SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For Quarter Ended September 30, 1997 Commission File Number 1-4629
GOLDEN WEST FINANCIAL CORPORATION
- -------------------------------------------------------------------------------
Delaware 95-2080059
- -------------------------------- -------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1901 Harrison Street, Oakland, California 94612
- ----------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 446-3420
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----------- -----------
The number of shares outstanding of the registrant's common stock on
October 31, 1997, was 56,803,844 shares.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The consolidated financial statements of Golden West Financial Corporation
and subsidiaries (the Company) for the three and nine months ended September 30,
1997 and 1996 are unaudited. In the opinion of the Company, all adjustments
(consisting only of normal recurring accruals) that are necessary for a fair
statement of the results for such three and nine month periods have been
included. The operating results for the three and nine months ended September
30, 1997, are not necessarily indicative of the results for the full year.
Golden West Financial Corporation
Consolidated Statement of Financial Condition
(Unaudited)
(Dollars in thousands)
September 30
--------------------------- December 31
1997 1996 1996
------------- ------------ -------------
Assets:
Cash $ 140,898 $ 130,467 $ 218,719
Securities available for sale at fair value 586,401 650,927 781,325
Other investments at cost 436,404 1,350,002 1,078,832
Mortgage-backed securities available for sale without recourse at 197,121 237,176 227,466
fair value
Mortgage-backed securities available for sale with recourse at fair value -0- 220,612 -0-
Mortgage-backed securities held to maturity without recourse at cost 749,913 814,619 800,692
Mortgage-backed securities held to maturity with recourse at cost 2,974,764 2,039,227 3,265,424
Loans receivable 32,723,212 30,278,267 30,113,421
Interest earned but uncollected 211,653 218,366 221,604
Investment in capital stock of Federal Home Loan Bank--at cost
which approximates fair value 580,861 480,468 500,105
Real estate held for sale or investment 67,074 83,074 83,052
Prepaid expenses and other assets 329,545 297,917 226,054
Premises and equipment--at cost less accumulated depreciation 230,513 210,301 213,904
------------- ------------ -------------
$ 39,228,359 $37,011,423 $37,730,598
============= ============ =============
Liabilities and Stockholders' Equity:
Deposits $ 24,234,947 $21,584,365 $22,099,934
Advances from Federal Home Loan Bank 7,228,765 8,159,240 8,798,433
Securities sold under agreements to repurchase 2,890,918 2,227,481 1,908,126
Medium-term notes 309,969 689,755 589,845
Accounts payable and accrued expenses 527,992 593,594 452,182
Taxes on income 250,407 163,252 207,605
Subordinated notes--net of discount 1,210,141 1,323,592 1,323,996
Stockholders' equity 2,575,220 2,270,144 2,350,477
------------- ------------ -------------
$ 39,228,359 $37,011,423 $37,730,598
============= ============ =============
Golden West Financial Corporation
Consolidated Statement of Net Earnings
(Unaudited)
(Dollars in thousands except per share figures)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------ ------------------------------
1997 1996 1997 1996
------------ ------------- ------------ -------------
Interest Income:
Interest on loans $ 610,177 $ 554,245 $ 1,758,899 $ 1,637,733
Interest on mortgage-backed securities 70,611 59,882 217,913 181,416
Interest and dividends on investments 37,414 32,460 105,908 96,723
------------ ------------- ------------ -------------
718,202 646,587 2,082,720 1,915,872
Interest Expense:
Interest on deposits 314,895 264,445 889,337 787,727
Interest on advances 103,005 107,803 323,394 289,476
Interest on repurchase agreements 43,371 31,054 111,739 93,408
Interest on other borrowings 34,786 38,338 100,833 124,152
------------ ------------- ------------ -------------
496,057 441,640 1,425,303 1,294,763
------------ ------------- ------------ -------------
Net Interest Income 222,145 204,947 657,417 621,109
Provision for loan losses 9,980 23,498 43,786 59,256
------------ ------------- ------------ -------------
Net Interest Income after Provision
for Loan Losses 212,165 181,449 613,631 561,853
Non-Interest Income:
Fees 11,574 9,504 33,609 27,872
Gain on the sale of securities, MBS, and loans 1,884 1,952 6,168 9,783
Other 6,962 6,220 19,685 18,371
------------ ------------- ------------ -------------
20,420 17,676 59,462 56,026
Non-Interest Expense:
General and administrative:
Personnel 45,198 40,146 133,190 119,273
Occupancy 14,008 12,702 40,804 37,267
Deposit insurance (a) 1,786 140,949 5,769 162,298
Advertising 3,445 1,954 8,205 6,711
Other 18,797 15,531 53,063 46,993
------------ ------------- ------------ -------------
83,234 211,282 241,031 372,542
Earnings (Loss) Before Taxes on Income and
Cumulative Effect of Change in Accounting 149,351 (12,157) 432,062 245,337
Taxes on Income (b) 59,344 (147,942) 171,404 (48,626)
------------ ------------- ------------ -------------
Earnings Before Cumulative Effect of Change in
Accounting for Goodwill 90,007 135,785 260,658 293,963
Cumulative Effect of Change in Accounting
for Goodwill (c) -0- -0- -0- (205,242)
------------ ------------- ----------- -------------
Net Earnings $ 90,007 $ 135,785 $ 260,658 $ 88,721
============ ============= =========== =============
Earnings Per Share:
Earnings Per Share Before Cumulative Effect of
Change in Accounting for Goodwill $ 1.58 $ 2.32 $ 4.57 $ 5.01
Cumulative Effect of Change in Accounting
for Goodwill (c) 0.00 0.00 0.00 (3.49)
------------ ------------- ----------- ------------
Net Earnings Per Share $ 1.58 $ 2.32 $ 4.57 $ 1.52
============ ============= ============ =============
(a) The amounts for 1996 reflect the one-time SAIF assessment of $133
million.
(b) The amounts for 1996 reflect a tax benefit of $139 million arising from
a prior year acquisition.
(c) In September 1996, the Company adopted SFAS 72 effective January 1, 1996
for acquisitions prior to September 30, 1982. As a result, the Company
wrote off $205 million as the cumulative effect of the change in
accounting for goodwill.
Golden West Financial Corporation
Consolidated Statement of Cash Flows
(Unaudited)
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ -------------
Cash Flows From Operating Activities:
Net earnings $ 90,007 $ 135,785 $ 260,658 $ 88,721
Adjustments to reconcile net earnings to net cash
provided by operatingctivities:
Provision for loan losses 9,980 23,498 43,786 59,256
Cumulative effect of the change in accounting for goodwill -0- -0- -0- 205,242
Amortization of loan fees and discounts (4,282) (5,412) (13,533) (18,093)
Depreciation and amortization 5,263 4,884 15,570 14,512
Loans originated for sale (47,591) (72,354) (146,342) (407,606)
Sales of loans originated for sale 44,482 73,715 142,786 408,594
Decrease in interest earned but uncollected 5,656 6,198 9,951 7,029
Federal Home Loan Bank stock dividends (9,145) (6,217) (33,463) (20,701)
Decrease (increase) in prepaid expenses and other assets 26,917 7,684 (94,545) (136,688)
Increase in accounts payable and accrued expenses 42,187 80,576 75,810 142,780
Increase (decrease) in taxes on income 138 (197,773) 25,007 (198,759)
Other, net (874) (4,672) (8,744) (11,987)
------------ ------------ ------------ -------------
Net cash provided by operating activities 162,738 45,912 276,941 132,300
Cash Flows From Investing Activities:
New loan activity:
New real estate loans originated for portfolio (1,932,509) (2,034,022) (5,383,485) (4,791,836)
Real estate loans purchased (670) (1,934) (1,930) (4,009)
Other, net (13,172) (9,559) (36,291) (15,074)
------------ ------------ ------------ -------------
(1,946,351) (2,045,515) (5,421,706) (4,810,919)
Real estate loan principal payments:
Monthly payments 174,060 161,679 508,619 451,541
Payoffs, net of foreclosures 744,387 528,889 1,932,070 1,651,319
Refinances 76,929 62,114 204,535 202,411
------------ ------------ ------------ -------------
995,376 752,682 2,645,224 2,305,271
Purchases of mortgage-backed securities held to maturity -0- (4) -0- (1,522)
Repayments of mortgage-backed securities 131,174 100,527 369,760 320,465
Proceeds from sales of real estate 58,487 50,371 171,803 148,349
Purchases of securities available for sale (110) (344,476) (1,297) (674,721)
Sales of securities available for sale 4,381 -0- 5,342 81,133
Matured securities available for sale 13,994 207,393 238,047 862,264
Decrease (increase) in other investments 608,352 (139,862) 642,428 (159,842)
Purchases of Federal Home Loan Bank stock -0- (115,256) (56,239) (152,355)
Redemptions of Federal Home Loan Bank stock -0- 37,649 -0- 37,649
Additions to premises and equipment (14,612) (7,216) (37,744) (21,722)
------------ ------------ ------------ -------------
Net cash used in investing activities (149,309) (1,503,707) (1,444,382) (2,065,950)
Golden West Financial Corporation
Consolidated Statement of Cash Flows (Continued)
(Unaudited)
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------ ------------ -------------
Cash Flows From Financing Activities:
Deposit activity:
Increase (decrease) in deposits, net $ (46,244) $ 324,260 $1,426,904 $ 92,604
Interest credited 244,531 219,507 708,109 643,851
------------ ------------ ------------ -------------
198,287 543,767 2,135,013 736,455
Additions to Federal Home Loan Bank advances 511,750 1,117,600 555,950 1,881,050
Repayments of Federal Home Loan Bank advances (642,070) (134,025) (2,125,759) (169,302)
Proceeds from agreements to repurchase securities 2,553,903 1,974,262 4,990,396 3,989,933
Repayments of agreements to repurchase securities (2,617,206) (2,064,039) (4,007,604) (3,580,395)
Repayments of medium-term notes -0- -0- (280,000) (908,135)
Proceeds from federal funds purchased 7,808,000 -0- 7,808,000 1,250,000
Repayments of federal funds purchased (7,808,000) -0- (7,808,000) (1,250,000)
Repayment of subordinated debt -0- -0- (115,000) -0-
Dividends on common stock (6,241) (5,496) (18,795) (16,591)
Sale of stock 1,441 1,665 3,770 6,110
Purchase and retirement of Company stock (3,062) (35,196) (48,351) (93,703)
------------ ------------- ------------ ------------
Net cash provided by (used in) financing activities (3,198) 1,398,538 1,089,620 1,845,422
------------ ------------ ------------ -------------
Net Increase (Decrease) in Cash 10,231 (59,257) (77,821) (88,228)
Cash at beginning of period 130,667 189,724 218,719 218,695
------------ ------------ ------------ -------------
Cash at end of period $ 140,898 $ 130,467 $ 140,898 $ 130,467
============ ============ ============ =============
Supplemental cash flow information:
Cash paid for:
Interest $ 492,562 $ 476,400 $1,421,204 $ 1,342,224
Income taxes 59,206 49,832 147,720 155,410
Cash received for interest and dividends 723,858 652,785 2,092,671 1,922,901
Noncash investing activities:
Loans transferred to foreclosed real estate 51,472 64,061 156,198 163,050
Loans securitized into MBS with recourse -0- -0- -0- 226,210
Golden West Financial Corporation
Consolidated Statement of Stockholders' Equity
(Unaudited)
(Dollars in thousands)
Nine Months Ended
September 30
---------------------------
1997 1996
------------ ------------
Common Stock:
Balance at January 1 $ 5,734 $ 5,887
Common stock issued upon exercise of stock options 16 25
Common stock retired upon purchase of stock (73) (174)
------------ ------------
Balance at September 30 5,677 5,738
------------ ------------
Paid-in Capital:
Balance at January 1 67,953 55,353
Common stock issued upon exercise of stock options 3,754 6,085
------------ ------------
Balance at September 30 71,707 61,438
------------ ------------
Retained Earnings:
Balance at January 1 2,177,098 2,140,883
Net earnings 260,658 88,721
Cash dividends on common stock (18,795) (16,591)
Retirement of stock (48,278) (93,529)
------------ ------------
Balance at September 30 2,370,683 2,119,484
------------ ------------
Unrealized Gains on Securities Available for Sale:
Balance at January 1 99,692 76,230
Change during period 27,461 7,254
------------ ------------
Balance at September 30 127,153 83,484
------------ ------------
Total Stockholders' Equity at September 30 $ 2,575,220 $ 2,270,144
============ ============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion and analysis included herein covers those material changes
in liquidity and capital resources that have occurred since December 31, 1996,
as well as certain material changes in results of operations during the three
and nine month periods ended September 30, 1997, and 1996, respectively.
