-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WBrGPIEJDHQYaMewMZ//e5nczLgSfcAmNaYvCBfAlCI4co2oTRN2h69xzp2xXDnM IXISZoqGdeiUj7ZBXionRA== 0000042293-00-000009.txt : 20000331 0000042293-00-000009.hdr.sgml : 20000331 ACCESSION NUMBER: 0000042293-00-000009 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOLDEN WEST FINANCIAL CORP /DE/ CENTRAL INDEX KEY: 0000042293 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 952080059 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-04629 FILM NUMBER: 584260 BUSINESS ADDRESS: STREET 1: 1901 HARRISON STREET CITY: OAKLAND STATE: CA ZIP: 94612 BUSINESS PHONE: 5104663420 MAIL ADDRESS: STREET 2: 1901 HARRISON STREET CITY: OAKLAND STATE: CA ZIP: 94612 FORMER COMPANY: FORMER CONFORMED NAME: TRANS WORLD FINANCIAL CORP DATE OF NAME CHANGE: 19760806 FORMER COMPANY: FORMER CONFORMED NAME: TRANS WORLD FINANCIAL CO DATE OF NAME CHANGE: 19751124 10-K405 1 GOLDEN WEST 10-K, LIVE FILING SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 for the fiscal year ended December 31, 1999 Commission File No. 1-4629 GOLDEN WEST FINANCIAL CORPORATION - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-2080059 - --------------------------------------------- -------------------------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 1901 Harrison Street, Oakland, California 94612 - --------------------------------------------- -------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (510) 446-3420 -------------------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - ------------------------------ ------------------------------------------ Common Stock, $.10 par value New York Stock Exchange, Inc., Pacific Stock Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: NONE 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 --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The approximate aggregate market value of the Registrant's common stock held by nonaffiliates of the Registrant on February 29, 2000, was $4,544,526,866. The number of shares outstanding of the Registrant's common stock on February 29, 2000, was 159,457,083 shares. DOCUMENTS INCORPORATED BY REFERENCE Documents Incorporated by Reference Applicable Part of Form 10-K - ----------------------------------- ---------------------------- Proxy Statement Dated March 13, 2000, Part III Furnished to Stockholders in Connection with Registrant's Annual Meeting of Stockholders. PART I ITEM 1. BUSINESS REGISTRANT Golden West Financial Corporation (Golden West or Company) is a savings and loan holding company, the principal business of which is the operation of a savings bank business through its wholly-owned savings bank subsidiaries, World Savings Bank, FSB (WFSB), and World Savings Bank, SSB, (WSSB) and a savings and loan business through its wholly-owned subsidiary, World Savings and Loan Association, a Federal Savings and Loan Association (WSL). WFSB, WSL and WSSB are referred to collectively as the "Insured Institutions" or "Insured Subsidiaries." Golden West also has two other subsidiaries, Atlas Advisers, Inc., and Atlas Securities, Inc. These two companies were formed to provide services to Atlas Assets, Inc., a series open-end registered investment company sponsored by the Company. Atlas Advisers, Inc., is a registered investment adviser and the investment manager of Atlas Assets, Inc.'s fourteen portfolios (the Atlas Funds). Atlas Securities, Inc., is a registered broker-dealer and the sole distributor of Atlas Fund shares. The Company was incorporated in 1959 and has its headquarters in Oakland, California. References herein to the Company or Golden West mean Golden West and its subsidiaries on a consolidated basis, unless the context requires otherwise. During 1995, Golden West acquired Watchung Hills Bank for Savings of New Jersey and renamed it World Savings Bank, FSB. WFSB is a federally chartered savings bank, with deposits insured by the Federal Deposit Insurance Corporation (FDIC) Bank Insurance Fund (BIF) and its home office is in Oakland, California. As of December 31, 1999 and 1998, WFSB had assets of $37.8 billion and $31.9 billion, respectively. For the years ended December 31, 1999, 1998 and 1997, WFSB had net income of $349 million, $242 million and $185 million, respectively. WSL, whose deposits are insured by the FDIC Savings Association Insurance Fund (SAIF), was incorporated in 1912 as a capital stock savings and loan association and has its home office in Oakland, California. WSL became a federally chartered savings and loan association in September 1981. WSL's assets totaled $5.1 billion and $6.8 billion at yearends 1999 and 1998, respectively. For the years ended December 31, 1999, 1998 and 1997, WSL's net income was $134 million, $223 million and $161 million, respectively. WSSB had assets of $3.5 billion for the years ended December 31, 1999 and 1998. For the years ended December 31, 1999, 1998 and 1997, WSSB had net income of $16.4 million, $8.0 million, and $901 thousand, respectively. ITEM 1. BUSINESS (Continued) FORWARD LOOKING STATEMENTS This report contains certain forward-looking statements, which are not historical facts and pertain to future operating results of the Company. Such statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward looking statements are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond the Company's control. In addition, these forward-looking statements are subject to change. Actual results may differ materially from the results discussed in these forward-looking statements for the reasons, among others, discussed under the heading "Asset/Liability Management" in the Management's Discussion and Analysis of Financial Condition and Results of Operations, herein under Item 7. REGULATORY FRAMEWORK The Company is a savings and loan holding company within the meaning of the Home Owners' Loan Act (HOLA), and is subject to the regulation, examination, supervision, and reporting requirements of HOLA. WFSB is a member of the Federal Home Loan Bank (FHLB) system and owns stock in the FHLB of San Francisco. WSSB is a member of the FHLB system and owns stock in the FHLB of Dallas. WFSB's and WSSB's savings accounts are insured by the FDIC BIF, up to the maximum amounts provided by law. WSL is a member of the FHLB system and owns stock in the FHLB of San Francisco. WSL's savings accounts are insured by the FDIC SAIF, also up to the maximum amounts provided by law. The Company, WFSB, and WSL are subject to extensive examination, supervision, and regulation by the Office of Thrift Supervision (OTS) and the FDIC. Applicable regulations govern, among other things, lending and investment powers, the types of savings accounts that can be offered, the types of businesses that can be engaged in, capital requirements, and the payment of dividends. WSSB also is subject to extensive examination, supervision, and regulation by the FDIC, as well as the Texas Savings and Loan Department. WFSB, WSL, and WSSB are also subject to regulations of the Board of Governors of the Federal Reserve System (Federal Reserve Board) with respect to reserve requirements and certain other matters (see Regulation). ITEM 1. BUSINESS (Continued) OFFICE STRUCTURE As of December 31, 1999, the Company operated 119 savings branch offices in California, 38 in Colorado, 33 in Florida, 21 in Texas, 15 in Arizona, 11 in New Jersey, eight in Kansas, and four in Illinois. The Company also operates 269 loan origination offices of which 228 are located in the states listed above. The remaining 41 loan origination offices are located in Connecticut, Delaware, Georgia, Idaho, Indiana, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Mexico, North Carolina, Ohio, Oregon, Pennsylvania, Tennessee, Utah, Virginia, Washington, and Wisconsin. Of the 269 loan offices, 18 are fully-staffed offices that are located in the same premises as savings branch offices and 120 others are savings branch offices that have a single loan officer on site. The remaining loan origination offices are located in facilities that are separate from savings branch offices. ACQUISITIONS/DIVESTITURES During 1999, the Company sold three branches in Colorado and one branch in Kansas with a total of $149 million in deposits. During 1998, the Company sold one savings branch in Colorado with $36 million in deposits. The foregoing divestitures are not material to the financial position or net earnings of Golden West and pro forma information is not deemed necessary. OPERATIONS The principal business of the Company, through the Insured Subsidiaries, is attracting funds, primarily in the form of savings deposits acquired from the general public, and investing those funds principally in loans secured by deeds of trust or mortgages on residential and other real estate, and mortgage-backed securities (MBS). Funds for the Insured Subsidiaries' operations are also provided through earnings; loan repayments; sales of loans; wholesale certificates of deposit; borrowings from the Federal Home Loan Bank system; debt collateralized by mortgages, MBS, or other securities; and the issuance of medium-term notes. In addition, the Insured Subsidiaries have a number of other alternatives available to provide liquidity or finance operations. These include borrowings from public offerings of debt, issuances of commercial paper, and borrowings from commercial banks. Furthermore, under certain limited conditions, WFSB and WSL may borrow from the Federal Reserve Bank of San Francisco and WSSB may borrow from the Federal Reserve Bank of Dallas to meet short-term cash needs. The availability of these funds will vary depending on policies of the FHLB of San Francisco, the Federal Reserve Bank of San Francisco, and the Federal Reserve Board. The principal sources of funds for the holding company, 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 the Insured Subsidiaries 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, dividends to stockholders, the purchase of Company stock, and general and administrative expenses. ITEM 1. BUSINESS (Continued) DEPOSIT ACTIVITIES Deposit flows are affected by changes in general economic conditions, changes in prevailing interest rates, and competition among depository institutions and other investment alternatives. The Company currently offers a number of alternatives for depositors, including passbook, checking, and money market deposit accounts from which funds may be withdrawn at any time without penalty, and certificate accounts with varying maturities ranging up to seven years. All types of accounts presently offered by the Company have rates that are set by the Company, consistent with prevailing interest rates. The Company's certificate accounts are issued in non-negotiable form through its branch offices. In addition, beginning in January 1997, the Company began a program to use government securities dealers to sell certificates of deposit (CDs) to institutional investors. These are referred to in this document as "wholesale CDs". The Company's deposit balance at December 31, 1999 and 1997 included $600 million and $525 million, respectively, of these wholesale CDs. There were no wholesale CDs outstanding at December 31, 1998. Retail deposits increased $896 million during 1999, including interest credited of $1.1 billion, compared to an increase of $2.6 billion during 1998, including interest credited of $1.1 billion, and an increase of $1.5 billion, including interest credited of $960 million during 1997. Retail deposits increased in 1999 primarily due to interest credited. Retail deposits increased during 1998 and 1997 primarily due to ongoing marketing efforts as well as active promotions of market rate transaction accounts. At December 31, 1999, 1998, and 1997, transaction accounts (which includes checking, passbook, and money market accounts) represented 35%, 35% and 20%, respectively, of the total balance of deposits. The change in the mix of deposits since 1996 resulted in part due to the Company actively promoting hi-yield checking accounts and money market deposit accounts. In addition, the change was also due to a new program begun in the fourth quarter of 1996. Specifically, for the years 1996 through 1999, reported balances of interest-bearing checking accounts decreased as compared to 1995 and the reported balances of money market accounts for the same years increased compared to balances reported in 1995. The new program 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. The table on the following page summarizes the Company's deposits by original term to maturity at December 31. ITEM 1. BUSINESS (Continued) DEPOSIT ACTIVITIES (continued)
TABLE 1 Deposits by Original Term to Maturity (Dollars in thousands) 1999 1998 1997 1996 1995 ----------- ------------ ------------ ------------ ------------ Interest-bearing checking . . $ 128,677 $ 102,874 $ 85,343 $ 318,422 $ 750,160 Interest-bearing checking accounts swept into money market deposit accounts . . . . . . .3,206,240 2,706,811 1,386,398 488,361 -0- Passbook. . . . . . . . . . . 484,132 514,265 528,727 550,075 567,890 Money market deposit accounts. 5,869,963 5,825,450 2,774,336 1,077,321 1,291,501 Term certificate accounts with original maturities of: 4 weeks to 1 year . . . . 8,554,573 5,893,772 8,996,965 10,144,102 9,358,705 1 to 2 years. . . . . . . 5,947,712 7,717,692 5,750,387 5,012,735 3,599,540 2 to 3 years. . . . . . . 1,349,180 1,417,606 1,478,756 1,587,068 2,128,392 3 to 4 years. . . . . . . 368,540 368,615 431,400 565,997 651,787 4 years and over . . . . 582,275 1,150,056 1,440,434 1,993,983 2,065,785 Retail jumbo CDs . . . . . . 623,286 521,478 711,010 360,441 430,647 Wholesale CDs. . . . . . . . . 600,000 -0- 525,305 -0- -0- All other . . . . . . . . . . 332 476 656 1,429 3,503 ----------- ------------ ------------ ------------ ------------ Total deposits. . . . . . . .$27,714,910 $26,219,095 $24,109,717 $22,099,934 $20,847,910 =========== ============ ============ ============ ============
The table below sets forth the Company's deposits by interest rate at December 31.
TABLE 2 Deposits by Interest Rate (Dollars in thousands) 1999 1998 -------------- --------------- 0.00% -- 4.00% . .. . . $ 4,988,608 $ 4,282,680 4.01% -- 6.00% . .. . . 22,399,910 21,060,706 6.01% -- 8.00% . .. . . 316,903 865,533 8.01% -- 10.00% . .. . . 93 716 10.01% -- 12.00% . .. . . 9,396 9,460 -------------- --------------- $27,714,910 $26,219,095 ============== ===============
At December 31, the weighted average cost of deposits was 4.69% (1999) and 4.67% (1998). ITEM 1. BUSINESS (Continued) DEPOSIT ACTIVITIES (continued) The table below shows the maturities of deposits at December 31, 1999 by interest rate.
TABLE 3 Deposit Maturities by Interest Rate (Dollars in thousands) 2004 and 2000(a) 2001 2002 2003 thereafter Total -------------- -------------- ------------ ------------ ------------- -------------- 0.00% -- 4.00% $ 4,974,496 $ 14,112 $ -0- $ -0- $ -0- $ 4,988,608 4.01% -- 6.00% 20,513,523 1,434,060 262,100 105,409 84,818 22,399,910 6.01% -- 8.00% 151,360 126,074 36,848 89 2,532 316,903 8.01% -- 10.00% 93 -0- -0- -0- -0- 93 10.01% -- 12.00% 63 57 58 9,160 58 9,396 -------------- -------------- ------------ ------------ ------------- -------------- $25,639,535 $1,574,303 $299,006 $114,658 $ 87,408 $27,714,910 ============== ============== ============ ============ ============= ==============
(a) Includes passbook, checking, and money market deposit accounts, which have no stated maturity. As of December 31, 1999, the aggregate amount outstanding of time certificates of deposit in amounts of $100,000 or more was $3.3 billion, of which, $623 million were retail jumbo CDs and $600 million were wholesale CDs. The following table presents the maturity of these time certificates of deposit at December 31, 1999.
TABLE 4 Maturities of Time Certificates of Deposit Equal to or Greater than $100,000 (Dollars in thousands) 3 months or less $1,384,838 Over 3 months through 6 months 899,099 Over 6 months through 12 months 699,524 Over 12 months 317,306 -------------- $3,300,767 ==============
More information regarding deposits is included in Note J to the Financial Statements included in Item 14. ITEM 1. BUSINESS (Continued) BORROWINGS The Company generally may borrow from the FHLB upon the security of a) the capital stock of the FHLB owned by the Company, b) certain of its residential mortgage loans and MBS or c) certain other assets (principally obligations of, or guaranteed by, the United States Government or a federal agency). The Company uses FHLB borrowings, also known as "advances", to supplement cash flow and to provide funds for loan originations. Advances offer strategic advantages for asset-liability management, including long-term maturities and, in certain cases, prepayment at the Company's option. Each advance has a specified maturity and interest rate, which may be fixed or variable. At December 31, 1999, the Company had $8.9 billion in FHLB advances outstanding, compared to $6.2 billion at yearend 1998. During 1998, the Company paid off, before maturity, $4.4 billion of high-cost FHLB of San Francisco advances and, as a result, incurred a $21 million pre-tax charge for the penalties associated with these prepayments. See "Extraordinary Item" discussion on page 30. The Company enters into reverse repurchase agreements with selected major government securities dealers, large banks, or the FHLB of San Francisco and the FHLB of Dallas. A reverse repurchase agreement involves the sale and delivery of U.S. Government securities or mortgage-backed securities by the Company to a broker or dealer coupled with an agreement to buy the securities back at a later date. Under generally accepted accounting principles, these transactions are properly accounted for as borrowings secured by securities. The Company pays the counterparty a variable or fixed rate of interest for the use of the funds for the period involved. At maturity, the borrowings are repaid (by repurchase of the same securities) and the same securities are returned to the Company. The Company also enters into dollar reverse repurchase agreements (dollar reverses) with selected major government securities dealers, as well as large banks. A dollar reverse involves the sale and delivery of mortgage-backed securities by the Company to a broker or dealer, coupled with an agreement to purchase securities of the same type and interest coupon at a fixed price for settlement at a later date. Under generally accepted accounting principles, these transactions are properly accounted for as borrowings secured by mortgage-backed securities. The Company pays the brokers and dealers a fixed rate of interest for the use of the funds for the period involved, which is generally short-term. At maturity, the secured borrowings are repaid (by purchase of similar securities) and similar securities are delivered to the Company. The Company monitors the level of activity with any one party in connection with reverse repurchase agreements and dollar reverses in order to minimize its risk exposure in these transactions. Reverse repurchase agreements and dollar reverses amounted to $1.0 billion at December 31, 1999, compared to $1.3 billion at yearend 1998. ITEM 1. BUSINESS (Continued) BORROWINGS (continued) At December 31, 1999, Golden West, at the holding company level, had principal amounts outstanding of $813 million of subordinated debt. As of December 31, 1999, Golden West's subordinated debt securities were rated A3 and A- by Moody's Investors Service (Moody's) and Standard & Poor's Corporation (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 December 31, 1999, WFSB had not issued any notes under this authority. The table below sets forth the composition of the Company's borrowings at December 31.
