SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For Quarter Ended September 30, 1998 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
---------------------
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
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The number of shares outstanding of the registrant's common stock on
October 31, 1998, was 56,920,949 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,
1998 and 1997 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, 1998, are not necessarily indicative of the results for the full year.
Golden West Financial Corporation
Consolidated Statement of Financial Condition
(Dollars in thousands)
September 30 September 30 December 31
1998 1997 1997
------------- ------------ -------------
(Unaudited)
---------------------------
Assets:
Cash $ 199,747 $ 140,898 $ 172,241
Securities available for sale at fair value 310,296 586,401 608,544
Other investments at cost 890,379 436,404 252,648
Mortgage-backed securities available for sale without recourse at 125,107 197,121 157,327
fair value
Mortgage-backed securities held to maturity without recourse at cost 629,036 749,913 752,029
Mortgage-backed securities held to maturity with recourse at cost 7,642,479 2,974,764 3,030,390
Loans receivable 27,940,415 32,723,212 33,260,709
Interest earned but uncollected 200,036 211,653 216,923
Investment in capital stock of Federal Home Loan Banks--at cost
which approximates fair value 768,601 580,861 590,244
Real estate held for sale or investment 45,659 67,074 62,006
Prepaid expenses and other assets 365,451 329,545 247,003
Premises and equipment--at cost less accumulated depreciation 265,800 230,513 240,207
------------- ------------ -------------
$ 39,383,006 $39,228,359 $ 39,590,271
============= ============ =============
Liabilities and Stockholders' Equity:
Deposits $ 25,477,429 $24,234,947 $ 24,109,717
Advances from Federal Home Loan Banks 6,866,847 7,228,765 8,516,605
Securities sold under agreements to repurchase 2,310,198 2,890,918 2,334,048
Medium-term notes -0- 309,969 109,992
Accounts payable and accrued expenses 523,230 527,992 446,325
Taxes on income 307,969 250,407 265,065
Subordinated notes--net of discount 911,467 1,210,141 1,110,488
Stockholders' equity 2,985,866 2,575,220 2,698,031
------------- ------------ -------------
$ 39,383,006 $39,228,359 $ 39,590,271
============= ============ =============
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
---------------------------- ----------------------------
1998 1997 1998 1997
------------- ------------ ------------ ------------
Interest Income:
Interest on loans $ 529,135 $ 610,177 $ 1,745,201 $ 1,758,899
Interest on mortgage-backed securities 156,234 70,611 333,965 217,913
Interest and dividends on investments 59,088 37,414 161,063 105,908
------------- ------------ ------------ ------------
744,457 718,202 2,240,229 2,082,720
Interest Expense:
Interest on deposits 327,589 314,895 963,878 889,337
Interest on advances 112,394 103,005 341,160 323,394
Interest on repurchase agreements 27,750 43,371 93,783 111,739
Interest on other borrowings 38,582 34,786 120,355 100,833
------------ ------------
------------- ------------
506,315 496,057 1,519,176 1,425,303
------------- ------------ ------------ ------------
Net Interest Income 238,142 222,145 721,053 657,417
Provision for loan losses 3,130 9,980 8,777 43,786
------------- ------------ ------------ ------------
Net Interest Income after Provision
for Loan Losses 235,012 212,165 712,276 613,631
Non-Interest Income:
Fees 16,224 11,574 44,887 33,609
Gain on the sale of securities, MBS, and 6,417 1,884 28,001 6,168
loans
Other 8,182 6,962 27,035 19,685
------------- ------------ ------------ ------------
30,823 20,420 99,923 59,462
Non-Interest Expense:
General and administrative:
Personnel 49,632 45,198 144,212 133,190
Occupancy 15,636 14,008 44,754 40,804
Deposit insurance 1,444 1,786 4,572 5,769
Advertising 2,189 3,445 7,653 8,205
Other 18,604 18,797 57,024 53,063
------------- ------------ ------------ ------------
87,505 83,234 258,215 241,031
Earnings Before Taxes on Income and
Extraordinary Item 178,330 149,351 553,984 432,062
Taxes on Income 70,309 59,344 218,932 171,404
------------- ------------ ------------ ------------
Earnings Before Extraordinary Item 108,021 90,007 335,052 260,658
Extraordinary Item:
Federal Home Loan Bank advance prepayment
penalty, net of tax (4,801) -0- (12,511) -0-
------------- ------------ ------------ ------------
Net Earnings $ 103,220 $ 90,007 $ 322,541 $ 260,658
============= ============ ============ ============
Basic Earnings Per Share Before Extraordinary $ 1.87 $ 1.59 $ 5.84 $ 4.57
Basic Earnings Per Share on Extraordinary
Item, Net of Tax (0.08) 0.00 (0.22) 0.00
------------ ------------ ------------ ------------
Basic Earnings Per Share $ 1.79 $ 1.59 $ 5.62 $ 4.57
============= ============ ============ ============
Diluted Earnings Per Share Before Extraordinary $ 1.85 $ 1.56 $ 5.78 $ 4.50
Diluted Earnings Per Share on Extraordinary
Item, Net of Tax (0.08) 0.00 (0.22) 0.00
------------- ------------ ------------ ------------
Diluted Earnings Per Share $ 1.77 $ 1.56 $ 5.56 $ 4.50
============= ============ ============ ============
Golden West Financial Corporation
Consolidated Statement of Cash Flows
(Unaudited)
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Cash Flows From Operating Activities:
Net earnings ................................... $ 103,220 $ 90,007 $ 322,541 $ 260,658
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Extraordinary item ........................... 8,117 -0- 21,152 -0-
Provision for loan losses .................... 3,130 9,980 8,777 43,786
Amortization of loan fees and discounts ...... (5,474) (4,282) (16,568) (13,533)
Depreciation and amortization ................ 6,369 5,263 18,060 15,570
Loans originated for sale .................... (291,424) (47,591) (625,382) (146,342)
Sales of loans ............................... 375,872 44,482 776,038 142,786
Decrease in interest earned but uncollected . 9,651 5,656 16,887 9,951
Federal Home Loan Bank stock dividends ....... (12,559) (9,145) (40,274) (33,463)
Decrease (increase) in prepaid expenses and .. (452) 26,917 (107,284) (94,545)
other assets
Increase in accounts payable and accrued ..... 2,433 42,187 76,905 75,810
expenses
Increase (decrease) in taxes on income ....... (11,412) 138 31,819 25,007
Other, net ................................... 785 (874) (5,087) (8,744)
----------- ----------- ----------- -----------
Net cash provided by operating activities .. 188,256 162,738 477,584 276,941
Cash Flows From Investing Activities:
New loan activity:
New real estate loans originated for portfolio (1,886,820) (1,932,509) (5,091,687) (5,383,485)
Real estate loans purchased .................. (648) (670) (2,337) (1,930)
Other, net ................................... (65,120) (13,172) (85,491) (36,291)
----------- ----------- ----------- -----------
(1,952,588) (1,946,351) (5,179,515) (5,421,706)
Real estate loan principal payments:
Monthly payments ............................. 158,922 174,060 493,429 508,619
Payoffs, net of foreclosures ................. 1,340,611 821,316 4,073,503 2,136,605
----------- ----------- ----------- -----------
1,499,533 995,376 4,566,932 2,645,224
Repayments of mortgage-backed securities ....... 723,795 131,174 1,239,664 369,760
Proceeds from sales of real estate ............. 31,484 58,487 118,020 171,803
Purchases of securities available for sale ..... (183,116) (110) (310,597) (1,297)
Sales of securities available for sale ......... -0- 4,381 81,373 5,342
Matured securities available for sale .......... 304,096 13,994 557,767 238,047
Decrease (increase) in other investments ....... (746,379) 608,352 (637,731) 642,428
Purchases of Federal Home Loan Bank stock ...... (49,253) -0- (149,247) (56,239)
Additions to premises and equipment ............ (13,495) (14,612) (48,792) (37,744)
----------- ----------- ----------- -----------
Net cash provided by (used in) investing ..... (385,923) (149,309) 237,874 (1,444,382)
activities
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- ------------------------------
1998 1997 1998 1997
----------- ------------ ------------- -------------
Cash Flows From Financing Activities:
Deposit activity:
Increase (decrease) in deposits, net ...... $ 213,571 $ (46,244) $ 589,384 $ 1,426,904
Interest credited ......................... 270,150 244,531 778,328 708,109
------------- ------------- ------------- -------------
483,721 198,287 1,367,712 2,135,013
Additions to Federal Home Loan Bank advances 2,712,440 511,750 5,976,940 555,950
