnings. The following table sets forth the Company's balance sheet composition by index (in thousands): June 30, 2002 December 31, 2001 ------------- ----------------- Balance Sheet Composition by Index: Securities Fixed $ 3,608,386 $ 5,348,562 COFI 901,402 1,140,414 Treasury 1,378,015 1,516,419 Other ARMs 227,034 483,136 Unrealized gain/(loss) 90,968 97,070 Purchase accounting 544 4,129 ----------- ----------- Total securities 6,206,349 8,589,730 ----------- ----------- Loans Fixed 8,893,069 9,149,482 Hybrid ARMs 19,317,198 18,649,980 COFI 4,316,168 5,092,248 Treasury 4,572,025 5,340,633 Other ARMs 1,990,340 1,592,005 Purchase accounting 6,506 8,573 Allowance for loan losses (469,047) (497,298) ----------- ----------- Total loans 38,626,259 39,335,623 ----------- ----------- Other interest-earning assets 2,602,882 4,151,004 Noninterest-earning assets 4,425,535 4,414,312 ----------- ----------- Total assets $51,861,025 $56,490,669 =========== =========== Deposits $24,300,551 $25,134,078 Borrowings: Fixed with maturities < 1 year 8,363,661 9,416,480 Fixed with maturities > 1 year 8,407,683 10,155,390 Adjustable 5,857,000 7,063,000 Purchase accounting 910 2,524 Accrued interest payable 139,787 171,092 ----------- ----------- Total borrowings 22,769,041 26,808,486 ----------- ----------- Noninterest-bearing liabilities 1,527,751 1,478,670 Minority interest and stockholders' equity 3,263,682 3,069,435 ----------- ----------- Total liabilities and equity $51,861,025 $56,490,669 =========== =========== Page 62 MORTGAGE BANKING ACTIVITIES The following table provides detailed information related to FNMC's MSRs:

_____________ (a) Excludes $1.8 million at June 30, 2002 and $3.0 million at December 31, 2001 of MSRs on non-single family residential portfolios. Page 63 The table below summarizes mortgage servicing acquisitions during the six and three months ended June 30, 2002 and 2001:

Page 64 MORTGAGE BANKING RISK MANAGEMENT The recent decline in long-term interest rates has resulted in acceleration of mortgage loan prepayments, which accelerate amortization of MSRs. This results in reduced servicing fee income and market value of MSRs. To reduce the sensitivity of its earnings to interest rate and market value fluctuations, the Company hedges the change in value of its MSRs based on changes in the benchmark interest rate. Although the Company hedges the change in value of its MSRs, its hedge coverage ratio does not equate to 100%. The Company does not hedge certain components of its portfolio, notably ARMs and loans with prepayment penalties. In addition, the Company hedges only certain components of risk, which have not generally included the mortgage rate spread to other market interest rates. The Company owned several derivative instruments at June 30, 2002, which were used to hedge against the change in value of the mortgage servicing portfolio due to expected prepayment risk assumption changes caused by declining rates. These derivative instruments included interest rate swap agreements, Constant Maturity Swap interest rate floor contracts, swaptions and PO swaps. MSR derivatives used to hedge prepayment risk are comprised of the following (dollars in thousands):

_____________ (a) Premiums paid to counterparties in exchange for the right to receive cash payments when the 10-year Constant Maturity Swap rate falls below the strike rate are recorded as part of the MSR derivative asset on the balance sheet. (b) Premiums paid to counterparties in exchange for the right to enter into an interest rate swap are recorded as part of the MSR derivative asset on the balance sheet. Servicing fee income for the six months ended June 30, 2002 included a $127.1 million charge to increase the valuation allowance on MSRs. During the six-month period, the benchmark mortgage rate the Company uses for its internal estimates declined by 53 bps. During this period, the MSRs were not 100% hedged, which in a declining interest rate environment can negatively impact net income. The hedge coverage ratio during this period was approximately between 60% and 80%. When developing MSR values, there is no demonstrable liquid market for MSRs with the same size and other characteristics as the Company's MSR asset. Management is therefore forced to turn to other methods to estimate fair value. Management regularly reviews its process for determining MSR fair value and believes that the process it has been using has led to reasonable estimates of value. Page 65 LIQUIDITY The ratio of cash and short-term U.S. Government securities and other specified securities to deposits and borrowings due within one year measures the Company's liquidity. The OTS requires that California Federal maintain sufficient liquidity to ensure its safe and sound operation. Effective March 15, 2001, the OTS eliminated the previously imposed minimum liquidity requirement of 4%. California Federal has been