TABLE 5 Composition of Borrowings (Dollars in thousands) 1999 1998 1997 1996 1995 ------------ ------------ ------------- ------------- ------------ FHLB advances. . . . . . . . . . . $ 8,915,218 $ 6,163,472 $ 8,516,605 $ 8,798,433 $ 6,447,201 Reverse repurchase agreements. . . 970,129 1,252,469 2,334,048 1,614,763 1,752,171 Dollar reverse repurchase 75,047 -0- -0- 293,363 65,772 agreements . Medium-term notes . . . . . . . . . -0- -0- 109,992 589,845 1,597,507 Subordinated debt . . . . . . . . . 812,950 911,753 1,110,488 1,323,996 1,322,392 ------------ ------------ ------------- ------------- ------------ Total borrowings. . . . . . . . $10,773,344 $ 8,327,694 $ 12,071,133 $ 12,620,400 $11,185,043 ============ ============ ============= ============= ============ Weighed average interest rate of total borrowings . . . . . . 5.77% 5.87% 5.99% 5.80% 6.15% ============ ============ ============= ============= ============
More information concerning the borrowings of the Company is included in Notes K, L, and M to the Financial Statements which are included in Item 14. ITEM 1. BUSINESS (Continued) LOANS RECEIVABLE AND MORTGAGE-BACKED SECURITIES The Company invests primarily in whole loans. The Company securitizes loans from its portfolio into mortgage-backed securities (MBS) and Real Estate Mortgage Investment Conduit Securities (MBS-REMICs). From time to time, the Company purchases MBS. MBS and MBS-REMICs are available to be used as collateral for borrowings. At December 31, 1999 and 1998, the balance of loans receivable including mortgage-backed securities was $39.6 billion and $35.8 billion, respectively. Included in the $39.6 billion at December 31, 1999 was $3.9 billion of Federal National Mortgage Association (FNMA) mortgage-backed securities with the underlying loans subject to full credit recourse to the Company, $7.2 billion of MBS-REMICs, and $514 million of purchased MBS. Included in the $35.8 billion at December 31, 1998, was $3.9 billion of FNMA MBS with the underlying loans subject to full credit recourse to the Company, $5.5 billion of MBS-REMICs, and $686 million of purchased MBS. The loan portfolio, including MBS, grew $3.8 billion or 11% for the year ended December 31, 1999. The balance of the loan portfolio decreased by $1.5 billion or 4% for the year ended December 31, 1998, due to a high level of prepayments and an increase in loans sold. MORTGAGE-BACKED SECURITIES The Company classifies its MBS as either held to maturity or available for sale. The Company has no trading MBS. MBS held to maturity are recorded at cost because the Company has the ability to hold these MBS to maturity and because Management intends to hold these securities to maturity. Premiums and discounts on MBS are amortized or accreted using the interest method over the estimated life of the security. At December 31, 1999, 1998, and 1997, the Company had MBS held to maturity in the amount of $11.6 billion, $9.9 billion, and $3.8 billion, respectively. MBS available for sale are reported at fair value, with unrealized gains and losses excluded from earnings and reported net of applicable income taxes as a separate component of stockholders' equity until realized. At December 31, 1999, 1998, and 1997, the Company had mortgage-backed securities available for sale in the amount of $79 million, $114 million, and $157 million, respectively, including unrealized gains on mortgage-backed securities available for sale of $1 million, $5 million, and $8 million, respectively. Realized gains or losses on sales of MBS are recorded in earnings at the time of sale and are determined by the difference between the net sales proceeds and the cost of the MBS, using specific identification, adjusted for any unamortized premium or discount. During 1999 and 1998, the Company securitized $3.7 billion and $6.4 billion, respectively, of mortgage loans into Real Estate Mortgage Investment Conduits formed by WFSB. MBS-REMICs are being used as collateral for borrowings. MBS-REMICs are classified as MBS held to maturity. ITEM 1. BUSINESS (Continued) MORTGAGE-BACKED SECURITIES (continued) During 1999, 1998, and 1997 the Company securitized $1.1 billion, $1.8 billion, and $1.0 billion, respectively, of adjustable rate mortgages (ARMs) into FNMA Eleventh District Cost of Funds Index (COFI)-indexed MBS. 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. During 1997, the Company desecuritized $856 million of FNMA COFI-indexed MBS. Repayments of MBS during the years 1999, 1998, and 1997 amounted to $2.8 billion, $2.1 billion, and $518 million, respectively. MBS repayments were higher in 1999 due to the increase in total MBS outstanding partially offset by a decrease in the prepayment rate. MBS repayments were higher in 1998 due to the increase in total MBS outstanding and an increase in the prepayment rate. For information on MBS, see Notes D and E to the Financial Statements included in Item 14. LOANS Income from real estate loans provides the principal source of revenue to the Company in the form of interest, loan origination fees, and other fees. Loans made by the Company are generally secured by first liens primarily on residential properties. Although the Company has from time to time made commercial real estate and construction loans, the Company is not currently active in these segments of the lending market. The Company has the authority to originate loans in any part of the United States. At December 31, 1999, the Company was originating loans in Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Idaho, Indiana, Illinois, Kansas, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Jersey, New Mexico, North Carolina, Oregon, Ohio, Pennsylvania, Texas, Tennessee, Utah, Virginia, Washington, and Wisconsin. The Company also makes loans to customers on the security of their deposit accounts. Deposit loans constituted less than one percent of the Company's total loans outstanding as of December 31, 1999 and 1998. ITEM 1. BUSINESS (Continued) LOANS (continued) The tables on the following two pages set forth the Company's loan portfolio by state as of December 31, 1999 and 1998.
TABLE 6 Loan Portfolio by State December 31, 1999 (Dollars in thousands) Residential Real Estate Commercial Loans -------------------------- Real Total as a% of State 1 - 4 5+ Land Estate Loans (a) Portfolio - ------------------ ------------ ----------- --------- ------------ ------------- ------------ California $21,870,151 $3,351,504 $ 185 $ 28,449 $ 25,250,289 64.39% Florida 1,767,662 14,878 -0- 461 1,783,001 4.55 Texas 1,580,035 59,381 374 1,208 1,640,998 4.18 New Jersey 1,342,963 -0- -0- 3,614 1,346,577 3.43 Illinois 1,212,369 119,469 -0- -0- 1,331,838 3.40 Washington 720,326 490,169 -0- -0- 1,210,495 3.09 Colorado 992,624 175,566 -0- 5,156 1,173,346 2.99 Arizona 845,995 18,653 -0- -0- 864,648 2.20 Other (b) 4,561,968 44,453 53 10,261 4,616,735 11.77 ------------ ----------- --------- ------------ ------------- --------- Totals $34,894,093 $4,274,073 $ 612 $ 49,149 39,217,927 100.00% ============ =========== ========= ============ ========= SFAS 91 deferred loan costs 70,211 Loan discount on purchased loans (1,967) Undisbursed loan funds (5,022) Allowance for loan losses (232,134) Loans to facilitate (LTF) interest reserve (325) Troubled debt restructured (TDR) interest reserve (1,079) Loans on deposits 20,107 ------------- Total loan portfolio and loans securitized into FNMA MBS with recourse and MBS-REMICs 39,067,718 Loans securitized into FNMA MBS and MBS-REMICs (11,147,901)(c) ------------- Total loan portfolio $ 27,919,817 =============
(a) The Company has no commercial loans other than commercial real estate loans. (b) Includes states with loans less than 2% of total loans. (c) The above schedule includes the December 31, 1999 balances of loans that were securitized and retained as FNMA MBS with recourse and MBS-REMICs. ITEM 1. BUSINESS (Continued) LOANS (continued)
TABLE 7 Loan Portfolio by State December 31, 1998 (Dollars in thousands) Residential Real Estate Commercial Loans -------------------------- Real Total as a% of State 1 - 4 5+ Land Estate Loans (a) Portfolio - ------------------ ------------ ----------- --------- ------------ ------------- ------------ California $19,786,322 $3,332,721 $ 212 $ 39,820 $ 23,159,075 65.59% Florida 1,462,265 17,826 2 687 1,480,780 4.19 Texas 1,400,077 67,615 519 1,342 1,469,553 4.16 Illinois 1,147,766 146,418 -0- -0- 1,294,184 3.67 New Jersey 1,210,384 -0- -0- 4,593 1,214,977 3.44 Colorado 959,218 194,823 -0- 5,482 1,159,523 3.28 Washington 545,150 427,989 -0- 686 973,825 2.76 Arizona 738,654 22,631 -0- -0- 761,285 2.16 Other (b) 3,730,209 50,589 65 13,123 3,793,986 10.75 ------------ ----------- --------- ------------ ------------- --------- Totals $30,980,045 $4,260,612 $ 798 $ 65,733 35,307,188 100.00% ============ =========== ========= ============ ========= SFAS 91 deferred loan fees (12,265) Loan discount on purchased loans (3,008) Undisbursed loan funds (3,080) Allowance for loan losses (244,466) Loans to facilitate (LTF) interest reserve (484) Troubled debt restructured (TDR) interest reserve (1,872) Loans on deposits 25,279 ------------- Total loan portfolio and loans securitized into FNMA MBS with recourse and MBS-REMICs 35,067,292 Loans securitized into FNMA MBS and MBS-REMICs (9,346,004)(c) ------------- Total loan portfolio $ 25,721,288 =============
(a) The Company has no commercial loans other than commercial real estate loans. (b) Includes states with loans less than 2% of total loans. (c) The above schedule includes the December 31, 1998 balances of loans that were securitized and retained as FNMA MBS with recourse and MBS-REMICs. ITEM 1. BUSINESS (Continued) LOANS (continued) The table below sets forth the composition of the Company's loan portfolio by type of collateral at December 31.
TABLE 8 Loan Portfolio by Type of Security (Dollars in thousands) 1999 1998 1997 1996 1995 ------------- ------------ ------------ ------------- ------------- Loans collateralized primarily by first deeds of trust: One-to four-family units . $ 26,041,066 $21,639,015 $28,978,476 $ 25,862,898 $ 24,071,421 Over four-family units. . . 1,979,199 4,260,631 4,462,990 4,403,389 4,205,050 Commercial real estate. . . 49,149 65,865 82,888 97,852 122,396 Construction loans. . . . . -0- -0- -0- -0- 1,471 Land. . . . . . . . . . . . 612 798 977 1,147 1,511 Loans on deposits . . . . 20,107 25,279 28,167 31,936 33,279 Less: Undisbursed loan funds. . . 5,022 3,080 3,306 3,920 3,568 Unearned fees (deferred costs) and discounts . . . . . (66,840) 17,629 45,953 69,938 88,194 Unamortized discount arising from acquisitions. . . -0- 5,125 10,250 14,241 20,025 Allowance for loan losses . 232,134 244,466 233,280 195,702 141,988 ------------- ------------ ------------ ------------- ------------- Total loans receivable . . . . 27,919,817 25,721,288 33,260,709 30,113,421 28,181,353 Loans securitized into MBS: One-to four-family units . 8,853,027 9,346,004 3,030,390 3,265,424 2,232,686 Over four-family units. . . 2,294,874 -0- -0- -0- -0- ------------- ------------ ------------ ------------- ------------- Total loans securitized into MBS 11,147,901 9,346,004 3,030,390 3,265,424 2,232,686 ------------- ------------ ------------ ------------- ------------- Loan Portfolio including MBS $ 39,067,718 $ 35,067,292 $36,291,099 $ 33,378,845 $ 30,414,039 ============= ============ ============ ============= =============
At December 31, 1999, 99% of the loans in the portfolio (including loans securitized into MBS) had remaining terms to maturity in excess of 10 years. The following table sets forth the amount of loans due after one year that have predetermined interest rates and the amount that have floating interest rates at December 31, 1999. ITEM 1. BUSINESS (Continued) LOANS (continued)
TABLE 9 Loans Due After One Year (Dollars in thousands) Loans Securitized Loans into MBS Receivable Total -------------- -------------- -------------- Adjustable Rate $ 10,079,236 $26,567,595 $36,646,831 Fixed Rate 1,067,717 1,321,373 2,389,090 -------------- -------------- -------------- $ 11,146,953 $27,888,968 $39,035,921 ============== ============== ==============
The following table sets forth information concerning new loans made by the Company during 1999, 1998, and 1997 by type and purpose of loan.
TABLE 10 New Loan Originations By Type and Purpose (Dollars in thousands) 1999 1998 1997 ------------------------------ ----------------------------- ------------------------------ No.of % of No.of % of No. of % of Type Loans Amount Total Loans Amount Total Loans Amount Total ----------------- ------- ----------- ------ ------- ---------- ------ ------- ----------- ------ Residential (one unit) 77,790 $11,740,910 92.7% 51,881 $7,585,610 92.7% 47,508 $6,847,344 91.5% Residential (2 to 4 units) 1,907 356,340 2.8 1,382 214,618 2.6 1,625 231,682 3.1 Residential (5 or more 865 574,961 4.5 733 387,706 4.7 726 403,947 5.4 units) ------- ----------- ------ ------- ---------- ------ ------- ----------- ------ Totals 80,562 $12,672,211 100.0% 53,996 $8,187,934 100.0% 49,859 $7,482,973 100.0% ======= =========== ====== ======= ========== ====== ======= =========== ====== 1999 1998 1997 ------------------------------ ----------------------------- ------------------------------ No.of % of No.of % of No. of % of Type Loans Amount Total Loans Amount Total Loans Amount Total ----------------- ------- ----------- ------ ------- ---------- ------ ------- ----------- ------ Purchase 52,685 $ 7,664,726 60.5% 30,902 $4,548,415 55.6% 33,663 $5,018,687 67.1% Refinance 27,877 5,007,485 39.5 23,094 3,639,519 44.4 16,196 2,464,286 32.9 ------- ----------- ------ ------- ---------- ------ ------- ----------- ------ Totals 80,562 $12,672,211 100.0% 53,996 $8,187,934 100.0% 49,859 $7,482,973 100.0% ======= =========== ====== ======= ========== ====== ======= =========== ======
New loan originations in 1999, 1998, and 1997 amounted to $12.7 billion, $8.2 billion, and $7.5 billion, respectively. The increase in 1999 was due to a strong housing market and the renewed demand for adjustable rate loans, the Company's primary product, as interest rates moved up and the cost of fixed-rate loans increased. In addition, the Company increased the size of its loan origination staff to take advantage of favorable market conditions. The increase in 1998 occurred because more consumers sought to refinance their existing home loans as well as a result of a strong housing market. Refinanced loans constituted 40% of new loan originations in 1999 compared to 44% in 1998 and 33% in 1997. ITEM 1. BUSINESS (Continued) LOANS (continued) The Company originates adjustable rate mortgages tied to various indexes, principally the Eleventh District Cost of Funds Index (COFI), the Golden West Cost of Savings Index (COSI), and the twelve-month rolling average of the One-Year U. S. Treasury Constant Maturity (TCM). The following table shows the distribution of ARM originations by index for the years ended December 31, 1999 and 1998.