Repayments of Federal Home Loan Bank advances (3,341,798) (642,070) (7,648,071) (2,125,759)
Proceeds from agreements to repurchase securities 3,490,320 2,553,903 6,554,310 4,990,396
Repayments of agreements to repurchase securities (2,996,555) (2,617,206) (6,578,160) (4,007,604)
Repayments of medium-term notes ............. -0- -0- (110,000) (280,000)
Proceeds from federal funds purchased ....... 43,084,000 7,808,000 122,934,000 7,808,000
Repayments of federal funds purchased ....... (43,084,000) (7,808,000) (122,934,000) (7,808,000)
Repayment of subordinated debt .............. (100,000) -0- (200,000) (115,000)
Dividends on common stock ................... (7,214) (6,241) (21,517) (18,795)
Sale of stock ............................... 2,286 1,441 15,133 3,770
Purchase and retirement of Company stock .... (44,299) (3,062) (44,299) (48,351)
------------- ------------- ------------- -------------
Net cash provided by (used in) financing .. 198,901 (3,198) (687,952) 1,089,620
activities
------------- ------------- ------------- -------------
Net Increase (Decrease) in Cash ............... 1,234 10,231 27,506 (77,821)
Cash at beginning of period ................... 198,513 130,667 172,241 218,719
------------- ------------- ------------- -------------
Cash at end of period ......................... $ 199,747 $ 140,898 $ 199,747 $ 140,898
============= ============= ============= =============
Supplemental cash flow information:
Cash paid for:
Interest .................................. $ 510,620 $ 492,562 $ 1,525,208 $ 1,421,204
Income taxes .............................. 77,500 59,206 181,582 147,720
Cash received for interest and dividends .... 754,108 723,858 2,257,116 2,092,671
Noncash investing activities:
Loans transferred to foreclosed real estate 29,614 51,472 88,667 156,198
Loans securitized into mortgage-backed
securities
with recourse ........................ -0- -0- 5,698,458 -0-
Golden West Financial Corporation
Consolidated Statement of Stockholders' Equity
(Unaudited)
(Dollars in thousands)
For the Nine Months Ended September 30, 1998
-------------------------------------------------------------------------------------
Accumulated
Comprehensive
Income From
Additional Unrealized Total
Common Paid-in Retained Gains On Stockholders' Comprehensive
Stock Capital Earnings Securities Equity Income
---------- ---------- ---------- -------------- ------------ ---------------
Balance at January 1, 1998 . $ 5,707 $ 85,532 $ 2,457,055 $ 149,737 $ 2,698,031
Comprehensive income:
Net earnings ............. -0- -0- 322,541 322,541 $ 322,541
Change in unrealized gains on
securities available for sale,
net of tax ............. -0- -0- -0- 23,998 23,998 23,998
Reclassification adjustment
for gains included in income -0- -0- -0- (8,022) (8,022) (8,022)
------------
Comprehensive Income ... $ 338,517
============
Cash dividends on common
stock ($.375 per share) .. -0- -0- (21,517) (21,517)
Common stock issued upon
exercise of stock options,
including tax benefits ... 66 15,068 -0- 15,134
Purchase and retirement of
Company stock ............ (56) -0- (44,243) (44,299)
----------- --------- ----------- ------------- -----------
Balance at September 30, 1998 $ 5,717 $100,600 $ 2,713,836 $ 165,713 $2,985,866
=========== ========= =========== ============= ===========
For the Nine Months Ended September 30, 1997
-------------------------------------------------------------------------------------
Accumulated
Comprehensive
Income From
Additional Unrealized Total
Common Paid-in Retained Gains On Stockholders' Comprehensive
Stock Capital Earnings Securities Equity Income
---------- ---------- ---------- -------------- ------------ ---------------
Balance at January 1, 1997 $ 5,734 $ 67,953 $2,177,098 $ 99,692 $ 2,350,477
Comprehensive income:
Net earnings -0- -0- 260,658 260,658 $ 260,658
Change in unrealized gains on
securities available for sale,
net of tax -0- -0- -0- 29,315 29,315 29,315
Reclassification adjustment
for gains included in income -0- -0- -0- (1,854) (1,854) (1,854)
--------------
Comprehensive Income $ 288,119
==============
Cash dividends on common
stock ($.33 per share) -0- -0- (18,795) (18,795)
Common stock issued upon
exercise of stock options,
including tax benefits 16 3,754 -0- 3,770
Purchase and retirement of
Company stock (73) -0- (48,278) (48,351)
---------- ---------- ---------- -------------- ------------
Balance at September 30, 1997 $ 5,677 $ 71,707 $2,370,683 $ 127,153 $ 2,575,220
========== ========== ========== ============== ============
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, 1997,
as well as certain material changes in results of operations during the three
and nine month periods ended September 30, 1998, and 1997, respectively.
The following narrative is written with the presumption that the users have
read or have access to the Company's 1997 Annual Report on 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, 1997, and for the year then ended. Therefore, only
material changes in financial condition and results of operations are discussed
herein.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1998, Golden West adopted Statement 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.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). This Statement establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. This Statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. The Company has not yet completed
a full assessment of the impact of this statement on its financial statements
and results of operations.
Golden West Financial Corporation
Financial Highlights
(Unaudited)
(Dollars in thousands except per share figures)
September 30 September 30 December 31
1998 1997 1997
------------- ------------ -------------
Assets $ 39,383,006 $39,228,359 $ 39,590,271
Loans receivable 27,940,415 32,723,212 33,260,709
Mortgage-backed securities 8,396,622 3,921,798 3,939,746
Deposits 25,477,429 24,234,947 24,109,717
Stockholders' equity 2,985,866 2,575,220 2,698,031
Stockholders' equity/total assets 7.58% 6.56% 6.81%
Book value per common share $ 52.23 $ 45.36 $ 47.28
Common shares outstanding 57,172,249 56,770,444 57,068,504
Diluted common shares outstanding 57,743,225 57,837,051 58,021,902
Yield on loan portfolio 7.49% 7.47% 7.53%
Yield on mortgage-backed securities 7.23% 7.15% 7.23%
Yield on investments 6.20% 6.61% 6.48%
Yield on earning assets 7.40% 7.42% 7.48%
Cost of deposits 4.91% 5.08% 5.04%
Cost of borrowings 5.92% 5.98% 5.99%
Cost of funds 5.20% 5.37% 5.36%
Yield on earning assets less cost of funds 2.20% 2.05% 2.12%
Ratio of nonperforming assets to total assets .78% 1.05% .96%
Ratio of troubled debt restructured to total assets .06% .13% .11%
World Savings Bank, a Federal Savings Bank:
Total assets $ 31,854,886 $21,734,516 $ 24,608,701
Net worth 2,095,404 1,489,373 1,605,561
Net worth/total assets 6.58% 6.85% 6.52%
Regulatory capital ratios:
Core capital 6.57% 6.83% 6.51%
Risk-based capital 12.76% 13.30% 12.80%
World Savings and Loan Association:
Total assets $ 8,288,587 $17,116,425 $15,446,575
Net worth 804,414 1,196,534 1,121,961
Net worth/total assets 9.71% 6.99% 7.26%
Regulatory capital ratios:
Core capital 7.91% 6.34% 6.42%
Risk-based capital 16.72% 13.83% 13.64%
Golden West Financial Corporation
Financial Highlights
(Unaudited)
(Dollars in thousands except per share figures)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ------------ -----------
New real estate loans originated $2,178,244 $1,980,100 $ 5,717,069 $5,529,827
Average yield on new real estate loans 7.76% 7.63% 7.76% 7.56%
Increase in deposits (a) $ 483,721 $ 198,287 $ 1,367,712 $2,135,013
Earnings before extraordinary item 108,021 90,007 335,052 260,658
Net earnings 103,220 90,007 322,541 260,658
Basic earnings per share before extraordinary item 1.87 1.59 5.84 4.57
Diluted earnings per share before extraordinary item 1.85 1.56 5.78 4.50
Basic earnings per share 1.79 1.59 5.62 4.57
Diluted earnings per share 1.77 1.56 5.56 4.50
Cash dividends on common stock .125 .11 .375 .33
Average common shares outstanding 57,562,090 56,740,342 57,343,932 56,980,399
Average diluted common shares outstanding 58,182,842 57,756,318 57,997,076 57,921,035
Ratios:(b)
Net earnings/average net worth (ROE)(c) 13.97% 14.23% 15.04% 14.14%
Net earnings/average assets (ROA)(c) 1.05% .92% 1.09% .90%
Net interest income/average assets 2.43% 2.26% 2.44% 2.27%
General and administrative expense/average assets .89% .85% .87% .83%
(a) Includes a decrease of $208 million of wholesale deposits for the quarter
ended September 30, 1997. Includes a decrease of $525 million and an
increase of $864 million of wholesale deposits for the nine months ended
September 30, 1998 and 1997, respectively.