The following narrative is written with the presumption that the users have
read or have access to the Company's 1996 Form 10-K, which contains the latest
audited financial statements and notes thereto, together with Management's
Discussion and Analysis of Financial Condition and Results of Operations as of
December 31, 1996, and for the year then ended. Therefore, only material changes
in financial condition and results of operations are discussed herein.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130), which requires that an enterprise report, by major components and as a
single total, the change in its net assets during the period from nonowner
sources; and No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131), which establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas, and major customers. Adoption of these
statements will not impact the Company's consolidated financial position,
results of operations or cash flows, and any effect will be limited to the form
and content of its disclosures. The Company operates as a single segment and,
therefore, SFAS 131 is expected to have no effect on the Company's financial
statements. Both statements are effective for fiscal years beginning after
December 15, 1997, with earlier application permitted.
CHANGE IN ACCOUNTING FOR GOODWILL
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 72, "Accounting for Certain Acquisitions of Banking or
Thrift Institutions," (SFAS 72) for goodwill related to acquisitions made prior
to September 30, 1982. Up until 1996, the Company had applied SFAS 72 only to
acquisitions made after September 30, 1982. The adoption of SFAS 72 for goodwill
relating to acquisitions of banking or thrift institutions prior to September
30, 1982, is permitted but not required. SFAS 72 requires, among other things,
that goodwill be amortized over a period no longer than the estimated remaining
life of the acquired long-term interest-earning assets. As a result, the Company
wrote off goodwill totaling $205 million during 1996 as the cumulative effect of
the change in accounting for goodwill. The remaining goodwill from acquisitions
subsequent to 1982 amounting to less than .2% of total assets is not material
and has been reclassified to other assets. The minor amount of continuing
goodwill amortization no longer warrants a separate line item on the Company's
Consolidated Statement of Net Earnings and, therefore, for 1997 and 1996, has
been included in other income.
The adoption of SFAS 72 previously noted resulted in the restatement of
earnings previously reported for the first and second quarters of 1996. The
restatement included a first quarter charge of $3.49 per share for the
cumulative effect of change in accounting for goodwill and a credit of $.05 per
share and $.14 per share of goodwill amortization for the third quarter and
first nine months of 1996, respectively. For the three and nine months ended
September 30, 1996, earnings before the cumulative effect of the change in
accounting for goodwill were $2.32 per share and $5.01 per share, respectively.
Golden West Financial Corporation
Financial Highlights
(Unaudited)
(Dollars in thousands except per share figures)
September 30 September 30 December 31
1997 1996 1996
------------- ------------ -------------
Assets $ 39,228,359 $37,011,423 $ 37,730,598
Loans receivable 32,723,212 30,278,267 30,113,421
Mortgage-backed securities 3,921,798 3,311,634 4,293,582
Deposits 24,234,947 21,584,365 22,099,934
Stockholders' equity 2,575,220 2,270,144 2,350,477
Stockholders' equity/total assets 6.56% 6.13% 6.23%
Book value per common share $ 45.36 $ 39.57 $ 40.99
Common shares outstanding 56,770,444 57,375,909 57,342,389
Yield on loan portfolio 7.47% 7.42% 7.43%
Yield on mortgage-backed securities 7.15% 7.18% 7.13%
Yield on investments 6.61% 6.06% 6.88%
Yield on earning assets 7.42% 7.32% 7.37%
Cost of deposits 5.08% 4.95% 4.98%
Cost of borrowings 5.98% 5.85% 5.80%
Cost of funds 5.37% 5.28% 5.28%
Yield on earning assets less cost of funds 2.05% 2.04% 2.09%
Ratio of nonperforming assets to total assets 1.05% 1.20% 1.21%
Ratio of troubled debt restructured to total assets .13% .16% .22%
World Savings and Loan Association:
Total assets $ 17,116,425 $23,883,202 $21,040,890
Net worth 1,196,534 1,623,564 1,427,914
Net worth/total assets 6.99% 6.80% 6.79%
Regulatory capital ratios:
Tangible capital 6.34% 6.47% 6.37%
Core capital 6.34% 6.47% 6.37%
Risk-based capital 13.83% 14.19% 13.91%
World Savings Bank, a Federal Savings Bank:
Total assets $ 21,734,516 $12,830,891 $16,929,859
Net worth 1,489,373 880,253 1,136,717
Net worth/total assets 6.85% 6.86% 6.71%
Regulatory capital ratios:
Tangible capital 6.83% 6.83% 6.69%
Core capital 6.83% 6.83% 6.69%
Risk-based capital 13.30% 12.68% 13.14%
Golden West Financial Corporation
Financial Highlights
(Unaudited)
(Dollars in thousands except per share figures)
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- --------------------------
1997 1996 1997 1996
------------ ----------- ------------ -----------
New real estate loans originated $ 1,980,100 $2,106,376 $5,529,827 $5,199,442
Average yield on new real estate loans 7.63% 7.54% 7.56% 7.61%
Increase in deposits (a) $ 198,287 $ 543,767 $2,135,013 $ 736,455
Earnings excluding 1996 nonrecurring items (b) 90,007 74,208 260,658 232,386
Earnings before cumulative effect of change
in accounting for goodwill 90,007 135,785 260,658 293,963
Net earnings 90,007 135,785 260,658 88,721
Earnings per share excluding 1996 nonrecurring items (b) 1.58 1.29 4.57 3.99
Earnings per share before cumulative effect
of change in accounting for goodwill 1.58 2.32 4.57 5.01
Net earnings per share 1.58 2.32 4.57 1.52
Cash dividends on common stock .11 .095 .33 .285
Average common shares outstanding 56,740,342 57,584,306 56,980,399 58,216,474
Ratios:(c)
Net earnings/average net worth (ROE) (d) 14.23% 24.71% 14.14% 5.45%
Net earnings/average assets (ROA) (d) .92% 1.50% .90% .33%
Net interest income/average assets 2.26% 2.27% 2.27% 2.34%
General and administrative expense/average assets
(G&A to Average Assets) (d) .85% 2.34% .83% 1.40%
(a) Includes a decrease of $208 million of wholesale deposits for the quarter
ended September 30, 1997 and an increase of $864 million of wholesale
deposits for the nine months ended September 30, 1997.
(b) Excludes the third quarter 1996 SAIF assessment of $133 million
(pre-tax), or $1.34 per share, and the special tax credit of $139
million, or $2.40 per share. Also excluded is the $205 million, or $3.49
per share, cumulative effect of the change in accounting for goodwill,
which was effective January 1, 1996.
(c) Ratios are annualized by multiplying the quarterly computation by four
and the nine month computation by one and one-third. Averages are
computed by adding the beginning balance and each monthend balance during
the quarter and nine-month period and dividing by four and ten,
respectively.
(d) The ratios for the quarter and nine months ended September 30, 1996
include the three 1996 nonrecurring items in footnote (b) above. The
ratios for the quarter ended September 30, 1996, excluding the two
nonrecurring items are: ROE 13.50%; ROA .82%; and G&A to Average Assets
.87%. The year-to-date ratios as of September 30, 1996, excluding the
three nonrecurring items are: ROE 14.27%; ROA .87%; and G&A to Average
Assets .90%.
FINANCIAL CONDITION
The consolidated condensed balance sheet shown in the table below presents
the Company's assets and liabilities in percentage terms at September 30, 1997
and 1996, and December 31, 1996. The reader is referred to page 51 of the
Company's 1996 Form 10-K for similar information for the years 1993 through 1996
and a discussion of the changes in the composition of the Company's assets and
liabilities in those years.
TABLE 1
Consolidated Condensed Balance Sheet
In Percentage Terms
September 30
-------------------- December 31
1997 1996 1996
------- ------- -------------
Assets:
Cash and investments 3.0% 5.8% 5.5%
Mortgage-backed securities 10.0 8.9 11.4
Loans receivable 83.4 81.8 79.8
Other assets 3.6 3.5 3.3
------- ------- -------
100.0% 100.0% 100.0%
======= ======= =======
Liabilities and Stockholders' Equity:
Deposits 61.8% 58.3% 58.6%
Federal Home Loan Bank advances 18.4 22.0 23.3
Securities sold under agreements to repurchase 7.4 6.0 5.1
Medium-term notes 0.8 1.9 1.6
Other liabilities 1.9 2.1 1.7
Subordinated debt 3.1 3.6 3.5
Stockholders' equity 6.6 6.1 6.2
------- ------- -------
100.0% 100.0% 100.0%
======= ======= =======
As the above table shows, deposits represent the majority of the Company's
liabilities. The largest asset component is the loan portfolio, which consists
primarily of long-term mortgages. The disparity between the repricing (maturity
or interest rate change) of deposits and borrowings and the repricing of
mortgage loans and investments can have a material impact on the Company's
results of operations. The difference between the repricing characteristics of
assets and liabilities is commonly referred to as "the gap."