TABLE 11 Adjustable Rate Mortgage Originations by Index (Dollars in thousands) ARM Index 1999 1998 - -------------------------- -------------- -------------- COFI $3,264,773 $3,753,081 COSI 7,996,477 1,738,592 TCM 270,651 1,243,315 -------------- -------------- $11,531,901 $6,734,988 ============== ==============
The following table shows the distribution by index of the Company's outstanding balance of adjustable rate mortgages (including ARM MBS with recourse and ARM MBS-REMICs) at December 31.
TABLE 12 Adjustable Rate Mortgage Portfolio by Index (Including ARM MBS with recourse and ARM MBS-REMICs) (Dollars in thousands) ARM Index 1999 1998 - -------------------------- -------------- -------------- COFI $26,217,670 $29,761,484 COSI 9,182,829 1,703,283 TCM 1,266,541 1,256,775 Other 152,470 201,756 -------------- -------------- $36,819,510 $32,923,298 ============== ==============
ITEM 1. BUSINESS (Continued) LOANS (continued) The largest source of mortgage originations is loans secured by residential properties in California. Loans originated in California were $8.0 billion in 1999 compared to $5.1 billion in 1998 and $4.0 billion in 1997. In 1999, 63% of total originations were on California residential property compared to 62% in 1998 and 54% in 1997. The five largest states, other than California, for originations for the year ended December 31, 1999 were Florida, Texas, Washington, New Jersey, and Illinois with a combined total of 19% of total originations. The percentage of loans originated in California increased in 1999 as compared to 1998 and in 1998 as compared to 1997 due to the strong California real estate market. Federal regulations permit federally chartered savings and loan associations and savings banks to make or purchase both fixed-rate loans and loans with periodic adjustments to the interest rate. These latter types of loans are subject to the following primary limitations: (i) the adjustments must be based on changes in a specified interest rate index, which may be selected by the association or savings bank but which must be readily available to, and independently verifiable by, the borrower; and (ii) adjustments to the interest rate may be implemented through changes in the monthly payment amount and/or adjustment to the outstanding principal balance or term. Pursuant to the aforementioned powers, the Company offers adjustable rate mortgages, and this type of mortgage is the Company's primary real estate loan. The portion of the mortgage portfolio (including MBS) composed of rate-sensitive loans was 93% at yearend 1999 compared to 92% at yearend 1998 and 91% at yearend 1997. The Company's ARM originations constituted approximately 91% of new mortgage loans made in 1999, compared with 82% in 1998 and 95% in 1997. Most of the Company's ARMs carry an interest rate that changes monthly based on movements in certain indices. During the life of the loan, the interest rate may not be raised above a lifetime cap, set at the time of origination or assumption. The weighted average maximum lifetime cap rate on the Company's ARM loan portfolio was 12.44%, or 5.32% above the actual weighted average rate at December 31, 1999, versus 12.59%, or 5.36% above the weighted average rate at yearend 1998. The table on the following page shows the Company's ARM loans by lifetime cap bands as of December 31, 1999. ITEM 1. BUSINESS (Continued) LOANS (continued)
TABLE 13 Adjustable Rate Mortgage Portfolio by Lifetime Cap Bands December 31, 1999 (Dollars in thousands) ARM Number % of Total Cap Bands Balance of Loans Balance ---------------------------- ------------- ------------ ------------ Less than 9.00% $ -0- -0- 0.0% 9.00% - 9.49% 401 2 0.0% 9.50% - 9.99% 629 5 0.0% 10.00% - 10.49% 2,709 17 0.0% 10.50% - 10.99% 10,637 61 0.0% 11.00% - 11.49% 174,407 1,140 0.5% 11.50% - 11.99% 22,773,687 145,187 61.8% 12.00% - 12.49% 3,149,685 27,088 8.6% 12.50% - 12.99% 5,689,053 31,461 15.5% 13.00% - 13.49% 520,127 2,223 1.4% 13.50% - 13.99% 1,637,222 11,455 4.4% 14.00% or greater 2,835,545 19,662 7.7% No Cap 25,408 283 0.1% ------------- ------------ ------------ Total $ 36,819,510 238,584 100.0% ============= ============ ============
On most of the Company's ARMs, monthly payments of principal and interest are adjusted annually with a maximum increase or decrease of 7-1/2% of the prior year's payment. At five-year intervals, the payment may be adjusted without limit to amortize the loan fully within the then-remaining term. Within these five year periods, negative amortization (deferred interest) may occur to the extent that the loan balance remains below 125% of the original mortgage amount, unless the original loan to value ratio exceeded 85%, in which case the loan balance cannot exceed 110% of the original mortgage amount. On certain other ARMs, the payment and interest rate may change every six months, with the maximum rate per change capped at one percent. These ARMs do not allow negative amortization and, consequently, do not have the 7-1/2% payment change limitation. The Company also offers a "modified" ARM, a loan that offers a low introductory rate generally from 1% to 3% below the initial fully indexed contract rate for a specified period, normally one to 12 months. However, the borrower must qualify at the initial fully-indexed contract rate. ITEM 1. BUSINESS (Continued) LOANS (continued) Approximately $4.9 billion of the Company's ARMs (including MBS with recourse and MBS-REMICs) 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 December 31, 1999, $426 million of ARMs had reached their rate floors. The weighted average floor rate on the loans that had reached their floor was 7.69% at yearend 1999 compared to 7.72% at yearend 1998. Without the floor, the average yield on these loans would have been 6.92% at December 31, 1999 and 7.15% at December 31, 1998. Interest rates charged by the Company on real estate loans are affected principally by competition, and also by the supply of money available for lending, loan demand, and factors that are, in turn, affected by general economic conditions, regulatory and monetary policies of the federal government, the OTS and the Federal Reserve Board, and legislation and other governmental action dealing with budgetary and tax matters. The Company originates loans through offices that are staffed by employees who primarily contact local real estate brokers and mortgage brokers regarding possible lending opportunities. The Company's loan approval process is intended to assess both the borrower's ability to repay the loan and the adequacy of the proposed security. Documentation for all loans is maintained in the Company's loan servicing offices in San Antonio, Texas. The Company generally lends up to 80% of the appraised value of residential real property and, under certain circumstances, up to 97% of the appraised value of single-family residences. During 1999, 1998, and 1997, 5% of loans originated were in excess of 80% of the appraised value of the residence. The Company requires title insurance for all mortgage loans and requires that fire and casualty insurance be maintained on all improved properties that are security for its loans. The original contractual loan payment period for residential loans normally ranges from 15 to 40 years with most having original terms of 30 years. However, the majority of such loans remain outstanding for a shorter period of time. ITEM 1. BUSINESS (Continued) LOANS (continued) To generate income and to provide additional funds for lending and liquidity, the Company has from time to time sold, without recourse, whole loans and participations in pools of loans to the Federal National Mortgage Association. Beginning in 1995, the Company began sales to FNMA of whole loans with recourse, for which a recourse liability has been provided. The Company continues to collect payments on the loans as they become due, and otherwise to service the loans. The Company pays an agreed-upon yield on the buyer's portion of the loans. This yield is usually less than the interest agreed to be paid by the borrower, with the difference being retained by the Company as servicing fee income. Loans originated for sale were $793 million, $1.2 billion, and $217 million for the years ended December 31, 1999, 1998, and 1997, respectively. The reduction in loans originated for sale in 1999 as compared to 1998 was attributable to the decrease in fixed-rate originations due to higher rates being charged on fixed-rate loans. In addition, during 1999 and 1998, $522 million and $229 million, respectively, of loans were converted, at the borrower's request, from adjustable rate to fixed-rate. The Company sold $1.2 billion, $1.4 billion, and $209 million of loans during 1999, 1998, and 1997, respectively. The Company recognized pre-tax gains of $22 million in 1999 compared to $25 million in 1998 and $5 million in 1997. Included in the $22 million gain in 1999 was $21 million due to the capitalization of mortgage servicing rights (see page 22 for further information). The loans held for sale portfolio had a balance of $88 million at December 31, 1999, all of which are carried at the lower of cost or market. At December 31, 1999, the balance of loans sold with recourse was $2.1 billion. In addition to the loan portfolio (including MBS with recourse and MBS-REMICs), the Company was engaged in servicing approximately $3.1 billion of loan participations and whole loans for others at December 31, 1999. For the years ended December 31, 1999 and 1998, fees received for such servicing activities totaled $21 million, respectively. Loan repayments consist of monthly loan amortization and loan payoffs. During 1999, 1998, and 1997, loan repayments (excluding MBS) amounted to $4.9 billion, $6.2 billion, and $3.8 billion, respectively. The decrease in repayments in 1999 was due to a decrease in the loan prepayment rate during the second half of the year. The increase in repayments in 1998 as compared to 1997 was due to an increase in refinance and home sale activity. (See page 11 for MBS repayment discussion.) ITEM 1. BUSINESS (Continued) LOANS (continued) In addition to interest earned on loans, the Company receives fees for originating loans. The income represented by such fees varies with the volume and types of loans made. In 1999, 1998, and 1997, the Company responded to increased competition from fixed-rate lenders by offering more low and zero point adjustable rate mortgage options to its customers. The Company also charges fees for loan prepayments, loan assumptions and modifications, late payments and other miscellaneous services. The following table sets forth information relating to interest rates and loan fees charged for the years indicated.
TABLE 14 Weighted Average Interest Rates and Fees on New Loan Originations (a) 1999 1998 1997 1996 1995 --------- -------- --------- -------- --------- Fully-indexed weighted average interest rate on new real estate loans originated 7.60% 7.72% 7.59% 7.59% 7.56% Current weighted average interest rate on new real estate loans originated (b) 5.97% 6.20% 6.42% 6.56% 6.58% Weighted average loan fees received on new real estate loans originated .16% .26% .18% .25% .25%
(a) Excludes loans purchased. (b) The current rate reflects the introductory rate on new loans being paid by the borrower. If a borrower fails to make required payments on a loan, the Company takes steps required under applicable law to foreclose upon the security for the loan. If a delinquency is not cured, the property is generally acquired by the Company in a foreclosure sale or by taking a deed in lieu of foreclosure. If the applicable period of redemption by the borrower (which varies from state to state and by method of foreclosure pursued) has expired, the Company is free to sell the property. The property may then be sold generally with a loan conforming to normal loan requirements, or with a "loan to facilitate sale" which is so designated if the loan involves terms more favorable to the borrower than those normally permitted. Various antideficiency and homeowner protective provisions of state law may limit the remedies available to lenders when a residential mortgage borrower is in default. The effect of these provisions, in most cases, is to limit the Company to foreclosing upon, or otherwise obtaining ownership of, the property securing the loan after default and to prevent the Company from recovering from the borrower any deficiency between the amount realized from the sale of such property and the amount owed by the borrower. ITEM 1. BUSINESS (Continued) MORTGAGE SERVICING RIGHTS Capitalized mortgage servicing rights are included in "Other assets" on the Consolidated Statement of Financial Condition. The following table shows the changes in capitalized mortgage servicing rights for the years ended 1999, 1998, and 1997.
TABLE 15 Capitalized Mortgage Servicing Rights (Dollars in thousands) 1999 1998 1997 ------------ ------------ ------------ Beginning balance of capitalized mortgage servicing rights $ 28,635 $ 11,116 $ 9,325 New capitalized mortgage servicing rights from loan sales 20,556 22,680 4,914 Amortization of capitalized mortgage servicing rights (11,896) (5,161) (3,123) ------------ ------------ ------------ Ending balance of capitalized mortgage servicing rights $ 37,295 $ 28,635 $ 11,116 ============ ============ ============
The book value of the Company's servicing rights did not exceed the fair value at December 31, 1999, 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 loan and MBS portfolio is its ratio of nonperforming assets (NPAs) to total assets. Nonperforming assets include nonaccrual loans (loans, including loans securitized into MBS with recourse and loans securitized into MBS-REMICs, that are 90 days or more past due) and real estate acquired through foreclosure. No interest is recognized on nonaccrual loans. The Company's troubled debt restructured (TDRs) are made up of loans on which delinquent payments have been capitalized or on which temporary interest rate reductions have been made, primarily to customers negatively impacted by adverse economic conditions. ITEM 1. BUSINESS (Continued) ASSET QUALITY (continued) The following table sets forth the components of the Company's NPAs and TDRs and the various ratios to total assets at December 31.
TABLE 16 Nonperforming Assets and Troubled Debt Restructured (Dollars in thousands) 1999 1998 1997 1996 1995 ----------- ---------- ---------- ----------- ----------- Non-accrual loans $ 225,409 $ 262,332 $ 317,550 $ 373,157 $ 314,086 Real estate acquired through foreclosure 10,840 42,572 61,517 82,075 75,158 Real estate in judgment 69 74 67 416 443 ----------- ---------- ---------- ----------- ----------- Total nonperforming assets $ 236,318 $ 304,978 $ 379,134 $ 455,648 $ 389,687 =========== ========== ========== =========== =========== TDRs $ 10,542 $ 22,774 $ 43,795 $ 84,082 $ 45,222 =========== ========== ========== =========== =========== Ratio of nonperforming assets to total .56% .79% .96% 1.21% 1.11% assets =========== ========== ========== =========== =========== Ratio of TDRs to total assets .03% .06% .11% .22% .13% =========== ========== ========== =========== =========== Ratio of NPAs and TDRs to total assets .59% .85% 1.07% 1.43% 1.24% =========== ========== ========== =========== ===========
The decrease in NPAs during 1999, 1998 and 1997 reflected the strengthening California economy and housing market in those years. The increase in NPAs during 1996 reflected the continued weakness in the California housing market during 1996 and increased bankruptcies nationwide. The Company closely monitors all delinquencies and takes appropriate steps to protect its interests. Interest foregone on non-accrual loans (loans greater than 90 days past due) amounted to $4 million in 1999, $8 million in 1998, and $14 million in 1997. The Company's TDRs were $11 million, or .03% of assets, at December 31, 1999, compared to $23 million, or .06% of assets, at yearend 1998 and $44 million, or .11% of assets, at yearend 1997. Interest foregone on TDRs amounted to $446 thousand in 1999 compared to $899 thousand in 1998 and $1.9 million in 1997. The tables on the following page show the Company's nonperforming assets by state at December 31, 1999 and 1998. ITEM 1. BUSINESS (Continued) ASSET QUALITY (continued)
TABLE 17 Nonperforming Assets by State December 31, 1999 (Dollars in thousands) Non-Accrual Loans(a) ----------------------------------- Real Estate Owned Residential -------------------- NPAs as Real Estate Commercial Residential Total a % of State 1 - 4 5+ Real Estate 1 - 4 5+ NPAs(b) Loans - --------------------- ---------- --------- ----------- --------- --------- ---------- ----------- California $ 126,710 $ 2,063 $ 2,281 $ 7,630 $ -0- $ 138,684 0.55% Florida 15,987 -0- 179 756 -0- 16,922 0.95 Texas 8,030 -0- -0- 892 -0- 8,922 0.54 New Jersey 16,251 -0- 384 87 -0- 16,722 1.24 Illinois 10,000 216 -0- 170 -0- 10,386 0.78 Washington 2,052 -0- -0- -0- -0- 2,052 0.17 Colorado 2,296 407 -0- -0- -0- 2,703 0.23 Arizona 5,301 -0- -0- 81 -0- 5,382 0.62 Other (c) 30,439 84 2,729 1,522 -0- 34,774 0.75 ---------- --------- ----------- --------- --------- ---------- -------- Totals $ 217,066 $ 2,770 $ 5,573 $11,138 $ -0- 236,547 0.60 ========== ========= =========== ========= ========= REO general valuation allowance (229) (0.00) ---------- -------- Total nonperforming assets $ 236,318 0.60% ========== ========
(a) Non-accrual loans are 90 days or more past due and have no unpaid interest accrued. (b) The December 31, 1999 balances include loans that were securitized into FNMA MBS and MBS-REMICs. (c) Includes states with loans less than 2% of total loans.