(b) 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.
(c) The ratios for the quarter and nine months ended September 30, 1998
include the extraordinary item. The ratios for the quarter ended
September 30, 1998 excluding the extraordinary item are: ROE 14.62% and
ROA 1.10%. The year-to-date ratios as of September 30, 1998 excluding the
extraordinary item are: ROE 15.62% and ROA 1.13%.
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, 1998 and 1997, and December 31, 1997. The reader is referred to page 52 of
the Company's 1997 Annual Report on Form 10-K for similar information for the
years 1994 through 1997 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
--------------------
1998 1997 1997
------- ------- -------------
Assets:
Cash and investments 3.6% 3.0% 2.6%
Mortgage-backed securities 21.3 10.0 10.0
Loans receivable 70.9 83.4 84.0
Other assets 4.2 3.6 3.4
------- ------- -------
100.0% 100.0% 100.0%
======= ======= =======
Liabilities and Stockholders' Equity:
Deposits 64.7% 61.8% 60.9%
Federal Home Loan Bank advances 17.4 18.4 21.5
Securities sold under agreements to repurchase 5.9 7.4 5.9
Medium-term notes 0.0 0.8 0.3
Other liabilities 2.1 1.9 1.8
Subordinated debt 2.3 3.1 2.8
Stockholders' equity 7.6 6.6 6.8
------- -------- -------
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 long-term mortgages held
as loans and mortgage-backed securities. 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, 1998, the
Company's assets reprice sooner than its liabilities. If all repricing assets
and liabilities responded equally to changes in the interest rate environment,
then the gap analysis would suggest that the Company's earnings would rise when
interest rates increase and would fall when interest rates decrease. However,
the Company's earnings are also affected by the built-in reporting and repricing
lags inherent in the Eleventh District Cost of Funds Index (COFI), which is the
index Golden West uses to determine the rate on the majority of its adjustable
rate mortgages (ARMs). The reporting lag occurs because of the time it takes to
gather the data needed to compute the index. As a result, the COFI in effect in
any month actually reflects the Eleventh District's cost of funds at the level
it was two months prior. The repricing lag occurs because COFI is based on a
portfolio of accounts, not all of which reprice immediately. Therefore, COFI
does not initially fully 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.
TABLE 2
Repricing of Interest-Earning Assets and Interest-Bearing
Liabilities, Repricing Gaps, and Gap Ratio
As of September 30, 1998
(Dollars in millions)
Projected Repricing(a)
-----------------------------------------------------------------
0 - 3 4 - 12 1 - 5 Over 5
Months Months Years Years Total
----------- ---------- ----------- ---------- -----------
Interest-Earning Assets:
Investments $ 1,012 $ 6 $ 87 $ 96 $ 1,201
Mortgage-backed securities 7,728 103 331 234 8,396
Loans receivable:
Rate-sensitive 23,691 1,764 142 -0- 25,597
Fixed-rate 129 287 945 835 2,196
Other(b) 927 -0- -0- -0- 927
Impact of interest rate swaps 587 103 (454) (236) -0-
----------- --------- ----------- ----------- -----------
Total $ 34,074 $ 2,263 $ 1,051 $ 929 $ 38,317
=========== ========== =========== ========== ===========
Interest-Bearing Liabilities(c):
Deposits $ 14,033 $ 9,129 $ 2,308 $ 7 $ 25,477
FHLB advances 6,250 200 122 295 6,867
Other borrowings 2,304 7 712 199 3,222
Impact of interest rate swaps 461 (328) (133) -0- -0-
----------- ---------- ----------- ---------- -----------
Total $ 23,048 $ 9,008 $ 3,009 $ 501 $ 35,566
=========== ========== =========== ========== ===========
Repricing gap $ 11,026 $ (6,745) $ (1,958) $ 428
=========== ========== =========== ==========
Cumulative gap $ 11,026 $ 4,281 $ 2,323 $ 2,751
=========== ========== =========== ==========
Cumulative gap as a percentage of
total assets 28.0% 10.9% 5.9%
=========== ========== ===========
(a) Based on scheduled maturity or scheduled repricing; loans reflect scheduled
repayments and projected prepayments of principal.
(b) Includes cash in banks and Federal Home Loan Bank (FHLB) stock.
(c) Liabilities with no maturity date, such as checking, 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 Bank, FSB (WFSB), and World Savings and Loan Association
(WSL), to maintain a minimum amount of cash and certain qualifying investments
for liquidity purposes. As of December 1, 1997, the current minimum requirement
was changed from a monthly to a quarterly calculation and is either equal to 4%
of the quarterly average of daily balances of short-term deposits and borrowings
or 4% of the prior quarter's ending balance of short-term deposits and
borrowings. For all other months during 1997, the minimum liquidity requirement
was calculated monthly and was equal to 5% of the monthly average of deposits
and short-term borrowings. WFSB's regulatory liquidity ratios were 20% and 11%
for the quarters ended September 30, 1998 and December 31, 1997, respectively.
WFSB's regulatory average liquidity ratio was 8% for the month ended September
30, 1997. WSL's regulatory liquidity ratios were 49% and 12% for the quarters
ended September 30, 1998 and December 31, 1997, respectively. WSL's regulatory
average liquidity ratio was 10% for the month ended September 30, 1997. The
increase in the average liquidity ratios for the quarters ended September 30,
1998 and December 31, 1997, as compared to the month ended September 30, 1997,
was due to a change in the revised OTS liquidity regulation which expanded the
assets qualifying for the calculation.
At September 30, 1998 and 1997, and December 31, 1997, the Company had
securities available for sale in the amount of $310 million, $586 million, and
$609 million, respectively, including unrealized gains on securities available
for sale of $274 million, $206 million, and $245 million, respectively. At
September 30, 1998 and 1997, and December 31, 1997, the Company had no
securities held for trading in its investment securities portfolio.
Included in the Company's investment portfolio at September 30, 1998
and 1997, and December 31, 1997, were collateralized mortgage obligations (CMOs)
in the amount of $98 million, $82 million, and $71 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, 1998, all of
these CMOs qualified for inclusion in the regulatory liquidity measurement.
MORTGAGE-BACKED SECURITIES
At September 30, 1998 and 1997, and December 31, 1997, the Company had
mortgage-backed securities (MBS) held to maturity in the amount of $8.3 billion,
$3.7 billion, and $3.8 billion, respectively, including Federal National
Mortgage Association (FNMA) MBS subject to full credit recourse to the Company
of $4.2 billion at September 30, 1998, $3.0 billion at September 30, 1997 and
$3.0 billion at December 31, 1997, and including $3.4 billion at September 30,
1998, of securities issued by a Real Estate Mortgage Investment Conduit (REMIC).
At September 30, 1998 and 1997, and December 31, 1997, the Company had
mortgage-backed securities available for sale in the amount of $125 million,
$197 million, and $157 million, respectively, including unrealized gains on MBS
available for sale of $6 million, $8 million, and $8 million, respectively. At
September 30, 1998 and 1997 and December 31, 1997, the Company had no trading
MBS.
During the second quarter of 1998, the Company securitized $3.9 billion
of mortgage loans into a Real Estate Mortgage Investment Conduit. Securities
issued by the REMIC are being used as collateral for advances from the FHLB of
Dallas. The securities issued by the REMIC are classified as MBS held to
maturity.
During the first and second quarters of 1998, the Company securitized
$501 million and $1.3 billion, respectively, of adjustable rate mortgages (ARMs)
into FNMA COFI-indexed MBS. During the fourth quarter of 1997, the Company
desecuritized $856 million of FNMA COFI-indexed MBS in November and securitized
$1.0 billion of ARMs into FNMA COFI-indexed MBS in December. The Company has the
ability and intent to hold these MBS until maturity and, accordingly, these MBS
are classified as held to maturity. The FNMA MBS held to maturity are available
to be used as collateral for borrowings and are subject to full credit recourse
to the Company.
