10-Q 1 gsh90110q.txt GOLDEN STATE HOLDINGS 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 September 30, 2001 ------------------------------------------------ or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from N/A to N/A --------------------- ---------------------- Commission File Number: 000-24915 ------------------------------------------------------- Golden State Holdings Inc. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-4669792 ----------------------------------------- -------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 135 Main Street, San Francisco, CA 94105 ----------------------------------------- -------------------------------------- (Address of principal executive offices) (Zip Code) 415-904-1100 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) N/A -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No ---- ---- The number of shares outstanding of registrant's $1.00 par value common stock, as of the close of business on October 31, 2001: 1,000 shares. Registrant meets the conditions set forth in General Instruction H (1) (a) and (b) of Form 10-Q and is therefore filing this Form with certain reduced disclosures, as permitted by General Instruction H (2). Page 1 GOLDEN STATE HOLDINGS INC. THIRD QUARTER 2001 REPORT ON FORM 10-Q TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION ---- --------------------- Item 1. Consolidated Financial Statements Unaudited Consolidated Balance Sheets September 30, 2001 and December 31, 2000...........................3 Unaudited Consolidated Statements of Income Nine Months Ended September 30, 2001 and 2000......................4 Unaudited Consolidated Statements of Income Three Months Ended September 30, 2001 and 2000.....................5 Unaudited Consolidated Statements of Comprehensive Income Nine Months Ended September 30, 2001 and 2000......................6 Unaudited Consolidated Statements of Comprehensive Income Three Months Ended September 30, 2001 and 2000.....................7 Unaudited Consolidated Statement of Stockholder's Equity Nine Months Ended September 30, 2001...............................8 Unaudited Consolidated Statements of Cash Flows Nine Months Ended September 30, 2001 and 2000......................9 Notes to Unaudited Consolidated Financial Statements..............11 Item 2. Management's Narrative Analysis of Results of Operations..........24 Item 3. Quantitative and Qualitative Disclosures About Market Risk.........* PART II. OTHER INFORMATION ----------------- Item 1. Legal Proceedings.................................................44 Item 2. Changes in Securities..............................................* Item 3. Defaults Upon Senior Securities....................................* Item 4. Submission of Matters to a Vote of Security Holders................* Item 5. Other Information.................................................45 Item 6. Exhibits and Reports on Form 8-K..................................45 Glossary of Defined Terms..................................................46 Signatures.................................................................48 * Item 3 of Part I and Items 2, 3 and 4 of Part II are not included as per conditions met by Registrant set forth in General Instruction H (1) (a) and (b) of Form 10-Q. Golden State Holdings Inc. is a wholly owned subsidiary of Golden State Bancorp Inc. For more information, refer to Golden State Bancorp Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001. Page 2 GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 (Unaudited) (dollars in thousands, except per share data)

Page 3 GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (Unaudited) (in thousands)

Page 4 GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (Unaudited) (in thousands)

Page 5 GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (Unaudited) (in thousands)

Page 6 GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (Unaudited) (in thousands)

Page 7 GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY NINE MONTHS ENDED SEPTEMBER 30, 2001 (Unaudited) (in thousands)

GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY NINE MONTHS ENDED SEPTEMBER 30, 2001 (Unaudited) (in thousands)

Page 8 GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (Unaudited) (in thousands)

Page 9 GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (Unaudited) (in thousands)

Page 10 GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION --------------------- The accompanying unaudited consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the requirements of Regulation S-X, Article 10 and therefore do not include all disclosures necessary for complete financial statements. In the opinion of management, all adjustments have been made that are necessary for a fair presentation of the financial position and results of operations and cash flows as of and for the periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three and nine months ended September 30, 2001 are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period. Certain amounts for the three and nine-month periods in the prior year have been reclassified to conform to the current period's presentation. GS Holdings, a wholly owned subsidiary of Golden State, is a holding company whose only significant asset is all of the common and preferred stock of the Bank and therefore, activities for the consolidated entity are primarily carried out by the Bank and its operating subsidiaries. The accompanying unaudited consolidated financial statements include the accounts of GS Holdings, the Bank and the Bank's wholly owned subsidiaries. Unless the context otherwise indicates, "GS Holdings" or "Company" refers to Golden State Holdings Inc. as the surviving entity after the consummation of the Golden State Acquisition, and as the surviving entity in the GS Escrow Merger for periods after the GS Escrow Merger. On September 11, 1998, Glendale Federal merged with and into the Bank pursuant to the Glen Fed Merger. Unless the context otherwise indicates, "California Federal" or "Bank" refers to California Federal Bank as the surviving entity after the consummation of the Glen Fed Merger. Other minority interest represents amounts attributable to (a) the REIT Preferred Stock of California Federal Preferred Capital Corporation, a wholly owned subsidiary of the Bank, and (b) that portion of stockholders' equity of Auto One, a subsidiary of the Bank, attributable to 20% of its common stock. All significant intercompany balances and transactions have been eliminated in consolidation. These financial statements should be read in conjunction with the consolidated financial statements of GS Holdings included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. A glossary of defined terms begins on page 46 of this document. All terms used but not defined elsewhere herein have meanings ascribed to them in the Company's Annual Report on Form 10-K. As GS Holdings' common stock is wholly owned by Golden State, earnings per share data is not presented. (2) RECLASSIFICATION OF SECURITIES ------------------------------ On January 1, 2001, the Company reclassified $1.1 billion and $85.0 million carrying value of mortgage-backed securities and U.S. government and agency securities, respectively, from securities held-to-maturity to their respective available-for-sale portfolios, as permitted upon the adoption of SFAS No. 133. The net unrealized loss related to these securities of $30.4 million, which was recorded in OCI upon their initial transfer to the held-to-maturity portfolio in April 2000, was reclassified from accumulated other comprehensive loss, and the securities were subsequently marked to market, in accordance with SFAS No. 115. On April 30, 2000, the Company reclassified $1.1 billion and $445.0 million carrying value of mortgage-backed securities and U.S. government and agency securities, respectively, from securities available-for-sale to their respective held-to-maturity portfolios. These assets primarily comprised securities required as part of the Bank's regulatory liquidity portfolio. The net unrealized loss related to these securities of $64.0 million, included as a component of equity (accumulated other comprehensive loss), is being amortized to interest income over the remaining life of the securities as an adjustment of yield using the interest method. The effect of this amortization on interest income is fully offset by the effect of amortization of the related discount recorded against the respective assets at the time of transfer. Page 11 GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (3) CASH, CASH EQUIVALENTS, AND STATEMENTS OF CASH FLOWS ---------------------------------------------------- Cash paid (including interest credited) for interest on deposits and other interest-bearing liabilities during each of the nine months ended September 30, 2001 and 2000 was $2.2 billion. Net cash paid for income taxes during the nine months ended September 30, 2001 and 2000 was $164.5 million and $33.4 million, respectively. During the nine months ended September 30, 2001, noncash activity consisted of the reclassification of $1.1 billion and $85.0 million of mortgage-backed securities and U. S. government and agency securities, respectively, from securities held-to-maturity to their respective available-for-sale portfolios, as permitted upon the adoption of SFAS No. 133, the reclassification of $164.8 million from mortgage servicing rights to derivative assets ($173.6 million) and derivative liabilities ($8.8 million) related to the adoption of SFAS No. 133, the reclassification of $161.1 million from loans receivable to loans held-for-sale, transfers of $23.0 million from loans receivable to foreclosed real estate, transfers of $6.5 million from loans held-for-sale (at lower of cost or market) to loans receivable and $0.2 million of loans made to facilitate sales of real estate owned. Noncash activity during the nine months ended September 30, 2001 also included an increase of $3.1 million in additional paid-in capital reflecting the impact of Golden State restricted common stock outstanding under an employee incentive plan. During the nine months ended September 30, 2000, noncash activity consisted of the reclassification of $1.1 billion and $445.0 million of mortgage-backed securities and U.S. government and agency securities, respectively, from securities available-for-sale to their respective held-to-maturity portfolios, transfers of $113.2 million from loans receivable to mortgage-backed securities upon the securitization of certain of the Bank's single-family loans, transfers of $54.7 million from loans held-for-sale (at lower of cost or market) to loans receivable, transfers of $41.1 million from loans receivable to foreclosed real estate and $5.4 million of loans made to facilitate sales of real estate owned. Noncash activity during the nine months ended September 30, 2000 also included a $211.7 million reduction of the valuation allowance of the Company's deferred tax asset representing pre-merger tax benefits, of which $161.7 million was retained by the previous owners of FN Holdings and an increase of $2.7 million in additional paid-in capital reflecting the impact of Golden State restricted common stock outstanding under an employee incentive plan. Page 12 GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (4) SEGMENT REPORTING ----------------- Since the Company derives a significant portion of its revenues from interest income, and interest expense is the most significant expense, the segments are reported below using net interest income. Because the Company also evaluates performance based on noninterest income and noninterest expense goals, these measures of segment profit and loss are also presented. The Company does not allocate income taxes to the segments.