in compliance with the liquidity regulations during the six months ended June 30, 2002 and the year ended December 31, 2001. The major source of funding for Golden State on an unconsolidated basis is distributions from its subsidiary, GS Holdings, which receives substantially all of its funding from distributions of the Bank's earnings and tax sharing payments. Distributions of the Bank's earnings are subject to regulatory limitations. The Bank also uses its operating income to pay dividends on its preferred stock owned by GS Holdings, subject to certain restrictions. In turn, GS Holdings uses distributions received from the Bank primarily to pay debt and expenses, and make distributions to Golden State, subject to certain restrictions. For more information on dividend restrictions for the Bank and GS Holdings, refer to "Business - Regulation and Supervision" and note 24 of the "Notes to Consolidated Financial Statements" in the Company's 2001 Annual Report on Form 10-K. On a consolidated basis, a major source of the Company's funding is expected to be the Bank's retail deposit branch network, which management believes will be sufficient to meet its long-term liquidity needs. The Company must retain and attract new deposits, which depends upon the variety and effectiveness of its customer account products, service and convenience, and rates paid to customers. Any decline in retail deposit funding would adversely impact the Company's liquidity. The Company also obtains funds from the repayment and maturity of loans and mortgage-backed securities, as well as deposit inflows, loan sales, securities sold under agreements to repurchase, FHLB advances, and other secured and unsecured borrowings. The Company anticipates 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. A decline in the Bank's credit rating would adversely affect the Bank's ability to borrow and/or the related borrowing costs, thus impacting the Company's liquidity. In addition, if the Company were to default on a borrowing, all principal and accrued interest would become due and payable, thus negatively affecting the Company's liquidity. The consolidated Company's primary uses of funds are the origination or purchase of loans, mortgage-backed securities, maturing CDs, demand deposit withdrawals, repayment of borrowings and dividends to common shareholders. CDs scheduled to mature during the twelve months ending June 30, 2003 aggregate $8.0 billion. The Company may renew these certificates, attract new replacement deposits, replace such funds with other borrowings, or reduce the size of the balance sheet. In addition, at June 30, 2002, the Company had FHLB advances, securities sold under agreements to repurchase and other borrowings aggregating $10.4 billion and $14.2 billion maturing or repricing within the next three and twelve months, respectively. 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. Interest expense on the GS Holdings Notes approximates $107.3 million per year. Although GS Holdings expects that distributions and tax sharing payments from the Bank will cover future interest and principal payments, there is no guarantee. In addition, there is no assurance that Bank distributions will be permitted by the terms of any GS Holdings' debt instruments, any class of preferred stock issued by the Bank or its subsidiaries, including the REIT Preferred Stock, or under applicable federal thrift laws then in effect. The Company anticipates that cash and cash equivalents on hand and its 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. In addition to cash and cash equivalents of $853.0 million at June 30, 2002, the Company has substantial additional borrowing capacity with the FHLB and other sources amounting to $9.5 billion. Page 66 As presented in the accompanying unaudited consolidated statements of cash flows, the sources of liquidity vary between periods. The primary sources of funds during the six months ended June 30, 2002 were $52.3 billion in proceeds from additional borrowings, $11.7 billion in proceeds from sales of loans held for sale, $3.5 billion in net loan originations and principal collections, $2.3 billion in principal payments on mortgage-backed securities available for sale and held to maturity and $1.0 million in proceeds from sales and settlements of derivatives. The primary uses of funds were $56.0 billion in principal payments on borrowings, $10.6 billion in purchases and originations of loans held for sale, $2.8 billion in purchases of loans receivable and $833.4 million in purchases of derivatives. CAPITAL MANAGEMENT OTS capital regulations require the Bank to satisfy three minimum capital requirements: tangible capital, core (leverage) capital, and risk-based capital. TANGIBLE CAPITAL. Tangible capital is the sum of the Bank's common stockholder's equity (including retained earnings), noncumulative perpetual preferred stock and minority