TABLE 18 Nonperforming Assets by State December 31, 1998 (Dollars in thousands) Non-Accrual Loans(a) ----------------------------------- Real Estate Owned Residential -------------------- NPAs as Real Estate Commercial Residential Total a % of State 1 - 4 5+ Real Estate 1 - 4 5+ NPAs(b) Loans - --------------------- ---------- --------- ----------- --------- --------- ---------- ----------- California $ 171,362 $ 3,334 $ 944 $ 36,213 $ 703 $ 212,556 0.92% Florida 17,117 -0- 79 1,025 -0- 18,221 1.23 Texas 8,590 -0- -0- 1,300 -0- 9,890 0.67 Illinois 11,526 219 -0- 906 -0- 12,651 0.98 New Jersey 17,495 -0- 374 946 -0- 18,815 1.55 Colorado 1,140 -0- 3 -0- -0- 1,143 0.10 Washington 2,442 -0- -0- -0- -0- 2,442 0.25 Arizona 1,732 -0- -0- 78 -0- 1,810 0.24 Other (c) 25,975 -0- -0- 2,374 -0- 28,349 0.75 ---------- --------- ----------- --------- --------- ---------- -------- Totals $ 257,379 $ 3,553 $ 1,400 $ 42,842 $ 703 305,877 0.87 ========== ========= =========== ========= ========= REO general valuation allowance (899) (0.00) ---------- -------- Total nonperforming assets $ 304,978 0.87% ========== ========
(a) Non-accrual loans are 90 days or more past due and have no unpaid interest accrued. (b) The December 31, 1998 balances include loans that were securitized into FNMA MBS and MBS-REMICs. (c) Includes states with loans less than 2% of total loans. ITEM 1. BUSINESS (Continued) ASSET QUALITY (Continued) At December 31, 1999, approximately $318 million of the Company's loans were 30 to 89 days past due. An additional $163 million of loans were performing under bankruptcy protection. Management has included its estimate of potential losses on these loans in the allowance for loan losses. The Company provides specific valuation allowances for losses on loans when impaired, and on real estate owned when any significant and permanent decline in value is identified. The Company also utilizes a methodology for monitoring and estimating loan losses and recourse obligations that is based on both historical experience in the loan portfolio and factors reflecting current economic conditions. This approach uses a data base 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 the security property, 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 years indicated.
TABLE 19 Changes in Allowance for Loan Losses (Dollars in thousands) 1999 1998 1997 1996 1995 ----------- ----------- ---------- ----------- ---------- Beginning allowance for loan losses $ 244,466 $ 233,280 $195,702 $ 141,988 $ 124,003 Provision for (recovery of) loan losses charged to expense (2,089) 11,260 57,609 84,256 61,190 Transfer of allowance to reserve for losses on loans sold or securitized and retained (12,043) -0- -0- -0- -0- Less loans charged off -0- (1,387) (20,818) (31,239) (44,656) Add recoveries 1,800 1,313 787 697 1,451 ----------- ----------- ---------- ----------- ---------- Ending allowance for loan losses $ 232,134 244,466 233,280 195,702 141,988 =========== =========== ========== =========== ========== Ratio of net chargeoffs to average loans outstanding (including MBS with recourse) (.01)% .00% .06% .10% .15% =========== =========== ========== =========== ========== Ratio of allowance for loan losses to nonperforming assets 98.2% 80.2% 61.5% 43.0% 36.4% =========== =========== ========== =========== ==========
Chargeoffs decreased in 1999 as compared to 1998 and in 1998 as compared to 1997 primarily due to the strong California economy and housing market. ITEM 1. BUSINESS (Continued) ASSET QUALITY (Continued) The table below shows the changes in the reserve for losses on loans sold with recourse or securitized and retained for the years ended 1999, 1998, and 1997.
TABLE 20 Changes in Reserve for Losses on Loans Sold with Recourse or Securitized and Retained (Dollars in thousands) 1999 1998 1997 ---------- ---------- ---------- Beginning balance of reserve for losses on loans sold with recourse or securitized and retained $ 2,256 $ 886 $ 602 Initial recourse liability recognized at time of sale 1,273 1,370 284 Net transfers from allowance for loan losses 12,043 -0- -0- ---------- ---------- ---------- Ending balance of reserve for losses on loans sold with recourse or securitized and retained $15,572 $ 2,256 $ 886 ========== ========== ==========
The ratio to nonperforming assets of the allowance for loan losses and the reserve for losses on loans sold with recourse or securitized and retained was 104.82%, 80.90% and 61.76% at December 31, 1999, 1998, and 1997, respectively. At December 31, 1999, 1998, and 1997, the ratio to total loans (including MBS with recourse and MBS-REMICs) of the allowance for loan losses and the reserve for losses on loans sold with recourse or securitized and retained was .63%, .70% and .65%, respectively. ITEM 1. BUSINESS (Continued) INVESTMENT ACTIVITIES The Company classifies its investment securities as either held to maturity or available for sale. The Company has no trading securities. Held to maturity securities are recorded at cost with any discount or premium amortized using a method that is not materially different from the interest method, which is also known as the level yield method. Securities held to maturity are recorded at cost because the Company has the ability to hold these securities to maturity and because it is Management's intention to hold them to maturity. Securities available for sale increase the Company's portfolio management flexibility for investments and are reported at fair value. Net unrealized gains and losses are excluded from earnings and reported net of applicable income taxes in other comprehensive income and as a separate component of stockholders' equity until realized. Realized gains or losses on sales of securities are recorded in earnings at the time of sale and are determined by the difference between the net sales proceeds and the cost of the security, using specific identification, adjusted for any unamortized premium or discount. The Company has Other Investments which are recorded at cost with any discount or premium amortized using a method that is not materially different from the interest method. In determining the amounts of assets to invest in each class of investments, the Company considers relative rates, liquidity, and credit quality. The table below sets forth the composition of the Company's securities available for sale at December 31.
TABLE 21 Composition of Securities Available for Sale (Dollars in thousands) 1999 1998 1997 ------------ ------------ ------------ Equity securities $ 264,491 $ 363,427 $ 335,267 U.S. Treasury and Government agency obligations 6,344 5,814 201,845 Collateralized mortgage obligations 787 7,764 71,432 Certificate of deposit 4,996 -0- -0- Commercial paper 19,818 -0- -0- Medium-term notes 23,008 -0- -0- ------------ ------------ ------------ $ 319,444 $ 377,005 $ 608,544 ============ ============ ============
Included in the balances above are net unrealized gains on investment securities available for sale of $260 million, $358 million, and $245 million at December 31, 1999, 1998, and 1997, respectively. The cost basis of the securities available for sale portfolio at December 31, 1999, 1998, and 1997 was $59 million, $19 million and $364 million, respectively, and had weighted average yields of 12.78%, 19.21%, and 6.88% at December 31, 1999, 1998, and 1997, respectively. The higher yield in 1999 and 1998 reflects the effect of the high yield on the Federal Home Loan Mortgage Corporation stock on a smaller available for sale portfolio. ITEM 1. BUSINESS (Continued) INVESTMENT ACTIVITIES (continued) The table below sets forth the composition of the Company's other investments at December 31.
TABLE 22 Composition of Other Investments (Dollars in thousands) 1999 1998 1997 ----------- ------------ ------------ Overnight Investments: Federal funds $ 88,510 $ 166,896 $ 72,648 Eurodollar time deposits 197,000 -0- 180,000 Longer-Term Investments: Bank notes 25,000 25,000 -0- Collateralized mortgage obligations 114,637 188,304 -0- Medium-term notes 42,009 42,185 -0- ----------- ------------ ------------ $ 467,156 $ 422,385 $ 252,648 =========== ============ ============
The weighted average yields on the other investments portfolio were 5.00%, 4.92%, and 5.91% at December 31, 1999, 1998, and 1997, respectively. There were no sales of other investments during 1999, 1998, or 1997. Included in the Company's investment portfolio at December 31, 1999, 1998, and 1997, were collateralized mortgage obligations (CMOs) in the amount of $115 million, $196 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 December 31, 1999, all of the Company's CMOs qualified for inclusion in the regulatory liquidity measurement. 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 the Company's 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 related 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, in 1996 the Company wrote off goodwill totaling $205 million 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, was not material and was reclassified to other assets. Amortization of goodwill is recorded on the Company's Consolidated Statement of Net Earnings under the section titled "Noninterest Income - Other". ITEM 1. BUSINESS (Continued) STOCKHOLDERS' EQUITY The Company's stockholders' equity increased by $71 million during 1999 as a result of earnings partially offset by the $345 million cost of the repurchase of Company stock, decreased market values of securities available for sale, and the payment of quarterly dividends to stockholders. The Company's stockholders' equity increased by $426 million during 1998 as a result of earnings and increased market values of securities available for sale. These 1998 increases were partially offset by the $80 million cost of the repurchase of Company stock and the payment of quarterly dividends to stockholders. The Company's stockholders' equity increased by $348 million during 1997 as a result of earnings and increased market values of securities available for sale. These increases in 1997 were partially offset by the $48 million cost of the repurchase of Company stock and the payment of quarterly dividends to stockholders. In November 1999, the Company effected a three-for-one split of its outstanding Common Stock in the form of a 200% stock dividend. This dividend was payable December 10, 1999, to holders of record at the close of business on November 15, 1999. Per share amounts, in this 10-K filing, have been restated to reflect this stock dividend unless otherwise noted. Since 1993, through four separate actions, the Company's Board of Directors has authorized the purchase by the Company of up to 44.7 million shares of Golden West's common stock. As of December 31, 1999, 39.2 million shares had been repurchased and retired at a cost of $806 million since October 28, 1993, of which 10.7 million shares were purchased and retired at a cost of $345 million during 1999. 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. ITEM 1. BUSINESS (Continued) NEW ACCOUNTING PRONOUNCEMENTS 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 derivative instruments as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133" (SFAS 137) which delayed the effective date of SFAS 133 until fiscal years beginning after June 15, 2000. The Company has not yet adopted SFAS 133, but if SFAS 133 had been adopted at December 31, 1999, given the interest rate environment at that time, it would not have had a significant effect on the Company's financial statements or financial position. EARNINGS PER SHARE (EPS) The Company's Basic EPS before extraordinary items was $2.90 for the year ended December 31, 1999, compared to $2.60 and $2.07 for the years ended December 31, 1998 and 1997, respectively. The Company reported Diluted EPS before extraordinary items of $2.87 for the year ended December 31, 1999 as compared to $2.58 and $2.04 for the years ended December 31, 1998 and 1997, respectively. EXTRAORDINARY ITEM During 1998, the Company paid off, before maturity, $4.4 billion of high-cost FHLB of San Francisco advances and, as a result, incurred a $21 million pre-tax charge for the penalties associated with these prepayments which was recorded as an extraordinary item. YIELD ON INTEREST-EARNING ASSETS/COST OF FUNDS Information regarding the Company's yield on interest-earning assets and cost of funds at December 31, 1999, 1998, and 1997 is contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and is incorporated herein by reference. ITEM 1. BUSINESS (Continued) YIELD ON INTEREST-EARNING ASSETS/COST OF FUNDS (Continued) The gap table and related discussion included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, gives information on the repricing characteristics of the Company's interest-earning assets and interest-bearing liabilities at December 31, 1999, and is incorporated herein by reference. The dollar amounts of the Company's income and interest expense fluctuate depending both on changes in the respective interest rates and on changes in the respective amounts (volume) of interest-earning assets and interest-bearing liabilities. The following table sets forth certain information with respect to the yields earned and rates paid on the Company's interest-earning assets and interest-bearing liabilities.
TABLE 23 Average Interest-Earning Assets and Interest-Bearing Liabilities At and for the Years Ended December 31 (Dollars in thousands) 1999 1998 1997 ---------------------------- ---------------------------- ----------------------------- End of End of End of Average Average Period Average Average Period Average Average Period Balances Yield Yield Balances Yield Yield Balances Yield Yield ---------- ------- ------- ---------- ------- ------- ----------- ------- ------- ASSETS Investment Securities $ 3,207,032 5.35% 5.88% $ 2,956,971 5.72% 5.53% $ 2,025,096 6.06% 6.48% Mortgage-backed securities 10,929,555 7.04% 7.17% 6,891,798 7.23% 7.20% 3,985,408 7.09% 7.23% Loans receivable (a) 25,727,762 7.20% 7.16% 29,982,931 7.52% 7.36% 32,037,925 7.47% 7.53% Invest. in capital stock 612,579 5.43% 5.51% 692,345 5.87% 5.50% 566,678 6.19% 5.86% of FHLB ---------- ------- ---------- ------- ----------- ------- Interest-earning assets $40,476,928 6.98% $40,524,045 7.31% $38,615,107 7.34% ========== ======= ========== ======= =========== ======= LIABILITIES Deposits: Checking accounts $ 110,394 2.20% 3.06% $ 79,172 1.50% 2.06% $ 93,472 1.18% 1.75% Savings accounts 9,888,073 3.93% 3.92% 6,805,841 3.98% 3.97% 3,112,833 2.79% 3.75% Term accounts 17,419,254 4.94% 5.12% 19,028,844 5.32% 5.07% 20,700,959 5.42% 5.37% ---------- ------- ------- ---------- ------- ------- ----------- ------- ------- Total deposits 27,417,721 4.56% 4.69% 25,913,857 4.96% 4.67% 23,907,264 5.06% 5.04% Advances from FHLB 6,943,505 5.48% 5.64% 7,389,038 5.94% 5.67% 7,813,493 5.59% 5.78% Reverse repurchases 1,189,581 5.18% 5.46% 2,004,388 5.64% 5.39% 2,630,958 5.72% 5.73% Other borrowings 2,123,789 6.13% 7.63% 2,408,791 6.57% 7.90% 2,000,791 7.24% 7.94% ---------- ------- ---------- ------- ----------- ------- Interest-bearing $37,674,596 4.84% $37,716,074 5.29% $36,352,506 5.34% liabilities ========== ======= ========== ======= =========== ======= Net interest spread 2.14% 2.02% 2.00% ======= ======= ======= Net interest income $ 1,003,485 $ 967,322 $ 890,495 ========== ========== =========== Net yield on average interest-earning assets 2.48% 2.39% 2.31% ======= ======= =======
(a) Includes nonaccrual loans (90 days or more past due). ITEM 1. BUSINESS (Continued) YIELD ON INTEREST-EARNING ASSETS/COST OF FUNDS (continued) The table below presents the changes for 1999 and 1998 from the respective preceding year of the interest income and expense associated with each category of interest-bearing asset and liability as allocated to changes in volume and changes in rates.