_____________ (a) Includes $106.3 million and $81.6 million for the nine months ended September 30, 2001 and 2000, respectively, in earnings credit provided to FNMC by the Bank, primarily for custodial bank account balances generated by FNMC. Also includes $217.0 million and $192.8 million for the nine months ended September 30, 2001 and 2000, respectively, in interest income and expense on intercompany loans. Includes $37.8 million and $31.6 million for the three months ended September 30, 2001 and 2000, respectively, in earnings credit provided to FNMC by the Bank, primarily for custodial bank account balances generated by FNMC. Also includes $82.9 million and $70.5 million for the three months ended September 30, 2001 and 2000, respectively, in interest income and expense on intercompany loans. (b) Includes $29.8 million and $44.3 million for the nine months ended September 30, 2001 and 2000, respectively, in intercompany servicing fees. Includes $14.3 million and $15.0 million for the three months ended September 30, 2001 and 2000, respectively, in intercompany servicing fees. (c) Includes $3.5 million and $10.9 million for the nine months ended September 30, 2001 and 2000, respectively, in intercompany noninterest expense. Includes $1.2 million and $3.8 million for the three months ended September 30, 2001 and 2000, respectively, in intercompany noninterest expense. 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 for the nine and three months ended September 30, 2001 and 2000 (in thousands):

(5) LOANS RECEIVABLE, NET --------------------- The following details the components of loans receivable, net, at September 30, 2001 and December 31, 2000 (in thousands):

________________ (a) $772.8 million, or 40% and $632.4 million, or 40% of this portfolio, represents prime product as of September 30, 2001 and December 31, 2000, respectively. Page 14 GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (6) DEPOSITS -------- Deposits at September 30, 2001 and December 31, 2000 are comprised of the following (dollars in thousands):

(7) ACCRUED TERMINATION AND FACILITIES COSTS ---------------------------------------- In connection with the Golden State Acquisition, the Company recorded liabilities resulting from (a) branch consolidations due to duplicate facilities and (b) employee severance and termination benefits due to a planned reduction in force. The merger and integration plan relative to the Golden State Acquisition was in place on September 11, 1998. Certain of these costs were included in the allocation of purchase price and others were recognized in net income. The table below reflects a summary of the activity in the liability for the costs related to such plan since December 31, 2000 (in thousands):

Page 15 GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (8) INCOME TAXES ------------ During the nine months ended September 30, 2001, GS Holdings recorded net income tax expense of $211.3 million, which included net tax benefits of $29.0 million. In prior years, an accrued liability was established for the purpose of satisfying assessments that may result from issues arising during audits with various state taxing authorities. As a result of the completion and settlement of audits in various state taxing jurisdictions, additional guidance on the deductibility of covered asset losses, and the current assessment of exposure for tax strategies employed for prior years, management reduced its accrued state tax liability by $39.7 million. The Company also recorded additional Federal tax expense of $13.9 million due to the reduction of the state tax expense. In addition, an income tax benefit of $3.2 million was recorded due to the utilization of net operating losses of a subsidiary made available as a result of the subsidiary's liquidation into California Federal Bank. During the nine months ended September 30, 2000, GS Holdings recorded net income tax expense of $67.5 million, which included a tax benefit of $161.7 million. Based on favorable resolutions of federal income tax audits of Old California Federal and Glendale Federal, and based on the status of Mafco Holdings', including the Company's, audits for the years 1991 through 1995, management changed its judgment about the realizability of the Company's deferred tax asset and reduced its valuation allowance by $211.7 million during the nine-month period ended September 30, 2000. As a result of reducing the valuation allowance, income tax expense was reduced by $161.7 million and goodwill was reduced by $50.0 million. (9) STOCKHOLDER'S EQUITY -------------------- At September 30, 2001, there were 1,000 shares of GS Holdings common stock issued and outstanding. Dividends on common stock during the nine months ended September 30, 2001 and 2000 totalled $135.0 million and $71.0 million, respectively. (10) EXECUTIVE AND STOCK COMPENSATION -------------------------------- In the first quarter of 2001, Golden State granted to certain of the Company's employees non-qualified stock options equivalent to 851,000 shares of common stock at a weighted average price of $25.67 per share under the Golden State Bancorp Inc. Omnibus Stock Plan. In the second quarter of 2001, Golden State granted an additional 560,100 non-qualified stock options at a weighted average price of $30.75 per share. Golden State did not grant any non-qualified stock options in the third quarter of 2001. 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 nine months ended September 30, 2001, in accordance with the intrinsic value accounting methodology prescribed in APB Opinion No. 25, whereby compensation expense to employees is determined based upon the excess, if any, of the market price of Golden State's common stock at the measurement date over the exercise price of the award. During the three months ended September 30, 2001, 159,526 options were exercised and 28,247 options were cancelled or expired under all plans. During the nine months ended September 30, 2001, 314,143 options were exercised and 49,924 options were cancelled or expired under all plans. During the three and nine months ended September 30, 2000, a total of 36,893 and 51,200 options, respectively, were exercised and 18,584 and 82,950 options, respectively, were cancelled or expired under all plans. At September 30, 2001 and 2000, options to acquire an equivalent of 4,718,433 and 3,777,782 shares and 861,916 and 1,129,382 LTW(TM)s, respectively, remained outstanding under all plans. Page 16 GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS On January 22, 2001, Golden State awarded to certain of the Company's employees 99,108 shares of restricted stock under the Golden State Bancorp Inc. Executive Compensation Plan. The market value on the date of the awards was $26.38 per share. These shares generally vest over two years in one-half increments on the anniversary of the grant date, based upon the continued service of the employee. During the three and nine months ended September 30, 2001, 28,454 and 143,499 restricted shares were vested. During both the three and nine months ended September 30, 2000, 28,454 restricted shares were vested. At September 30, 2001, a total of 202,365 restricted shares were outstanding. The compensation expense based on the stock price on the date of these awards was recognized on a straight-line basis over the vesting period for each tranche of the award with a corresponding increase to additional paid-in capital. During the three and nine months ended September 30, 2001, $0.4 million and $1.4 million, respectively, in compensation expense was recognized related to such awards. During the three and nine months ended September 30, 2000, $0.4 million and $1.5 million, respectively, in compensation expense was recognized related to such awards. These restricted shares have full voting and dividend rights. (11) EXTRAORDINARY ITEMS ------------------- During the first quarter of 2000, the FHLB called and the Bank prepaid $200 million in FHLB advances, resulting in an extraordinary gain of $1.2 million, net of income taxes of $0.8 million, on the early extinguishment of such borrowings. Also during the first quarter of 2000, the Bank repurchased $2.5 million outstanding principal amount of the Convertible Subordinated Debentures due 2001, resulting in an extraordinary gain of $41 thousand, net of income taxes of $30 thousand, on the early extinguishment of debt. During the second quarter of 2000, the FHLB called and the Bank prepaid $200 million in FHLB advances, resulting in an extraordinary gain of $1.8 million, net of income taxes of $1.2 million, on the early extinguishment of such borrowings. (12) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE --------------------------------------------------- On September 21, 2000, the EITF issued EITF No. 99-20. This document, which was effective on April 1, 2001, establishes guidance for (1) recognizing interest income (including amortization of premiums or discounts) on (a) all credit-sensitive mortgage and asset-backed securities and (b) certain prepayment-sensitive securities including agency interest-only strips and (2) determining when these securities must be written down to fair value because of impairment. Existing GAAP did not provide interest recognition and impairment guidance for securities on which cash flows change as a result of both prepayments and credit losses and, in some cases, interest rate adjustments. On April 1, 2001, the Company identified a portfolio of securities with a total book value of $80.7 million which are subject to the impairment provisions of EITF No. 99-20. All of these securities had previously been reported as available-for-sale securities, with changes in fair value reflected in OCI. As a result of its implementation of EITF No. 99-20, the Company recorded a loss of $1.6 million, net of income tax credits of $1.1 million, representing the cumulative effect of change in accounting principle during the quarter ended June 30, 2001. During the quarter ended September 30, 2001, the Company recorded a pre-tax loss of $3.6 million in order to record the decline in fair value of these securities. Page 17 GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (13) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES --------------------------------------------- INTEREST RATE RISK MANAGEMENT - RISK MANAGEMENT POLICIES - CASH FLOW HEDGING INSTRUMENTS AND FAIR VALUE HEDGING INSTRUMENTS The primary focus of the Company's asset/liability management program is to monitor the sensitivity of the Company's net portfolio value and net income under varying interest rate scenarios in order to take steps to control its risks. On a quarterly basis, the Company simulates the net portfolio value and net income expected to be earned over a twelve-month period following the date of simulation. The simulation is based on a projection of market interest rates at varying levels and estimates the impact of such market rates on the levels of interest-earning assets and interest-bearing liabilities and on mortgage prepayment speeds (which affect the mortgage servicing rights asset) during the measurement period. Based upon the outcome of the simulation analysis, the Company considers the use of derivatives as a means of reducing the volatility of net portfolio value and projected net income within certain ranges of projected changes in interest rates. The Company evaluates the effectiveness of entering into any derivative instrument agreement by measuring the cost of such an agreement in relation to the reduction in net portfolio value and net income volatility within an assumed range of interest rates. INTEREST RATE RISK MANAGEMENT - CASH FLOW HEDGING INSTRUMENTS - BALANCE SHEET HEDGES OBJECTIVES AND CONTEXT ---------------------- The Company uses variable rate debt as a source of funds for use in the Company's lending and investment activities and other general business purposes. It has received short-term variable-rate FHLB advances and Repos. These debt obligations expose the Company to variability in interest payments due to changes in interest rates. If interest rates increase, interest expense increases. Conversely, if interest rates decrease, interest expense decreases. Management believes it is prudent to limit the variability of a portion of its interest payments, and therefore, generally hedges a significant portion of its variable-rate interest payments. STRATEGIES ---------- To meet this objective, management enters into derivative instrument agreements to manage fluctuations in cash flows resulting from interest rate risk. These instruments include interest rate swaps. The interest rate swaps change the variable-rate cash flow exposure on the short-term FHLB advances and Repos to fixed rate cash flows by entering into receive-variable, pay-fixed interest rate swaps. Under the interest rate swaps, the Company receives variable interest rate payments and makes fixed interest rate payments, thereby creating fixed rate FHLB advances and Repos. RESULTS ------- Risk management results for the quarter ended September 30, 2001 related to the balance sheet hedging of FHLB advances and Repos indicate that the hedges were 100% effective and that there was no component of the derivative instruments' gain or loss which was excluded from the assessment of hedge effectiveness. Changes in the fair value of interest rate swaps designated as hedging instruments of the variability of cash flows associated with FHLB advances and Repos are reported in OCI. These amounts subsequently are reclassified into interest expense as a yield adjustment in the same period in which the related interest on the FHLB advances and Repos affects earnings. The net amount of OCI reclassified into interest expense during the three and nine months ended September 30, 2001 was $22.8 million and $43.0 million, respectively. Page 18 GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS As of the date of the initial application of SFAS No. 133, January 1, 2001, approximately $18.1 million of losses reported in OCI and associated with the transition adjustment related to the interest rate swaps were expected to be reclassified into interest expense as a yield adjustment of the hedged FHLB advances and Repos during the twelve month period ending December 31, 2001. As of September 30, 2001, approximately $82.0 million of losses reported in OCI related to the interest rate swaps were expected to be reclassified into interest expense as a yield adjustment of the hedged FHLB advances and Repos during the twelve-month period ending September 30, 2002. INTEREST RATE RISK MANAGEMENT - FAIR VALUE HEDGING INSTRUMENTS - MORTGAGE SERVICING RIGHTS HEDGES OBJECTIVES AND CONTEXT ---------------------- The Company either purchases or originates mortgage servicing rights as a source of fee income. These mortgage-servicing rights expose the Company to variability in their fair value due to changes in the level of prepayments. Mortgage servicing rights are generally recorded in the financial statements at the lesser of their amortized cost or their fair value, unless they are designated for fair value hedging, in accordance with SFAS No. 133. The carrying value of mortgage servicing rights in a designated fair value hedging relationship will be adjusted upwards or downwards depending upon the effectiveness of the hedge. Management believes that it is prudent to limit the variability in the fair value of a portion of its MSR asset. It is the Company's objective to hedge the servicing rights asset associated with fixed rate, non-prepayment penalty loans for which it has recorded mortgage servicing rights, at coverage levels that are appropriate, given anticipated or existing interest rate levels and other market considerations, as well as the relationship of change in this asset to other assets of the Company. STRATEGIES ---------- To meet this objective, the Company utilizes interest rate swaps, principal only swaps, interest rate floors, and swaptions as an asset/liability management strategy to hedge against prepayment risk in its mortgage servicing portfolio caused by declining interest rates. Although the Company hedges the change in value of its MSRs, its hedge coverage ratio does not equate to 100%. Interest rate swap agreements are contracts to make a series of floating rate payments in exchange for receiving a series of fixed rate payments. Payments related to swap contracts are made either quarterly or semi-annually by one of the parties depending on the specific terms of the related contract. The notional amount of the contracts, on which the payments are based, are not exchanged. PO swap agreements simulate the ownership of a PO strip, the value of which is affected directly by prepayment rates themselves in an inverse manner to the servicing rights. Under the terms of the PO swap agreements, the counterparty to the transaction purchases a PO strip and places the PO strip in a trust. A decrease in the market value of the PO swap requires the Company to increase the amount paid to the counterparty and an increase in the market value requires the counterparty to increase their payment to the Company. The amounts to be paid and to be received are then netted together each month. The structure of this instrument results in increased cash flows and positive changes in the value of the swap during a declining interest rate environment. This positive change in the value of the swap is highly correlated to prepayment activity. Interest rate floors are interest rate protection instruments that involve payment from the seller to the buyer of an interest differential. This differential represents the difference between a long-term rate (e.g., 10-year Constant Maturity Swap), and an agreed-upon rate, the strike rate, applied to a notional principal amount. By purchasing a floor, the Company will be paid the differential by the counterparty, should the current long-term rate fall below the strike level of the agreement. The Company generally receives cash monthly on purchased floors (when the current interest rate falls below the strike rate). Page 19 GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS A swaption is an over-the-counter option that provides the right, but not the obligation, to enter into an interest rate swap agreement at predetermined terms at a specified time in the future. The nature and strategies associated with swaptions are similar to the other derivative instruments described above. RESULTS ------- Risk management results related to the hedging of mortgage servicing rights are summarized below and are included in the caption entitled "Loan servicing fees, net" in the accompanying consolidated statements of income (in thousands):