The following gap table shows that, as of September 30, 1997, the Company's
assets mature or reprice sooner than its liabilities. Consequently, one would
expect falling interest rates to lower the Company's earnings and rising
interest rates to increase the Company's earnings. However, the Company's
earnings are also affected by the built-in lags inherent in the Eleventh
District Cost of Funds Index (COFI), which is the benchmark the Company uses to
determine the rate on the great majority of its adjustable rate mortgages.
Specifically, there is a two-month delay in reporting the COFI because of the
time required to gather the data needed to compute the index. As a result, the
current COFI actually reflects the Eleventh District's cost of funds at the
level it was two months prior. In addition, because COFI is based on a portfolio
of accounts, not all of which mature or reprice immediately, COFI does not
initially reflect a change in market interest rates. Consequently, when the
interest rate environment changes, the COFI lags cause assets to initially
reprice more slowly than liabilities, enhancing earnings when rates are falling
and holding down income when rates rise. In addition to the COFI lags, other
elements of ARM loans also have an impact on earnings. These elements are
introductory rates on new ARM loans, the interest rate adjustment frequency of
ARM loans, interest rate limits on individual rate changes, and interest rate
floors.
TABLE 2
Repricing of Interest-Earning Assets and Interest-Bearing
Liabilities, Repricing Gaps, and Gap Ratio
As of September 30, 1997
(Dollars in millions)
Projected Repricing(a)
----------------------------------------------------------------
0 - 3 4 - 12 1 - 5 Over 5
Months Months Years Years Total
---------- ----------- ---------- ----------- ----------
Interest-Earning Assets:
Investments $ 719 $ 257 $ 45 $ 2 $ 1,023
Mortgage-backed securities 3,066 86 339 431 3,922
Loans receivable: (b)
Rate-sensitive 28,262 1,568 125 -0- 29,955
Fixed-rate 89 253 1,027 1,154 2,523
Other(c) 684 -0- -0- -0- 684
Impact of interest rate swaps 597 190 (356) (431) -0-
---------- ----------- ---------- ----------- ----------
Total $ 33,417 $ 2,354 $ 1,180 $ 1,156 $ 38,107
========== =========== ========== =========== ==========
Interest-Bearing Liabilities(d):
Deposits $ 13,569 $ 8,025 $ 2,620 $ 21 $ 24,235
FHLB advances 5,923 900 25 381 7,229
Other borrowings 3,294 200 718 199 4,411
Impact of interest rate swaps 1,362 (903) (368) (91) -0-
---------- ----------- ---------- ----------- -----------
Total $ 24,148 $ 8,222 $ 2,995 $ 510 $ 35,875
========== =========== ========== ========== ===========
Repricing gap $ 9,269 $ (5,868) $ (1,815) $ 646
========== =========== ========== ==========
Cumulative gap $ 9,269 $ 3,401 $ 1,586 $ 2,232
========== =========== ========== ===========
Cumulative gap as a percentage of
total assets 23.6% 8.7% 4.0%
========== =========== ==========
(a) Based on scheduled maturity or scheduled repricing; loans reflect scheduled
repayments and projected prepayments of principal.
(b) Excludes nonaccrual loans (90 days or more past due).
(c) Includes cash in banks and Federal Home Loan Bank (FHLB) stock.
(d) Liabilities with no maturity date, such as passbook and money market
deposit accounts, are assigned zero months.
CASH AND INVESTMENTS
The Office of Thrift Supervision (OTS) requires insured institutions, such
as World Savings and Loan Association (World or Association) and World Savings
Bank, FSB (WFSB), to maintain a minimum amount of cash and certain qualifying
investments for liquidity purposes. The current minimum requirement is equal to
a monthly average of daily balances of 5% of deposits and short-term borrowings.
Even though the ratio of cash and investments to total assets was 3.0% at
September 30, 1997 as shown on page 10, the average for the month was in excess
of the 5% requirement. For the months ended September 30, 1997 and 1996, and
December 31, 1996, World's average regulatory liquidity ratios were 10%, 7%, and
8%, respectively. For the months ended September 30, 1997 and 1996, and December
31, 1996, WFSB's average regulatory liquidity ratios were 8%, 6%, and 6%,
respectively. World and WFSB exceeded the monthly 5% requirements for each of
the nine months ended September 30, 1997 and all months during 1996. The level
of the Company's investments position in excess of its liquidity requirements at
any time depends on liquidity needs and available arbitrage opportunities.
At September 30, 1997 and 1996, and December 31, 1996, the Company had
securities available for sale in the amount of $586 million, $651 million, and
$781 million, respectively, including unrealized gains on securities available
for sale of $206 million, $132 million, and $159 million, respectively. At
September 30, 1997 and 1996, and December 31, 1996, the Company had no
securities held to maturity or for trading.
Included in the securities available for sale at September 30, 1997 and
1996, and December 31, 1996, were collateralized mortgage obligations (CMOs) in
the amount of $82 million, $216 million, and $170 million, respectively. The
Company holds CMOs on which both principal and interest are received. It does
not hold any interest-only or principal-only CMOs. At September 30, 1997, the
majority of the Company's CMOs had remaining terms to maturity of five years or
less, and qualified for inclusion in the regulatory liquidity measurement.
MORTGAGE-BACKED SECURITIES
At September 30, 1997 and 1996, and December 31, 1996, the Company had
mortgage-backed securities (MBS) held to maturity in the amount of $3.7 billion,
$2.9 billion, and $4.1 billion, respectively, including Federal National
Mortgage Association (FNMA) MBS subject to full credit recourse to the Company
of $3.0 billion at September 30, 1997, $2.0 billion at September 30, 1996, and
$3.3 billion at December 31, 1996. At September 30, 1997 and 1996, and December
31, 1996, the Company had mortgage-backed securities available for sale in the
amount of $197 million, $458 million, and $227 million, respectively, including
unrealized gains on MBS available for sale of $8 million, $11 million, and $11
million, respectively, and including $221 million of FNMA MBS subject to full
credit recourse at September 30, 1996. At September 30, 1997 and 1996 and
December 31, 1996, the Company had no trading MBS.
During 1995 and 1996, the Company securitized $2.3 billion and $1.3
billion, respectively, of adjustable rate mortgages (ARMs) into FNMA
COFI-indexed MBS, to be used as collateral for borrowings. Included in the $1.3
billion securitized during 1996, was $226 million of loans securitized into MBS
available for sale with recourse, which were subsequently transferred from the
MBS available for sale portfolio to the MBS held to maturity portfolio during
the fourth quarter of 1996. These securities are subject to full credit recourse
to the Company. The Company has the ability and intent to hold these MBS until
maturity. Accordingly, these MBS are classified as held to maturity.
Repayments of MBS during the third quarter and first nine months of 1997
were $131 million and $370 million, respectively, compared to $101 million and
$320 million in the same periods of 1996. The increase in repayments on MBS
during the first nine months of 1997 as compared to the first nine months of
1996 was primarily due to the increase in prepayments on the underlying loans
during the third quarter of 1997 as compared to the third quarter of 1996 and
the increase in MBS that resulted from the securitization of ARM loans into FNMA
MBS.
LOAN PORTFOLIO
LOAN VOLUME
New loan originations for the three and nine months ended September 30,
1997, amounted to $2.0 billion and $5.5 billion, respectively, compared to $2.1
billion and $5.2 billion for the same periods in 1996. The increase in loan
volume in 1997 occurred because of a continuing strong home sales market and
solid demand for ARMs, our primary product. Despite the fact that the cost of
fixed-rate mortgages fell below 8% during the third quarter of 1997, ARMs, the
Company's principal product, remained an attractive option for many customers.
The Company continues to sell most of its fixed-rate originations. Loans
originated for sale for the three and nine months ended September 30, 1997 were
$48 million and $146 million, respectively, compared to $72 million and $408
million for the same periods in 1996. Refinanced loans constituted 30% and 32%
of new loan originations for the three and nine months ended September 30, 1997,
compared to 29% and 35% for the three and nine months ended September 30, 1996.
The Company has lending operations in 25 states. The primary source of
mortgage origination is loans secured by residential properties in California.
For the three and nine months ended September 30, 1997, 53% of total loan
originations were on residential properties in California compared to 49% and
51% for the same periods in 1996. The five largest states, other than
California, for originations for the three and nine months ended September 30,
1997, were Florida, Texas, Illinois, New Jersey, and Colorado with a combined
total of 25% of total originations for both periods. The percentage of the total
loan portfolio (excluding mortgage-backed securities with recourse) that is
comprised of residential loans in California was 67% at September 30, 1997
compared to 70% at September 30, 1996, and 69% at December 31, 1996.
The tables on the following two pages show the Company's loan portfolio by
state at September 30, 1997 and 1996.