Repayments of MBS during the third quarter and first nine months of
1998 were $724 million and $1.2 billion, respectively, compared to $131 million
and $370 million in the same periods of 1997. MBS repayments were higher during
the first nine months of 1998 as compared to the first nine months of 1997 due
to an increase in total MBS outstanding and an increase in prepayments on the
underlying mortgages.
LOAN PORTFOLIO
LOAN VOLUME
New loan originations for the three and nine months ended September 30,
1998, amounted to $2.2 billion and $5.7 billion, respectively, compared to $2.0
billion and $5.5 billion for the same periods in 1997. The 1998 loan volume was
similar to the 1997 loan volume due to a continued strong housing market,
especially in California, and lower interest rates causing more borrowers to
refinance. Refinanced loans constituted 42% and 43% of new loan originations for
the three and nine months ended September 30, 1998, compared to 30% and 32% for
the three and nine months ended September 30, 1997.
Loans originated for sale amounted to $291 million and $625 million for
the three and nine months ended September 30, 1998, respectively, compared to
$48 million and $146 million for the same periods in 1997. The Company continues
to sell most of its fixed-rate originations.
The Company has lending operations in 26 states. The primary source of
mortgage origination is loans secured by residential properties in California.
For the three and nine months ended September 30, 1998, 63% and 62%,
respectively, of total loan originations were on residential properties in
California compared to 53% for the same periods in 1997. The five largest
states, other than California, for originations for the three and nine months
ended September 30, 1998, were Florida, Texas, Colorado, Illinois, and
Washington with a combined total of 20% and 21% of total originations,
respectively. The percentage of the total loan portfolio (including
mortgage-backed securities with recourse) that is comprised of residential loans
in California was 66% at September 30, 1998 compared to 67% at September 30,
1997, and 66% at December 31, 1997.
The tables on the following two pages show the Company's loan portfolio by
state at September 30, 1998 and 1997.
TABLE 3
Loan Portfolio by State
September 30, 1998
(Dollars in thousands)
Residential
Real Estate Commercial Loans as
------------------------- Real Total a% of
State 1 - 4 5+ Land Estate Loans (a) Portfolio
- --------------- ------------ ----------- ---------- --------------- ----------- ------------
California $20,097,429 $3,381,050 $ 216 $ 42,197 $23,520,892 65.65%
Texas 1,410,729 70,144 524 1,374 1,482,771 4.14
Florida 1,438,608 19,052 4 703 1,458,367 4.07
Illinois 1,186,384 152,000 -0- 1,481 1,339,865 3.74
Colorado 1,022,793 206,054 -0- 5,975 1,234,822 3.45
New Jersey 1,227,348 -0- -0- 4,633 1,231,981 3.44
Washington 542,281 416,926 -0- 693 959,900 2.68
Arizona 757,130 24,201 -0- -0- 781,331 2.18
Pennsylvania 640,893 4,179 -0- 2,988 648,060 1.81
Virginia 501,118 8,435 -0- 1,211 510,764 1.43
Connecticut 494,604 -0- -0- 16 494,620 1.38
Maryland 351,221 2,124 -0- 448 353,793 0.99
Oregon 254,915 14,476 -0- 243 269,634 0.75
Minnesota 222,190 7,841 -0- -0- 230,031 0.64
Utah 210,748 49 -0- 1,401 212,198 0.59
Wisconsin 178,817 3,812 -0- -0- 182,629 0.51
Kansas 169,011 4,959 -0- 161 174,131 0.49
Nevada 172,091 912 -0- -0- 173,003 0.48
Massachusetts 140,684 -0- -0- -0- 140,684 0.39
Missouri 90,051 5,551 -0- -0- 95,602 0.27
Washington DC 55,075 -0- -0- -0- 55,075 0.15
New Mexico 48,585 -0- -0- -0- 48,585 0.14
New York 38,021 -0- -0- -0- 38,021 0.11
Michigan 36,292 -0- -0- -0- 36,292 0.10
Idaho 32,834 -0- -0- -0- 32,834 0.09
Delaware 32,701 -0- -0- -0- 32,701 0.09
North Carolina 29,012 -0- -0- -0- 29,012 0.08
Georgia 25,472 -0- -0- 1,366 26,838 0.07
South Dakota 11,968 -0- -0- -0- 11,968 0.03
Ohio 7,621 1,231 68 2,978 11,898 0.03
Other 7,078 -0- -0- 2,767 9,845 0.03
------------ ----------- ---------- ------------ ------------ ---------
Totals $31,433,704 $4,322,996 $ 812 $ 70,635 35,828,147 100.00%
============ =========== ========== ============ =========
SFAS 91 deferred loan fees (20,134)
Loan discount on purchased loans (3,309)
Undisbursed loan funds (3,321)
Allowance for loan losses (242,415)
Loans to facilitate (LTF) interest reserve (514)
Troubled debt restructured (TDR) interest reserve (2,214)
Loans on deposits 26,654
-------------
Total loan portfolio and loans securitized into FNMA MBS with recourse
and MBS-REMIC 35,582,894
Loans securitized into FNMA MBS with recourse and MBS-REMIC (7,642,479)(b)
-------------
Total loan portfolio $27,940,415
=============
(a) The Company has no commercial loans.
(b) The above schedule includes the September 30, 1998 balances of adjustable
rate loans that have been securitized with full recourse into Federal
National Mortgage Association mortgage-backed securities and REMIC
mortgage-backed securities.
TABLE 4
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 interest reserve (587)
Troubled debt restructured 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) The above schedule includes the September 30, 1997 balances of adjustable
rate loans that have been securitized with full recourse into Federal
National Mortgage Association mortgage-backed securities.
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 (including MBS) composed of rate-sensitive
loans was 92% at September 30, 1998 compared to 91% at September 30, 1997 and
91% at December 31, 1997. The Company's ARM originations for the third quarter
and first nine months of 1998 constituted 84% and 86%, respectively, of new
mortgage loans made in 1998 compared to 96% for the third quarter and first nine
months of 1997.
The weighted average maximum lifetime cap rate on the Company's ARM
loan portfolio (including ARMs swapped into MBS with recourse) was 12.64%, or
5.27% above the actual weighted average rate at September 30, 1998, versus
12.76%, or 5.43% above the weighted average rate at September 30, 1997.
Approximately $5.0 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,
1998, $492 million of ARM loans had reached their rate floors. The weighted
average floor rate on the loans that had reached their floor was 7.74% at
September 30, 1998 compared to 7.76% at September 30, 1997. Without the floor,
the average yield on these loans would have been 7.17% at September 30, 1998 and
7.14% at September 30, 1997.
Loan repayments consist of monthly loan amortization and loan payoffs.
For the three and nine months ended September 30, 1998, loan repayments were
$1.5 billion and $4.6 billion, respectively, compared to $995 million and $2.6
billion in the same periods of 1997. The increase in prepayments for the first
nine months of 1998 as compared to the first nine months of 1997 was due to an
increase in refinance and home sale activity.
MORTGAGE SERVICING RIGHTS
The Company accounts for mortgage servicing rights in accordance with
SFAS 125. For the third quarter and first nine months of 1998, the Company
recognized gains of $5.8 million and $12.4 million, respectively, on the sale of
loans due to the capitalization of servicing rights compared to $1.1 million and
$3.2 million for the same periods in 1997. After amortization, the balance at
September 30, 1998 and 1997 of the capitalized servicing rights was $20.2
million and $10.3 million, respectively. The book value of Golden West's
servicing rights did not exceed the fair value at September 30, 1998 or 1997
and, therefore, no write-down of the servicing rights to their fair value was
necessary.