INTEREST RATE RISK MANAGEMENT - FAIR VALUE HEDGING INSTRUMENTS - WAREHOUSE LOANS OBJECTIVES AND CONTEXT ---------------------- The Company, as part of its traditional real estate lending activities, originates fixed-rate 1-4 unit residential loans for sale in the secondary market. At the time of origination, management identifies loans that are expected to be sold in the near future. These warehoused loans have been classified as loans held for sale, net, in the consolidated balance sheet and are recorded at the lower of aggregate amortized cost or market value. These loans expose the Company to variability in their fair value due to changes in interest rates. If interest rates increase, the value of the loans decreases. Conversely, if interest rates decrease, the value of the loans increases. Management believes it is prudent to limit the variability of a major portion of the change in fair value of its loans held for sale. It is the Company's objective to hedge primarily all of its warehoused loans held for sale to third parties. STRATEGIES ---------- To meet this objective, management employs forward loan sale hedging techniques to minimize the interest rate and pricing risks associated with the origination and sale of such warehoused loans. The forward loan sales lock in the price for the sale of either the specific loans classified as held for sale or for a generic group of loans similar to the specific loans classified as held for sale. RESULTS ------- Risk management results related to the hedging of warehouse loans 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 20 GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS DERIVATIVE INSTRUMENTS NOT DESIGNATED AS HEDGING INSTRUMENTS PURPOSE - INTEREST RATE LOCK COMMITMENTS AND FORWARD LOAN SALE ------------------------------------------------------------------------- COMMITMENTS ----------- The Company enters into rate lock commitments to extend credit to borrowers for generally a 30-day period. Some of these rate lock commitments will ultimately expire without being completed. 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):