TABLE 24 Volume and Rate Analysis of Interest Income and Interest Expense Years Ended December 31 (Dollars in thousands) Increase/Decrease in Income/Expense Due to Changes in Volume and Rate(a) -------------------------------------------------------------- 1999 1998 1997 1999 versus 1998 1998 versus 1997 ---------- ---------- ----------- ------------------------------ ------------------------------ Income/ Income/ Income/ Expense(b) Expense(b) Expense(b) Volume Rate Total Volume Rate Total ---------- ---------- ----------- -------- --------- --------- --------- --------- -------- Interest Income Investments $ 171,498 $ 169,194 $ 122,765 $ 10,175 $ (7,871) $ 2,304 $ 52,880 $ (6,451) $ 46,429 Mortgage-backed 769,314 498,319 282,499 283,844 (12,849) 270,995 210,039 5,781 215,820 securities Loans receivable 1,851,790 2,254,427 2,392,175 (309,438) (93,199) (402,637) (154,648) 16,900 (137,748) Invest. in capital stock of Federal Home Loan Banks 33,243 40,613 35,058 (4,467) (2,903) (7,370) 7,249 (1,694) 5,555 ---------- ---------- ----------- Total interest income 2,825,845 2,962,553 2,832,497 Interest Expense Deposits Checking accounts 2,433 1,184 1,100 567 682 1,249 (109) 193 84 Savings accounts 388,113 271,172 86,799 120,917 (3,976) 116,941 135,416 48,957 184,373 Term accounts 859,818 1,012,987 1,121,747 (82,333) (70,836) (153,169) (89,299) (19,461) (108,760) ---------- ---------- ----------- -------- --------- --------- --------- --------- -------- Total deposits 1,250,364 1,285,343 1,209,646 39,151 (74,130) (34,979) 46,008 29,689 75,697 Advances from Federal Home Loan Banks 380,189 438,660 437,028 (25,552) (32,919) (58,471) (12,543) 14,175 1,632 Securities sold under agreements to repurchase 61,565 112,942 150,557 (42,794) (8,583) (51,377) (35,339) (2,276) (37,615) Other borrowings 130,242 158,286 144,771 (17,929) (10,115) (28,044) 24,589 (11,074) 13,515 ---------- ---------- ----------- -------- --------- --------- --------- --------- -------- Total interest expense 1,822,360 1,995,231 1,942,002 ---------- ---------- ----------- Net interest income $1,003,485 $ 967,322 $ 890,495 $ 27,238 $ 8,925 $ 36,163 $ 92,805 $(15,978) $76,827 ========== ========== =========== ======== ========= ========= ========= ========= ======== Net interest income increase (decrease) as a percentage of average earning assets (c) .07% .02% .09% .23% (.04)% .19% ======== ========= ========= ========= ========= ========
(a) The change in volume is calculated by multiplying the difference between the average balance of the current year and the prior year by the prior year's average yield. The change in rate is calculated by multiplying the difference between the average yield of the current year and the prior year by the prior year's average balance. The mixed changes in rate/volume is calculated by multiplying the difference between the average balance of the current year and the prior year by the difference between the average yield of the current year and the prior year. This amount is then allocated proportionately to the volume and rate changes calculated previously. (b) The effects of interest rate swap activity has been included in income and expense of the related assets and liabilities. (c) Includes nonaccrual loans (90 days or more past due). ITEM 1. BUSINESS (Continued) COMPETITION AND OTHER MATTERS The Company experiences strong competition in both attracting deposits and making real estate loans. Competition for savings deposits has historically come from money market mutual funds, other savings associations, commercial banks, and government and corporate debt securities. In addition, traditional financial institutions have found themselves in competition with other financial services entities, such as securities dealers, insurance companies, credit unions, and others, including Internet companies. The principal methods used by the Company to attract deposits, in addition to the interest rates and terms offered, include the offering of a variety of services and the convenience of office locations and hours of public operation. Competition in making real estate loans comes principally from other savings associations, mortgage banking companies, and commercial banks, as well as Internet Companies. Many of the nation's largest savings associations, mortgage banking companies, and commercial banks are headquartered or have a significant number of branch offices in the areas in which the Company competes. Changes in the government's monetary, tax, or housing financing policies can also affect the ability of lenders to compete profitably. The primary factors in competing for real estate loans are interest rates, loan fee charges, underwriting standards, and the quality of service to borrowers and their representatives. In addition, the Company competes indirectly with government-sponsored enterprises, notably the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC), and the Federal Home Loan Banks. THRIFT INDUSTRY The operations of the thrift industry are significantly influenced by general economic conditions, by the related monetary and fiscal policies of the federal government, and by the policies of financial institution regulatory authorities. Deposit flows and costs of funds are impacted by interest rates on competing investments and general market rates of interest. Lending and other investment activities are affected by the demand for mortgage financing and for consumer and other types of loans, which in turn are affected by the interest rates at which such financing may be offered and other factors affecting the supply of housing and the availability of funds. REGULATION FEDERAL HOME LOAN BANK SYSTEM. The FHLB system functions in a reserve credit capacity for its members, which may include savings associations, savings banks, commercial banks, and credit unions. As members, the Insured Institutions are required to own capital stock of a FHLB in an amount that depends generally upon their outstanding home mortgage loans or advances from such FHLB, and are authorized to borrow funds from such FHLB (see Borrowings). ITEM 1. BUSINESS (Continued) REGULATION (continued) LIQUIDITY. The Office of Thrift Supervision (OTS) requires insured institutions, such as WFSB and 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 to equal either a) 4% of the quarterly average of daily balances of short-term deposits and borrowings for the prior quarter or b) 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 equal to 5% of the monthly average of deposits and short-term borrowings. At December 31, 1999, 1998, and 1997, the Company's insured subsidiaries had liquidity in excess of the regulatory requirements. FEDERAL DEPOSIT INSURANCE CORPORATION. The deposit accounts of WFSB and WSSB are insured by the FDIC as part of the BIF, up to the maximum amount permitted by law, currently $100,000 per insured depositor. The deposit accounts of WSL are insured by the FDIC as part of the SAIF, also up to the maximum amount permitted by law. As a result, WFSB, WSL, and WSSB are subject to supervision, regulation, and examination by the FDIC. FDIC insurance is required for all federally chartered financial institutions such as WFSB and WSL, and for state chartered entities such as WSSB. Such BIF insurance may be terminated by the FDIC under certain circumstances involving violations of regulations or unsound practices. During 1996, federal legislation was enacted to capitalize the Savings Association Insurance Fund in order to bring it into parity with the FDIC's other insurance fund, the BIF. The new banking law required members to pay a levy of $4.7 billion to bring the SAIF up to the required reserve level of 1.25% of insured deposits, but lowered savings and loan deposit insurance premiums starting in 1997. As a result of this legislation, WSL incurred a one-time charge of $133 million during 1996. The premiums paid for the years 1997 through 1999 were adjusted quarterly. The current rate paid by SAIF insured institutions, such as WSL, is $.592 and the current rate paid by BIF insured institutions, such as WFSB and WSSB, is $.1184 per $1,000. Beginning on January 1, 2000, the premium paid by WFSB, WSL, and WSSB to the FDIC will be changed to $.212 per $1,000. The deposits of savings institutions insured by the SAIF may be converted to BIF insurance. Further, deposits insured by the BIF may be converted to SAIF insurance. Such conversions require payment of an exit fee to the insurance fund that the institution leaves and an entrance fee to the insurance fund that the institution enters. In addition, bank holding companies, which were previously authorized to acquire savings institutions only in connection with supervisory transactions, may now acquire savings institutions generally. ITEM 1. BUSINESS (Continued) REGULATION (continued) OFFICE OF THRIFT SUPERVISION. Because they are federally chartered savings institutions, the principal regulator of both WFSB and WSL is the OTS. Under various regulations of the OTS, savings associations are required, among other things, to pay assessments to the OTS, maintain required regulatory capital, maintain liquid assets above specified minimums, and to comply with various limitations on loans to one borrower, equity investments, investments in real estate, and investments in corporate debt securities that are not investment grade. FEDERAL RESERVE SYSTEM. Federal Reserve Board regulations require savings institutions to maintain noninterest-earning reserves against their checking accounts. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements. WFSB, WSL, and WSSB are currently in compliance with all applicable Federal Reserve Board reserve requirements. Savings associations have authority to borrow from the Federal Reserve Bank but the Federal Reserve Board requires savings associations to exhaust all FHLB sources before borrowing from the Federal Reserve Bank. REGULATORY CAPITAL. The OTS requires federally insured institutions such as WFSB and WSL to meet certain minimum capital requirements. The following table summarizes WFSB's regulatory capital ratios and compares them to the OTS minimum requirements at December 31.
TABLE 25 World Savings Bank, a Federal Savings Bank Regulatory Capital Ratios (Dollars in thousands) 1999 1998 -------------------------------------------------- -------------------------------------------------- ACTUAL REQUIRED ACTUAL REQUIRED ----------------------- ----------------------- ----------------------- ----------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ------------ --------- ------------ --------- ----------- --------- ----------- --------- Tangible $2,514,211 6.64% $ 567,705 1.50% $2,163,838 6.77% $ 479,370 1.50% Core 2,514,211 6.64 1,513,880 4.00 2,163,838 6.77 1,278,319 4.00 Risk-based 2,668,878 11.95 1,786,623 8.00 2,311,286 12.93 1,430,371 8.00
ITEM 1. BUSINESS (Continued) REGULATION (continued) The following table summarizes WSL's regulatory capital ratio and compares them to the OTS minimum requirements at December 31.
TABLE 26 World Savings and Loan Association Regulatory Capital Ratios (Dollars in thousands) 1999 1998 -------------------------------------------------- -------------------------------------------------- ACTUAL REQUIRED ACTUAL REQUIRED ----------------------- ----------------------- ----------------------- ----------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ------------ --------- ------------ --------- ----------- --------- ----------- --------- Tangible $ 382,972 7.86% $ 73,120 1.50% $ 473,523 7.25% $ 97,909 1.50% Core 382,972 7.86 194,986 4.00 473,523 7.25 261,091 4.00 Risk-based 413,636 15.47 213,950 8.00 617,654 16.24 304,286 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 WFSB and WSL do not have 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 institution falls into a certain classification depends primarily on its capital ratios. As of December 31, 1999, 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. ITEM 1. BUSINESS (Continued) REGULATION (continued) The table below shows a reconciliation of WFSB's equity capital to regulatory capital at December 31, 1999.
TABLE 27 World Savings Bank, a Federal Savings Bank Reconciliation of Equity Capital to Regulatory Capital (Dollars in thousands) Core/ Tier 1 Total Equity Tangible Tangible Leverage Risk-Based Risk-Based Capital Capital Equity Capital Capital Capital ------------ ------------- ------------ ------------ ------------- ------------ Common stock $ 150 Paid-in surplus 1,672,138 Retained earnings 841,923 Unrealized loss on securities after tax (20) ------------ Equity capital $ 2,514,191 $ 2,514,191 $ 2,514,191 $ 2,514,191 $ 2,514,191 $ 2,514,191 ============ General valuation allowance 154,667 Unrealized loss on securities after tax 20 20 20 20 20 ------------- ------------ ------------ ------------- ------------ Regulatory capital $ 2,514,211 $ 2,514,211 $ 2,514,211 $ 2,514,211 $ 2,668,878 ============= ============ ============ ============= ============ Total assets $37,835,121 ============ Adjusted total assets $ 37,846,989 $37,846,989 $37,846,989 ============= ============ ============ Risk-weighted assets $ 22,332,788 $22,332,788 ============= ============ CAPITAL RATIO - ACTUAL 6.65% 6.64% 6.64% 6.64% 11.26% 11.95% ============ ============= ============ ============ ============= ============ Regulatory Capital Ratio Requirements: Well-capitalized, equal to or greater than 5.00% 6.00% 10.00% ============ ============= ============
ITEM 1. BUSINESS (Continued) REGULATION (continued) The table below shows a reconciliation of WFSB's equity capital to regulatory capital at December 31, 1998.
TABLE 28 World Savings Bank, a Federal Savings Bank Reconciliation of Equity Capital to Regulatory Capital (Dollars in thousands) Core/ Tier 1 Total Equity Tangible Tangible Leverage Risk-Based Risk-Based Capital Capital Equity Capital Capital Capital ------------ ------------- ------------ ------------- ------------ ------------ Common stock $ 150 Paid-in surplus 1,672,138 Retained earnings 492,566 ------------ Equity capital $ 2,164,854 $ 2,164,854 $ 2,164,854 $ 2,164,854 $ 2,164,854 $ 2,164,854 ============ Positive goodwill (1,016) (1,016) (1,016) (1,016) (1,016) General valuation allowance 147,448 ------------- ------------ ------------- ------------ ------------ Regulatory capital $ 2,163,838 $ 2,163,838 $ 2,163,838 $ 2,163,838 $ 2,311,286 ============= ============ ============= ============ ============ Total assets $31,912,264 ============ Adjusted total assets $31,957,968 $31,957,968 $31,957,968 ============= ============ ============= Risk-weighted assets $17,879,637 $ 7,879,637 ============ ============ CAPITAL RATIO - ACTUAL 6.78% 6.77% 6.77% 6.77% 12.10% 12.93% ============ ============= ============ ============= ============ ============ Regulatory Capital Ratio Requirements: Well-capitalized, equal to or greater than 5.00% 6.00% 10.00% ============= ============ ============
ITEM 1. BUSINESS (Continued) REGULATION (continued) The table below shows a reconciliation of WSL's equity capital to regulatory capital at December 31, 1999.
TABLE 29 World Savings and Loan Association Reconciliation of Equity Capital to Regulatory Capital (Dollars in thousands) Core/ Tier 1 Total Equity Tangible Tangible Leverage Risk-Based Risk-Based Capital Capital Equity Capital Capital Capital ------------ ------------ ------------- ------------- ------------ ------------ Common stock $ 150 Paid-in surplus 233,441 Retained earnings 149,381 Unrealized gains on securities available for sale 157,252 ------------ Equity capital $ 540,224 $ 540,224 $ 540,224 $ 540,224 $ 540,224 $ 540,224 ============ Unrealized gains on securities available for sale (157,252) (157,252) (157,252) (157,252) (157,252) Equity/other investments (2,867) General valuation allowance exceeding limitation (8,073) General valuation allowance 41,604 ------------ ------------- ------------- ------------ ------------ Regulatory capital $ 382,972 $ 382,972 $ 382,972 $ 382,972 $ 413,636 ============ ============= ============= ============ ============ Total assets $ 5,051,847 ============ Adjusted total assets $4,874,645 $4,874,645 $4,874,645 ============ ============= ============= Risk-weighted assets $2,674,373 $2,674,373 ============ ============ CAPITAL RATIO - ACTUAL 10.69% 7.86% 7.86% 7.86% 14.32% 15.47% ============ ============ ============= ============ ============ ============= Regulatory Capital Ratio Requirements: Well-capitalized, equal to or greater than 5.00% 6.00% 10.00% ============ ============= ============
ITEM 1. BUSINESS (Continued) REGULATION (continued) The table below shows a reconciliation of WSL's equity capital to regulatory capital at December 31, 1998.
TABLE 30 World Savings and Loan Association Reconciliation of Equity Capital to Regulatory Capital (Dollars in thousands) Core/ Tier 1 Total Equity Tangible Tangible Leverage Risk-Based Risk-Based Capital Capital Equity Capital Capital Capital ------------ ------------ ------------- ------------- ------------ ------------ Common stock $ 150 Paid-in surplus 233,441 Retained earnings 239,932 Unrealized gains on securities available for sale 214,255 ------------ Equity capital $ 687,778 $ 687,778 $ 687,778 $ 687,778 $ 687,778 $ 687,778 ============ Unrealized gains on securities available for sale (214,255) (214,255) (214,255) (214,255) (214,255) Equity/other investments (3,108) Subordinated debt 99,818 General valuation allowance 47,421 ------------ ------------- ------------- ------------ ------------ Regulatory capital $ 473,523 $ 473,523 $ 473,523 $ 473,523 $ 617,654 ============ ============= ============= ============ ============ Total assets $6,810,266 ============ Adjusted total assets $6,527,285 $6,527,285 $6,527,285 ============ ============= ============= Risk-weighted assets $3,803,573 $3,803,573 ============ ============ CAPITAL RATIO - ACTUAL 10.10% 7.25% 7.25% 7.25% 12.45% 16.24% ============ ============ ============= ============= ============ ============ Regulatory Capital Ratio Requirements: Well-capitalized, equal to or greater than 5.00% 6.00% 10.00% ============ ============= ============
ITEM 1. BUSINESS (Continued) REGULATION (continued) The table below shows that WFSB's regulatory capital exceeds the requirements of the well-capitalized classification at December 31.