ASSET QUALITY
One measure of the soundness of the Company's portfolio is its ratio of
nonperforming assets (NPAs) to total assets. Nonperforming assets includes
non-accrual loans (loans, including loans swapped into MBS with recourse and
loan securitized into MBS-REMIC, that are 90 days or more past due) and real
estate acquired through foreclosure. No interest is recognized on loans 90 days
or more past due. 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
1998 1997 1997
----------- ------------ --------------
Non-accrual loans $ 264,198 $ 344,655 $ 317,550
Real estate acquired through foreclosure 44,537 66,652 61,517
Real estate in judgment -0- -0- 67
----------- ------------ ------------
Total nonperforming assets $ 308,735 $ 411,307 $ 379,134
=========== ============ ============
TDRs $ 24,118 $ 51,785 $ 43,795
=========== ============ ============
Ratio of NPAs to total assets .78% 1.05% .96%
=========== ============ ============
Ratio of TDRs to total assets .06% .13% .11%
=========== ============ ============
Ratio of NPAs and TDRs to total assets .84% 1.18% 1.07%
=========== ============ ============
The decrease in NPAs during 1998 reflects the strong California economy and
housing market. The Company continues to closely monitor all delinquencies and
takes appropriate steps to protect its interests. For the third quarter and
first nine months of 1998, the Company's reserve for interest foregone on loans
90 days or more past due increased $738 thousand and $6 million, respectively,
as compared to increases of $3 million and $12 million for the same periods in
1997. Interest foregone on TDRs amounted to $203 thousand and $729 thousand for
the three and nine months ended September 30, 1998, compared to $381 thousand
and $1.5 million for the three and nine months ended September 30, 1997.
The tables on the following two pages show the Company's nonperforming
assets by state as of September 30, 1998 and 1997.
TABLE 6
Nonperforming Assets by State
September 30, 1998
(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 $178,080 $ 5,835 $ 462 $39,236 $ 1,027 $ -0- $224,640 0.96%
Texas 7,434 -0- -0- 755 -0- -0- 8,189 0.55
Florida 13,506 -0- 80 926 -0- -0- 14,512 1.00
Illinois 10,487 220 -0- 1,242 -0- -0- 11,949 0.89
Colorado 1,141 -0- 3 -0- -0- -0- 1,144 0.09
New Jersey 14,805 -0- 57 875 -0- -0- 15,737 1.28
Washington 1,620 -0- -0- -0- -0- -0- 1,620 0.17
Arizona 2,618 -0- -0- 112 -0- -0- 2,730 0.35
Pennsylvania 7,396 -0- -0- 286 -0- -0- 7,682 1.19
Virginia 1,805 -0- -0- 239 -0- -0- 2,044 0.40
Connecticut 3,029 -0- -0- 80 -0- -0- 3,109 0.63
Maryland 1,179 -0- -0- 82 -0- -0- 1,261 0.36
Oregon 844 -0- -0- -0- -0- -0- 844 0.31
Minnesota 1,463 -0- -0- 104 -0- -0- 1,567 0.68
Utah 2,208 -0- -0- -0- -0- -0- 2,208 1.04
Wisconsin 369 -0- -0- -0- -0- -0- 369 0.20
Kansas 569 40 -0- -0- -0- -0- 609 0.35
Nevada 2,080 -0- -0- 328 -0- -0- 2,408 1.39
Massachusetts -0- -0- -0- -0- -0- -0- -0- 0.00
Missouri 225 -0- -0- 27 -0- -0- 252 0.26
Washington DC 139 -0- -0- -0- -0- -0- 139 0.25
New Mexico 393 -0- -0- -0- -0- -0- 393 0.81
New York 3,188 -0- -0- -0- -0- 11 3,199 8.41
Michigan 12 -0- -0- -0- -0- -0- 12 0.03
Idaho 235 -0- -0- -0- -0- -0- 235 0.72
Delaware -0- -0- -0- -0- -0- -0- -0- 0.00
North Carolina -0- -0- -0- -0- -0- -0- -0- 0.00
Georgia 510 -0- -0- 148 -0- -0- 658 2.45
South Dakota 135 -0- -0- -0- -0- -0- 135 1.13
Ohio 2 -0- -0- -0- -0- -0- 2 0.02
Other 2,029 -0- -0- -0- -0- -0- 2,029 20.61
--------- --------- -------- -------- -------- -------- --------- ------
Totals $257,501 $ 6,095 $ 602 $44,440 $ 1,027 $ 11 309,676 0.86%
========= ========= ======== ======== ======== ========
REO general valuation allowance (941) 0.00
--------- ------
Total nonperforming assets $308,735 0.86%
========= ======
(a) Non-accruals loans are 90 days or more past due and have no unpaid interest
accrued.
(b) During the past four years, the Company has securitized adjustable rate
loans into FNMA mortgage-backed securities with full credit recourse. In
addition, during the second quarter of 1998, the Company securitized
mortgage loans into REMIC MBS. The September 30, 1998 balances of the
related nonperforming assets are reflected in the amounts above.
TABLE 7
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, 1996, and 1997, the Company securitized adjustable rate
mortgages into FNMA mortgage-backed securities with full credit recourse.
The September 30, 1997 balances 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, loans
securitized into MBS-REMIC, 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.
The table below shows the changes in the allowance for loan losses for
the three and nine months ended September 30, 1998 and 1997.
TABLE 8
Changes in Allowance for Loan Losses
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ -----------------------
1998 1997 1998 1997
----------- ---------- ---------- ----------
Beginning allowance for loan losses $ 239,537 $ 216,651 $ 233,280 $ 195,702
Provision charged to expense 3,130 9,980 8,777 43,786
Less loans charged off, net (370) (4,810) 46 (18,115)
Add recoveries 118 199 312 647
----------- ---------- ---------- ----------
Ending allowance for loan losses $ 242,415 $ 222,020 $ 242,415 $ 222,020
=========== ========== ========== ==========
Ratio of chargeoffs net of recoveries to average loans
outstanding (including MBS with recourse and MBS-REMIC) .00% .05% .00% .07%
=========== ========== ========== ==========
Ratio of allowance for loan losses to nonperforming assets 78.5% 54.0%
========== ==========
Ratio of allowance for loan losses to total loans
(including MBS with recourse and MBS-REMIC) .68% .62%
========== ==========
DEPOSITS
Retail deposits increased during the third quarter of 1998 by $484
million, including interest credited of $270 million, compared to an increase of
$406 million, including interest credited of $244 million, in the third quarter
of 1997. Retail deposits increased during the first nine months of 1998 by $1.9
billion, including interest credited of $778 million, compared to an increase of
$1.3 billion, including interest credited of $708 million, in the first nine
months of 1997. Retail deposits increased during the first nine months of 1998
and 1997 primarily due to ongoing marketing efforts and competitive rates
offered by the Company on its insured accounts. In addition, the Company began
actively promoting market rate transaction accounts during the second half of
1997, which continued during the first nine months of 1998.
Beginning in January 1997, the Company began a program to use
government securities dealers to sell certificates of deposit (CDs) to
institutional investors. There were no outstanding wholesale CDs at September
30, 1998 as compared to $864 million at September 30, 1997.
The table below shows the Company's deposits by interest rate and by
remaining maturity at September 30, 1998 and 1997.
TABLE 9
Deposits
(Dollars in millions)
September 30
---------------------------------------------------
1998 1997
---------------------- -----------------------
Rate* Amount Rate* Amount
-------- ---------- --------- ----------
Deposits by interest rate:
Interest-bearing checking accounts 2.24% $ 87 1.28% $ 286
Passbook accounts 2.73 666 2.15 530
Money market deposit accounts 4.37 7,168 3.73 2,883
Term certificate accounts with original maturities of:
4 weeks to 1 year 4.95 6,741 5.28 11,220
1 to 2 years 5.36 7,331 5.44 4,455
2 to 3 years 5.43 1,376 5.44 1,382
3 to 4 years 5.32 371 5.77 453
4 years and over 5.80 1,178 5.79 1,544
Retail jumbo CDs 5.20 558 5.58 617
Wholesale CDs 0.00 -0- 5.69 864
All other 7.60 1 7.65 1
----------- -----------
$ 25,477 $ 24,235
=========== ===========
Deposits by remaining maturity:
No contractual maturity $ 7,921 $ 3,699
Maturity within one year:
4th quarter 6,112 9,570
1st quarter 4,449 4,236
2nd quarter 2,093 1,914
3rd quarter 2,588 2,175
----------- -----------
15,242 17,895
1 to 2 years 1,783 1,986
2 to 3 years 283 389
3 to 4 years 132 121
4 years and over 116 145
----------- -----------
$ 25,477 $ 24,235
=========== ===========
* Weighted average interest rate, including the impact of interest rate swaps.
At September 30, the weighted average cost of deposits was 4.91% (1998)
and 5.08% (1997).
ADVANCES FROM FEDERAL HOME LOAN BANKS
The Company uses borrowings from FHLBs, also known as "advances," to
supplement cash flow and to provide funds for loan origination activities.