(14) RECENT ACCOUNTING PRONOUNCEMENTS -------------------------------- ACCOUNTING FOR TRANSFERS AND SERVICING FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES On September 29, 2000, the FASB issued SFAS No. 140. SFAS No. 140 replaces SFAS No. 125, which was issued in June of 1996. It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of the provisions of SFAS No. 125 without reconsideration. In general, SFAS No. 140 was effective for transfers of financial assets occurring after March 31, 2001 and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The implementation of SFAS No. 140 on April 1, 2001 (incremental provisions that were not previously part of SFAS No. 125) did not materially impact the Company's financial condition or operating results. BUSINESS COMBINATIONS On July 20, 2001, the FASB issued SFAS No. 141 which defines a business combination as a transaction through which an enterprise acquires all or a portion of the net assets that constitute a business or equity interests of one or more enterprises and obtains control over those enterprises. This definition is not substantively different from the APB Opinion No. 16 definition. SFAS No. 141 requires that all business combinations be accounted for using the purchase method. Use of the pooling-of-interests method to account for business combinations, which APB Opinion No. 16 required to be used when certain criteria were met, is prohibited. SFAS No. 141 provides guidance for determining the acquiror versus the acquiree in an acquisition. In addition, SFAS No. 141 requires that additional information be disclosed about business combination transactions. Page 21 GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The accounting, disclosure and financial statement provisions of SFAS No. 141 are effective for business combinations initiated after June 30, 2001, and as such, the implementation of SFAS No. 141 is not expected to materially impact the Company's current financial condition or operating results. GOODWILL AND OTHER INTANGIBLE ASSETS On July 20, 2001, the FASB also issued SFAS No. 142. SFAS No. 142 supersedes APB Opinion No. 17 and establishes new accounting standards for both identifiable and unidentifiable intangible assets acquired in a business combination, including goodwill, but does not address internally developed intangible assets. It would continue to require recognition of goodwill as an asset but would not permit amortization of goodwill as currently required by APB Opinion No. 17. Instead, goodwill would be tested for impairment at a level referred to as a reporting unit. A reporting unit is the same level as, or one level below, an operating segment (as that term is used in SFAS No. 131). Goodwill would be tested for impairment annually and on an interim basis if an event or circumstance occurs between annual tests that might reduce the fair value of a reporting unit below its carrying value. An example of such an event or circumstance may include an adverse change in the business climate or market, a legal factor, an action by regulators, an introduction of competition, or a loss of key personnel. Goodwill would also be tested for impairment on an interim basis when (a) a more-likely-than-not expectation exists that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of, (b) a significant asset group within a reporting unit is tested for recoverability under SFAS No. 121, or (c) a subsidiary of that reporting unit has recognized a goodwill impairment loss. The fair value of each reporting unit would not have to be recomputed every year if the components of the reporting unit had not changed since the previous fair value computation, the previous fair value amount exceeded the carrying amount of the reporting unit by a substantial margin, and no evidence exists indicating that the current fair value of the reporting unit may be less than its current carrying amount. Goodwill would be tested for impairment using a two-step approach. The first step is a comparison of the fair value of a reporting unit to its carrying amount, including goodwill. If the fair value of the reporting unit is greater than its carrying amount, goodwill is not considered impaired and no further work is required. If the fair value of the reporting unit is less than its carrying amount, the second step of the impairment test must be performed. The second step of the impairment test is a comparison of the implied fair value of goodwill to its carrying amount. If the implied fair value of goodwill is less than its carrying amount, goodwill is considered impaired and an impairment loss recognized. The impairment loss would be measured as the amount by which the carrying amount of goodwill exceeds its implied fair value. An acquired intangible asset other than goodwill would be amortized over its useful economic life and reviewed for impairment in accordance with SFAS No. 121. The aggregate amount of goodwill would be presented as a separate line item in the balance sheet. The aggregate amount of goodwill impairment losses would be presented as a separate line item in the operating section of the income statement unless a goodwill impairment loss is associated with a discontinued operation. At a minimum, intangible assets would be aggregated and presented as a separate line item in the statement of financial position. Amortization expense and impairment losses for intangible assets other than goodwill would be presented in income statement line items as deemed appropriate for each entity. SFAS No. 142 is effective for the Company on January 1, 2002. Management has reviewed the records from the Company's various acquisitions. At September 30, 2001, $645.4 million of the Company's $646.5 million intangible asset represents goodwill and will cease to be amortized as of January 1, 2002 pursuant to SFAS No. 142. As a result, management expects GAAP earnings to increase by $14.8 million per quarter in 2002. Page 22 GOLDEN STATE HOLDINGS INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS On October 3, 2001, the FASB issued SFAS No. 144. SFAS No. 144 establishes a single accounting model for the financial accounting and reporting for impairment or disposal of long-lived assets. The reason for issuing the Statement stemmed from the failure of SFAS No. 121 to address the accounting for the disposal of a segment of a business accounted for as a discontinued operation under APB Opinion No. 30. Thus, two accounting models existed for the disposal of long-lived assets. SFAS No. 144 is based on the framework established in SFAS No. 121. The accounting, disclosure and financial statement provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. The provisions of the Statement generally are to be applied prospectively. The implementation of SFAS No. 144 is not expected to materially impact the Company's financial condition or operating results. Page 23 ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS. THIS QUARTERLY REPORT CONTAINS FORWARD-LOOKING STATEMENTS, WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, THAT PERTAIN TO OUR FUTURE OPERATING RESULTS. WORDS SUCH AS "ANTICIPATE," "BELIEVE," "EXPECT," "INTEND" AND OTHER SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY THESE STATEMENTS. FORWARD-LOOKING STATEMENTS ARE NOT HISTORICAL FACTS AND ARE INHERENTLY SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC AND COMPETITIVE UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND OUR CONTROL. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS DUE TO SUCH FACTORS AS (I) PORTFOLIO CONCENTRATIONS; (II) INTEREST RATE CHANGES, INCLUDING CHANGES IN SHORT-TERM INTEREST RATES, THE SHAPE OF THE YIELD CURVE AND THE TREASURY-EURODOLLAR SPREAD; (III) CHANGES IN ASSET PREPAYMENT SPEEDS; (IV) CHANGES IN OUR COMPETITIVE AND REGULATORY ENVIRONMENTS; AND (V) CHANGES IN THE AVAILABILITY OF NET OPERATING LOSS CARRYOVERS AND DEFERRED TAX LIABILITIES. IN OCTOBER 2001, GOLDEN STATE BANCORP INC. FILED AN S-3 REGISTRATION STATEMENT WITH THE SEC THAT DISCUSSES THESE FACTORS IN GREATER DETAIL. WE ASSUME NO OBLIGATION TO UPDATE ANY OF OUR FORWARD-LOOKING STATEMENTS. OVERVIEW GS Holdings, through California Federal, operates retail branches that provide deposit products such as demand, transaction and savings accounts, and sells investment products such as mutual funds, annuities and insurance. In addition, it engages in mortgage banking activities, including originating and purchasing 1-4 unit residential loans for sale to various investors in the secondary market or for retention in its own portfolio, and servicing loans for itself and others. To a lesser extent, the Company originates and/or purchases commercial real estate, commercial and consumer loans for investment. Revenues are derived primarily from interest earned on loans, interest received on government and agency securities and mortgage-backed securities, gains on sales of loans and other investments and fees received in connection with loan servicing, securities brokerage and other customer service transactions. Expenses primarily consist of interest on customer deposit accounts, interest on short-term and long-term borrowings, general and administrative expenses consisting of compensation and benefits, data processing, occupancy and equipment, communications, deposit insurance assessments, advertising and marketing, professional fees and other general and administrative expenses. NET INCOME GS Holdings reported income before the cumulative effect of change in accounting principle of $317.6 million for the nine months ended September 30, 2001. Income before extraordinary items was $429.2 million for the nine months ended September 30, 2000. Net income for the nine months ended September 30, 2001 was $316.0 million compared with net income of $432.2 million for the corresponding period in 2000. Net income for the nine months ended September 30, 2001 includes a loss of $1.6 million, net of tax, from the cumulative effect of change in accounting principle. Net income for the nine months ended September 30, 2000 includes gains on the early extinguishment of debt, net of tax, of $3.0 million. The Bank's efficiency ratio was 48.73% for the nine months ended September 30, 2001, compared to 47.91% for the comparable period in 2000. GS Holdings reported net income for the three months ended September 30, 2001 of $106.9 million compared with net income of $90.7 million for the corresponding period in 2000. The Bank's efficiency ratio was 47.66% for the third quarter of 2001, compared to 48.03% for the comparable period in 2000. Page 24 FINANCIAL CONDITION During the nine months ended September 30, 2001, consolidated total assets decreased $1.0 billion from December 31, 2000, to $59.5 billion, and total liabilities decreased from $57.7 billion to $56.5 billion. Loans held for sale and loans receivable increased $1.26 billion and $1.25 billion, respectively, during the nine month period, while mortgage-backed securities and securities declined $3.0 billion and $0.9 billion, respectively, during the same period. This shift represents strong loan production by the Company coupled with high repayment rates for both loans and securities in light of the current declining interest rate environment. Deposits increased $1.1 billion during the nine months ended September 30, 2001, including increases of $1.5 billion in transaction accounts and $0.9 billion in custodial accounts, offset by a $1.0 billion decline in certificates of deposit and a $0.3 billion decline in brokered deposits - part of management's goal to become more "bank-like" and to lower its cost of funds. Custodial accounts increased $905.1 million, or 110%, over December 31, 2000 balances, a direct result of the increase in repayments in the loan servicing portfolio. Total borrowings, including securities sold under agreements to repurchase, FHLB advances and other borrowings, declined $2.9 billion during the nine months ended September 30, 2001 due in part to $350 million of the GS Holdings Notes which matured, and was paid in full, on August 1, 2001. During the nine months ended September 30, 2001, stockholders' equity increased $190.1 million to $2.5 billion. The increase in stockholders' equity is principally the net result of $316.0 million in net income for the period, a $102.8 million improvement in net unrealized gain/loss, after tax, on securities available-for-sale, a $30.4 million improvement in unrealized loss on securities upon reclassification from the held-to-maturity to the available-for-sale portfolio and $17.9 million of amortization on the unrealized holding loss on securities held-to-maturity. These amounts are offset, in part, by $135.0 million in common stock dividends, $101.9 million in net unrealized losses, after tax, on derivatives and a $44.6 million transition adjustment recorded upon the adoption of SFAS No. 133. GS Holdings' non-performing assets, consisting of non-performing loans, net of purchase accounting adjustments, foreclosed real estate, net, and repossessed assets, decreased to $130.8 million at September 30, 2001 compared with $140.9 million at December 31, 2000. Total non-performing assets as a percentage of the Bank's total assets decreased to 0.22% at September 30, 2001 from 0.23% at December 31, 2000. Page 25 RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2001 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2000 The following table shows the Company's consolidated average balance sheets, with the related interest income, interest expense and the average interest rates for the periods presented. Average balances are calculated on a daily basis.

Page 26

____________ (1) Non-performing assets are included in the average balances for the periods indicated. (2) Includes securities held-to-maturity, securities available-for-sale and interest-bearing deposits in other banks. (3) Interest and average rate include the impact of interest rate swaps. Page 27 The following table shows what portion of the changes in interest income and interest expense were due to changes in rate and volume. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to volume (change in average outstanding balance multiplied by the prior period's rate) and rate (change in average interest rate multiplied by the prior period's volume). Changes attributable to both volume and rate have been allocated proportionately.

INTEREST INCOME. Total interest income was $3.1 billion for the nine months ended September 30, 2001, an increase of $29.7 million from the nine months ended September 30, 2000. Total interest-earning assets for the nine months ended September 30, 2001 averaged $56.9 billion, compared to $56.1 billion for the corresponding period in 2000, primarily as a result of increased loan volume, partially offset by a decline in mortgage-backed securities. The yield on total interest-earning assets during the nine months ended September 30, 2001 decreased to 7.21% from 7.24% for the nine months ended September 30, 2000, primarily due to the repricing of loans and securities at lower rates, partially offset by a higher percentage of loans to total earning assets during the nine months ended September 30, 2001. At September 30, 2001, 13% of the Company's portfolio loans were tied to COFI indices, 12% to Treasury-based indices and 45% were "hybrid" ARMS - fixed for three to ten years and then adjusting annually. Twenty-five percent of the portfolio is fixed. The remaining 5% of the portfolio is in other adjustable-rate products. GS Holdings earned $2.3 billion of interest income on loans receivable for the nine months ended September 30, 2001, an increase of $200.8 million from the nine months ended September 30, 2000. The average balance of loans receivable was $41.1 billion for the nine months ended September 30, 2001, compared to $37.4 billion for the same period in 2000. The weighted average yield on loans receivable decreased to 7.42% for the nine months ended September 30, 2001 from 7.44% for the nine months ended September 30, 2000. The increase in the average balance reflects a net increase in residential and commercial real estate loan origination activities and new auto loan production from the Downey Acquisition. On July 1, 2001, the Company began accounting for interest income on newly originated automobile loans on a gross coupon basis rather than based on credit-adjusted yield. The impact on the nine months ended September 30, 2001 was immaterial, but in future periods, interest income is expected to increase. Page 28 Loan production during the nine months ended September 30, 2001 and 2000 is detailed in the table below (in thousands):