TABLE 31 World Savings Bank, a Federal Savings Bank Regulatory Capital Compared to Well-Capitalized Classification Requirement (Dollars in thousands) 1999 1998 ---------------------------------------------- ---------------------------------------------- ACTUAL WELL-CAPITALIZED ACTUAL WELL-CAPITALIZED --------------------- ---------------------- --------------------- ---------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ---------- -------- ----------- --------- ---------- -------- ---------- --------- Leverage $2,514,211 6.64% $1,892,349 5.00% $2,163,838 6.77% $1,597,898 5.00% Tier 1 risk based 2,514,211 11.26 1,339,967 6.00 2,163,838 12.10 1,072,778 6.00 Total risk-based 2,668,878 11.95 2,233,279 10.00 2,311,286 12.93 1,787,964 10.00
The table below shows that WSL's regulatory capital exceeds the requirements of the well-capitalized classification at December 31.
TABLE 32 World Savings and Loan Association Regulatory Capital Compared to Well-Capitalized Classification Requirement (Dollars in thousands) 1999 1998 ---------------------------------------------- ---------------------------------------------- ACTUAL WELL-CAPITALIZED ACTUAL WELL-CAPITALIZED --------------------- ---------------------- --------------------- ---------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ---------- -------- ----------- --------- ---------- -------- ---------- --------- Leverage $ 382,972 7.86% $ 243,732 5.00% $ 473,523 7.25% $ 326,364 5.00% Tier 1 risk based 382,972 14.32 160,462 6.00 473,523 12.45 228,214 6.00 Total risk-based 413,636 15.47 267,437 10.00 617,654 16.24 380,357 10.00
WSSB is a state chartered savings bank regulated by the FDIC. At December 31, WSSB had the following regulatory capital calculated in accordance with FDIC's capital standards:
TABLE 33 World Savings Bank, a State Chartered Savings Bank Regulatory Capital Ratios (Dollars in thousands) 1999 1998 --------------------------------------------- --------------------------------------------- ACTUAL REQUIRED ACTUAL REQUIRED --------------------- --------------------- --------------------- --------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ---------- -------- ---------- -------- ---------- -------- ---------- -------- Tier 1 Leverage $ 202,846 5.66% $ 107,593 3.00% $ 186,411 5.26% $ 106,220 3.00% Tier 1 risk based 202,846 26.90 30,161 4.00 186,411 25.12 29,686 4.00 Total risk-based 203,087 26.93 60,322 8.00 186,647 25.15 59,372 8.00
ITEM 1. BUSINESS (Continued) REGULATION (continued) CAPITAL DISTRIBUTIONS BY SAVINGS INSTITUTIONS. During 1999, WSL paid a total of $225 million in upstream dividends to Golden West. See Item 5, "MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS" on page 47, for a discussion on certain limitations imposed by the OTS on dividends paid by savings institutions. LIMITATION ON LOANS TO ONE BORROWER. Current law subjects savings institutions to the same loans-to-one borrower restrictions that are applicable to national banks with limited provisions for exceptions. In general, the national bank standard restricts loans to a single borrower to no more than 15% of a bank's unimpaired capital and unimpaired surplus, plus an additional 10% if the loan is collateralized by certain readily marketable collateral. (Real estate is not included in the definition of "readily marketable collateral".) At December 31, 1999, the maximum that WFSB could have loaned to one borrower was $400 million while the largest amount of loans it had to one borrower was $56 million. At December 31, 1999, the maximum amount that WSL could have loaned to one borrower (and related entities) was $62 million while the largest amount of loans WSL had outstanding to any one borrower was $5 million. DEPOSITOR PRIORITIES. In the event of the appointment of a receiver of a federally chartered savings association or savings bank, such as WFSB or WSL, or state-chartered savings banks such as WSSB, based upon the failure of the savings associations or savings banks to meet certain minimum capital requirements or the existence of certain other conditions, the Federal Deposit Insurance Act recognizes a priority in favor of holders of withdrawable deposits (including the FDIC subrogee or transferee) over general creditors (including holders of debt of the Insured Institutions). Thus, in the event of a liquidation of the Insured Institutions or a similar event, claims for deposits would have a priority over claims of holders of debt. As of December 31, 1999, the Insured Institutions had approximately $27.7 billion of deposits outstanding. ITEM 1. BUSINESS (Continued) REGULATION (continued) POWERS OF THE FDIC IN CONNECTION WITH THE INSOLVENCY OF AN INSURED DEPOSITORY INSTITUTION. If the FDIC is appointed a receiver or conservator of an insured depository institution, such as WFSB, WSL, or WSSB, the FDIC may disaffirm or repudiate any contract or lease to which such institution is a party, the performance of which is determined to be burdensome, and the disaffirmance or repudiation of which is determined to promote the orderly administration of the institution's affairs. The FDIC may contend that its power to repudiate "contracts" extends to obligations such as the debt of the depository institution, and at least one court has held that the FDIC can repudiate publicly-traded debt obligations. The effect of any such repudiation should be to accelerate the maturity of debt. Such repudiation would result in a claim by each holder of debt against the receivership. The claim may be for principal and interest accrued through the date of the appointment of the conservator or receiver. Alternatively, at least one court has held that the claim would be in the amount of the fair market value of the debt as of the date of the repudiation, which amount could be more or less than accrued principal and interest. The amount paid on the claims of the holders of the debt would depend, among other factors, upon the amount of receivership assets available for the payment of unsecured claims and the priority of the claim relative to the claims of other unsecured creditors and depositors, and may be less than the amount owed to the holders of the debt. See "Depositor Priorities" above. If the maturity of the debt were so accelerated, and a claim relating to the debt paid by the receivership, the holders of the debt might not be able, depending upon economic conditions, to reinvest any amounts paid on the debt at a rate of interest comparable to that paid on the debt. In addition, although the holders of the debt may have the right to accelerate the debt in the event of the appointment of a conservator or receiver of the depository institution, the FDIC as conservator or receiver may enforce most types of contracts, including the debt pursuant to their terms, notwithstanding any such acceleration provision. The FDIC as conservator or receiver may also transfer to a new obligor any of the depository institution's assets and liabilities, without the approval or consent of its creditors. In its resolutions of the problems of an insured depository institution in default or in danger of default, the FDIC is generally obligated to satisfy its obligations to insured depositors at the least possible cost to the deposit insurance fund. In addition, the FDIC may not take any action that would have the effect of increasing the losses to the relevant deposit insurance fund by protecting depositors for more than the insured portion of deposits (generally $100,000) or by protecting creditors other than depositors. Existing law authorizes the FDIC to settle all uninsured and unsecured claims in the insolvency of an insured institution by making a final payment after the declaration of insolvency. Such a payment would constitute full payment and disposition of the FDIC's obligations to claimants. Existing law provides that the rate of such final payment is to be a percentage reflecting the FDIC's receivership recovery experience. ITEM 1. BUSINESS (Continued) REGULATION (continued) SAVINGS AND LOAN HOLDING COMPANY LAW. Golden West is a "savings and loan holding company" under the HomeOwners' Loan Act (HOLA). As such, it has registered with the OTS and is subject to OTS regulation and OTS and FDIC examination, supervision, and reporting requirements. Among other things, the OTS has authority to determine that an activity of a savings and loan holding company constitutes a serious risk to the financial safety, soundness, or stability of its subsidiary savings institutions and thereupon may impose, among other things, restrictions on the payment of dividends by the subsidiary institutions and on transactions between the subsidiary institutions, the holding company, and subsidiaries or affiliates of either. As WFSB's, WSL's, and WSSB's parent company, Golden West is considered an "affiliate" of WFSB, WSL, and WSSB for regulatory purposes. In addition, WFSB, WSL, and WSSB are considered to be affiliates of each other. Savings associations and savings banks are subject to the rules relating to transactions with affiliates and loans to insiders generally applicable to commercial banks that are members of the Federal Reserve System set forth in Sections 23A, 23B, and 22(h) of the Federal Reserve Act, and with respect to savings associations, as well as additional limitations set forth in current law and as adopted by the OTS. In addition, current law generally prohibits a savings institution from lending or otherwise extending credit to an affiliate, other than the institution's subsidiaries, unless the affiliate is engaged only in activities that the Federal Reserve Board has determined to be permissible for bank holding companies and that the OTS has not disapproved. OTS regulations provide guidance in determining affiliates of a savings institution and in calculating compliance with the quantitative limitations on transactions with affiliates. QTL TEST. The HOLA requires savings institutions to meet a qualified thrift lender (QTL) test. Under the QTL test, a savings institution is required to maintain at least 65% of its "portfolio assets" in certain "qualified thrift investments" (primarily residential mortgages and related investments, including certain mortgage-backed and related securities) in at least nine months out of each 12 month period. A savings institution that fails the QTL test must either convert to a bank charter or operate under certain restrictions. At December 31, 1999, WFSB and WSL were in compliance with the QTL test. ITEM 1. BUSINESS (Continued) REGULATION (continued) TAXATION. The Company files consolidated federal income tax returns with its subsidiaries. The provision for federal and state taxes on income is based on taxes currently payable and taxes expected to be payable in the future as a result of events that have been recognized in the financial statements or tax returns. 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. EMPLOYEE RELATIONS The Company had a total of 4,737 full-time and 913 permanent part-time employees at December 31, 1999. None of the employees of the Company are represented by any collective bargaining group. The management of the Company considers employee relations to be good. ITEM 2. PROPERTIES Properties owned by the Company are located in Arizona, California, Colorado, Florida, Illinois, Kansas, New Jersey, and Texas. The executive offices of the Company are located at 1901 Harrison Street, Oakland, California, in leased facilities. The Company owns a 300,000 square-foot office complex on an 111-acre site in San Antonio, Texas. This complex houses its Loan Service, Savings Operations, Information Systems Departments, and various other back-office functions. The Company owns 208 of its branches, some of which are located on leased land. For further information regarding the Company's investment in premises and equipment and expiration dates of long-term leases, see Note I to the Financial Statements included in Item 14. The Company continuously evaluates the suitability and adequacy of the offices of the Company and has a program of relocating or remodeling them as necessary to maintain efficient and attractive facilities. ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries are parties to actions arising in the ordinary course of business, none of which, in the opinion of management, is material to the Company's consolidated financial condition or results of operations, or is otherwise required to be discussed pursuant to Item 103 of Regulation S-K. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Inapplicable. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS MARKET PRICES OF STOCK Golden West's stock is listed on the New York Stock Exchange and Pacific Exchange and traded on the Boston and Chicago Stock Exchanges under the ticker symbol GDW. The quarterly price ranges for the Company's common stock during 1999 and 1998 were as follows:
TABLE 34 Common Stock Price Range 1999 1998 ------------------------------ ----------------------------- First Quarter $29 17/64 - $34 33/64 $27 7/16 - $32 55/64 Second Quarter $30 41/64 - $34 61/64 $31 11/16 - $38 5/64 Third Quarter $30 17/64 - $33 9/16 $25 17/64 - $36 45/64 Fourth Quarter $31 1/4 - $38 1/64 $24 1/8 - $32 35/64
PER SHARE CASH DIVIDENDS DATA Golden West's cash dividends paid per share for 1999 and 1998 were as follows: TABLE 35 Cash Dividends Per Share 1999 1998 --------- --------- First Quarter $ .0467 $ .0417 Second Quarter $ .0467 $ .0417 Third Quarter $ .0467 $ .0417 Fourth Quarter $ .0525 $ .0467
The principal sources of funds for the payment by Golden West of cash dividends are cash dividends paid to it by its Insured Subsidiaries. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS (Continued) During the first quarter of 1999, the OTS changed its regulations governing capital distributions. Those changes become effective April 1, 1999. Under the new regulations, WFSB and WSL may pay capital distributions during a calendar year, without notice or application to the OTS, equal to net income for the applicable calendar year plus retained net income for the two prior calendar years. WFSB and WSL must file applications for approval of a proposed distribution, if (i) they are not eligible for expedited application processing, (ii) they would not be at least adequately capitalized following the capital distribution, or (iii) they would violate a prohibition contained in any applicable statute, regulation, or agreement with the OTS or the FDIC, or would violate a condition of OTS approval by making the proposed distribution. In addition, the new regulations require 30-days advance notice to be filed for proposed capital distributions that would result in the savings association being less than well-capitalized or that involve the reduction or retirement of the savings association's stock. (See "CAPITAL DISTRIBUTIONS BY SAVINGS ASSOCIATIONS" on page 42.) At December 31, 1999, $1.0 billion of the Insured Institutions' retained earnings were available for the payment of cash dividends without the imposition of additional federal income taxes. STOCKHOLDERS At the close of business on March 22, 2000, 158,508,733 shares of Golden West's Common Stock were outstanding and were held by 1,358 stockholders of record. At the close of business on March 22, 2000, the Company's common stock price was $31 13/16. The transfer agent and registrar for the Golden West Common Stock is Chase Mellon Shareholder Services, L.L.C., San Francisco, California 94101. The Securities and Exchange Commission (Commission) maintains a web site which contains reports, proxy and information statements, and other information pertaining to registrants that file electronically with the Commission including Golden West. The address is: http://www.sec.gov. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected consolidated financial and other data for Golden West for the years indicated. Such information is qualified in its entirety by the more detailed financial information set forth in the financial statements and notes thereto appearing in documents incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA (Continued)