TABLE 3
Loan Portfolio by State
September 30, 1997
(Dollars in thousands)
Residential
Real Estate Commercial Loans as
-------------------------- Real Total a % of
State 1 - 4 5+ Land Estate Loans (a) Portfolio
- ----------------- ------------ ----------- ---------- -------------- ------------ ------------
California $20,573,055 $3,418,748 $ 240 $ 51,498 $24,043,541 66.89%
Texas 1,335,730 100,082 563 1,493 1,437,868 4.00
Illinois 1,189,536 175,226 -0- 1,668 1,366,430 3.80
Colorado 1,075,954 231,209 -0- 7,014 1,314,177 3.66
Florida 1,260,196 20,120 30 923 1,281,269 3.56
New Jersey 1,196,308 403 -0- 5,551 1,202,262 3.34
Washington 507,543 398,141 -0- 732 906,416 2.52
Arizona 737,858 40,000 -0- 559 778,417 2.17
Pennsylvania 583,660 4,228 -0- 3,282 591,170 1.64
Virginia 524,069 8,527 -0- 1,361 533,957 1.49
Connecticut 477,893 -0- -0- 20 477,913 1.33
Maryland 364,166 2,168 -0- 507 366,841 1.02
Oregon 247,806 12,844 -0- 245 260,895 0.73
Utah 194,538 56 -0- 1,630 196,224 0.55
Nevada 190,787 1,035 -0- -0- 191,822 0.53
Minnesota 182,700 8,146 -0- -0- 190,846 0.53
Kansas 162,572 4,797 -0- 178 167,547 0.47
Wisconsin 139,254 3,866 -0- -0- 143,120 0.40
Massachusetts 118,187 -0- -0- 20 118,207 0.33
Missouri 80,941 6,153 -0- -0- 87,094 0.24
Washington DC 49,706 -0- -0- -0- 49,706 0.14
New Mexico 47,573 -0- -0- -0- 47,573 0.13
New York 44,610 -0- -0- -0- 44,610 0.12
Georgia 31,578 -0- -0- 1,443 33,021 0.09
Delaware 30,631 -0- -0- -0- 30,631 0.09
Idaho 30,227 -0- -0- -0- 30,227 0.08
Ohio 13,256 1,788 181 3,477 18,702 0.05
South Dakota 9,452 -0- -0- -0- 9,452 0.03
North Carolina 7,486 -0- -0- 464 7,950 0.02
Other 10,315 4 -0- 4,419 14,738 0.05
------------ ----------- ---------- ------------ ------------- ---------
Totals $31,417,587 $4,437,541 $ 1,014 $ 86,484 35,942,626 100.00%
============ =========== ========== ============ =========
SFAS 91 deferred loan fees (42,573)
Loan discount on purchased loans (3,654)
Undisbursed loan funds (3,511)
Allowance for loan losses (222,020)
Loans to facilitate (LTF) interest reserve (587)
Troubled debt restructured (TDR) interest reserve (3,965)
Loans on deposits 31,660
------------
Total loan portfolio and loans securitized into FNMA MBS with recourse 35,697,976
Loans securitized into FNMA MBS with recourse (2,974,764)(b)
------------
Total loan portfolio $32,723,212
============
(a) The Company has no commercial loans.
(b) During 1995 and 1996, loans amounting to $2.3 billion and $1.3 billion,
respectively, were securitized with full recourse into Federal National
Mortgage Association mortgage-backed securities. The September 30, 1997
balances of these FNMA mortgage-backed securities are reflected in the
amounts above.
TABLE 4
Loan Portfolio by State
September 30, 1996
(Dollars in thousands)
Residential
Real Estate Commercial Loans as
-------------------------- Real Total a % of
State 1 - 4 5+ Land Estate Loans (a) Portfolio
- ----------------- ------------ ----------- ---------- -------------- ------------ -----------
California $19,615,787 $3,369,019 $ 259 $ 65,584 $23,050,649 70.35%
Colorado 931,879 233,318 -0- 7,404 1,172,601 3.58
Illinois 985,939 182,522 -0- 1,857 1,170,318 3.57
Texas 1,052,319 106,486 579 1,602 1,160,986 3.54
New Jersey 992,647 409 -0- 7,155 1,000,211 3.05
Florida 917,033 17,829 143 976 935,981 2.86
Washington 397,289 341,335 -0- 765 739,389 2.26
Arizona 569,451 51,943 -0- 1,689 623,083 1.90
Virginia 474,620 7,884 -0- 1,498 484,002 1.48
Pennsylvania 452,421 4,273 -0- 3,780 460,474 1.41
Connecticut 379,277 -0- -0- 24 379,301 1.16
Maryland 310,800 1,396 -0- 561 312,757 0.95
Oregon 199,410 11,031 -0- 2,778 213,219 0.65
Nevada 173,693 1,148 -0- -0- 174,841 0.53
Kansas 140,487 4,951 -0- 198 145,636 0.44
Utah 134,296 61 -0- 1,841 136,198 0.42
Minnesota 118,120 5,135 -0- -0- 123,255 0.38
Wisconsin 87,158 4,183 -0- -0- 91,341 0.28
Missouri 68,924 6,697 -0- -0- 75,621 0.23
Massachusetts 52,479 -0- -0- 20 52,499 0.16
New York 50,257 -0- -0- 18 50,275 0.15
Washington, DC 39,633 -0- -0- -0- 39,633 0.12
Georgia 37,223 -0- -0- 1,864 39,087 0.12
New Mexico 31,705 -0- -0- -0- 31,705 0.10
Ohio 18,743 2,322 283 4,477 25,825 0.08
Idaho 23,298 -0- -0- -0- 23,298 0.07
Delaware 20,944 -0- -0- -0- 20,944 0.06
North Carolina 8,067 254 -0- 511 8,832 0.03
South Dakota 4,838 -0- -0- -0- 4,838 0.01
Other 12,874 18 -0- 4,698 17,590 0.06
------------ ----------- ---------- ------------ ------------- ---------
Totals $28,301,611 $4,352,214 $ 1,264 $ 109,300 $32,764,389 100.00%
============ =========== ========== ============ =========
SFAS 91 deferred loan fees (63,634)
Loan discount on purchased loans (5,436)
Undisbursed loan funds (4,913)
Allowance for loan losses (178,354)
Loans to facilitate (LTF) interest reserve (532)
Troubled debt restructured (TDR) interest reserve (5,237)
Loans on deposits 31,823
------------
Total loan portfolio and loans securitized into FNMA MBS with recourse 32,538,106
Loans securitized into FNMA MBS with recourse (2,259,839)(b)
------------
Total loan portfolio $30,278,267
============
(a) The Company has no commercial loans.
(b) During 1995 and 1996, loans amounting to $2.3 billion and $226 million,
respectively, were securitized with full recourse into Federal National
Mortgage Association (FNMA) mortgage-backed securities. The September 30,
1996 balances of these FNMA mortgage-backed securities are reflected in
the amounts above.
The Company continues to emphasize ARM loans with interest rates that
change periodically in accordance with movements in specified indexes. The
portion of the mortgage portfolio (excluding MBS) composed of rate-sensitive
loans was 93% at September 30, 1997 compared to 91% at September 30, 1996 and
December 31, 1996. The Company's ARM originations for the third quarter and
first nine months of 1997 constituted approximately 96% of new mortgage loans
made in 1997 compared to 95% and 89% in the same periods of 1996.
The weighted average maximum lifetime cap rate on the Company's ARM loan
portfolio (including MBS with recourse) was 12.76%, or 5.43% above the actual
weighted average rate at September 30, 1997, versus 12.95%, or 5.72% above the
weighted average rate at September 30, 1996.
Approximately $5.5 billion of the Company's ARM loans (including MBS with
recourse) have terms that state that the interest rate may not fall below a
lifetime floor set at the time of origination or assumption. As of September 30,
1997, $567 million of ARM loans had reached their rate floors. The weighted
average floor rate on the loans that had reached their floor was 7.76% at
September 30, 1997 compared to 7.75% at September 30, 1996. Without the floor,
the average yield on these loans would have been 7.14% at September 30, 1997 and
7.08% at September 30, 1996.
Loan repayments consist of monthly loan amortization, loan payoffs, and
refinances. For the three and nine months ended September 30, 1997, loan
repayments were $995 million and $2.6 billion, respectively, compared to $753
million and $2.3 billion in the same periods of 1996. Loan repayments were
higher during the first nine months of 1997 as compared to the first nine months
of 1996 primarily due to an increase in the loan portfolio balance as well as
increased prepayment rates.
MORTGAGE SERVICING RIGHTS
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights" (SFAS 122). SFAS
122 amends Statement of Financial Accounting Standards No. 65, "Accounting for
Certain Mortgage Banking Activities," to require that any financial institution
participating in the secondary mortgage market recognize, as separate assets,
rights to service mortgage loans for others when those rights are acquired
through either the purchase or origination of mortgage loans which are
subsequently sold or securitized. SFAS 122 also requires that financial
institutions participating in the secondary mortgage market should evaluate and
measure for impairment of capitalized mortgage servicing rights based on the
fair value of those rights on a disaggregated basis. If the book value exceeds
the fair value of the capitalized mortgage servicing rights, financial
institutions are required to write-down the servicing rights to their fair
value. The book value of Golden West's servicing rights did not exceed the fair
value at September 30, 1997 or 1996 and, therefore, no adjustment was necessary.
On January 1, 1997, the Company adopted Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" (SFAS 125). The accounting for mortgage
servicing assets under SFAS 125 is substantially the same as the accounting for
mortgage servicing assets under SFAS 122. See page 24 for further discussion on
SFAS 125. For the third quarter and first nine months of 1997, the Company
recognized gains of $1.1 million and $3.2 million, respectively, on the sale of
loans due to the capitalization of servicing rights. For the same periods in
1996, the Company recognized gains of $1.8 million and $8.8 million,
respectively. After amortization, the balance at September 30, 1997 and 1996 of
the capitalized servicing rights was $10.3 million and $7.9 million,
respectively.
ASSET QUALITY
One measure of the soundness of the Company's portfolio is its ratio of
nonperforming assets (NPAs) to total assets. Nonperforming assets include
non-accrual loans (loans, including loans swapped into MBS with recourse, that
are 90 days or more past due) and real estate acquired through foreclosure. No
interest is recognized on non-accrual loans. The Company's troubled debt
restructured (TDRs) is made up of loans on which delinquent payments have been
capitalized or on which temporary interest rate reductions have been made,
primarily to customers adversely impacted by economic conditions.
The following table shows the components of the Company's nonperforming
assets and troubled debt restructured and the various ratios to total assets.
TABLE 5
Nonperforming Assets and Troubled Debt Restructured
(Dollars in thousands)
September 30
-------------------------- December 31
1997 1996 1996
----------- ------------ --------------
Non-accrual loans $ 344,655 $ 362,817 $ 373,157
Real estate acquired through foreclosure 66,652 81,563 82,075
Real estate in judgment -0- 944 416
----------- ------------ ------------
Total nonperforming assets $ 411,307 $ 445,324 $ 455,648
=========== ============ ============
TDRs $ 51,785 $ 60,732 $ 84,082
=========== ============ ============
Ratio of NPAs to total assets 1.05% 1.20% 1.21%
=========== ============ ============
Ratio of TDRs to total assets .13% .16% .22%
=========== ============ ============
Ratio of NPAs and TDRs to total assets 1.18% 1.36% 1.43%
=========== ============ ============
The decrease in NPAs during 1997 reflects the improving California economy.