_____________ (a) Approximately 41% and 42% of this volume was in prime product; 59% and 58% in sub-prime product for the nine months ended September 30, 2001 and 2000, respectively. The decrease in the weighted average yield is primarily due to the repricing of variable-rate loans and the origination of loans at lower rates and new purchases of auto loans at lower rates during 2001. GS Holdings earned $99.2 million of interest income on loans held for sale for the nine months ended September 30, 2001, an increase of $52.8 million from the nine months ended September 30, 2000. The average balance of loans held for sale was $2.0 billion for the nine months ended September 30, 2001, an increase of $1.2 billion from the comparable period in 2000, primarily attributed to increased originations of residential, fixed-rate loans as a result of heightened borrower refinancing activity in the current declining interest rate environment. Fixed-rate production for sale totalled $12.8 billion during the nine months ended September 30, 2001, an increase of more than 213% over the $4.1 billion originated during the comparable period in 2000. The weighted average yield on loans held for sale decreased to 6.65% for the nine months ended September 30, 2001 from 7.44% for the nine months ended September 30, 2000, primarily due to declining market interest rates. Interest income on mortgage-backed securities available-for-sale was $486.9 million for the nine months ended September 30, 2001, a decrease of $138.3 million from the nine months ended September 30, 2000. The average portfolio balance decreased $2.6 billion, to $9.9 billion, for the nine months ended September 30, 2001 compared to the same period in 2000. The weighted average yield on these assets decreased from 6.66% for the nine months ended September 30, 2000 to 6.57% for the nine months ended September 30, 2001. The decrease in the volume is primarily attributed to payments and sales of mortgage-backed securities, partially offset by the reclassification of $1.1 billion in mortgage-backed securities from the held-to-maturity portfolio, as permitted upon the adoption of SFAS No. 133 on January 1, 2001. The decrease in the weighted average yield primarily reflects the repricing of variable-rate securities at lower rates. Interest income on mortgage-backed securities held-to-maturity was $99.4 million for the nine months ended September 30, 2001, a decrease of $49.9 million from the nine months ended September 30, 2000. The average portfolio balance decreased $1.0 billion, to $1.6 billion, for the nine months ended September 30, 2001 compared to the same period in 2000, primarily due to the $1.1 billion reclassification in mortgage-backed securities to the available-for-sale portfolio, as permitted upon the adoption of SFAS No. 133 on January 1, 2001. The weighted average yields for the nine months ended September 30, 2001 and 2000 were 8.15% and 7.54%, respectively. The increase in the weighted average yield is primarily the result of the aforementioned $1.1 billion reclassification of securities with a weighted average rate of 6.84%. Page 29 Interest income on securities and interest-bearing deposits in other banks was $39.8 million for the nine months ended September 30, 2001, a decrease of $28.9 million from the nine months ended September 30, 2000. The average portfolio balance was $0.9 billion and $1.4 billion for the nine months ended September 30, 2001 and 2000, respectively. The decrease in the volume is primarily attributed to payments and maturities of securities. The lower weighted average yield of 5.96% for the nine months ended September 30, 2001 compared to 6.39% for the nine months ended September 30, 2000 is primarily due to the $2.4 million in interest income on a federal income tax refund related to Old California Federal, received in the first half of 2000 (for which there is no corresponding earning asset), and the repricing of securities at lower rates during the nine months of 2001. Dividends on FHLB stock were $63.5 million for the nine months ended September 30, 2001, a decrease of $6.9 million from the nine months ended September 30, 2000. The average balance outstanding during the nine months ended September 30, 2001 and 2000 was $1.4 billion and $1.3 billion, respectively. The weighted average dividend on FHLB stock declined to 6.05% for the nine months ended September 30, 2001 from 7.35% for the nine months ended September 30, 2000. The increase in the average balance is due to an overall increase in average borrowings from the FHLB while the decrease in the weighted average yield is the result of a reduction in the dividend rate on FHLB stock. INTEREST EXPENSE. Total interest expense was $2.1 billion for the nine months ended September 30, 2001, a decrease of $110.2 million from the nine months ended September 30, 2000. The decrease is primarily due to declining market interest rates and a reduction in higher rate securities sold under agreements to repurchase, partially offset by additional borrowings under lower rate FHLB advances and deposits used to fund total assets. Interest expense on deposits, including Brokered Deposits, was $666.3 million for the nine months ended September 30, 2001, a decrease of $12.8 million from the nine months ended September 30, 2000. The average balance of deposits outstanding increased from $23.1 billion for the nine months ended September 30, 2000 to $24.2 billion for the nine months ended September 30, 2001. The increase in the average balance is primarily attributed to increases in the average balances of custodial accounts, money market accounts and retail customer checking accounts, partially offset by declines in savings account balances and certificates of deposit. The overall weighted average cost of deposits decreased to 3.68% for the nine months ended September 30, 2001 from 3.93% for the nine months ended September 30, 2000, primarily due to a lower average balance of higher rate certificates of deposit and a higher average balance of lower rate checking, money market and custodial accounts in 2001. Interest expense on securities sold under agreements to repurchase totalled $166.9 million for the nine months ended September 30, 2001, a decrease of $100.8 million from the nine months ended September 30, 2000. The average balance of such borrowings for the nine months ended September 30, 2001 and 2000 was $3.9 billion and $5.6 billion, respectively. The decrease in the average balance is primarily the result of maturities during the nine months of 2001. The weighted average interest rate on these instruments decreased to 5.69% for the nine months ended September 30, 2001 from 6.34% for the nine months ended September 30, 2000, primarily due to maturities of higher rate fixed-rate borrowings and the repricing of variable-rate borrowings at lower rates during the nine months of 2001. Interest expense on borrowings totalled $1.2 billion for the nine months ended September 30, 2001, an increase of $3.3 million from the nine months ended September 30, 2000. The average balance outstanding for the nine months ended September 30, 2001 and 2000 was $28.5 billion and $27.1 billion, respectively. The weighted average interest rate on these instruments decreased to 5.79% for the nine months ended September 30, 2001 from 6.05% for the nine months ended September 30, 2000. The increase in the average volume is the result of additional FHLB borrowings used to fund total assets, while the decrease in the weighted average rate is primarily due to declining market interest rates. Page 30 NET INTEREST INCOME. Net interest income was $1.0 billion for the nine months ended September 30, 2001, an increase of $140.0 million from the nine months ended September 30, 2000. The interest rate spread increased to 2.33% for the nine months ended September 30, 2001 from 2.04% for the nine months ended September 30, 2000, primarily as a result of declining market interest rates reducing cost 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 2.35% for the nine months ended September 30, 2001, up 28 basis points from the 2.07% reported during the first nine months of 2000. NONINTEREST INCOME. Total noninterest income, consisting primarily of loan servicing fees, customer banking fees, gain on sale, settlement and transfer of loans, net, gain on sale of assets, net and other income was $260.3 million for the nine months ended September 30, 2001, representing a decrease of $65.7 million from the nine months ended September 30, 2000. Loan servicing fees for the Company, were $(35.7) million for the nine months ended September 30, 2001, compared to $131.3 million for the nine months ended September 30, 2000. The following table details the components of loan servicing fees, net (in thousands):

As the table reflects, loan servicing fees increased $49.2 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 $83.0 billion at September 30, 2000 to $86.3 billion at September 30, 2001. The recent decline in long-term interest rates has resulted in the acceleration of mortgage loan prepayments. The annualized runoff rate on the Company's portfolio of mortgages serviced for others was 26.1% for the nine months ended September 30, 2001 compared to 12.2% for the nine months ended September 30, 2000. Higher levels of prepayments generally accelerate amortization of MSRs and generally will result in a reduction in the market value of MSRs and servicing fee income. MSR amortization increased $70.8 million in the first nine months of 2001 over the same period in 2000; the MSR amortization rate averaged 19.9% for the nine months ended September 30, 2001 compared to 13.7% during the same period in 2000. MSR amortization was also affected by a higher average MSR balance for the nine months ended September 30, 2001 compared to the same period in 2000. Pass-through interest expense increased $17.0 million (229%) year over year, also influenced by higher runoff rates. Servicing fee income also includes a $29.5 million pre-tax gain from the impact of SFAS No. 133 pertaining to the MSR fair value hedges. To reduce the sensitivity of its earnings to interest rate and market value fluctuations, the Company hedges the change in value of its MSRs based on changes in interest rates. 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. A $158.0 million pre-tax valuation provision on the MSRs was recorded during the nine months ended September 30, 2001. On an aggregate basis, at September 30, 2001, the estimated fair value of the MSRs was $18.8 million higher than book value (net of a valuation allowance of $158 million). To the extent there is recovery of fair values of the impaired tranches in future quarters, the valuation allowance will be reduced. Page 31 Customer banking fees were $161.0 million for the nine months ended September 30, 2001 compared to $147.3 million for the nine months ended September 30, 2000. The increase is primarily attributed to increased emphasis by management on transaction account growth. Transaction accounts (including custodial accounts) as a percentage of retail deposits increased to 53.9% at September 30, 2001, from 46.6% at September 30, 2000. The following table details the components of customer banking fees (in thousands):