Advances are secured by pledges of certain loans, MBS-REMIC, and capital stock
of FHLBs. FHLB advances amounted to $6.9 billion at September 30, 1998, compared
to $7.2 billion and $8.5 billion at September 30, 1997, and December 31, 1997,
respectively. During the first quarter of 1998, the Company notified the FHLB of
San Francisco that it would pay off, before maturity, $2.9 billion of high-cost
advances and, as a result, incurred a $13 million pre-tax charge during the
first quarter of 1998 for the penalties associated with these prepayments.
During July 1998, the Company notified the FHLB of San Francisco that it would
pay off an additional $1.5 billion of high-cost advances before maturity and, as
a result, incurred an additional $8 million pre-tax charge during the third
quarter of 1998 for the penalties associated with these prepayments. See
Extraordinary Item discussion on page 30.
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 $2.3 billion, $2.9 billion, and $2.3 billion at
September 30, 1998 and 1997, and December 31, 1997, respectively.
The Company uses accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities in accordance
with SFAS 125 and SFAS 127. The Company adopted SFAS 127 on January 1, 1998 and
the adoption of SFAS 127 had no effect on the Company's financial condition and
results of operations.
OTHER BORROWINGS
At September 30, 1998, Golden West, at the holding company level, had a
total of $812 million of subordinated debt issued and outstanding. As of
September 30, 1998, 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, 1998, 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.
WSL 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, 1998, the full
amount was available for issuance. As of September 30, 1998, WSL had a total of
$100 million of subordinated notes issued and outstanding, which were rated A2
and A by Moody's and S&P, respectively. The subordinated notes are included in
WSL's risk-based regulatory capital as Supplementary Capital.
WSL 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, 1998. WSL had no medium-term notes
outstanding under prior registrations at September 30, 1998, compared to $310
million at September 30, 1997, and $110 million at December 31, 1997. As of
September 30, 1998, WSL's medium-term notes had a preliminary rating of A1 and
A+ by Moody's and S&P, respectively.
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, 1998, WFSB had not issued any notes
under this authority.
STOCKHOLDERS' EQUITY
The Company's stockholders' equity increased by $288 million during the
first nine months of 1998. The increase in stockholders' equity was a result of
net earnings for the first nine months of 1998 and a $16 million increase in
market values of securities available for sale since December 31, 1997,
partially offset by the $44 million cost of the purchase of Company stock and
the payment of $22 million in quarterly dividends to stockholders. The Company's
stockholders' equity increased by $225 million during the first nine months of
1997. The increase in stockholders' equity in 1997 was primarily the 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.
Unrealized gains, net of taxes, on securities and MBS available for sale
included in stockholders' equity at September 30, 1998 and 1997, and December
31, 1997, were $166 million, $127 million, and $150 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 the Company's common stock
is a wise use of excess capital.
Since 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, 1998, 9 million shares
had been purchased and retired at a cost of $425 million since October 1993, of
which 553,300 shares were purchased and retired at a cost of $44 million during
the first nine months of 1998. Dividends from subsidiaries 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.
WSL paid a $100 million dividend to Golden West in March, June and
August and $200 million in September 1998, for a total of $500 million for the
nine months ended September 30, 1998. Also, Golden West purchased at market from
WSL, and subsequently contributed as capital to WFSB, $100 million of
substandard loans during each of the three quarters of 1998, for a total of $300
million for the nine months ended September 30, 1998.
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 WFSB and WSL,
to meet certain minimum capital requirements. Effective March 31, 1998, FIRREA's
old 3% minimum requirement for Core (or Leverage) Capital has been superseded by
a 4% minimum requirement under the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA).
The following table shows WFSB's regulatory capital ratios and compares
them to the OTS minimum requirements at September 30, 1998 and 1997.
TABLE 10
World Savings Bank, a Federal Savings Bank
Regulatory Capital Ratios
(Dollars in thousands)
September 30, 1998 September 30, 1997
----------------------------------------------- ----------------------------------------------
ACTUAL REQUIRED ACTUAL REQUIRED
---------------------- ---------------------- ---------------------- ----------------------
Capital Ratio Capital Ratio Capital Ratio Capital Ratio
----------- --------- ----------- --------- ---------- --------- ---------- --------
Tangible $2,094,134 6.57% $ 478,353 1.50% $1,487,088 6.83% $ 326,468 1.50%
Core 2,094,134 6.57 1,275,607 4.00 1,487,088 6.83 652,936 3.00
Risk-based 2,197,128 12.76 1,377,966 8.00 1,562,867 13.30 940,300 8.00
The following table shows WSL's current regulatory capital ratios and
compares them to the OTS minimum requirements at September 30, 1998 and 1997.
TABLE 11
World Savings and Loan Association
Regulatory Capital Ratios
(Dollars in thousands)
September 30, 1998 September 30, 1997
------------------------------------------------ ------------------------------------------------
ACTUAL REQUIRED ACTUAL REQUIRED
----------------------- ----------------------- ---------------------- -----------------------
Capital Ratio Capital Ratio Capital Ratio Capital Ratio
----------- --------- ----------- --------- ----------- -------- ----------- --------
Tangible $ 638,887 7.91% $ 121,168 1.50% $1,077,399 6.34% $ 254,738 1.50%
Core 638,887 7.91 323,115 4.00 1,077,399 6.34 509,477 3.00
Risk-based 797,702 16.72 381,666 8.00 1,390,093 13.83 804,375 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 WFSB nor WSL
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. As of September 30, 1998, the most recent notification from the
OTS categorized both WFSB and WSL as "well-capitalized" under the current
requirements. There are no conditions or events that have occurred since that
notification that the Company believes would have an impact on the
categorization of either WFSB or WSL.
The table below shows that WFSB's regulatory capital exceeds the
requirements of the well-capitalized classification at September 30, 1998.
TABLE 12
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 $ 2,094,134 6.57% $ 1,594,509 5.00%
Tier 1 risk-based 2,094,134 12.16 1,033,474 6.00
Total risk-based 2,197,128 12.76 1,722,457 10.00
The table below shows that WSL's regulatory capital exceeds the
requirements of the well-capitalized classification at September 30, 1998.
TABLE 13
World Savings and Loan Association
Regulatory Capital Compared to Well-Capitalized Classification
(Dollars in thousands)
ACTUAL WELL-CAPITALIZED
----------------------- -- --------------------------
Capital Ratio Capital Ratio
----------- ---------- ----------- -----------
Leverage $ 638,887 7.91% $ 403,891 5.00%
Tier 1 risk-based 638,887 13.39 286,250 6.00
Total risk-based 797,702 16.72 477,083 10.00
RESULTS OF OPERATIONS
NET EARNINGS
Net earnings before an extraordinary item (see extraordinary item
discussion on page 30) for the nine months ended September 30, 1998 were $335
million compared to net earnings of $261 million for the nine months ended
September 30, 1997. Net earnings after the extraordinary item for the nine
months ended September 30, 1998 were $323 million compared, to net earnings of
$261 million for the nine months ended September 30, 1997. Net earnings for the
first nine months of 1998 included a gain of $13 million before tax from the
redemption of preferred stock which was called by the issuer. In addition to the
stock gain, net earnings increased in 1998 as compared 1997 as a result of
increased net interest income and a decrease in the provision for loan losses.
These increases to net earnings were partially offset by an increase in general
and administrative expense.
EARNINGS PER SHARE
Golden West calculates Basic Earnings Per Share (EPS) and Diluted EPS
in accordance with SFAS 128. Basic EPS is calculated by dividing net earnings
for the period by the weighted-average common shares outstanding for that
period. Diluted EPS takes into account the effect of dilutive instruments, such
as stock options, but uses 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. The Company's Basic EPS before the extraordinary
item and the preferred stock gain of $.13 per share for the quarter and nine
months ended September 30, 1998 were $1.87 and $5.71, respectively, as compared
to $1.59 and $4.57 for the quarter and nine months ended September 30, 1997,
respectively. Basic EPS after the extraordinary item and including the preferred
stock gain for the quarter and nine months ended September 30, 1998 were $1.79
and $5.62, respectively, as compared to $1.59 and $4.57, for the quarter and
nine months ended September 30, 1997, respectively. The Company reported Diluted
EPS (before the extraordinary item and the preferred stock gain) of $1.85 and
$5.65 for the quarter and nine months ended September 30, 1998, compared to
$1.56 and $4.50 for the three and nine months ended September 30, 1997. Diluted
EPS after the extraordinary item and the preferred stock gain for the quarter
and nine months ended September 30, 1998 were $1.77 and $5.56, respectively, as
compared to $1.56 and $4.50 for the quarter and nine months ended September 30,
1997, 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, 1998 and 1997, and December 31, 1997.