TABLE 36 Five Year Consolidated Summary of Operations (Dollars in thousands except per share figures) Year Ended December 31 --------------------------------------------------------------------- 1999 1998 1997 1996 1995 ----------- ------------ ----------- ----------- ------------ Interest Income: Interest on loans $1,851,790 $2,254,427 $2,392,175 $2,203,752 $2,097,664 Interest on mortgage-backed securities 769,314 498,319 282,499 246,293 181,355 Interest on dividends and investments 204,741 209,807 157,823 131,516 148,422 ----------- ------------ ----------- ----------- ------------ 2,825,845 2,962,553 2,832,497 2,581,561 2,427,441 Interest Expense: Interest on deposits 1,250,364 1,285,343 1,209,646 1,061,414 1,048,390 Interest on advances and other borrowings 571,996 709,888 732,356 689,187 656,215 ----------- ------------ ----------- ----------- ------------ 1,822,360 1,995,231 1,942,002 1,750,601 1,704,605 ----------- ------------ ----------- ----------- ------------ Net interest income 1,003,485 967,322 890,495 830,960 722,836 Provision for (recovery of) loan losses (2,089) 11,260 57,609 84,256 61,190 ----------- ------------ ----------- ----------- ------------ Net interest income after provision for (recovery of) loan losses 1,005,574 956,062 832,886 746,704 661,646 Noninterest Income: Fees 65,456 62,820 45,910 38,558 29,200 Gain (loss) on the sale of securities, mortgage-backed securities, and loans 22,764 38,784 8,197 11,954 (493) Other 55,082 36,009 27,161 24,387 11,071 ----------- ------------ ----------- ----------- ------------ 143,302 137,613 81,268 74,899 39,778 Noninterest Expense General and administrative expenses Personnel 215,483 196,153 180,917 163,243 151,352 Occupancy 67,015 62,549 55,508 50,171 48,737 Deposit insurance 5,358 5,925 7,454 167,528 44,993 Advertising 11,928 10,412 11,525 9,277 9,850 Other 86,363 79,468 71,555 63,203 61,260 ----------- ------------ ----------- ----------- ------------ 386,147 354,507 326,959 453,422 316,192 ----------- ------------ ----------- ----------- ------------ Earnings before taxes on income 762,729 739,168 587,195 368,181 385,232 Taxes on income 282,750 292,077 233,057 (1,732) 150,693 ----------- ------------ ----------- ----------- ------------ Earnings before cumulative effect of change in accounting for goodwill and extraordinary item 479,979 447,091 354,138 369,913 234,539 Cumulative effect of change in accounting for goodwill -0- -0- -0- (205,242) -0- Extraordinary item -0- (12,511) -0- -0- -0- ----------- ------------ ----------- ----------- ------------ Net earnings $ 479,979 $ 434,580 $ 354,138 $ 164,671 $ 234,539 =========== ============ =========== =========== ============ Basic earnings per share before cumulative effect of change in accounting for goodwill and extraordinary item $ 2.90 $ 2.60 $ 2.07 $ 2.13 $ 1.33 Cumulative effect of change in accounting for goodwill 0.00 0.00 0.00 (1.18) 0.00 Extraordinary item 0.00 (.07) 0.00 0.00 0.00 ----------- ------------ ----------- ----------- ------------ Basic earnings per share $ 2.90 $ 2.53 $ 2.07 $ 0.95 $ 1.33 =========== ============ =========== =========== ============ Diluted earnings per share before cumulative effect of change in accounting for goodwill and extraordinary item $ 2.87 $ 2.58 $ 2.04 $ 2.09 $ 1.31 Cumulative effect of change in accounting for goodwill 0.00 0.00 0.00 (1.16) 0.00 Extraordinary item 0.00 (.07) 0.00 0.00 0.00 ----------- ------------ ----------- ----------- ------------ Diluted earnings per share $ 2.87 $ 2.51 $ 2.04 $ 0.93 $ 1.31 =========== ============ =========== =========== ============
ITEM 6. SELECTED FINANCIAL DATA (Continued)
TABLE 37 Five Year Summary of Financial Condition (Dollars in thousands) At December 31 -------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 --------------- --------------- --------------- ---------------- --------------- Assets $42,142,205 $38,468,729 $39,590,271 $37,730,598 $35,118,156 Cash, securities available for sale, and other investments 1,120,393 1,050,265 1,033,433 2,078,876 2,310,711 Mortgage-backed securities 11,661,621 10,031,965 3,939,746 4,293,582 3,409,341 Loans receivable 27,919,817 25,721,288 33,260,709 30,113,421 28,181,353 --------------- --------------- --------------- ---------------- --------------- Total loan portfolio 39,581,438 35,753,253 37,200,455 34,407,003 31,590,694 Deposits 27,714,910 26,219,095 24,109,717 22,099,934 20,847,910 Advances from FHLBs 8,915,218 6,163,472 8,516,605 8,798,433 6,447,201 Securities sold under agreements to repurchase and other borrowings 1,045,176 1,252,469 2,334,048 1,908,126 1,817,943 Medium-term notes -0- -0- 109,992 589,845 1,597,507 Subordinated debt 812,950 911,753 1,110,488 1,323,996 1,322,392 Stockholders' equity 3,194,854 3,124,318 2,698,031 2,350,477 2,278,353
ITEM 6. SELECTED FINANCIAL DATA (Continued) TABLE 38 Five Year Selected Other Data (Dollars in thousands except per share figures) Year Ended December 31 ---------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ------------- ------------ ------------ ------------- ------------ New real estate loans originated $12,672,211 $ 8,187,934 $ 7,482,973 $ 7,012,562 $ 5,949,064 Fully indexed rate on new real estate loans 7.60% 7.72% 7.59% 7.59% 7.56% Current rate on new real estate loans(a) 5.97% 6.20% 6.42% 6.56% 6.58% New adjustable rate mortgages as a percentage of new real estate loans originated 91.00% 82.26% 95.05% 90.07% 92.74% Deposits increase ($) $ 1,495,815 $ 2,109,378 $ 2,009,783 $ 1,252,024 $ 1,628,521 Deposits increase (%) 5.7% 8.7% 9.1% 6.0% 8.5% Net earnings/average net worth (ROE) 15.19% 14.94% (b) 14.14% 7.46% (c) 10.98% Net earnings/average assets (ROA) 1.22% 1.11% (b) .91% .46% (c) .69% General and administrative expense(G&A) to: Net interest income plus other income 33.67% 32.08% 33.64% 50.05% (c) 41.31% Total revenues 13.01% 11.44% (b) 11.22% 17.07% (c) 12.80% Average assets .98% .90% .84% 1.26% (c) .93% Ratio of earnings to fixed charges: (d) Including interest on deposits 1.42x 1.37x 1.30x 1.21x 1.23x Excluding interest on deposits 2.32x 2.03x 1.79x 1.53x 1.58x Yield on loan portfolio 7.16% 7.36% 7.53% 7.43% 7.69% Yield on MBS 7.17% 7.20% 7.23% 7.13% 7.41% Yield on investments 5.88% 5.53% 6.48% 6.88% 5.96% Yield on earning assets 7.15% 7.30% 7.48% 7.37% 7.56% Cost of deposits 4.69% 4.67% 5.04% 4.98% 5.15% Cost of borrowings 5.77% 5.87% 5.99% 5.80% 6.15% Cost of funds 5.00% 4.96% 5.36% 5.28% 5.50% Spread 2.15% 2.34% 2.12% 2.09% 2.06% Nonperforming asset/total assets (e) .56% .79% .96% 1.21% 1.11% Stockholders' equity/total assets 7.58% 8.12% 6.81% 6.23% 6.49% Average stockholders' equity/average assets 8.04% 7.41% 6.45% 6.15% 6.30% World Savings Bank, FSB (WFSB) regulatory capital ratios: (f) Tangible capital 6.64% 6.77% 6.51% 6.69% 14.01% Core capital 6.64% 6.77% 6.51% 6.69% 14.01% Risk-based capital 11.95% 12.93% 12.80% 13.14% 26.55% World Savings and Loan Association (WSL) regulatory capital ratios: (f) Tangible capital 7.86% 7.25% 6.42% 6.37% 6.38% Core capital 7.86% 7.25% 6.42% 6.37% 6.38% Risk-based capital 15.47% 16.24% 13.64% 13.91% 13.40% Number of savings branch offices 249 248 250 244 233 Cash dividends per share $ .193 $ .172 $ .152 $ .132 $ .117 Dividend payout ratio 6.64% 6.79% (b) 7.32% 13.91% 8.75%
(a) The current rate reflects the actual rate being paid by the borrower at time of origination. (b) The ratios for the year ended December 31, 1998 include an extraordinary charge of $21 million before tax, or $.07 per basic and diluted earnings per share, net of tax benefit, associated with the prepayment of FHLB advances and include a nonrecurring gain of $13 million before tax, or $.05 per basic and diluted earnings per share, after tax, realized when preferred stock purchased at a discount was redeemed by the issuer at par. Excluding the extraordinary item, ROE was 15.37%, ROA was 1.14%, and the dividend payout ratio was 6.59%. Excluding the one-time stock gain, G&A to total revenues was 11.48%. (c) The numbers for the year ended December 31, 1996 include the 1996 SAIF assessment of $133 million, the special tax credit of $139 million, and the $205 million cumulative effect of the change in accounting for goodwill. The ratios for the year ended December 31, 1996, excluding the three 1996 nonrecurring items are: ROE 13.97%, ROA .86%, G&A to net interest income plus other income 34.32%, G&A to total revenues 12.08%, and G&A to average assets .89%. (d) Earnings represent income from continuing operations before income taxes, cumulative effect of change in accounting, extraordinary item, and fixed charges. Fixed charges include interest expense and amortization of debt expense. (e) The definition of nonperforming assets includes nonaccrual loans (loans that are 90 days or more past due) and real state owned acquired through foreclosure. (f) For regulatory purposes, the requirements to be considered "well capitalized" are 5.0% and 10.0% for core and risk-based capital, respectively. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The table below sets forth Golden West Financial Corporation's (Golden West or Company) net earnings for the three years ended December 31, 1999, 1998 and 1997.
TABLE 39 Golden West Net Earnings, Basic Earnings Per Share, and Diluted Earnings Per Share (Dollars in thousands except per share figures) Year Ended December 31 --------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Earnings before extraordinary item (a)(b) $479,979 $447,091 $354,138 Extraordinary item (c) -0- (12,511) -0- ------------ ------------ ------------ Net Earnings $479,979 $434,580 $354,138 ============ ============ ============ Basic earnings per share before extraordinary item (a)(b) $ 2.90 $ 2.60 $ 2.07 Extraordinary item (c) 0.00 (.07) 0.00 ------------ ------------ ------------ Basic earnings per share $ 2.90 $ 2.53 $ 2.07 ============ ============ ============ Diluted earnings per share before extraordinary item (a)(b) $ 2.87 $ 2.58 $ 2.04 Extraordinary item (c) 0.00 (.07) 0.00 ------------ ------------ ------------ Diluted earnings per share $ 2.87 $ 2.51 $ 2.04 ============ ============ ============
(a) 1999 includes a nonrecurring gain of $8 million or $.03 per basic and diluted share, after tax, from the sale of four savings branches and a nonrecurring tax benefit of $3 million or $.02 per basic and diluted share, from the donation of land to a non-profit organization. (b) 1998 includes a nonrecurring gain of $13 million or $.05 per basic and diluted earnings per share, after tax, realized when preferred stock purchased at a discount was redeemed by the issuer at par. (c) Penalties resulting from the prepayment of Federal Home Loan Bank of San Francisco advances during 1998. See "Extraordinary Item" section on page 74. Golden West's principal subsidiaries are World Savings Bank, FSB (WFSB), World Savings and Loan Association (WSL), and World Savings Bank, SSB (WSSB). WFSB, WSL, and WSSB are referred to collectively as the "Insured Institutions." WFSB and WSL are headquartered in Oakland, California. WSSB is headquartered in Austin, Texas. At December 31, 1999, WFSB, WSL, and WSSB had $38 billion, $5 billion, and $4 billion, respectively, in assets. At December 31, 1999, Golden West had a savings network of 119 branches in California, 38 in Colorado, 33 in Florida, 21 in Texas, 15 in Arizona, 11 in New Jersey, eight in Kansas and four in Illinois. By virtue of being federally-chartered, WFSB and WSL can originate mortgages anywhere in the nation, even though they may not be authorized to conduct deposit gathering business in those jurisdictions. In addition to the states with savings operations referenced above, the Company had lending operations in Connecticut, Delaware, Georgia, Idaho, Indiana, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Mexico, North Carolina, Ohio, Oregon, Pennsylvania, Tennessee, Utah, Virginia, Washington, and Wisconsin. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The savings accounts offered by WFSB and WSSB are insured by the Bank Insurance Fund (BIF) of the Federal Deposit Insurance Corporation (FDIC). WSL's accounts are insured by the Savings Association Insurance Fund (SAIF) of the FDIC. WFSB and WSL share savings branches in which all products of each institution are made available. In addition, customers of each of the Company's Insured Institutions can transact business on their accounts at any of the Company's branch offices. Interest rates set on deposit accounts offered by the Company's Insured Subsidiaries are based on market conditions, cost, and funding needs. In addition to the Insured Subsidiaries, Golden West has two other subsidiaries, Atlas Advisers, Inc., and Atlas Securities, Inc. These two companies were formed to provide services to Atlas Assets, Inc., a series open-ended registered investment company sponsored by the Company. Atlas Advisers, Inc., is an investment adviser to the Atlas family of mutual funds and Atlas Securities, Inc., is the distributor of the Atlas mutual funds and annuities. The following narrative focuses on the significant financial statement changes that have taken place at Golden West over the past three years and includes a discussion of the Company's financial condition, results of operations, and liquidity and capital resources. FINANCIAL CONDITION The following table summarizes the Company's major asset, liability, and equity components in percentage terms at yearends 1999, 1998, 1997, and 1996. As the table shows, the largest asset component is the loan portfolio (including mortgage-backed securities), which consists primarily of long-term mortgages. Deposits represent the majority of the Company's liabilities. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
TABLE 40 Asset, Liability, and Equity Components as Percentages of the Total Balance Sheet December 31 ---------------------------------------------- 1999 1998 1997 1996 --------- --------- --------- --------- Assets: Cash and investments 2.7% 2.7% 2.6% 5.5% Loans receivable including mortgage-backed securities 93.9 93.0 94.0 91.2 Other assets 3.4 4.3 3.4 3.3 --------- --------- --------- --------- 100.0% 100.0% 100.0% 100.0% ========= ========= ========= ========= Liabilities and Stockholders' Equity: Deposits 65.8% 68.1% 60.9% 58.6% FHLB advances 21.2 16.0 21.5 23.3 Securities sold under agreements to repurchase 2.5 3.3 5.9 5.1 Medium-term notes 0.0 0.0 0.3 1.6 Other liabilities 1.0 2.1 1.8 1.7 Subordinated debt 1.9 2.4 2.8 3.5 Stockholders' equity 7.6 8.1 6.8 6.2 --------- --------- --------- --------- 100.0% 100.0% 100.0% 100.0% ========= ========= ========= =========
ASSET/LIABILITY MANAGEMENT The Company's earnings depend primarily on its net interest income, which is the difference between the amounts it receives from interest earned on loans, MBS, and investments and the amounts it pays in interest on deposits and borrowings. Therefore, the Company's profitability is largely dependent upon its ability to manage interest rate risk and credit risk (see "Asset Quality" section on page 62). The Company mitigates its credit risk through strict underwriting standards and loan reviews. The Company manages interest rate risk by managing the repricing of interest-rate sensitive assets and liabilities. The Company enters into interest rate swaps as part of its interest rate risk management strategy. Such instruments are entered into solely to alter the repricing characteristics of designated assets and liabilities. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) One measure of exposure to interest rate risk is the gap, the difference between the repricing of assets and liabilities. The Company is subject to interest rate risk to the extent its assets and liabilities reprice at different times. The disparity between the repricing (maturity, prepayment, 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 following is the Company's gap table at December 31, 1999:
TABLE 41 Repricing of Interest-Earning Assets and Interest-Bearing Liabilities, Repricing Gaps, and Gap Ratio As of December 31, 1999 (Dollars in Millions) Projected Repricing(a) ----------------------------------------------------------------------- 0 - 3 4 - 12 1 - 5 Over 5 Months Months Years Years Total ------------ ------------ ------------ ------------ ----------- Interest-Earning Assets: Investments $ 551 $ 63 $ 18 $ 155 $ 787 Mortgage-backed securities 10,192 171 678 621 11,662 Loans receivable: Rate-sensitive 23,658 2,730 256 -0- 26,644 Fixed-rate 38 107 390 643 1,178 Other (b) 687 -0- -0- -0- 687 Impact of swaps 395 280 (675) -0- -0- ------------ ------------ ------------ ------------ ----------- Total $ 35,521 $ 3,351 $ 667 $ 1,419 $ 40,958 ============ ============ ============ ============ =========== Interest-Bearing Liabilities: Deposits (c) $ 15,256 $ 10,384 $ 2,046 $ 29 $ 27,715 FHLB advances 8,100 415 109 291 8,915 Other borrowings 1,145 115 598 -0- 1,858 Impact of swaps 216 (41) (175) -0- -0- ------------ ------------ ------------ ------------ ------------ Total $ 24,717 $ 10,873 $ 2,578 $ 320 $ 38,488 ============ ============ ============ ============ ============ Repricing gap $ 10,804 $ (7,522) $ (1,911) $ 1,099 $ 2,470 ============ ============ ============ ============ ============ Cumulative gap $ 10,804 $ 3,282 $ 1,371 $ 2,470 ============ ============ ============ ============ Cumulative gap as a percentage of total assets 25.6% 7.8% 3.3% ============ ============ ============
(a) Based on scheduled maturity or scheduled repricing; loans and MBS reflect scheduled repayments and projected prepayments of principal based on current rates of prepayment. (b) Includes cash in banks and FHLB stock. (c) Liabilities with no maturity date, such as checking, passbook, and money market deposit accounts, are assigned zero months. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) The gap table shows that, as of December 31, 1999, 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 Golden West's earnings would rise when interest rates increase and would fall when interest rates decrease. However, Golden West'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 benchmark the Company 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. Additionally, the Company originates loans that are tied to the Golden West Cost of Savings Index (COSI). The COSI in effect in the current month reflects the actual Golden West Cost of Savings at the end of the previous month. Therefore, there is a one-month repricing lag for these types of loans. In addition to the index 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 caps or limits on individual rate changes, and interest rate floors. Partially offsetting the impact of the index lags are similar lags on a portion of the Company's liabilities. On balance, the index 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 table below reflects the Company's expected cash flows and applicable yields on the balances of its interest sensitive assets and liabilities as of December 31, 1999, and takes into consideration expected prepayments of the Company's long-term assets (primarily mortgage-backed securities and loans receivable) and the estimated current fair value. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued)