Gain on sale, settlement and transfer of loans, net totalled $69.1 million for the nine months ended September 30, 2001, an increase of $31.4 million from the nine months ended September 30, 2000. During the nine months ended September 30, 2001 and 2000, the Company recorded reductions in its recourse liability of $24.5 million and $14.5 million, respectively. This liability is a life-of-loan accrual which has experienced favorable performance over the past several years. The Company's revised loss estimate is lower than previously expected, primarily for three reasons: (a) The historical performance of these loans since they were acquired has been better than initial estimates and expectations, with only minimal losses experienced over the past four years. (b) These loans are generally over 10 years old. This seasoning has contributed to lower LTVs, and hence, lower loss exposure. (c) Interest rates have been relatively low over the past few years, and have continued to decline. Because substantially all of these loans are adjustable-rate loans, borrowers have enjoyed lower payments. The lag associated with adjustable-rate indices assures that borrowers' payments will continue to decline. During the nine months ended September 30, 2001, California Federal sold $11.2 billion in single-family mortgage loans originated for sale with servicing rights retained as part of its ongoing mortgage banking operations at gains of $33.8 million compared to $3.7 billion of such sales for the corresponding period in 2000 at gains of $13.8 million. The results in 2001 include $4.2 million related to the gain on sale of $136.2 million in government-insured loans that were previously seriously delinquent and had become performing (GNMA reperformers). The overall increase in the volume of loans sold and related gain is the significant increase in fixed-rate loan originations as a result of the overall decline in market interest rates and increased mortgage refinancing. Gain on sale also includes a $2.4 million unrealized gain on forward loan sale commitments related to SFAS No. 133. Gain on sale of assets, net totalled $22.0 million for the nine months ended September 30, 2001, compared to a net loss of $15.3 million for the nine months ended September 30, 2000. The gain during the nine months of 2001 includes a $16.6 million gain on the sale of $761.8 million in mortgage-backed securities and a gain of $9.3 million on the sale of the Company's Concord EFS stock, partially offset by a $4.1 million loss on the mark-to-market of the Company's portfolio of IO strip securities. The loss during 2000 is primarily attributed to an $18.7 million loss from the sale of approximately $500 million of mortgage-backed securities with an average yield of 6.64% during the second quarter and a $0.9 million loss from the sale of $187.6 million of mortgage-backed securities with an average yield of 6.59% during the third quarter, partially offset by a $1.3 million gain from the sale of interest rate swaps with a notional amount of $284.0 million in August 2000. Other income totalled $44.0 million for the nine months ended September 30, 2001, an increase of $18.9 million over the same period in 2000. The increase relates to a gain of $20.7 million on the non-monetary exchange of Star Systems common stock for 634,520 shares of Concord EFS common stock which occurred in the first quarter of 2001 as a result of Concord's acquisition of Star. Page 32 NONINTEREST EXPENSE. Total noninterest expense was $714.6 million for the nine months ended September 30, 2001, an increase of $42.2 million compared to the nine months ended September 30, 2000. Noninterest expense for the nine months ended September 30, 2001 included increases of $22.8 million in compensation and employee benefit expense, $18.5 million in other noninterest expense and $4.9 million in occupancy and equipment expense. These changes were partially offset by decreases of $3.3 million in professional fees and $2.5 million in amortization of intangible assets. Compensation and employee benefits expense was $346.0 million for the nine months ended September 30, 2001, an increase of $22.8 million from the nine months ended September 30, 2000. The increase is primarily attributed to an increase in staff (from 7,811 at September 30, 2000 to 8,095 at September 30, 2001), primarily in volume-related operating groups, as well as normal salary adjustments. In addition, the Company has experienced an increase in group insurance and other benefit costs that it has elected not to pass on to its employees. Occupancy and equipment expense was $119.1 million for the nine months ended September 30, 2001, an increase of $4.9 million from the nine months ended September 30, 2000, primarily due to an increase in depreciation expense, as well as increased utility costs and higher contract maintenance and repair fees. Professional fees were $25.2 million for the nine months ended September 30, 2001, a decrease of $3.3 million from the nine months ended September 30, 2000, primarily due to a decrease in consulting fees related to various data processing systems projects. Amortization of intangible assets was $44.8 million for the nine months ended September 30, 2001, a decrease of $2.5 million from the nine months ended September 30, 2000, primarily attributed to a December 2000 reduction in the goodwill balance due to the reversal of Old California Federal state deferred taxes. Other noninterest expense was $168.1 million for the nine months ended September 30, 2001 compared to $149.6 million during the comparable period in 2000. The increase in expenses relates to increases in a number of operating expense categories, including retail back office operations, telephone, courier service, postage and marketing. PROVISION FOR INCOME TAX. During the nine months ended September 30, 2001, GS Holdings recorded net income tax expense of $211.3 million, which included net tax benefits of $29.0 million. In prior years, an accrued liability was established for the purpose of satisfying assessments that may result from issues arising during audits with various state taxing authorities. As a result of the completion and settlement of audits in various state taxing jurisdictions, additional guidance on the deductibility of covered asset losses, and the current assessment of exposure for tax strategies employed for prior years, management reduced its accrued state tax liability by $39.7 million. The Company also recorded additional Federal tax expense of $13.9 million due to the reduction of the state tax expense. In addition, an income tax benefit of $3.2 million was recorded due to the utilization of net operating losses of a subsidiary made available as a result of the subsidiary's liquidation into California Federal. During the nine months ended September 30, 2000, GS Holdings recorded net income tax expense of $67.5 million which included a tax benefit of $161.7 million. Based on favorable resolutions of federal income tax audits of Old California Federal and Glendale Federal, and the current status of Mafco Holdings', including the Company's, audits for the years 1991 through 1995, management changed its judgment about the realizability of the Company's deferred tax asset and reduced its valuation allowance by $211.7 million during the nine-month period ended September 30, 2000. As a result of reducing the valuation allowance, income tax expense was reduced by $161.7 million and goodwill was reduced by $50.0 million. Page 33 GS Holdings' effective federal tax rate was 39% and 7% during the nine months ended September 30, 2001 and 2000, respectively, while its federal statutory tax rate was 35% during both periods. In 2001, the difference between the effective and statutory rate was primarily the result of a reduction in the accrued state tax liability and nondeductible goodwill amortization, partially offset by an adjustment to net operating losses from prior periods. In 2000, the difference between the effective and statutory rates was the result of the reduction in the deferred tax asset valuation allowance, partially offset by nondeductible goodwill amortization. GS Holdings' effective state tax rate was (1)% and 6% during the nine months ended September 30, 2001 and 2000, respectively. The effective state tax rate declined during 2001 as a result of a reduction in the accrued state tax liability previously discussed. MINORITY INTEREST. Dividends on the REIT Preferred Stock totalling $34.2 million were recorded during each of the nine months ended September 30, 2001 and 2000 and were recorded as minority interest on an after-tax basis for the respective periods. EXTRAORDINARY ITEMS. During 2000, the FHLB called and the Bank prepaid $400 million in FHLB advances, resulting in an extraordinary gain of $3.0 million, net of income taxes of $2.1 million, on the early extinguishment of such borrowings. Also during 2000, the Bank repurchased $2.5 million outstanding principal amount of the Convertible Subordinated Debentures due 2001, resulting in an extraordinary gain of $41 thousand, net of income taxes of $30 thousand, on the early extinguishment of debt. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Cumulative effect of change in accounting principle for the nine months ended September 30, 2001 includes a write-down of $1.6 million, net of income taxes of $1.1 million, on certain securities as a result of the Company's implementation of EITF No. 99-20 on April 1, 2001. See note 12 of the Company's Notes to Unaudited Consolidated Financial Statements. Page 34 IMPACT OF SFAS NO. 133. On January 1, 2001, the Company adopted SFAS No. 133. In connection with the adoption of this pronouncement, the Company reclassified $1.2 billion in securities from held-to-maturity to available-for-sale, which had the effect of improving the OCI component of stockholder's equity by $30.4 million. The pronouncement impacted several other areas of the financial statements on a year-to-date basis, as summarized below (debit/(credit); in thousands):

Page 35 RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2001 VERSUS THREE MONTHS ENDED SEPTEMBER 30, 2000 The following table shows the Company's consolidated average balance sheets, with the related interest income, interest expense and the average interest rates for the periods presented. Average balances are calculated on a daily basis.

Page 36

(1) Non-performing assets are included in the average balances for the periods indicated. (2) Includes securities held-to-maturity, securities available-for-sale and interest-bearing deposits in other banks. (3) Interest and average rate include the impact of interest rate swaps. Page 37 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 $988.6 million for the three months ended September 30, 2001, a decrease of $67.3 million from the three months ended September 30, 2000. Total interest-earning assets for the three months ended September 30, 2001 averaged $56.5 billion, compared to $57.1 billion for the corresponding period in 2000, primarily as a result of a decline in mortgage-backed securities, partially offset by an increase in loan volume. The yield on total interest-earning assets during the three months ended September 30, 2001 decreased to 6.99% from 7.39% for the three months ended September 30, 2000, primarily due to the repricing of loans and securities at lower rates, partially offset by a higher percentage of loans to total earning assets during 2001. GS Holdings earned $745.4 million of interest income on loans receivable for the three months ended September 30, 2001, an increase of $3.3 million from the three months ended September 30, 2000. The average balance of loans receivable was $41.3 billion for the three months ended September 30, 2001, compared to $39.1 billion for the same period in 2000. The weighted average yield on loans receivable decreased to 7.22% for the three months ended September 30, 2001 from 7.59% for the three months ended September 30, 2000. The increase in the average balance reflects a net increase in residential and commercial real estate loan origination activities. On July 1, 2001, the Company began accounting for interest income on newly originated automobile loans on a gross coupon basis rather than based on credit-adjusted yield. The impact on the current quarter was immaterial, but in future periods, interest income is expected to increase. Page 38 Loan production during the three months ended September 30, 2001 and 2000 is detailed in the table below (in thousands):