The Company continues to closely monitor all delinquencies and takes appropriate
steps to protect its interests. Interest foregone on non-accrual loans is
fully-reserved and amounted to $3 million and $12 million in the third quarter
and first nine months of 1997 compared to $5 million and $15 million for the
same periods of 1996. Interest foregone on TDRs amounted to $381 thousand and
$1.5 million for the three and nine months ended September 30, 1997, compared to
$432 thousand and $1.2 million for the three and nine months ended September 30,
1996.
The tables on the following two pages show the Company's nonperforming
assets by state at September 30, 1997 and 1996.
TABLE 6
Nonperforming Assets by State
September 30, 1997
(Dollars in thousands)
Non-Accrual Loans (a) Real Estate Owned
----------------------------------- --------------------------------
Residential Commercial Commercial NPAs AS
Real Estate Real Residential Real Total a % of
State 1 -4 5+ Estate 1 - 4 5+ Estate NPAs(b) Loans
- ----------- --------- ---------- --------- -------- -------- --------- --------- --------
California $252,838 $ 12,737 $ 1,071 $55,089 $ 6,112 $ 2,279 $330,126 1.37%
Texas 7,986 -0- -0- 1,059 -0- -0- 9,045 0.63
Illinois 10,400 223 -0- 384 -0- -0- 11,007 0.81
Colorado 1,890 -0- 3,086 -0- -0- -0- 4,976 0.38
Florida 10,265 -0- 257 546 -0- -0- 11,068 0.86
New Jersey 16,076 -0- 823 494 -0- -0- 17,393 1.45
Washington 2,014 -0- -0- -0- -0- -0- 2,014 0.22
Arizona 1,989 -0- -0- 52 -0- -0- 2,041 0.26
Pennsylvania 5,289 -0- -0- 295 -0- -0- 5,584 0.94
Virginia 1,469 -0- -0- 530 -0- -0- 1,999 0.37
Connecticut 2,430 -0- -0- 354 -0- -0- 2,784 0.58
Maryland 2,545 -0- -0- 106 -0- -0- 2,651 0.72
Oregon 1,008 -0- -0- -0- -0- -0- 1,008 0.39
Utah 982 -0- -0- -0- -0- -0- 982 0.50
Nevada 1,964 -0- -0- 133 -0- -0- 2,097 1.09
Minnesota 492 -0- -0- -0- -0- -0- 492 0.26
Kansas 293 40 -0- -0- -0- -0- 333 0.20
Wisconsin 612 -0- -0- -0- -0- -0- 612 0.43
Massachusetts 96 -0- 20 -0- -0- -0- 116 0.10
Missouri 488 40 -0- -0- -0- -0- 528 0.61
Washington, DC 43 -0- -0- -0- -0- -0- 43 0.09
New Mexico 109 -0- -0- -0- -0- -0- 109 0.23
New York 3,049 -0- -0- 420 -0- 243 3,712 8.32
Georgia 1,533 -0- -0- 181 -0- -0- 1,714 5.19
Delaware 198 -0- -0- -0- -0- -0- 198 0.65
Idaho 235 -0- -0- -0- -0- -0- 235 0.78
Ohio 6 -0- 3 -0- -0- -0- 9 0.05
South Dakota -0- -0- -0- -0- -0- -0- -0- 0.00
North Carolina -0- -0- -0- -0- -0- -0- -0- 0.00
Other 56 -0- -0- -0- -0- -0- 56 0.38
--------- ---------- --------- -------- --------- --------- --------- -----
Totals $326,355 $ 13,040 $ 5,260 $59,643 $ 6,112 $ 2,522 412,932 1.15%
========= ========== ========= ======== ========= =========
REO general valuation allowance (1,625) (0.01)
--------- -----
Total nonperforming assets $411,307 1.14%
========= =====
(a) Non-accruals loans are 90 days or more past due and have no unpaid
interest accrued.
(b) During 1995 and 1996, loans amounting to $2.3 billion and $1.3 billion,
respectively, were securitized with full recourse into FNMA mortgage-
backed securities. The September 30, 1997 balances of the related
nonperforming assets are reflected in the amounts above.
TABLE 7
Nonperforming Assets by State
September 30, 1996
(Dollars in thousands)
Non-Accrual Loans (a) Real Estate Owned
----------------------------------- --------------------------------------------
Residential Commercial Commercial NPAs as
Real Estate Real Residential Real Total a % of
State 1 -4 5+ Estate 1 - 4 5+ Land Estate NPAs(b) Loans
- ----------- --------- ---------- --------- -------- -------- -------- --------- ---------- --------
California $291,880 $ 18,711 $ 530 $63,792 $ 14,649 $ 475 $ 2,167 $ 392,204 1.70%
Colorado 1,220 119 3,092 165 -0- -0- -0- 4,596 0.39
Illinois 4,726 191 -0- 227 281 -0- -0- 5,425 0.46
Texas 3,881 -0- -0- 102 -0- -0- -0- 3,983 0.34
New Jersey 11,955 -0- 791 1,393 -0- -0- -0- 14,139 1.41
Florida 3,903 -0- 269 430 -0- -0- -0- 4,602 0.49
Washington 1,470 -0- -0- -0- -0- -0- -0- 1,470 0.20
Arizona 776 -0- 1,096 -0- -0- -0- -0- 1,872 0.30
Virginia 1,224 -0- -0- 733 -0- -0- -0- 1,957 0.40
Pennsylvania 2,696 -0- -0- 48 -0- -0- -0- 2,744 0.60
Connecticut 2,936 -0- -0- 279 -0- -0- -0- 3,215 0.85
Maryland 1,596 -0- -0- -0- -0- -0- -0- 1,596 0.51
Oregon 850 -0- -0- -0- -0- -0- -0- 850 0.40
Nevada 1,000 -0- -0- -0- -0- -0- -0- 1,000 0.57
Kansas 720 40 -0- -0- -0- -0- -0- 760 0.52
Utah 294 -0- -0- -0- -0- -0- -0- 294 0.22
Minnesota 323 -0- -0- -0- -0- -0- -0- 323 0.26
Wisconsin -0- -0- -0- -0- -0- -0- -0- -0- 0.00
Missouri 849 106 -0- -0- -0- -0- -0- 955 1.26
Massachusetts -0- -0- -0- -0- -0- -0- -0- -0- 0.00
New York 3,926 -0- -0- -0- -0- -0- -0- 3,926 7.81
Washington, DC -0- -0- -0- -0- -0- -0- -0- -0- 0.00
Georgia 1,443 -0- -0- 73 -0- -0- -0- 1,516 3.88
New Mexico -0- -0- -0- -0- -0- -0- -0- -0- 0.00
Ohio 70 -0- 58 -0- -0- -0- -0- 128 0.50
Idaho -0- -0- -0- -0- -0- -0- -0- -0- 0.00
Delaware -0- -0- -0- -0- -0- -0- -0- -0- 0.00
North Carolina -0- -0- -0- -0- -0- -0- -0- -0- 0.00
South Dakota -0- -0- -0- -0- -0- -0- -0- -0- 0.00
Other 76 -0- -0- -0- -0- -0- -0- 76 0.43
--------- ---------- --------- -------- --------- --------- --------- ---------- ----
Totals $ 337,814 $ 19,167 $ 5,836 $ 67,242 $ 14,930 $ 475 $ 2,167 447,631 1.37%
========= ========== ========= ======== ========= ========= =========
REO general valuation allowance (2,307) (0.01)
---------- -----
Total nonperforming assets $ 445,324 1.36%
========== =====
(a) Non-accruals loans are 90 days or more past due and have no unpaid
interest accrued.
(b) During 1995 and 1996, loans amounting to $2.3 billion and $226 million,
respectively, were securitized with full recourse into FNMA mortgage-
backed securities. The September 30, 1996 balance of the related
nonperforming assets are reflected in the amounts above.
The Company provides specific valuation allowances for losses on loans when
impaired, including loans securitized into MBS with recourse or loans sold with
recourse, and on real estate owned when any significant and permanent decline in
value is identified. The Company also utilizes a methodology, based on trends in
the basic portfolio, for monitoring and estimating loan losses that is based on
both historical experience in the loan portfolio and factors reflecting current
economic conditions. This approach uses a database that identifies losses on
loans and foreclosed real estate from past years to the present, broken down by
year of origination, type of loan, and geographical area. Management is then
able to estimate a range of general loss allowances to cover losses in the
portfolio. In addition, periodic reviews are made of major loans and real estate
owned, and major lending areas are regularly reviewed to determine potential
problems. Where indicated, valuation allowances are established or adjusted. In
estimating possible losses, consideration is given to the estimated sale price,
cost of refurbishing, payment of delinquent taxes, cost of disposal, and cost of
holding the property. Additions to and reductions from the allowances are
reflected in current earnings.
Loans securitized into FNMA MBS with full credit recourse are included with
the Company's loan portfolio when determining the allowance for loan losses. For
loans sold to FNMA with full credit recourse, the Company records a separate
recourse liability for any potential losses.
The table below shows the changes in the allowance for loan losses for the
three and nine months ended September 30, 1997 and 1996.
TABLE 8
Changes in Allowance for Loan Losses
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ ------------------------
1997 1996 1997 1996
----------- ---------- ----------- ----------
Beginning allowance for loan losses $ 216,651 $ 163,846 $ 195,702 $ 141,988
Provision charged to expense 9,980 23,498 43,786 59,256
Less loans charged off (4,810) (9,167) (18,115) (23,398)
Add recoveries 199 177 647 508
----------- ---------- ----------- ----------
Ending allowance for loan losses $ 222,020 $ 178,354 $ 222,020 $ 178,354
=========== ========== =========== ==========
Ratio of net charge-offs to average loans
outstanding (including MBS with recourse) .05% .11% .07% .10%
=========== ========== =========== ==========
Ratio of allowance for loan losses to nonperforming assets 54.0% 40.1%
=========== ==========
Ratio of allowance for loan losses to total loans
(including MBS with recourse) .62% .55%
=========== ==========
DEPOSITS
Retail deposits increased during the third quarter of 1997 by $406 million,
including interest credited of $244 million, compared to an increase of $544
million, including interest credited of $220 million, in the third quarter of
1996. Retail deposit balances in the first nine months of 1997 increased by $1.3
billion, including interest credited of $708 million, compared to an increase of
$736 million, including interest credited of $644 million, during the first nine
months of 1996. Retail deposits increased during 1997 primarily due to ongoing
marketing efforts and competitive rates offered by the Company on its insured
accounts.
Beginning in January 1997, the Company began a program to use government
securities dealers to sell wholesale certificates of deposit (CDs) to
institutional investors. The Company's deposit balance at September 30, 1997
includes $864 million of these wholesale CDs.