interest in equity accounts of fully consolidated subsidiaries, less disallowed intangibles. Tangible capital must be at least 1.5% of adjusted total assets. CORE CAPITAL. Core capital generally is the sum of tangible capital plus certain other qualifying intangibles. Under the leverage requirement, a savings association is required to maintain core capital equal to a minimum of 4% of adjusted total assets. RISK-BASED CAPITAL. Risk-based capital equals the sum of core capital plus supplementary capital. Risk-based capital must be at least 8% of risk-weighted assets. RISK-WEIGHTED ASSETS. Risk-weighted assets equal assets plus the credit risk equivalent of certain off-balance sheet items, multiplied by the appropriate risk weight. SUPPLEMENTARY CAPITAL. Supplementary capital includes 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. Supplementary capital may not exceed 100% of core capital for purposes of the risk-based requirement. MINIMUM REQUIREMENTS. These capital requirements discussed above are viewed as minimum standards by the OTS. 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 circumstances. The Bank is not subject to any such individual regulatory capital requirement that is higher than the minimum. These capital requirements are currently applicable to the Bank but not to Golden State. Page 67 At June 30, 2002, the Bank's tangible, core and risk-based capital ratios of 7.61%, 7.61% and 14.22%, respectively, exceeded the minimum regulatory capital requirements. The following is a reconciliation of the Bank's stockholder's equity to regulatory capital as of June 30, 2002:

The amount of adjusted total assets used for the tangible and leverage capital ratios is $50.9 billion. Risk-weighted assets used for the risk-based capital ratio amounted to $30.2 billion. Under the prompt corrective action regulations mandated by the FDICIA, the OTS must take certain actions against savings associations that fall within certain undercapitalized capital categories. The regulation establishes five categories of capital classification: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." Under the regulation, three ratios determine an association's capital classification: o the ratio of total capital to risk-weighted assets, o the ratio of core capital to risk-weighted assets and o the leverage capital ratio. The Bank met the capital requirements of a "well capitalized" institution under the FDICIA prompt corrective action standards as of June 30, 2002. The Bank is not subject to any enforcement action or other regulatory proceedings with respect to the prompt corrective action regulation. Management believes there have been no conditions or events since June 30, 2002 that would change the Bank's capital classification. Page 68 At June 30, 2002, the Bank's capital levels were sufficient for it to be considered "well capitalized," as presented below. Risk-based Leverage ------------------------- Capital Tier 1 Total Capital -------- ------ ------------- Regulatory capital of the Bank 7.61% 12.78% 14.22% "Well capitalized" ratio 5.00 6.00 10.00 ---- ----- ----- Excess above "well capitalized" ratio 2.61% 6.78% 4.22% ==== ===== ===== 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 June 30, 2002, none 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, no amount has been excluded from the Bank's regulatory capital at June 30, 2002. While Golden State is not subject to any minimum regulatory capital standards, management established an internal goal to achieve a 4% bank holding company equivalent leverage capital ratio. At June 30, 2002, this ratio was 4.84% for Golden State. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in reported market risks faced by Golden State since the Company's report in Item 7A of its Form 10-K for the year ended December 31, 2001. Page 69 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. CALIFORNIA FEDERAL GOODWILL LITIGATION The Bank is the plaintiff in a lawsuit against the Government, the California Federal Goodwill Litigation. In the California Federal Goodwill Litigation, the Bank alleged, among other things, that the Government breached certain contractual commitments regarding the computation of its regulatory capital for which the Bank sought damages and restitution. The Bank's claims arose from changes, mandated by FIRREA, with respect to the rules for computing Old California Federal's regulatory capital. In late 1997, a Claims Court Judge ruled in favor of the Bank's motion for partial summary judgment as to the Government's liability to the Bank for breach of contract, and a formal order in that regard was subsequently issued. In late 1998, a second Claims Court Judge ruled that California Federal could not meet its burden for proving lost profits damages and ordered that the case proceed to trial on the damage issue of restitution and reliance. On April 16, 1999, the Claims Court