_____________ (a) Approximately 41% and 47% of this volume was in prime product; 59% and 53% in sub-prime product for the three months ended September 30, 2001 and 2000, respectively. The decrease in the weighted average yield primarily reflects the repricing of variable-rate loans and the origination of loans at lower rates during 2001. GS Holdings earned $46.6 million of interest income on loans held for sale for the three months ended September 30, 2001, an increase of $28.8 million from the three months ended September 30, 2000. The average balance of loans held for sale was $2.8 billion for the three months ended September 30, 2001, an increase of $1.9 billion from the comparable period in 2000, primarily attributed to increased originations of residential, fixed-rate loans as a result of heightened borrower refinancing activity in the current declining interest rate environment. Fixed-rate production for sale totalled $5.4 billion during the quarter ended September 30, 2001 compared to $1.7 billion originated during the comparable period in 2000. The weighted average yield on loans held for sale decreased to 6.59% for the three months ended September 30, 2001 from 7.65% for the three months ended September 30, 2000, primarily due to declining market interest rates. Interest income on mortgage-backed securities available-for-sale was $141.9 million for the three months ended September 30, 2001, a decrease of $47.8 million from the three months ended September 30, 2000. The average portfolio balance decreased $2.4 billion, to $8.9 billion, for the three months ended September 30, 2001 compared to the same period in 2000. The weighted average yield on these assets decreased from 6.73% for the three months ended September 30, 2000 to 6.37% for the three months ended September 30, 2001. The decrease in the volume is primarily attributed to payments and sales of mortgage-backed securities, partially offset by the reclassification of $1.1 billion in mortgage-backed securities from the held-to-maturity portfolio, as permitted upon the adoption of SFAS No. 133 on January 1, 2001. The decrease in the weighted average yield primarily reflects the repricing of variable-rate securities at lower rates. Interest income on mortgage-backed securities held-to-maturity was $28.4 million for the three months ended September 30, 2001, a decrease of $30.0 million from the three months ended September 30, 2000. The average portfolio balance decreased $1.6 billion, to $1.5 billion, for the three months ended September 30, 2001 compared to the same period in 2000, primarily attributed to the $1.1 billion reclassification in mortgage-backed securities to the available-for-sale portfolio, as permitted upon the adoption of SFAS No. 133 on January 1, 2001. The weighted average yields for the three months ended September 30, 2001 and 2000 were 7.53% and 7.55%, respectively. The decrease in the weighted average yield is primarily due to the repricing of variable-rate securities at lower rates, partially offset by the aforementioned $1.1 billion reclassification of securities with a weighted average rate of 6.84%. Page 39 Interest income on securities and interest-bearing deposits in other banks was $8.2 million for the three months ended September 30, 2001, a decrease of $14.6 million from the three months ended September 30, 2000. The average portfolio balance was $0.6 billion and $1.4 billion for the three months ended September 30, 2001 and 2000, respectively. The decrease in the volume is primarily attributed to payments and maturities of securities. The lower weighted average yield of 5.73% for the three months ended September 30, 2001 compared to 6.36% for the three months ended September 30, 2000 reflects the repricing of securities at lower rates during 2001. Dividends on FHLB stock were $18.1 million for the three months ended September 30, 2001, a decrease of $7.1 million from the three months ended September 30, 2000. The average balance outstanding during the three months ended September 30, 2001 and 2000 was $1.4 billion and $1.3 billion, respectively. The weighted average dividend on FHLB stock decreased to 5.04% for the three months ended September 30, 2001 from 7.51% for the three months ended September 30, 2000. The increase in the average balance is due to an increase in average borrowings from the FHLB while the decrease in the weighted average yield is the result of a reduction in the dividend rate on FHLB stock. INTEREST EXPENSE. Total interest expense was $632.1 million for the three months ended September 30, 2001, a decrease of $137.9 million from the three months ended September 30, 2000. The decrease is primarily due to declining market interest rates and a reduction in higher rate securities sold under agreements to repurchase, partially offset by additional borrowings under lower rate FHLB advances and deposits used to fund total assets. Interest expense on deposits, including Brokered Deposits, was $201.9 million for the three months ended September 30, 2001, a decrease of $34.1 million from the three months ended September 30, 2000. The average balance of deposits outstanding increased from $23.4 billion for the three months ended September 30, 2000 to $24.6 billion for the three months ended September 30, 2001. The increase in the average balance is primarily attributed to increases in the average balances of money market accounts, custodial accounts and retail customer checking accounts, partially offset by declines in certificates of deposit and savings account balances. The overall weighted average cost of deposits decreased to 3.26% for the three months ended September 30, 2001 from 4.02% for the three months ended September 30, 2000, primarily due to a lower average balance of higher rate certificates of deposit and a higher average balance of lower-rate checking, money market and custodial accounts during 2001. Interest expense on securities sold under agreements to repurchase totalled $45.5 million for the three months ended September 30, 2001, a decrease of $49.4 million from the three months ended September 30, 2000. The average balance of such borrowings for the three months ended September 30, 2001 and 2000 was $3.6 billion and $5.4 billion, respectively. The decrease in the average balance is primarily the result of maturities during the third quarter of 2001. The weighted average interest rate on these instruments decreased to 4.91% for the three months ended September 30, 2001 from 6.83% for the three months ended September 30, 2000, primarily due to maturities of higher rate fixed-rate borrowings and the repricing of variable-rate borrowings at lower rates in 2001. Interest expense on borrowings totalled $384.8 million for the three months ended September 30, 2001, a decrease of $54.3 million from the three months ended September 30, 2000. The average balance outstanding for both the three months ended September 30, 2001 and 2000 was $28.0 billion. The weighted average interest rate on these instruments decreased to 5.45% for the three months ended September 30, 2001 from 6.23% for the three months ended September 30, 2000. The decrease in the weighted average rate primarily reflects declining market interest rates. NET INTEREST INCOME. Net interest income was $356.5 million for the three months ended September 30, 2001, an increase of $70.5 million from the three months ended September 30, 2000. The interest rate spread increased to 2.53% for the three months ended September 30, 2001 from 2.01% for the three months ended September 30, 2000, primarily as a result of declining market interest rates reducing the cost 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 2.56% for the three months ended September 30, 2001, up 52 basis points from the 2.04% reported during the third quarter of 2000. Page 40 NONINTEREST INCOME. Total noninterest income, consisting primarily of loan servicing fees, customer banking fees, gain on sale, settlement and transfer of loans, net, and gain on sale of assets, net was $86.9 million for the three months ended September 30, 2001, representing a decrease of $25.7 million from the three months ended September 30, 2000. Loan servicing fees for the Company, were $(28.7) million for the three months ended September 30, 2001, compared to $45.5 million for the three months ended September 30, 2000. The following table details the components of loan servicing fees, net (in thousands):

As the table reflects, loan servicing fees increased $12.8 million from year-ago levels, which is primarily attributable to the growth of the Company's servicing portfolio and higher ancillary fees. The single-family residential loan servicing portfolio, excluding loans serviced for the Bank, increased from $83.3 billion at June 30, 2001 to $86.3 billion at September 30, 2001. The annualized runoff rate on the Company's portfolio of mortgages serviced for others was 27.2% in the third quarter of 2001 compared to 12.8% during the same period in 2000. This runoff rate also influences MSR amortization, which increased $21.0 million in the third quarter of 2001 over the same period in 2000; the MSR amortization rate averaged 19.1% during the quarter ended September 30, 2001 compared to 13.3% during the same period in 2000. MSR amortization was also affected by a higher average MSR balance during the quarter ended September 30, 2001 compared to the same period in 2000. Pass-through interest expense increased $5.6 million (213%) compared to the year-ago quarter, also influenced by higher run-off rates. Servicing fee income includes a $20.5 million pre-tax gain for the three months ended September 30, 2001 from the impact of SFAS No. 133 pertaining to the MSR fair value hedges. See "--Results of Operations--Nine Months Ended September 30, 2001 versus Nine Months Ended September 30, 2000--Noninterest Income." An $81.0 million pre-tax valuation provision on the MSRs was recorded during the three months ended September 30, 2001, which was due in large part to the significant decline in interest rates since September 11, 2001. Hedging activities covered approximately 70% of the total decline in value of the servicing portfolio, as hedge ratios were maintained at high levels throughout the quarter. On an aggregate basis, at September 30, 2001, the estimated fair value of the MSRs was $18.8 million higher than book value (net of a valuation allowance of $158 million). To the extent there is recovery of fair values of the impaired tranches in future quarters, the valuation allowance will be reduced. Customer banking fees were $55.2 million for the three months ended September 30, 2001 compared to $48.6 million for the three months ended September 30, 2000. The increase is primarily attributed to increased emphasis by management on transaction account growth and higher fee income on mutual fund and annuity products. The following table details the components of customer banking fees (in thousands):

Page 41 Gain on sale, settlement and transfer of loans, net totalled $47.2 million for the three months ended September 30, 2001, an increase of $36.6 million from the three months ended September 30, 2000. During the three months ended September 30, 2001, the Company recorded a $24.5 million reduction in its recourse liability. See "--Results of Operations--Nine Months Ended September 30, 2001 versus Nine Months Ended September 30, 2000--Noninterest Income." During the three months ended September 30, 2001, California Federal sold $5.5 billion in single-family mortgage loans originated for sale with servicing rights retained as part of its ongoing mortgage banking operations at gains of $19.7 million compared to $1.4 billion of such sales for the corresponding period in 2000 at gains of $4.7 million. The results in 2001 include $4.2 million related to the gain on sale of $136.2 million in government-insured loans that were previously seriously delinquent and had become performing (GNMA reperformers). The overall increase in the volume of loans sold and related gain is the significant increase in fixed-rate loan originations as a result of the overall decline in market interest rates and increased mortgage refinancing. Gain on sale also includes a $1.2 million unrealized loss on forward loan sale commitments related to SFAS No. 133. Gain on sale of assets, net totalled $5.8 million for the three months ended September 30, 2001, compared to $0.7 million for the three months ended September 30, 2000. The gain during the third quarter of 2001 includes a $10.0 million gain on the sale of $464.0 million in mortgage-backed securities, partially offset by a $4.1 million loss on the mark-to-market of the Company's portfolio of IO strip securities. The gain during 2000 is primarily attributed to a $1.3 million gain from the sale of interest rate swaps with a notional amount of $284.0 million, partially offset by a $0.9 million loss from the sale of $187.6 million of mortgage-backed securities with an average yield of 6.59%. NONINTEREST EXPENSE. Total noninterest expense was $242.2 million for the three months ended September 30, 2001, an increase of $16.6 million compared to the three months ended September 30, 2000. Noninterest expense for the three months ended September 30, 2001 included increases of $10.3 million in other noninterest expense, $6.5 million in compensation and employee benefits and $0.6 million in occupancy and equipment expense. Compensation and employee benefits expense was $114.8 million for the three months ended September 30, 2001, an increase of $6.5 million from the three months ended September 30, 2000. The increase is primarily attributed to an increase in staff (from 7,811 FTE at September 30, 2000 to 8,095 at September 30, 2001), primarily in volume-related operating groups, and normal salary adjustments. In addition, the Company has experienced an increase in group insurance and other benefit costs that it has elected not to pass on to its employees. Occupancy and equipment expense was $41.3 million for the three months ended September 30, 2001, an increase of $0.6 million from the three months ended September 30, 2000, primarily due to increased rent expense as well as an increase in operating equipment expense. Other noninterest expense was $56.9 million for the three months ended September 30, 2001, an increase of $10.3 million from the three months ended September 30, 2000. The increase in expenses relates to increases in a number of operating expense categories including retail back office operations, telephone, marketing, courier service and charitable contributions. PROVISION FOR INCOME TAX. During the three months ended September 30, 2001 and 2000, GS Holdings recorded net income tax expense of $87.5 million and $75.4 million, respectively. GS Holdings' effective gross federal tax rate was 37% and 38% during the three months ended September 30, 2001 and 2000, respectively, while its federal statutory tax rate was 35% during both periods. In 2001 and 2000, the difference between the effective and statutory rates was primarily the result of nondeductible goodwill amortization. GS Holdings' effective state tax rate was 6% during each of the three months ended September 30, 2001 and 2000. MINORITY INTEREST. Dividends on the REIT Preferred Stock totalling $11.4 million were recorded during each of the three months ended September 30, 2001 and 2000 and were recorded as minority interest on an after-tax basis for the respective periods. Page 42 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 September 30, 2001, as summarized below (debit/(credit); in thousands):