During 1997 the Company has been actively promoting money market deposit
accounts and starting in September of 1997, the Company began promoting a
high-yield checking account. The higher rates offered on these accounts have
caused the weighted average interest rate for interest-bearing checking accounts
and money market deposit accounts to be higher at September 30, 1997 as compared
to the previous year (see Table 9 on page 23).
The mix of reported deposits changed during 1997 as compared to 1996, in
part due to a new program begun in the fourth quarter of 1996. Specifically, the
reported balance of interest-bearing checking accounts has decreased as compared
to 1996 and the reported balance of money market accounts has increased compared
to balances reported in 1996 as a result of this new program which calculates
the minimum amount of funds needed to cover disbursements for each customer's
checking account and transfers the remaining funds to a money market account,
reducing the Company's required reserves at the Federal Reserve Bank. In
addition, during 1997 the Company has been actively promoting money market
deposit accounts.
The table below shows the Company's deposits by interest rate and by
remaining maturity at September 30, 1997 and 1996.
TABLE 9
Deposits
(Dollars in millions)
September 30
---------------------------------------------------
1997 1996
---------------------- -----------------------
Rate* Amount Rate* Amount
-------- ---------- --------- ----------
Deposits by interest rate:
Interest-bearing checking accounts 1.28% $ 286 1.22% $ 747
Passbook accounts 2.15 530 2.22 549
Money market deposit accounts 3.73 2,883 3.06 1,095
Term certificate accounts with original maturities
of:
4 weeks to 1 year 5.28 11,220 5.05 9,104
1 to 2 years 5.44 4,455 5.21 5,259
2 to 3 years 5.44 1,382 5.96 1,750
3 to 4 years 5.77 453 5.58 591
4 years and over 5.79 1,544 5.78 2,034
Retail jumbo CDs 5.58 617 5.31 453
Wholesale CDs 5.69 864 0.00 -0-
All other 7.65 1 7.71 2
----------- -----------
$ 24,235 $ 21,584
=========== ===========
Deposits by remaining maturity:
No contractual maturity $ 3,699 $ 2,391
Maturity within one year:
4th quarter 9,570 5,704
1st quarter 4,236 6,568
2nd quarter 1,914 2,857
3rd quarter 2,175 1,127
----------- -----------
17,895 16,256
1 to 2 years 1,986 1,763
2 to 3 years 389 772
3 to 4 years 121 232
4 years and over 145 170
----------- -----------
$ 24,235 $ 21,584
=========== ===========
* Weighted average interest rate, including the impact of interest rate swaps.
ADVANCES FROM FEDERAL HOME LOAN BANKS
The Company uses borrowings from the FHLB, also known as "advances," to
supplement cash flow and to provide funds for loan origination activities.
Advances are secured by pledges of certain loans, capital stock of the FHLB, and
MBS. FHLB advances amounted to $7.2 billion at September 30, 1997, compared to
$8.2 billion and $8.8 billion at September 30, 1996 and December 31, 1996,
respectively.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company borrows funds through transactions in which securities are sold
under agreements to repurchase (Reverse Repos). Reverse Repos are entered into
with selected major government securities dealers, large banks, and the Federal
Home Loan Bank of San Francisco, typically using MBS from the Company's
portfolio. Reverse Repos with dealers, banks and the Federal Home Loan Bank of
San Francisco amounted to $2.9 billion, $2.2 billion, and $1.9 billion at
September 30, 1997 and 1996, and December 31, 1996, respectively. The $2.9
billion balance at September 30, 1997, included $750 million in Federal Home
Loan Bank of San Francisco MBS Reverse Repos with maturities ranging from 1997
to 1998.
In June 1996, the Financial Accounting Standards Board (FASB) issued SFAS
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". SFAS 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. These standards are based on consistent application of a
financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished. This statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. SFAS 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996, and is to be applied prospectively. In December 1996, the FASB issued
Statement of Financial Accounting Standards No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125" (SFAS 127), which delayed
the effective date for portions of SFAS 125 for one year. The impact of the SFAS
125 and SFAS 127 on the Company's financial condition and results of operations
has not been nor is it expected to be material.
OTHER BORROWINGS
At September 30, 1997, Golden West, at the holding company level, had a
total of $1.0 billion of subordinated debt issued and outstanding. As of
September 30, 1997, the Company's subordinated debt securities were rated A3 and
A- by Moody's Investors Service (Moody's) and Standard & Poor's Corporation
(S&P), respectively. At September 30, 1997, Golden West had on file a
registration statement with the Securities and Exchange Commission for the sale
of up to $300 million of subordinated notes.
World currently has on file a shelf registration with the OTS for the
issuance of $2.0 billion of unsecured medium-term notes, all of which was
available for issuance at September 30, 1997. World had medium-term notes
outstanding under prior registrations with principal amounts of $310 million at
September 30, 1997, compared to $690 million at September 30, 1996, and $590
million at December 31, 1996. As of September 30, 1997, World's medium-term
notes were rated A1 and A+ by Moody's and S&P, respectively.
World also has on file a registration statement with the OTS for the sale
of up to $300 million of subordinated notes and, at September 30, 1997, the full
amount was available for issuance. As of September 30, 1997, World had issued
under prior registrations a total of $200 million of subordinated notes (of
which $100 million matured in October 1997), which were rated A2 and A by
Moody's and S&P, respectively. The subordinated notes are included in World's
risk-based regulatory capital as Supplementary Capital.
During November 1996, WFSB received permission from the OTS to issue
non-convertible medium-term notes to institutional investors under rules similar
to Office of the Comptroller of the Currency rules applicable to similarly
situated national banks. As of September 30, 1997, WFSB had not issued any notes
under this authority.
STOCKHOLDERS' EQUITY
The Company's stockholders' equity increased by $225 million during the
first nine months of 1997. The increase in stockholders' equity was primarily a
result of net earnings for the first nine months of 1997 and a $27 million
increase in market values of securities available for sale since December 31,
1996, which were partially offset by the $48 million cost of the purchase of
Company stock and the payment of $19 million in quarterly dividends to
stockholders. The Company's stockholders' equity decreased during the first nine
months of 1996 as a result of the $94 million cost of the purchase of Company
stock and the payment of $17 million in quarterly dividends to stockholders. The
decrease was offset by net earnings for the first nine months of 1996 and a $7
million increase in market values of securities available for sale since
December 31, 1995. Unrealized gains net of taxes on securities and MBS available
for sale included in stockholders' equity at September 30, 1997 and 1996, and
December 31, 1996, were $127 million, $83 million, and $100 million,
respectively.
During periods of low asset growth, the Company's capital ratios may build
to levels well in excess of the amounts necessary to meet regulatory capital
requirements. Golden West's Board of Directors periodically reviews alternative
uses of excess capital, including faster growth and acquisitions. At times, the
Board has determined that the purchase of common stock is a wise use of excess
capital.
Since October 1993, through three separate actions, Golden West's Board of
Directors has authorized the purchase by the Company of up to 12.2 million
shares of Golden West's common stock. As of September 30, 1997, 8.5 million
shares had been purchased and retired at a cost of $380 million since October
1993, of which 731,100 were purchased and retired at a cost of $48 million
during the first nine months of 1997. Dividends from World Savings are expected
to continue to be the major source of funding for the stock repurchase program.
The purchase of Golden West stock is not intended to have a material impact on
the normal liquidity of the Company.
World paid a $135 million, a $140 million and a $100 million dividend to
Golden West in March, June and September 1997, respectively. Golden West
purchased from World, and subsequently contributed as capital to WFSB, $30
million in loans during the first quarter of 1997, $18 million in loans during
the second quarter, and $17 million in loans during the third quarter of 1997.
In addition, Golden West contributed $30 million in the first quarter of 1997,
$47 million in the second quarter of 1997, and $82 million in the third quarter
of 1997 in capital to WFSB.
The Company has on file a shelf registration statement with the Securities
and Exchange Commission to issue up to two million shares of its preferred
stock. The preferred stock may be issued in one or more series, may have varying
provisions and designations, and may be represented by depository shares. The
preferred stock is not convertible into common stock. No preferred stock has yet
been issued under the registration. The Company's preferred stock has been
preliminarily rated a2 by Moody's.
REGULATORY CAPITAL
The OTS requires federally insured institutions, such as World and WFSB, to
meet certain minimum capital requirements. Both World's and WFSB's regulatory
capital ratios continue to exceed regulatory requirements for well-capitalized
institutions, the highest regulatory standard. The following table shows World's
regulatory capital ratios and compares them to the OTS minimum requirements at
September 30, 1997 and 1996.
TABLE 10
World Savings and Loan Association
Regulatory Capital Ratios
(Dollars in thousands)
September 30, 1997 September 30, 1996
------------------------------------------------ ------------------------------------------------
ACTUAL REQUIRED ACTUAL REQUIRED
----------------------- ----------------------- ---------------------- -----------------------
Capital Ratio Capital Ratio Capital Ratio Capital Ratio
----------- --------- ----------- --------- ----------- -------- ----------- --------
Tangible $ 1,077,399 6.34% $ 254,738 1.50% $ 1,541,519 6.47% $ 357,644 1.50%
Core 1,077,399 6.34 509,477 3.00 1,541,519 6.47 715,288 3.00
Risk-based 1,390,093 13.83 804,375 8.00 1,866,220 14.19 1,052,051 8.00
The following table shows WFSB's current regulatory capital ratios and
compares them to the current OTS minimum requirements at September 30, 1997 and
1996.
TABLE 11
World Savings Bank, a Federal Savings Bank
Regulatory Capital Ratios
(Dollars in thousands)
September 30, 1997 September 30, 1996
----------------------------------------------- ----------------------------------------------
ACTUAL REQUIRED ACTUAL REQUIRED
---------------------- ---------------------- ---------------------- ----------------------
Capital Ratio Capital Ratio Capital Ratio Capital Ratio
----------- --------- ----------- --------- ---------- --------- ---------- --------
Tangible $1,487,088 6.83% $ 326,468 1.50% $876,490 6.83% $ 192,563 1.50%
Core 1,487,088 6.83 652,936 3.00 876,490 6.83 385,125 3.00
Risk-based 1,562,867 13.30 940,300 8.00 901,307 12.68 568,592 8.00
In addition, institutions whose exposure to interest rate risk as
determined by the OTS is deemed to be above normal may be required to hold
additional risk-based capital. The OTS has determined that neither the
Association nor WFSB has above-normal exposure to interest rate risk.