TABLE 14
Yield on Earning Assets,
Cost of Funds, and Primary Spread
September 30
--------------------------- December 31
1998 1997 1997
----------- ----------- -------------
Yield on loan portfolio 7.49% 7.47% 7.53%
Yield on MBS 7.23 7.15 7.23
Yield on investments 6.20 6.61 6.48
---------- -------- ----------
Yield on earning assets 7.40 7.42 7.48
---------- -------- ----------
Cost of deposits 4.91 5.08 5.04
Cost of borrowings 5.92 5.98 5.99
---------- -------- ----------
Cost of funds 5.20 5.37 5.36
---------- -------- ----------
Primary spread 2.20% 2.05% 2.12%
========== ======== ==========
The Company originates ARMs to manage the rate sensitivity of the asset
side of the balance sheet. 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). Nevertheless, the yield on the Company's ARM portfolio tends to lag
changes in market interest rates because of lags related to the index and
because of certain loan features. These features include introductory rates on
new ARM loans, the interest rate adjustment frequency of ARM loans, interest
rate caps or limits on individual rate changes and interest rate floors. On
balance, COFI lags and ARM structural features cause the Company's assets
initially to reprice more slowly than its liabilities, resulting in a temporary
reduction in net interest income when rates increase and a temporary increase in
net interest income when rates fall.
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,
1998 and 1997, 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
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Interest on loans 68.2% 82.6% 74.6% 82.1%
Interest on mortgage-backed securities 20.2 9.6 14.2 10.2
Interest and dividends on investments 7.6 5.0 6.9 4.9
--------- --------- --------- ---------
96.0 97.2 95.7 97.2
Less:
Interest on deposits 42.3 42.6 41.2 41.5
Interest on advances and other borrowings 23.0 24.5 23.7 25.0
--------- --------- --------- ---------
65.3 67.1 64.9 66.5
Net interest income 30.7 30.1 30.8 30.7
Provision for loan losses 0.4 1.4 0.4 2.0
--------- --------- --------- ---------
Net interest income after provision for loan 30.3 28.7 30.4 28.7
losses
Add:
Fees 2.1 1.6 1.9 1.6
Gain on the sale of securities, MBS, and loans 0.8 0.3 1.2 0.3
Other non-interest income 1.1 0.9 1.2 0.9
--------- --------- --------- ---------
4.0 2.8 4.3 2.8
Less:
General and administrative expenses 11.3 11.3 11.0 11.3
Taxes on income 9.1 8.0 9.4 8.0
--------- --------- --------- ---------
Earnings before extraordinary item 13.9 12.2 14.3 12.2
Extraordinary item (0.6) 0.0 (0.5) 0.0
--------- --------- --------- ---------
Net earnings 13.3% 12.2% 13.8% 12.2%
========= ========= ========= =========
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 $2 million
and $7 million for the three and nine months ended September 30, 1998, as
compared to a decrease of $1.5 million and $3 million for the same periods in
1997.
The following table summarizes the unrealized gains and losses for
interest rate swaps at September 30, 1998 and 1997.
TABLE 16
Schedule of Unrealized Gains and Losses on Interest Rate Swaps
(Dollars in thousands)
September 30, 1998 September 30, 1997
---------------------------------------- ----------------------------------------
Net Net
Unrealized Unrealized Unrealized Unrealized Unrealized Unrealized
Gains Losses Gain (Loss) Gains Losses Gain (Loss)
------------ ------------ ------------- ------------ ------------ ------------
Interest rate swaps $ 12,416 $ (59,075) $ (46,659) $ 13,625 $ (34,030) $ (20,405)
============ ============ ============= ============ ============ =============
TABLE 17
Schedule of Interest Rate Swaps Activity
(Notional amounts in millions)
Nine Months Ended
September 30, 1998
----------------------------
Receive Pay
Fixed Fixed
Swaps Swaps
------------- ------------
Balance at December 31, 1997 $ 1,679 $ 1,108
Additions -0- -0-
Maturities (1,078) (179)
------------- -------------
Balance at September 30, 1998 $ 601 $ 929
============= =============
The range of floating interest rates received on swap contracts in the
first nine months of 1998 was 5.31% to 6.19%, and the range of floating interest
rates paid on swap contracts was 4.95% to 6.08%. The range of fixed interest
rates received on swap contracts in the first nine months of 1998 was 4.86% 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 1998, interest on loans was lower than in the
comparable 1997 period by $81 million or 13.3%. The decrease in the third
quarter of 1998 was due to a $4.5 billion decrease in the average portfolio
balance partially offset by a four basis point increase in the average portfolio
yield. The decrease in the average loan portfolio balance was primarily due to
the securitization of adjustable-rate loans into MBS with full credit recourse
(see page 13). For the first nine months of 1998, interest on loans was lower
than in the comparable 1997 period by $14 million or .8%. The decrease was due
to a $689 million decrease in the average portfolio balance which was partially
offset by a ten basis point increase in the average portfolio yield.
INTEREST ON MORTGAGE-BACKED SECURITIES
In the third quarter of 1998, interest on mortgage-backed securities
was higher than in the comparable 1997 period by $86 million or 121.3%. The 1998
increase was due primarily to a $4.7 billion increase in the average portfolio
balance and a nine basis point increase in the average portfolio yield. For the
first nine months of 1998, interest on mortgage-backed securities was higher
than in the comparable 1997 period by $116 million or 53.3% due primarily to an
$2.1 billion increase in the average portfolio balance and a six basis point
increase in the average portfolio yield. The increase in the mortgage-backed
securities portfolio is primarily due to the securitization of adjustable-rate
loans with full credit recourse, as discussed on page 13.
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 1998, interest and dividends on investments was higher
than in the comparable 1997 period by $22 million or 57.9%. The increase was
primarily due to a $1.5 billion increase in the average portfolio balance, which
was partially offset by a six basis point decrease in the average portfolio
yield. For the first nine months of 1998, interest and dividends on investments
was higher than in the comparable 1997 period by $55 million or 52.1%. The
increase was primarily due to a $1.2 billion increase in the average portfolio
balance, which was partially offset by a one basis point decrease in the average
portfolio yield.
INTEREST ON DEPOSITS
In the third quarter of 1998, interest on deposits increased by $13
million or 4.0% from the comparable period in 1997. The third quarter increase
was due to a $1.6 billion increase in the average balance of deposits, which was
partially offset by a 12 basis point decrease in the average cost of deposits.
In the first nine months of 1998, interest on deposits increased by $75 million
or 8.4% from the comparable period in 1997. The nine month increase was
primarily due to a $2.1 billion increase in the average balance of deposits,
which was partially offset by a three basis point decrease in the average cost
of deposits.
INTEREST ON ADVANCES AND OTHER BORROWINGS
For the third quarter interest on advances and other borrowings
decreased by $2.4 million or 1.3% from the comparable period of 1997. The third
quarter decrease was primarily due to a $154 million decrease in the average
balance. For the first nine months of 1998, interest on advances and other
borrowings increased by $19 million or 3.6% from the comparable periods of 1997.
The nine month increase was primarily due to a $272 million increase in the
average balance and an eight basis point increase in the average cost of these
borrowings.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $3 million and $9 million,
respectively, for the three and nine months ended September 30, 1998, compared
to $10 million and $44 million for the same periods in 1997. The lower provision
in 1998 was due to lower chargeoffs resulting from the strong California housing
market and declining nonperforming assets.
GENERAL AND ADMINISTRATIVE EXPENSES
For the third quarter and first nine months of 1998, general and
administrative expenses (G&A) was $88 million and $258 million, respectively,
compared to $83 million and $241 million for the comparable periods in 1997. G&A
as a percentage of average assets on an annualized basis was .89% and .87%,
respectively, for the third quarter and first nine months of 1998 compared to
.85% and .83%, respectively, for the same periods in 1997. Expenses are slightly
higher in 1998 because of the increase in mortgage activity, the ongoing
expansion of the Company's branch system, and the implementation of a variety of
technology initiatives including addressing the "Year 2000" computer issue (see
Year 2000 discussion on page 32).