Page 43 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS CALIFORNIA FEDERAL GOODWILL LITIGATION The Bank is the plaintiff in a lawsuit against the Government, the California Federal Goodwill Litigation. In the California Federal Goodwill Litigation, the Bank alleged, among other things, that the Government breached certain contractual commitments regarding the computation of its regulatory capital for which the Bank sought damages and restitution. The Bank's claims arose from changes, mandated by FIRREA, with respect to the rules for computing Old California Federal's regulatory capital. In late 1997, a Claims Court Judge ruled in favor of the Bank's motion for partial summary judgment as to the Government's liability to the Bank for breach of contract, and a formal order in that regard was subsequently issued. In late 1998, a second Claims Court Judge ruled that California Federal could not meet its burden for proving lost profits damages and ordered that the case proceed to trial on the damage issue of restitution and reliance. On April 16, 1999, the Claims Court issued its decision on the damages claim against the Government in the California Federal Goodwill Litigation, ruling that the Government must compensate the Bank in the sum of $23.4 million. The summary judgment liability decision by the first Claims Court Judge was appealed by the Government, and the damage award by the second Claims Court Judge was appealed by the Bank. On April 3, 2001, the Court of Appeals for the Federal Circuit upheld the summary judgment liability decision and ruled that California Federal be allowed to present evidence regarding damages incurred under the lost profits theory. The case has been remanded back to the Claims Court for a damages trial under the lost profits theory. The Bank intends to vigorously pursue its claim against the Government. GLENDALE GOODWILL LITIGATION By virtue of the Glen Fed Merger, the Bank is also a plaintiff in a claim against the United States in a second lawsuit, the Glendale Goodwill Litigation. In the Glendale Goodwill Litigation, Glendale Federal sued the Government contending that FIRREA's treatment of supervisory goodwill constituted a breach by the Government of its 1981 contract with the Bank, under which the Bank had merged with a Florida thrift and was permitted to include the goodwill resulting from the merger in its regulatory capital. In 1992, the Claims Court found in favor of Glendale Federal's position, ruling that the Government breached its express contractual commitment to permit Glendale Federal to include supervisory goodwill in its regulatory capital and that Glendale Federal is entitled to seek financial compensation. The trial began in February 1997 and concluded in September 1998. On April 9, 1999, the Claims Court issued its decision in the Glendale Goodwill Litigation, ruling that the Government must compensate the Bank in the sum of $908.9 million. This decision was appealed by the Government and the Bank. On February 16, 2001 the Court of Appeals for the Federal Circuit vacated the trial court's award of damages and remanded the case back to the trial court for determination of total reliance damages to which the Bank might be entitled. Oral argument before the trial court on that issue took place on June 26, 2001 and the Bank is awaiting the Claims Court's decision. The Bank continues to vigorously pursue its case for damages against the Government. Page 44 BARTOLD V. GLENDALE FEDERAL BANK ET AL On September 18, 1995, four plaintiffs commenced an action in Superior Court of California, County of Orange, alleging that the defendants Glendale Federal, to which the Bank is a successor by merger, and Verdugo, a wholly owned subsidiary of the Bank, failed timely to record their release of the mortgage interest following payoffs of residential mortgage loans and, in at least some instances, improperly required borrowers to pay fees for these releases. The plaintiffs' complaint seeks relief for the named plaintiffs, as well as purportedly for all others similarly situated in California and throughout the United States and the general public, on causes of action for violation of California Civil Code Section 2941 and California Business and Professions Code Section 17200, breach of contract, fraud and unjust enrichment. The plaintiffs seek statutory damages of $300 for each supposed, separate violation of Section 2941 by Glendale Federal and Verdugo, restitution, punitive damages, injunctive relief and attorney's fees, among other things. In October 1997, the trial court granted summary judgment for the defendants. In September 2000, the California Court of Appeals reversed this decision and remanded for further proceedings, including further development of class certification issues. On March 2, 2001, the trial court held that a California class had been certified. On June 7, 2001, the trial court dismissed two of the four causes of action against the Bank, holding that the OTS pre-empted the California courts from regulating the Bank's procedures for reconveying deeds. The Bank believes that it has additional meritorious defenses to plaintiffs' claims and intends to continue to contest the remaining claims in the lawsuit vigorously. OTHER LITIGATION In addition to the matters described above, GS Holdings and its subsidiaries are involved in other legal proceedings and claims incidental to the normal conduct of their business. Although it is impossible to predict the outcome of any outstanding legal proceedings, management believes that such legal proceedings and claims, individually or in the aggregate, will not have a material effect on GS Holdings or the Bank. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: 3.1 Certificate of Incorporation of the Registrant, as amended. (Incorporated by reference to Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.) 3.2 By-laws of the Registrant, as amended. (Incorporated by reference to Exhibit 3.2 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.) (b) Reports on Form 8-K: None. Page 45 GLOSSARY OF DEFINED TERMS APB - Accounting Principles Board APB OPINION NO. 16 - Business Combinations APB OPINION NO. 17 - Intangible Assets APB OPINION NO. 25 - Accounting for Stock Issued to Employees APB OPINION NO. 30 - Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions ARM - Adjustable rate mortgage AUTO ONE - Auto One Acceptance Corporation BANK - California Federal Bank BROKERED DEPOSITS - Issued certificates of deposit through direct placement programs and national investment banking firms. CAL FED ACQUISITION - Agreement and Plan of Merger among FN Holdings, Cal Fed Bancorp Inc. and California Federal Bank, A Federal Savings Bank. FN Holdings acquired 100% of the outstanding stock of Cal Fed and Old California Federal, and First Nationwide merged with and into Old California Federal in January 1997. CALIFORNIA FEDERAL - California Federal Bank CALIFORNIA FEDERAL GOODWILL LITIGATION - California Federal Bank v. United 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 CLAIMS COURT - United States Court of Federal Claims COFI - Cost of Funds Index (tied to the FHLB's 11th District cost of funds) COMPANY - Golden State Holdings Inc. CONVERTIBLE SUBORDINATED DEBENTURES DUE 2001 - In 1986, Cal Fed Inc., Old California Federal's former parent company, issued $125 million of 6.5% convertible subordinated debentures due February 20, 2001. DIG - Derivatives Implementation Group DOWNEY ACQUISITION - Auto One's acquisition of the Downey Auto Finance Corporation in February, 2000. EITF - Emerging Issues Task Force EITF NO. 99-20 - Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets FASB - Financial Accounting Standards Board FDICIA - Federal Deposit Insurance Corporation Improvement Act FHLB - Federal Home Loan Bank FHLB SYSTEM - Federal Home Loan Bank System FIRREA - Financial Institutions Reform, Recovery and Enforcement Act of 1989 and its implementing regulations. FLSC - forward loan sale commitments FN HOLDINGS - First Nationwide Holdings Inc. FN HOLDINGS ASSET TRANSFER - FN Holdings contributed all of its assets (including all of the common stock of the Bank) to GS Holdings in September 1998. FNMC - First Nationwide Mortgage Corporation FTE - Full-time equivalent staff GAAP - generally accepted accounting principles GLENDALE FEDERAL - Glendale Federal Bank, Federal Savings Bank GLENDALE GOODWILL LITIGATION - Glendale Federal Bank v. United States, No. 90-772C GLENDALE GOODWILL LITIGATION ASSET - an asset, related to the Glendale Goodwill Litigation, arising out of the purchase of Glendale Federal. Page 46 GLEN FED MERGER - Glendale Federal Bank merged with and into the Bank. GOLDEN STATE - Golden State Bancorp Inc. GOLDEN STATE ACQUISITION - FN Holdings Asset Transfer, Holding Company Mergers and Glen Fed Merger, collectively GOLDEN STATE MERGER - the merger, completed on September 11, 1998, between Golden State, the publicly traded parent company of Glendale Federal, and First Nationwide Holdings Inc. and Hunter's Glen/Ford, Ltd. GOODWILL LITIGATION ASSETS -the California Federal Goodwill Litigation Asset and the Glendale Goodwill Litigation Asset, collectively GOVERNMENT - United States Government GS ESCROW MERGER - GS Escrow was merged with and into GS Holdings, pursuant to a merger agreement by and between GS Escrow and GS Holdings in September 1998. GS HOLDINGS - Golden State Holdings Inc. GS HOLDINGS NOTES - On August 6, 1998, GS Escrow, which subsequently merged into GS Holdings, issued $2 billion of fixed and floating rate notes. GSB INVESTMENTS - GSB Investments Corp. HOLDING COMPANY MERGERS - FN Holdings merged with and into Golden State Financial Corporation, which owned all of the common stock of Glendale Federal. IO - Interest only LIBOR - London Interbank Offered Rate LTV - Loan-to-value LTW - Litigation Tracking Warrant MAFCO HOLDINGS - Mafco Holdings Inc. MSR - Mortgage servicing rights NOL - Net operating loss OCI - Other comprehensive income OLD CALIFORNIA FEDERAL - California Federal Bank, A Federal Savings Bank prior to the Cal Fed Acquisition. PO - Principal only REIT - Real Estate Investment Trust REIT PREFERRED STOCK - 9 1/8% Noncumulative Exchangeable Preferred Stock, Series A, issued by California Federal Preferred Capital Corporation in January 1996. REPOS - short-term securities sold under agreements to repurchase SEC - Securities and Exchange Commission SFAS - Statement of Financial Accounting Standards SFAS NO. 114 - Accounting by Creditors for Impairment of a Loan SFAS NO. 115 - Accounting for Certain Investments in Debt and Equity Securities SFAS NO. 121 - Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of SFAS NO. 125 - Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities SFAS NO. 131 - Disclosures about Segments of an Enterprise and Related Information SFAS NO. 133 - Accounting for Derivative Instruments and Hedging Activities SFAS NO. 140 - Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement No. 125 SFAS NO. 141 - Accounting for Business Combinations SFAS NO. 142 - Accounting for Goodwill and Intangible Assets SFAS NO. 144 - Accounting for the Impairment or Disposal of Long-Lived Assets STOCK PLAN - Golden State Bancorp Inc. Omnibus Stock Plan VERDUGO - Verdugo Trustee Service Corporation Page 47 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Golden State Holdings Inc. /s/ Richard H. Terzian --------------------------------------------------- By: Richard H. Terzian Executive Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Renee Nichols Tucei --------------------------------------------------- By: Renee Nichols Tucei Executive Vice President and Controller (Principal Accounting Officer) November 7, 2001 Page 48

GOLDEN STATE HOLDINGS INC 10-Q