The OTS has adopted rules based upon five capital tiers: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized. The determination of whether an association falls
into a certain classification depends primarily on its capital ratios.
The table below shows that World's regulatory capital exceeds the
requirements of the well capitalized classification at September 30, 1997.
TABLE 12
World Savings and Loan Association
Regulatory Capital Compared to Well Capitalized Classification
(Dollars in thousands)
ACTUAL WELL CAPITALIZED
----------------------- --------------------------
Capital Ratio Capital Ratio
----------- -------- ----------- -----------
Leverage $1,077,399 6.34% $ 849,128 5.00%
Tier 1 risk-based 1,077,399 10.72 603,282 6.00
Total risk-based 1,390,093 13.83 1,005,469 10.00
The table below shows that WFSB's regulatory capital exceeds the
requirements of the well capitalized classification at September 30, 1997.
TABLE 13
World Savings Bank, a Federal Savings Bank
Regulatory Capital Compared to Well Capitalized Classification
(Dollars in thousands)
ACTUAL WELL CAPITALIZED
----------------------- --------------------------
Capital Ratio Capital Ratio
----------- -------- ----------- -----------
Leverage $1,487,088 6.83% $ 1,088,227 5.00%
Tier 1 risk-based 1,487,088 12.65 705,225 6.00
Total risk-based 1,562,867 13.30 1,175,375 10.00
RESULTS OF OPERATIONS
NET EARNINGS
Net earnings for the nine months ended September 30, 1997 were $261 million
or $4.57 per share compared to $89 million or $1.52 per share for the nine
months ended September 30, 1996. Net earnings for the nine months ended
September 30, 1996 were significantly influenced by three nonrecurring items:
the federally mandated recapitalization of the Savings Association Insurance
Fund (SAIF) which resulted in a one-time charge of $133 million, or $1.34 per
share on an after-tax basis at the end of the third quarter (see Deposit
Insurance Section on page 33); the recognition during the third quarter of $139
million, or $2.40 per share of tax benefits arising from a prior year
acquisition; and the adoption, as of January 1, 1996, of SFAS 72 which resulted
in the write-off of $205 million, or $3.49 per share, of goodwill (see
Accounting Change section on page 7). Without the effect of the three
nonrecurring items, Golden West's earnings for the first nine months of 1996
would have been $232 million or $3.99 per share. Net earnings from operations
increased in 1997 as a result of increased net interest income and a lower
provision for loan losses. In addition, the 1996 general and administrative
expenses included the one-time SAIF assessment discussed above.
SFAS 128 - EARNINGS PER SHARE
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Measurement of Earnings Per Share"
(SFAS 128). SFAS 128 replaces Primary and Fully-Diluted Earnings Per Share (EPS)
with "Basic EPS" and "Diluted EPS" for fiscal years ending after December 15,
1997. Basic EPS will be calculated by dividing net earnings for the period by
the weighted-average common shares outstanding for that period. There will be no
adjustment to the number of outstanding shares for stock options or other
dilutive items as is currently done in the calculation of Primary EPS. Diluted
EPS will take into account the effect of dilutive instruments, such as stock
options, but will use the average share price for the period in determining the
number of incremental shares that are to be added to the weighted average number
of shares outstanding. In contrast, the current, Fully-Diluted EPS uses the
period-ending share price, if it exceeds the average price, in the calculation
to determine the number of incremental shares that are to be added. If SFAS 128
had been applied for the quarter and the nine months ended September 30, 1997,
the Basic EPS reported would have been $1.59 and $4.57, respectively, and the
Diluted EPS would have been $1.56 and $4.50, respectively. For the quarter and
nine months ended September 30, 1996, before the cumulative effect of the change
in accounting for goodwill, Basic EPS would have been $2.36 and $5.05,
respectively, and Diluted EPS would have been $2.32 and $4.97, respectively.
SPREADS
An important determinant of the Company's earnings is its primary spread --
the difference between its yield on earning assets and its cost of funds. The
table below shows the components of the Company's spread at September 30, 1997
and 1996, and December 31, 1996.
TABLE 14
Yield on Earning Assets,
Cost of Funds, and Primary Spread
September 30
---------------------------
December 31
1997 1996 1996
--------- ----------- -------------
Yield on loan portfolio 7.47% 7.42% 7.43%
Yield on MBS 7.15 7.18 7.13
Yield on investments 6.61 6.06 6.88
---------- -------- ----------
Yield on earning assets 7.42 7.32 7.37
---------- -------- ----------
Cost of deposits 5.08 4.95 4.98
Cost of borrowings 5.98 5.85 5.80
---------- -------- ----------
Cost of funds 5.37 5.28 5.28
---------- -------- ----------
Primary spread 2.05% 2.04% 2.09%
========== ======== ==========
The Company's primary spread is, to some degree, influenced on changes in
interest rates because the Company's liabilities tend to respond somewhat more
rapidly to rate movements than its assets, which are primarily adjustable rate
mortgages. Most of the Company's ARMs have interest rates that change in
accordance with an index based on the cost of deposits and borrowings of savings
institutions that are members of the FHLB of San Francisco (the COFI). In
general, the repricing of COFI ARM portfolios tends to lag liability interest
rate changes because the COFI tends to trail changes in liability costs due to
the existence of a two-month reporting lag and because of certain loan features
which restrain monthly adjustments. In addition, because COFI is based on a
portfolio of accounts, not all of which mature or reprice immediately, COFI does
not initially reflect a change in market interest rates. Yields on short term
and long-term interest rates fluctuated both modestly upward and downward in
1997. The effects of this interest rate environment led to a nine basis point
increase in the Company's cost of funds for the first nine months of 1997. The
yield on earning assets increased five basis points during the first nine months
of 1997. The yield on earning assets did not respond as much to the changing
interest rate environment mainly due to the lags in the COFI index. These
changes resulted in a four basis point decrease in the Company's spread since
yearend 1996.
The following table shows the Company's revenues and expenses as a
percentage of total revenues for the three and nine months ended September 30,
1997 and 1996, in order to focus on the changes in interest income between years
as well as changes in other revenue and expense amounts.
TABLE 15
Selected Revenue and Expense Items
as Percentages of Total Revenues
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ----------------------
1997 1996 1997 1996
--------- -------- --------- ---------
Interest on loans 82.6% 83.4% 82.1% 83.1%
Interest on mortgage-backed securities 9.6 9.0 10.2 9.2
Interest and dividends on investments 5.0 4.9 4.9 4.9
--------- -------- --------- ---------
97.2 97.3 97.2 97.2
Less:
Interest on deposits 42.6 39.8 41.5 40.0
Interest on advances and other borrowings 24.5 26.7 25.0 25.7
--------- -------- --------- ---------
67.1 66.5 66.5 65.7
Net interest income 30.1 30.8 30.7 31.5
Provision for loan losses 1.4 3.5 2.0 3.0
--------- -------- --------- ---------
Net interest income after provision for loan losses 28.7 27.3 28.7 28.5
Add:
Fees 1.6 1.4 1.6 1.4
Gain on the sale of securities, MBS, and loans 0.3 0.3 0.3 0.5
Other non-interest income 0.9 1.0 0.9 0.9
--------- -------- --------- ---------
2.8 2.7 2.8 2.8
Less:
General and administrative expenses 11.3 31.8 (a) 11.3 18.9 (a)
Taxes on income 8.0 (22.2) (b) 8.0 (2.5)(b)
--------- -------- --------- ---------
Earnings before cumulative effect of change in
accounting for goodwill 12.2 20.4 12.2 14.9
Cumulative effect of change in accounting for goodwill 0.0 0.0 0.0 (10.4)
--------- -------- --------- ---------
Net earnings 12.2% 20.4% 12.2% 4.5%
========= ======== ========= =========
(a) Without the effect of the one-time SAIF assessment (see Deposit
Insurance section on page 33), general and administrative expenses as a
percentage of total revenues would have been 11.8% and 12.2% for the
three and nine months ended September 30, 1996, respectively.
(b) Without the effect of the one-time SAIF assessment and the special tax
credit (see Taxes on Income section on page 34), taxes on income as a
percentage of total revenues would have been 7.0% and 7.4% for the
three and nine months ended September 30, 1996, respectively.
INTEREST RATE SWAPS
The Company enters into interest rate swaps as a part of its interest rate
risk management strategy. Such instruments are entered into solely to alter the
repricing characteristics of designated assets and liabilities. The Company does
not hold any derivative financial instruments for trading purposes.
Interest rate swap activity decreased net interest income by $1.5 million
and $3 million for the three and nine months ended September 30, 1997, as
compared to a decrease of $2 million and $9 million for the same periods in
1996.
TABLE 16
Schedule of Interest Rate Swaps Activity
(Notional amounts in millions)
Nine Months Ended
September 30, 1997
--------------------------------------------
Receive Pay Forward
Fixed Fixed Starting
Swaps Swaps Swaps
------------- ------------ ------------
Balance at December 31, 1996 $ 2,581 $ 1,340 $ 10
Additions 90 -0- -0-
Maturities (926) (202) -0-
Forward starting becoming effective 10 -0- (10)
------------ ------------ ------------
Balance at September 30, 1997 $ 1,755 $ 1,138 $ -0-
============ ============ ============
The following table summarizes the unrealized gains and losses for interest
rate swaps at September 30, 1997 and 1996.
TABLE 17
Schedule of Unrealized Gains and Losses on Interest Rate Swaps
(Dollars in thousands)
September 30, 1997 September 30, 1996
---------------------------------------- ----------------------------------------
Net Net
Unrealized Unrealized Unrealized Unrealized Unrealized Unrealized
Gains Losses Gain (Loss) Gains Losses Gain (Loss)
------------ ------------ ------------- ------------ ------------ ------------
Interest rate swaps $ 13,625 $ (34,030) $ (20,405) $ 25,763 $ (42,980) $ (17,217)
============ ============ ============= ============ ============= =============
The range of floating interest rates received on swap contracts in the
first nine months of 1997 was 5.47% to 6.08%, and the range of floating interest
rates paid on swap contracts was 4.76% to 6.00%. The range of fixed interest
rates received on swap contracts in the first nine months of 1997 was 4.62% to
8.68% and the range of fixed interest rates paid on swap contracts was 5.38% to
9.14%.