issued its decision on the damages claim against the Government in the California Federal Goodwill Litigation, ruling that the Government must compensate the Bank in the sum of approximately $23 million. The summary judgment liability decision by the first Claims Court Judge was appealed by the Government, and the damage award by the second Claims Court Judge was appealed by the Bank. On April 3, 2001, the Court of Appeals for the Federal Circuit upheld the summary judgment liability decision and the approximately $23 million damage award, but it also ruled that the Bank be allowed to present evidence regarding damages incurred under the lost profits theory. The case has been remanded back to the Claims Court for a damages trial under the lost profits theory, and trial is currently expected to begin in the first week of September 2002. In preparation for this trial, the Bank has had prepared a supplemental expert report, which contains alternate damage calculations based upon different assumptions, with the higher calculation being $587 million in lost profits and the lower calculation being $288 million in lost profits. The Government has had prepared reports from four different experts, all of which challenge, for a variety of reasons, the calculations in the Bank's expert report and which essentially contend that the Bank is not entitled to any damages other than the approximately $23 million previously awarded by the Claims Court and affirmed by the Federal Circuit. GLENDALE GOODWILL LITIGATION By virtue of the Glen Fed Merger, the Bank is also a plaintiff in a claim against the United States in a second lawsuit, the Glendale Goodwill Litigation. In the Glendale Goodwill Litigation, Glendale Federal sued the Government contending that FIRREA's treatment of supervisory goodwill constituted a breach by the Government of its 1981 contract with the Bank, under which the Bank had merged with a Florida thrift and was permitted to include the goodwill resulting from the merger in its regulatory capital. In 1992, the Claims Court found in favor of Glendale Federal's position, ruling that the Government breached its express contractual commitment to permit Glendale Federal to include supervisory goodwill in its regulatory capital and that Glendale Federal is entitled to seek financial compensation. The trial began in February 1997 and concluded in September 1998. On April 9, 1999, the Claims Court issued its decision in the Glendale Goodwill Litigation, ruling that the Government must compensate the Bank in the sum of $908.9 million. This decision was appealed by the Government and the Bank. On February 16, 2001, the Court of Appeals for the Federal Circuit vacated the trial court's award of damages and remanded the case back to the trial court for determination of total reliance damages to which the Bank might be entitled. Oral argument before the trial court took place on June 26, 2001, and on August 2, 2002, the Claims Court ruled that the Bank's total reliance damages were $380.8 million. Page 70 BARTOLD V. GLENDALE FEDERAL BANK ET AL. On September 18, 1995, four plaintiffs commenced an action in Superior Court of California, County of Orange, alleging that the defendants Glendale Federal, to which the Bank is a successor by merger, and Verdugo, a wholly owned subsidiary of the Bank, failed timely to record their release of the mortgage interest following payoffs of residential mortgage loans and, in at least some instances, improperly required borrowers to pay fees for these releases. The plaintiffs' complaint seeks relief for the named plaintiffs, as well as purportedly for all others similarly situated in California and throughout the United States and the general public, on causes of action for violation of California Civil Code Section 2941 and California Business and Professions Code Section 17200, breach of contract, fraud and unjust enrichment. The plaintiffs seek statutory damages of $300 for each supposed, separate violation of Section 2941 by Glendale Federal and Verdugo, restitution, punitive damages, injunctive relief and attorney's fees, among other things. In October 1997, the trial court granted summary judgment for the defendants. In September 2000, the California Court of Appeals reversed this decision and remanded for further proceedings, including further development of class certification issues. On March 2, 2001, the trial court held that a California class had been certified. On June 7, 2001, the trial court dismissed two of the four causes of action against the Bank, holding that the OTS pre-empted the California courts from regulating the Bank's procedures for reconveying deeds. The California Court of Appeal denied plaintiff's petition for review of the trial court's decision. In September 2001, the California state legislature amended California Civil Code Section 2941 (Assembly Bill 1090) clarifying the legislature's