EXTRAORDINARY ITEM
During the first quarter of 1998, the Company notified the FHLB of San
Francisco that it intended to retire before maturity, $2.9 billion of high-cost
FHLB advances. As a result, the Company incurred a $13 million pretax charge in
the first quarter of 1998 for the penalties associated with the prepayments. In
addition, in July of 1998, the Company notified the FHLB of San Francisco that
it intended to retire before maturity, an additional $1.5 billion of high-cost
FHLB advances. As a result, the Company incurred an $8 million pretax charge in
the third quarter of 1998 for the penalties associated with the prepayments.
Golden West has replaced the prepaid FHLB advances with new lower-cost
obligations.
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.
Taxes as a percentage of earnings before the extraordinary item were
39.4% and 39.5%, respectively, for the third quarter and first nine months of
1998 compared to 39.7% for the same periods a year ago.
LIQUIDITY AND CAPITAL RESOURCES
WFSB's principal sources of funds are cash flows generated from
earnings; deposits; loan repayments; negotiable certificates of deposit;
borrowings from the FHLB; investments and borrowings from its affiliates; debt
collateralized by mortgages, MBS, or securities; and the issuance of medium-term
notes. 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, 1998, and 1997, and December 31, 1997, see
the Cash and Investments section on page 12.
WSL'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, WSL 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, negotiable
certificates of deposit, issuances of commercial paper, and borrowings from
commercial banks. Furthermore, under certain conditions, WSL 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 WSL's liquidity positions at September 30, 1998, and 1997, and
December 31, 1997, see the Cash and Investments section on page 12.
The principal sources of funds for WFSB's and WSL's parent, Golden
West, are dividends from subsidiaries, 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
WFSB and WSL can pay. The principal liquidity needs of Golden West are for
payment of interest and principal on subordinated debt securities, capital
contributions to its insured subsidiaries (including $466 million for the nine
months ended September 30, 1998 and $224 million for the year ended December 31,
1997), dividends to stockholders, the purchase of Golden West stock (see
stockholders' equity section on page 23), and general and administrative
expenses. At September 30, 1998 and 1997, and December 31, 1997, Golden West's
total cash and investments amounted to $728 million, $891 million, and $965
million, respectively. Included in the September 30, 1998 and 1997, and December
31, 1997 amounts is a $600 million loan to WFSB.
YEAR 2000
The Company is aware of the system challenges that the Year 2000 has
created and currently has a plan in place to insure that all of the Company's
mission critical systems will be Year 2000 compliant by early 1999. The plan has
been developed in accordance with guidance set forth by federal banking
regulators in a series of jointly-issued policy statements. The Company has
completed an inventory and assessment of its systems. The Company is currently
in the process of testing and modifying or replacing systems that may be
affected by these Year 2000 compliance issues (Year 2000 Project.) Included in
this process are both information technology systems and other systems (e.g.
elevators, doorlocks) that could be affected by Year 2000 issues. The Company
has placed priority on information technology systems affecting its core
business of deposit-taking and lending. Testing of individual systems for the
ability to function during the Year 2000 has been started, with such testing to
be substantially completed by December 31, 1998. During the first quarter of
1999, the Company will commence integrated testing and ascertain that all
systems function together. All systems affecting the Company's core business are
scheduled to be Year 2000 compliant by June 1999.
While the Company believes it is doing everything technologically
possible to assure Year 2000 compliance, the success of the Year 2000 Project is
to some extent dependent upon vendor cooperation. The Company is requiring its
computer systems and software vendors to represent that the products provided
are or will be Year 2000 compliant and has planned a program of testing for
compliance. Such testing is included in the testing previously described in this
section. To date, the Company has no indication that its principal vendors or
their systems will adversely affect the Company's Year 2000 compliance efforts.
The Company currently estimates that it will cost approximately $19
million to make all of its computer systems Year 2000 compliant by the end of
1999. The Company will expense all costs associated with the Year 2000 Project
and expects to fund such costs through operating cash flows. The Year 2000
Project expense incurred during the first nine months of 1998 was $5 million.
Included in the $19 million are estimates for compensation of employees
dedicated to the Year 2000 Project, consultants, hardware and software expense
and depreciation of the equipment purchased as part of this process. However,
the Company's Year 2000 expenses are not expected to result in a dollar for
dollar increase in the Company's overall information systems expenditures
because the Company has dedicated a number of its existing resources solely to
the Year 2000 Project.
The Company believes that its Year 2000 Project will result in the
Company's systems functioning normally, without adverse consequences. While the
systems of others, with whom and through which the Company conducts business,
are not within the Company's control, the Year 2000 Project is intended to
provide the Company with sufficient advance warning that such systems will not
perform. In the unlikely event of a system problem, the Company has developed
contingency plans to address the potential that one or more systems might fail,
despite efforts to the contrary.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Golden West estimates the sensitivity of the Company's net interest
income, net earnings, and capital ratios to interest rate changes based on
simulations using an asset/liability model which takes into account the lags
described on pages 11 and 27. The simulation model projects net interest income,
net earnings, and capital ratios based on an immediate interest rate increase
that is sustained for a thirty-six month period. The model is based on the
actual maturity and repricing characteristics of interest-rate sensitive assets
and liabilities. For certain assets, the model incorporates assumptions
regarding the impact of changing interest rates on prepayment rates which are
based on the Company's historical prepayment information. The model factors in
projections for anticipated activity levels by product lines offered by the
Company. Based on the information and assumptions in effect at September 30,
1998, Management believes that a 200 basis point rate increase sustained over a
thirty-six month period would not affect the Company's long-term profitability
and financial strength.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits
Exhibit Description
No.
3(a) Certificate of Incorporation, as amended, and amendments
thereto, are incorporated by reference to Exhibit 3(a) to
the Company's Annual Report on Form 10-K (File No. 1-4269)
for the year ended December 31, 1990.
3(b) By-Laws of the Company, as amended in 1997,. are
incorporated by reference to Exhibit 3(a) to the Company's
Annual Report on Form 10-K (File No. 1-4269) for the year
ended December 31, 1997.
4(a) The Registrant agrees to furnish to the Commission, upon
request, a copy of each instrument with respect to issues of
long-term debt, the authorized principal amount of which
does not exceed 10% of the total assets of the Company.
10(a) 1996 Stock Option Plan, as amended, is incorporated by
reference to Exhibit A of the Company's Definitive Proxy
Statement on Schedule 14A, filed on March 15, 1996, for the
Company's 1996 Annual Meeting of Stockholders.
10(b) Annual Incentive Bonus Plan is incorporated by reference to
Exhibit A of the Company's Definitive Proxy Statement on
Schedule 14A, filed on March 14, 1997, for the Company's
1997 Annual Meeting of Stockholders.
10(c) Deferred Compensation Agreement between the Company and
James T. Judd is incorporated by reference to Exhibit 10(b)
of the Company's Annual Report on Form 10-K (File No.
1-4629) for the year ended December 31, 1986.
10(d) Deferred Compensation Agreement between the Company and
Russell W. Kettell is incorporated by reference to Exhibit
10(c) of the Company's Annual Report on Form 10-K (File No.
1-4629) for the year ended December 31, 1986.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (Continued)
(a) Index To Exhibits (continued)
Exhibit Description
No.
10(e) Deferred Compensation Agreement between the Company and J.
L. Helvey is incorporated by reference to Exhibit 10(d) of
the Company's Annual Report on Form 10-K (File No. 1-4629)
for the year ended December 31, 1986.
10(f) Deferred Compensation Agreement between the Company and
David C. Welch is incorporated by reference to Exhibit 10(f)
of the Company's Annual Report on Form 10-K (File No.
1-4629) for the year ended December 31, 1987.
10(g) Form of Supplemental Retirement Agreement between the
Company and certain executive officers is incorporated by
reference to Exhibit 10(j) to the Company's Annual Report on
Form 10-K (File No. 1-4629) for the year ended December 31,
1990.
10(h) Operating lease on Company headquarters building, 1901
Harrison Street, Oakland, California 94612.
11 Statement of Computation of Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
The Registrant did not file any current reports on Form 8-K with the
Commission during the first nine months of 1998.
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 12, 1998 /s/ J. L. Helvey
---------------------------------
J. L. Helvey
Executive Vice President
(duly authorized and principal financial
officer)