INTEREST ON LOANS
In the third quarter of 1997, interest on loans was higher than in the
comparable 1996 period by $56 million or 10.1%. The increase in the third
quarter of 1997 was due to a $2.6 billion increase in the average portfolio
balance and a ten basis point increase in the average portfolio yield. For the
first nine months of 1997, interest on loans was higher than the comparable 1996
period by $121 million or 7.4%. The increase was due to a $2.4 billion increase
in the average portfolio balance which was partially offset by a six basis point
decrease in the average portfolio yield.
INTEREST ON MORTGAGE-BACKED SECURITIES
In the third quarter of 1997, interest on mortgage-backed securities was
higher than in the comparable 1996 period by $11 million or 17.9%. The 1997
increase was due primarily to a $623 million increase in the average portfolio
balance which was partially offset by a five basis point decrease in the average
portfolio yield. For the first nine months of 1997, interest on mortgage-backed
securities was higher than in the comparable 1996 period by $36 million or 20.1%
due to a $770 million increase in the average portfolio balance which was
partially offset by an 18 basis point decrease in the average portfolio yield.
The increase in the mortgage-backed securities portfolio and the lower average
portfolio yield were primarily the result of the securitization of
adjustable-rate loans with full credit recourse that began in 1995, as discussed
on page 12.
INTEREST AND DIVIDENDS ON INVESTMENTS
The income earned on the investment portfolio fluctuates, depending upon
the volume outstanding and the yields available on short-term investments. For
the third quarter of 1997, interest and dividends on investments were higher
than in the comparable 1996 period by $5 million or 15.3%. The increase was
primarily due to a $177 million increase in the average portfolio balance and a
22 basis point increase in the average portfolio yield. For the first nine
months of 1997, interest and dividends on investments were $9 million or 9.5%
higher than for the same period in 1996. The increase was primarily due to a $92
million increase in the average portfolio balance and a 25 basis point increase
in the average portfolio yield.
INTEREST ON DEPOSITS
In the third quarter of 1997, interest on deposits increased by $50 million
or 19.1% from the comparable period in 1996. In the first nine months of 1997,
interest on deposits increased by $102 million or 12.9% from the comparable
period in 1996. The third quarter increase was due to a $3.2 billion increase in
the average balance of deposits and an 18 basis point increase in the average
cost of deposits. The nine month increase was primarily due to a $2.5 billion
increase in the average balance of deposits and a seven basis point increase in
the average cost of deposits.
INTEREST ON ADVANCES AND OTHER BORROWINGS
For the third quarter and first nine months of 1997, interest on advances
and other borrowings increased by $4 million or 2.2% and $29 million or 5.7%,
respectively, from the comparable periods of 1996. The third quarter increase
was primarily due to a $139 million increase in the average balance and a six
basis point increase in the average cost of these borrowings. The nine month
increase was primarily due to a $817 million increase in the average balance
which was partially offset by a six basis point decrease in the average cost of
these borrowings.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $10 million and $44 million,
respectively, for the three and nine months ended September 30, 1997, compared
to $23 million and $59 million for the same periods in 1996. The lower provision
in 1997 reflects the decrease in nonperforming assets, a decrease in net
chargeoffs in the third quarter of 1997 as compared to the third quarter of
1996, and the improving California economy.
GENERAL AND ADMINISTRATIVE EXPENSES
For the third quarter and first nine months of 1997, general and
administrative expenses (G&A) were $83 million and $241 million, respectively,
compared to $211 million and $373 million for the comparable periods in 1996.
The 1996 G&A amounts include the one-time 1996 third quarter Savings Association
Insurance Fund (SAIF) assessment of $133 million (See Deposit Insurance section
below). Thus, the primary reason for the decrease in 1997 was the aforementioned
1996 SAIF assessment as well as the benefit received from reduced deposit
insurance premiums paid by the Association in 1997. Excluding the effect of the
lower deposit insurance premiums, total G&A increased due to the expansion of
savings branches, higher loan volume, and the installation of enhancements to
data processing systems. In addition, advertising expense was higher during the
third quarter and first nine months of 1997 due to the promotion of the new
money market account and the high-yield checking account as discussed on page
22. Without the effect of the one-time SAIF assessment, G&A as a percentage of
average assets on an annualized basis was .85% and .83%, respectively, for the
third quarter and first nine months of 1997 compared to .87% and .90% for the
same periods in 1996. Including the effect of the one-time SAIF assessment, G&A
as a percentage of average assets on an annualized basis was 2.34% and 1.40% for
the third quarter and first nine months of 1996, respectively.
DEPOSIT INSURANCE
During 1996, legislation was enacted to recapitalize the Savings
Association Insurance Fund in order to bring it into parity with the FDIC's
other insurance fund, the Bank Insurance Fund (BIF). The new banking law
required members to pay a levy of $4.7 billion to bring SAIF up to the required
reserve level of 1.25% of insured deposits, but lowered the premiums paid by
SAIF-insured institutions, starting in the fourth quarter of 1996. As a result
of this legislation, Golden West's subsidiary, World Savings and Loan
Association, incurred a one-time charge of $133 million at the end of the third
quarter of 1996. Beginning on January 1, 1997, the premium paid by the
Association to the FDIC was reduced from $2.30 per $1,000 in savings balances to
$.65 per $1,000. Beginning on January 1, 1997, the premiums paid by BIF insured
institutions, such as WFSB, was increased from $0.00 per $1,000 in savings
balances to $.13 per $1,000.
TAXES ON INCOME
The Company utilizes the accrual method of accounting for income tax
purposes and for preparing its published financial statements. For financial
reporting purposes only, the Company uses purchase accounting in connection with
certain assets acquired through mergers. The purchase accounting portion of
income is not subject to tax.
During the third quarter of 1996, the Company recognized $139 million of
tax benefits associated with the Company's acquisition of Beach Federal Savings
and Loan Association (Beach). Specifically, in December 1988, Golden West
entered into a government approved transaction with Beach to provide management
services to that institution. As part of the agreement, Golden West obtained an
option to take title to the stock of Beach and subsequently exercised this right
in July 1991. When Golden West took title to the stock, the Company disclosed
that tax benefits were anticipated from operating losses which had been
accumulated at Beach's predecessor institution up to the time of the 1988
agreement, although the availability and the amount of these benefits were
uncertain. The availability of the $139 million of tax benefits was confirmed in
the third quarter of 1996.
Taxes as a percentage of earnings before the cumulative effect of the
change in accounting for goodwill were 39.7% for the third quarter and first
nine months of 1997. Taxes as a percentage of earnings before the cumulative
effect of the change in accounting for goodwill excluding the one time SAIF
assessment and the aforementioned $139 million tax benefit, were 38.4% and 38.5%
for the third quarter and nine months ended September 30, 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
World's principal sources of funds are cash flows generated from earnings;
deposits; loan repayments; borrowings from the FHLB; debt collateralized by
mortgages, MBS, or securities, and the issuance of medium-term notes. In
addition, World has a number of other alternatives available to provide
liquidity or finance operations. These include borrowings from its affiliates,
borrowings from public offerings of debt, sales of loans, sales of negotiable
certificates of deposit, issuances of commercial paper, and borrowings from
commercial banks. Furthermore, under certain conditions, World may borrow from
the Federal Reserve Bank of San Francisco to meet short-term cash needs. The
availability of these funds will vary depending upon policies of the FHLB, the
Federal Reserve Bank of San Francisco, and the Federal Reserve Board. For a
discussion of World's liquidity positions at September 30, 1997, and 1996, and
December 31, 1996, see the Cash and Investments section on page 12.
WFSB's principal sources of funds are cash flows generated from earnings;
deposits; loan repayments; negotiable certificates of deposit, borrowings from
the FHLB; issuance of medium-term notes; investments and borrowings from its
affiliates; and debt collateralized by mortgages, MBS, or securities. In
addition, WFSB has other alternatives available to provide liquidity or finance
operations including borrowings from public offerings of debt, sales of loans,
issuances of commercial paper, and borrowings from commercial banks.
Furthermore, under certain conditions, WFSB may borrow from the Federal Reserve
Bank of San Francisco to meet short-term cash needs. The availability of these
funds will vary depending upon policies of the FHLB, the Federal Reserve Bank of
San Francisco, and the Federal Reserve Board. For a discussion of WFSB's
liquidity positions at September 30, 1997, and 1996, and December 31, 1996, see
the Cash and Investments section on page 12.
The principal sources of funds for Golden West (the Parent) are dividends
from World, interest on investments, and the proceeds from the issuance of debt
and equity securities. Various statutory and regulatory restrictions and tax
considerations limit the amount of dividends World and WFSB can pay. The
principal liquidity needs of Golden West are for payment of interest and
principal on subordinated debt securities (of which $200 million matures in
1998), capital contributions to its insured subsidiaries (including $224 million
for the nine months ended September 30, 1997 and $500 million for the year ended
December 31, 1996 to WFSB), dividends to stockholders, the purchase of Golden
West stock (see stockholders' equity section on page 24), and general and
administrative expenses. At September 30, 1997 and 1996, and December 31, 1996,
Golden West's total cash and investments amounted to $891 million (including a
$600 million long-term loan to WFSB), $910 million (including a $600 million
short-term loan to World and a $1.5 million short-term loan to World Savings
Bank, a State Savings Bank), and $913 million (including a $600 million
long-term loan to WFSB), respectively.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 - Statement of Computation of Earnings Per Share
27 - Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GOLDEN WEST FINANCIAL CORPORATION
Dated: November 13, 1997 /s/ J. L. Helvey
---------------------------------------------
J. L. Helvey
Executive Vice President
(duly authorized and principal financial
officer)
EXHIBIT 11
Golden West Financial Corporation
Statement of Computation of Earnings Per Share
(Dollars in thousands except per share figures)
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------- ------------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
Earnings Before Cumulative Effect of
Change in Accounting for Goodwill $ 90,007 $ 135,785 $ 260,658 $ 293,963
Cumulative Effect of Change in
Accounting for Goodwill -0- -0- -0- (205,242)
------------- ------------- ------------- -------------
Net Earnings $ 90,007 $ 135,785 $ 260,658 $ 88,721
============= ============= ============= =============
Average Number of Common
Shares Outstanding 56,740,342 57,584,306 56,980,399 58,216,474
============= ============= ============= =============
Earnings Per Share Before Cumulative Effect
of Change in Accounting for Goodwill $ 1.58 2.32 4.57 5.01
Cumulative Effect of Change in Accounting
for Goodwill 0.00 0.00 0.00 (3.49)
------------- ------------- ------------- -------------
Earnings Per Common Share $ 1.58 $ 2.32 $ 4.57 $ 1.52
============= ============= ============= =============