intent that loan servicers had 39 days from loan pay off to deliver reconveyance documents and that trustees had 21 days from the time of receiving the reconveyance documents to record or cause to be recorded the reconveyance. This amendment specifically abrogated the contrary September 2000 holding of the California Court of Appeal in this litigation. The Bank believes that it has additional meritorious defenses to plaintiffs' claims and intends to continue to contest the remaining claims in the lawsuit vigorously. STOCKHOLDER LITIGATION Golden State stockholders filed three separate purported class action lawsuits concerning the Merger. The first suit, captioned Tolwin v. Ford, CGC-02-408282, was filed on May 23, 2002 on behalf of all stockholders of Golden State in the Superior Court of the State of California against Gerald J. Ford, Ronald O. Perelman, Golden State and unidentified others in connection with the Merger. The complaint alleges that Messrs. Ford and Perelman violated their fiduciary duties to the stockholders of Golden State by agreeing to vote their shares in favor of the Merger without first soliciting competing bids for Golden State. The complaint also alleges, among other things, that the Merger is the product of unfair dealing and inadequate procedural safeguards, and is also unfair to Golden State stockholders because the Merger consideration fails to adequately compensate stockholders given the rising value of Golden State's stock, Golden State's financial condition, the advantages gained by Citigroup as a result of the Merger and California Federal's position as one of California's largest depository institutions. The complaint seeks injunctive and equitable relief as well as damages. On June 7, 2002, the complaint in Tolwin was amended to add as defendants the directors of Golden State. The amended complaint makes allegations similar to those in the original Tolwin complaint, and also alleges, among other things, that Messrs. Perelman, Ford and Gittis structured the Merger to inure to their own financial benefit rather than that of all stockholders of Golden State. Golden State believes that it has meritorious defenses to each of the claims made in connection with this litigation. Page 71 The second purported class action captioned, Liu vs. Golden State Bancorp Inc., CGC-02-408330, and the third purported class action captioned ETP, Inc. v. Ford et al., CGC-02-408306 were filed on May 24, 2002 in the Superior Court of the State of California against Golden State, fifteen members of Golden State's board and unidentified others. The complaints allege, among other things, that the defendant directors of Golden State breached their fiduciary duties in connection with the proposed acquisition by Citigroup by, among other things: (a) failing to implement a sales process designed to maximize shareholder values; (b) agreeing to an unfair and wholly inadequate price; and (c) agreeing to terms in the Merger Agreement which fail to protect Golden State shareholders from a substantial decline in the value of Citigroup common stock. The complaints seek injunctive and equitable relief as well as damages. Golden State believes that it has meritorious defenses to each of the claims made in these complaints. On July 8, 2002, the three lawsuits were consolidated with the Tolwin amended complaint as the operative complaint in the consolidation order. The caption in the consolidated litigation is In re Golden State Bancorp Inc. Securities Litigation, CGC-02-408282. On August 12, 2002, Golden State reached an agreement in principle to settle these stockholder class actions. The Merger Agreement currently provides that Golden State will pay to Citigroup in specified scenarios, a termination fee that ranges from $117.5 million to $235 million, depending on the circumstances. In connection with the proposed settlement, Citigroup has agreed, effective immediately, to reduce the amount of this termination fee by $75 million (to a range of $42.5 million to $160 million). Other than the reduction of the termination fee referred to above, the proposed settlement is subject to court approval. The other terms of the Merger Agreement are not affected by the proposed settlement. OTHER LITIGATION In addition to the matters described above, Golden State and its subsidiaries are involved in other legal proceedings and claims incidental to the normal conduct of their business. Although it is impossible to predict the outcome of any outstanding legal proceedings, management believes that such legal proceedings and claims, individually or in the aggregate, will not have a material effect on Golden State, GS Holdings or the Bank. ITEM 2. CHANGES IN SECURITIES. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. Page 72 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. At the Annual Meeting of Stockholders held on May 20, 2002, the following matters were submitted to a vote of security holders with the indicated number of votes being cast for, against or withheld, and with the indicated number of abstentions and broker non-votes: 1. To elect five members of the Board of Directors to hold office until the 2005 annual meeting of stockholders or until their successors are duly elected and qualified. Number of Votes --------------------------- For Withheld --- -------- John F. King 120,424,577 1,437,843 Gabrielle K. McDonald 120,946,505 915,915 John A. Moran 121,174,820 687,600 B. M. Rankin, Jr. 120,644,544 1,217,876 Robert Setrakian 121,163,605 698,815 2. To ratify the appointment of KPMG LLP to serve as the Company's independent auditors for the year ending December 31, 2002. For 120,132,392 Against 1,687,035 Abstain 42,993 Broker Non-Vote 0 ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: 3.1 Certificate of Incorporation of the Registrant, as amended. (Incorporated by reference to 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, as amended. (Incorporated by reference to Exhibit 3.2 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999.) 99.1 Certification of Periodic Report by Principal Executive Officer. 99.2 Certification of Periodic Report by Principal Financial Officer. (b) Reports on Form 8-K: During the quarter ended June 30, 2002, the Company filed with the SEC the following Current Report on Form 8-K: Dated May 28, 2002 and filed on May 29, 2002, detailing certain information regarding the Merger, including the calculation of the exchange ratio for shares of the Company's common stock, under Item 5 and filing copies of the Merger Agreement and Securityholders Agreement under Item 7. Page 73 GLOSSARY OF DEFINED TERMS AICPA - American Institute of Certified Public Accountants ALCO - Asset/Liability Management Committee APB - Accounting Principles Board APB OPINION NO. 17 - Intangible Assets APB OPINION NO. 25 - Accounting for Stock Issued to Employees APB OPINION NO. 30 - Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions ARM - Adjustable-rate mortgage BANK - California Federal Bank BPS - basis points BROKERED DEPOSITS - Issued CDs through direct placement programs and national investment banking firms CAL FED ACQUISITION - Agreement and Plan of Merger among FN Holdings, Cal Fed Bancorp Inc. and California Federal Bank, A Federal Savings Bank. FN Holdings acquired 100% of the outstanding stock of Cal Fed and Old California Federal, and First Nationwide merged with and into Old California Federal in January 1997. CALIFORNIA FEDERAL - California Federal Bank CALIFORNIA FEDERAL GOODWILL LITIGATION - California Federal Bank v. United States, Civil Action 92-138 CALIFORNIA FEDERAL GOODWILL LITIGATION ASSET - an asset, related to California Federal Goodwill Litigation, arising out of the purchase of the Old California Federal. CD - Certificate of deposit CFI - Cal Fed Investments CITIGROUP - Citigroup Inc. CLAIMS COURT - United States Court of Federal Claims COFI - Cost of Funds Index (tied to the FHLB's 11th District cost of funds) COMPANY - Golden State Bancorp Inc. EITF - Emerging Issues Task Force EITF NO. 99-20 - Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets EPS - earnings per share FASB - Financial Accounting Standards Board FDICIA - Federal Deposit Insurance Corporation Improvement Act FEDERAL CIRCUIT - U.S. Court of Appeals for the Federal Circuit FHLB - Federal Home Loan Bank of San Francisco FHLB SYSTEM - Federal Home Loan Bank System FIRREA - Financial Institutions Reform, Recovery and Enforcement Act of 1989 and its implementing regulations. FN HOLDINGS - First Nationwide Holdings Inc. FN HOLDINGS ASSET TRANSFER - FN Holdings contributed all of its assets (including all of the common stock of the Bank) to GS Holdings in September 1998. FN HOLDINGS NOTES - FN Holdings 12 1/4% Senior Notes, the FN Holdings 9 1/8% Senior Sub Notes and the FN Holdings 10 5/8% Notes, collectively FNMC - First Nationwide Mortgage Corporation FTE - Full-time equivalent staff GAAP -accounting principles generally accepted in the United States of America GLEN FED MERGER - Glendale Federal Bank merged with and into the Bank GLENDALE FEDERAL - Glendale Federal Bank, Federal Savings Bank GLENDALE GOODWILL LITIGATION - Glendale Federal Bank v. United States, No. 90-772C GLENDALE GOODWILL LITIGATION ASSET - an asset, related to the Glendale Goodwill Litigation, arising out of the purchase of Glendale Federal. GNMA - Government National Mortgage Association GOLDEN STATE - Golden State Bancorp Inc. GOLDEN STATE ACQUISITION - FN Holdings Asset Transfer, Holding Company Mergers and Glen Fed Merger, collectively Page 74 GLOSSARY OF DEFINED TERMS (CONTINUED) GOLDEN STATE COMMON STOCK - Golden State common stock, par value $1.00 GOLDEN STATE MERGER - the merger, completed on September 11, 1998, between Golden State, the publicly traded parent company of Glendale Federal, and First Nationwide Holdings Inc. and Hunter's Glen/Ford, Ltd. GOODWILL LITIGATION ASSETS - the California Federal Goodwill Litigation Asset and the Glendale Goodwill Litigation Asset, collectively GOVERNMENT - United States Government GSB - Golden State Bancorp GSB INVESTMENTS - GSB Investments Corp. GS HOLDINGS - Golden State Holdings Inc. GS HOLDINGS NOTES - On August 6, 1998, GS Escrow Corp, which subsequently merged into GS Holdings, issued $2 billion of fixed and floating rate notes. HOLDINGCOMPANY MERGERS - FN Holdings merged with and into Golden State Financial Corporation, which owned all of the common stock of Glendale Federal. HUNTER'S GLEN - Hunter's Glen/Ford, Ltd. IO - Interest only IRS - Internal Revenue Service ISSUABLE SHARES - The Golden State Merger agreement provides that GSB Investments as successor to First Gibraltar 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 ("Issuable Shares") to GSB Investments and Hunter's Glen. LIBOR - London Interbank Offered Rate LTV - Loan-to-value LTWTM - Litigation Tracking WarrantsTM MERCURY MERGER SUB - Mercury Merger Sub, Inc., a subsidiary of Citigroup MERGER - The merger of Golden State with and into Mercury Merger Sub, with Mercury Merger Sub as the surviving entity MERGER AGREEMENT - the Agreement and Plan of Merger that provides for, among other things, the Merger MSR - Mortgage servicing rights NOL - net operating loss NOTIONAL AMOUNT - the amount on which calculations, payments, and the value of a derivative is based. Notional amounts do not represent direct credit exposures. NPV - Net portfolio value OCI - Other comprehensive income OLD CALIFORNIA FEDERAL - California Federal Bank, A Federal Savings Bank prior to the Cal Fed Acquisition. OTS - Office of Thrift Supervision PASS-THROUGH INTEREST EXPENSE - represents interest that FNMC pays to the investor(s) for loans serviced by FNMC, which are paid off by the borrower(s) before the end of the month. FNMC pays the shortfall of interest on the respective loans as a result of the contractual agreement between the servicer (FNMC) and the investor(s) (i. e., GNMA) PO - Principal only PREFERRED CAPITAL CORPORATION - California Federal Preferred Capital Corporation REIT - Real Estate Investment Trust REIT PREFERRED STOCK - 9 1/8% Noncumulative Exchangeable Preferred Stock, Series A, issued by California Federal Preferred Capital Corporation in January 1996. REPOS - short-term securities sold under agreements to repurchase SEC - United States Securities and Exchange Commission SECURITYHOLDERS - consists of Mafco Holdings Inc., GSB Investments Corp., MacAndrews & Forbes Holdings Inc., Hunter's Glen/Ford, Ltd. and Gerald Ford Page 75 GLOSSARY OF DEFINED TERMS (CONTINUED) SECURITYHOLDERS AGREEMENT - dated as of May 21, 2002, by and among Citigroup Inc., Golden State Bancorp Inc., Mafco Holdings Inc., GSB Investments Corp., MacAndrews & Forbes Holdings Inc., Hunter's Glen/Ford, Ltd. and Gerald Ford, pursuant to which the Securityholders, among other things, have agreed to vote certain shares of Company Common Stock beneficially owned by them, constituting approximately 31.5% of the outstanding shares of Golden State Common Stock, in favor of the Merger and against competing business combination proposals. SFAS - Statement of Financial Accounting Standards SFAS NO. 4 - Reporting Gains and Losses from Extinguishment of Debt SFAS NO. 13 - Accounting for Leases SFAS NO. 44 - Accounting for Intangible Assets of Motor Carriers SFAS NO. 64 - Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements SFAS NO. 114 - Accounting by Creditors for Impairment of a Loan SFAS NO. 115 - Accounting for Certain Investments in Debt and Equity Securities SFAS NO. 121 - Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of SFAS NO. 131 - Disclosures about Segments of an Enterprise and Related Information SFAS NO. 133 - Accounting for Derivative Instruments and Hedging Activities SFAS NO. 142 - Accounting for Goodwill and Intangible Assets SFAS NO. 144 - Accounting for the Impairment or Disposal of Long-Lived Assets SFAS NO. 145 - Rescission of SFAS No. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections SOP - Statement of Position SOP 01-6 - Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others STOCK PLAN - Golden State Bancorp Inc. Omnibus Stock Plan TOLWIN - the purported class action lawsuit Tolwin v. Ford, CGC-02-408282 UPB - Unpaid principal balance VERDUGO - Verdugo Trustee Service Corporation Page 76 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Golden State Bancorp Inc. /s/ Richard H. Terzian ------------------------------------------- By: Richard H. Terzian Executive Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Renee Nichols Tucei ------------------------------------------- By: Renee Nichols Tucei Executive Vice President and Controller (Principal Accounting Officer) August 9, 2002 Page 77

GOLDEN STATE BANCORP INC 10-Q