TABLE 42 Summary of Market Risk on Financial Instruments As of December 31, 1999 (Dollars in Millions) - ----------------------------------------------------------------------------------------------------------------------------------- Expected Maturity Date as of December 31, 1999 ------------------------------------------------------------------------------------------ 2005 & Total Fair 2000 2001 2002 2003 2004 Thereafter Balance Value ---------- --------- ---------- ---------- --------- ----------- --------- ---------- Interest-Sensitive Assets: Investments $ 671 $ -0- $ 12 $ -0- $ -0- $ 104 $ 787 $ 786 Weighted average interest rate MBS 5.91% 0.00% 5.74% 0.00% 0.00% 5.77% 5.88% Fixed Rate $ 234 $ 197 $ 158 $ 126 $ 107 $ 712 $ 1,534 1,536 Weighted average interest rate 7.79% 8.33% 8.27% 8.21% 8.14% 7.90% 8.02% Variable Rate $ 1,654 $ 1,369 $ 1,089 $ 900 $ 755 $ 4,361 $ 10,128 9,933 Weighted average interest rate 7.02% 7.01% 7.01% 7.00% 7.00% 7.00% 7.00% Loans Receivable Fixed Rate $ 272 $ 147 $ 121 $ 97 $ 84 $ 624 $ 1,345 1,331 Weighted average interest rate 8.73% 9.00% 8.98% 8.97% 8.89% 8.38% 8.65% Variable Rate $ 3,861 $ 3,197 $ 2,800 $ 2,396 $ 1,946 $ 12,375 $ 26,575 26,546 Weighted average interest rate (a) 7.37% 7.39% 7.41% 7.41% 7.40% 7.39% 7.09% ---------- --------- ---------- ---------- --------- ----------- --------- ---------- Total $ 6,692 $ 4,910 $ 4,180 $ 3,519 $ 2,892 $ 18,176 $ 40,369 $ 40,132 ========== ========= ========== ========== ========= =========== ========= ========== Interest-Sensitive Liabilities: Deposits (b) $ 25,640 $ 1,574 $ 299 $ 115 $ 58 $ 29 $ 27,715 $ 27,762 Weighted average interest rate 4.63% 5.38% 5.49% 5.66% 5.15% 4.99% 4.69% FHLB Advances Fixed Rate $ 845 $ 26 $ 40 $ 111 $ 22 $ 171 $ 1,215 1,213 Weighted average interest rate 5.93% 6.73% 7.00% 6.43% 6.58% 6.70% 6.15% Variable Rate $ 1,500 $ 2,500 $ 700 $ 2,000 $ -0- $ 1,000 $ 7,700 7,665 Weighted average interest rate 5.35% 5.77% 6.04% 5.37% 0.00% 5.38% 5.56% Reverse Repurchase Agreements Fixed Rate $ 401 $ -0- $ -0- $ -0- $ -0- $ -0- $ 401 401 Weighted average interest rate 5.57% 0.00% 0.00% 0.00% 0.00% 0.00% 5.57% Variable Rate $ 600 $ 44 $ -0- $ -0- $ -0- $ -0- $ 644 641 Weighted average interest rate 5.34% 6.15% 0.00% 0.00% 0.00% 0.00% 5.40% Subordinated Notes $ 215 $ -0- $ 399 $ 199 $ -0- $ -0- $ 813 813 Weighted average interest rate 8.88% 0.00% 7.71% 6.11% 0.00% 0.00% 7.63% ---------- --------- ---------- ---------- --------- ----------- --------- ---------- Total $ 29,201 $ 4,144 $ 1,438 $ 2,425 $ 80 $ 1,200 $ 38,488 $ 38,495 ========== ========= ========== ========== ========= =========== ========= ========== Off-Balance Sheet Items: Interest Rate Swaps Receive Fixed Swaps $ 46 $ 114 $ 12 $ 91 $ -0- $ -0- $ 263 $ (2) Weighted average receive rate 6.73% 6.35% 6.52% 6.39% 0.00% 0.00% 6.44% Weighted average pay rate 6.20% 6.24% 6.21% 6.31% 0.00% 0.00% 6.26% Pay Fixed Swaps $ 10 $ 96 $ 305 $ 212 $ 104 $ -0- $ 727 -0- Weighted average receive rate 6.03% 6.10% 6.12% 6.11% 6.21% 0.00% 6.12% Weighted average pay rate 6.08% 8.13% 7.54% 6.26% 6.65% 0.00% 7.10% ---------- --------- ---------- ---------- --------- ----------- --------- ---------- Total $ 56 $ 210 $ 317 $ 303 $ 104 $ -0- $ 990 $ (2) ========== ========= ========== ========== ========= =========== ========= ==========
(a) The total weighted average interest rate for variable loans receivable reflects loans with introductory rates in effect at December 31, 1999. Those loans are assumed to mature outside the introductory period at fully-indexed rates (the fully-indexed rate is equal to the effective index plus the loan margin). Consequently, the weighted average rate of all maturing variable rate loans will not equal the weighted average rate of total variable rate loans at December 31, 1999 as indicated in the total balance column. (b) Deposits with no maturity are included in the 2000 column. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) Golden West estimates the sensitivity of the Company's net interest income, net earnings, and capital ratios to interest rate changes and anticipated growth based on simulations using an asset/liability model which takes into account the lags previously described. 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 December 31, 1999, Management believes that a 200 basis point rate increase sustained over a thirty-six month period would not adversely affect the Company's long-term profitability and financial strength. CASH AND INVESTMENTS Golden West's investment portfolio is composed primarily of federal funds, short-term repurchase agreements collateralized by mortgage-backed securities, short-term money market securities, United States government obligations, collateralized mortgage obligations, and corporate bonds. In determining the amounts of assets to invest in each class of investments, the Company considers relative rates, liquidity, and credit quality. The Office of Thrift Supervision (OTS) requires insured institutions, such as WFSB and WSL, to maintain a minimum amount of cash and certain qualifying investments for liquidity purposes. The current minimum requirement is to maintain a minimum amount of liquid assets in the form of cash and securities approved by federal regulations at either 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. At December 31, 1999, 1998, and 1997, WFSB and WSL had liquidity in excess of the regulatory requirements. The state of Texas requires insured institutions, such as WSSB, to maintain a daily minimum amount of cash and certain qualifying investments for liquidity purposes. WSSB met this requirement during the periods under discussion. At December 31, 1999, and 1998, the Company had securities available for sale in the amount of $319 million and $377 million, respectively, including net unrealized gains on securities available for sale of $260 million and $358 million, respectively. At December 31, 1999 and 1998, the Company had no securities classified as trading in its investment securities portfolio. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) Included in the Company's investment portfolio at December 31, 1999, and 1998, were collateralized mortgage obligations (CMOs) in the amount of $115 million and $196 million, respectively. The Company holds CMOs on which both principal and interest are received. At December 31, 1999, all of these CMOs qualified for inclusion in the regulatory liquidity measurement. The Company does not hold any interest-only or principal-only CMO's. LOANS RECEIVABLE AND MORTGAGE-BACKED SECURITIES The Company invests primarily in whole loans. From time to time, the Company securitizes loans from its portfolio into mortgage-backed securities (MBS) and Real Estate Mortgage Investment Conduit Securities (MBS-REMICs), and purchases MBS. MBS and MBS-REMICs are available to be used as collateral for borrowings. At December 31, 1999 and 1998, the balance of loans receivable including mortgage-backed securities was $39.6 billion and $35.8 billion, respectively. Included in the $39.6 billion at December 31, 1999 was $3.9 billion of Federal National Mortgage Association (FNMA) mortgage-backed securities with the underlying loans subject to full credit recourse to the Company, $7.2 billion of MBS-REMICs, and $514 million of purchased MBS. Included in the $35.8 billion at December 31, 1998 was $3.9 billion of FNMA MBS with the underlying loans subject to full credit recourse to the Company, $5.5 billion of MBS-REMICs, and $686 million of purchased MBS. The loan portfolio, including MBS, grew $3.8 billion or 11% for the year ended December 31, 1999. The balance of the loan portfolio decreased modestly for the year ended December 31, 1998, due to a high level of prepayments and an increase in loans sold. MORTGAGE-BACKED SECURITIES At December 31, 1999 and 1998, the Company had MBS held to maturity in the amount of $11.6 billion and $9.9 billion, respectively. At December 31, 1999 and 1998, the Company had MBS available for sale in the amount of $79 million and $114 million, respectively, including net unrealized gains on mortgage-backed securities available for sale of $1 million and $5 million, respectively. At December 31, 1999 and 1998, the Company had no trading MBS. The Company securitized $3.7 billion and $6.4 billion of mortgage loans into Real Estate Mortgage Investment Conduits during the years ended December 31, 1999 and 1998, respectively. MBS-REMICs are being used as collateral for borrowings. The Company has the ability and intent to hold these MBS until maturity and, accordingly, MBS-REMICs are classified as MBS held to maturity. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) During 1999, 1998, and 1997 the Company securitized $1.1 billion, $1.8 billion, and $1.0 billion of adjustable rate mortgages (ARMs) into FNMA COFI-indexed MBS. The FNMA MBS held to maturity are available to be used as collateral for borrowings and the underlying loans are subject to full credit recourse to the Company. During 1997, the Company desecuritized $856 million of FNMA COFI-indexed MBS. The Company has the ability and intent to hold these loans until maturity and, accordingly, these loans are classified as held to maturity. At December 31, 1999, $10.1 billion of the Company's total MBS portfolio were backed by ARMs. The percentage of MBS backed by ARMs was 87% at yearend 1999 compared to 94% at yearend 1998 and 78% at yearend 1997. The large amount of adjustable rate MBS is mainly due to the large amount of ARM loans securitized in the last four years. Repayments of MBS during the years 1999, 1998, and 1997 amounted to $2.8 billion, $2.1 billion, and $518 million, respectively. MBS repayments were higher in 1999 due to the increase in total MBS outstanding. MBS repayments were higher in 1998 due to an increase in total MBS outstanding and an increase in the prepayment rates on the underlying mortgages. LOANS New loan originations in 1999, 1998, and 1997 amounted to $12.7 billion, $8.2 billion, and $7.5 billion, respectively. The increase in 1999 was due to the renewed demand for adjustable rate loans, the Company's primary product, as interest rates moved up and the cost of fixed-rate loans increased. In addition, the Company increased the size of its loan origination staff to take advantage of the favorable market conditions. The increase in 1998 occurred because more consumers sought to refinance their existing home loans as well as a result of a strong housing market. Refinanced loans constituted 40% of new loan originations in 1999 compared to 44% in 1998 and 33% in 1997. Loans originated for sale were $793 million, $1.2 billion, and $217 million for the years ended December 31, 1999, 1998, and 1997, respectively. The reduction in loans originated for sale in 1999 as compared to 1998 was attributable to the decrease in fixed-rate originations due to higher rates being charged on fixed-rate loans. In addition, during 1999 and 1998, $522 million and $229 million, respectively, of loans were converted at the customer's request from adjustable rate to fixed-rate. The Company continues to sell most of its fixed-rate loans. The Company sold $1.2 billion, $1.4 billion, $209 million, of fixed-rate loans during 1999, 1998, and 1997, respectively. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) At December 31, 1999, the Company had lending operations in 29 states. The largest source of mortgage origination is loans secured by residential properties in California. In 1999, 63% of total loan originations were on residential properties in California, compared to 62% and 54% in 1998 and 1997, respectively. The five largest states, other than California, for originations for the year ended December 31, 1999, were Florida, Texas, Washington, New Jersey, and Illinois with a combined total of 19% of total originations. The percentage of the total loan portfolio (including MBS with recourse and MBS-REMICs) that was comprised of residential loans in California was 64% at December 31, 1999 and 66% at December 31, 1998 and December 31, 1997. Golden West originates ARMs tied to a variety of indexes, principally the Eleventh District Cost of Funds Index (COFI), the Golden West Cost of Savings Index (COSI), and the twelve-month rolling average of the One-Year U.S. Treasury Constant Maturity (TCM). The following table shows the distribution of ARM originations by index for the years ended December 31, 1999 and 1998.
TABLE 43 Adjustable Rate Mortgage Originations by Index (Dollars in thousands) ARM Index 1999 1998 - --------- --------------- ---------------- COFI $ 3,264,773 $3,753,081 COSI 7,996,477 1,738,592 TCM 270,651 1,243,315 --------------- ---------------- $11,531,901 $6,734,988 =============== ================
The following table shows the distribution by index of the Company's outstanding balance of adjustable rate mortgages (including ARM MBS with recourse and ARM MBS-REMICs) at December 31, 1999 and 1998.
TABLE 44 Adjustable Rate Mortgage Portfolio by Index (Including ARM MBS with recourse and ARM MBS-REMICs) (Dollars in thousands) ARM Index 1999 1998 - --------- --------------- ---------------- COFI $26,217,670 $29,761,484 COSI 9,182,829 1,703,283 TCM 1,266,541 1,256,775 Other 152,470 201,756 --------------- ---------------- $36,819,510 $32,923,298 =============== ================
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) Approximately $4.9 billion of the Company's ARMs (including MBS with recourse and MBS-REMICs) 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 December 31, 1999, $426 million of ARMs had reached their rate floors. The weighted average floor rate on the loans that had reached their floor was 7.69% at December 31, 1999, compared to 7.72% at December 31, 1998. Without the floor, the average yield on these loans would have been 6.92% at December 31, 1999, and 7.15% at December 31, 1998. Loan repayments consisting of monthly loan amortization and loan payoffs during the years 1999, 1998, and 1997 amounted to $4.9 billion, $6.2 billion, and $3.8 billion, respectively. The decrease in repayments in 1999 was due to a decrease in loan prepayments during the second half of the year. The increase in repayments in 1998 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. Capitalized mortgage servicing rights are included in "Other assets" on the Consolidated Statement of Financial Condition. The following table shows the changes in capitalized mortgage servicing rights for the years ended December 31, 1999 and 1998.
TABLE 45 Capitalized Mortgage Servicing Rights (Dollars in thousands) 1999 1998 ------------ ------------ Beginning balance of capitalized mortgage servicing rights $28,635 $11,116 New capitalized mortgage servicing rights from loan sales 20,556 22,680 Amortization of capitalized mortgage servicing rights (11,896) (5,161) ------------ ------------ Ending balance of capitalized mortgage servicing rights $37,295 $28,635 ============ ============
The book value of Golden West's servicing rights did not exceed the fair value at December 31, 1999 or 1998 and, therefore, no writedown of the servicing rights to their fair value was necessary. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) ASSET QUALITY One measure of the soundness of the Company's loan and MBS 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 and loans securitized into MBS-REMICs, that are 90 days or more past due) and real estate acquired through foreclosure. No interest is recognized on non-accrual loans. NPAs amounted to $236 million, $305 million, and $379 million at yearends 1999, 1998, and 1997, respectively. The decrease in NPAs during 1999 and 1998 reflected the strong California economy and housing market. The Company continues to closely monitor all delinquencies and takes appropriate steps to protect its interests. The Company's TDRs are made up of loans on which delinquent loan payments have been capitalized or on which temporary interest rate reductions have been made, primarily to customers negatively impacted by adverse economic conditions. The Company's troubled debt restructured (TDRs) were $11 million, or .03% of assets, at December 31, 1999, compared to $23 million, or .06% of assets, at December 31, 1998, and $44 million, or .11% of assets, at December 31, 1997. The Company's ratio of NPAs and TDRs to total assets decreased to .59% at December 31, 1999 compared to .85% and 1.07% at yearends 1998 and 1997, respectively. The Company has other impaired loans on which specific loss reserves have been provided and that were not included in nonperforming loans or troubled debt restructured because the loans were performing in full accordance with the loan terms. Other impaired loans amounted to $60 million at yearend 1999 and $71 million at yearend 1998 and 1997. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) ALLOWANCE FOR LOAN LOSSES AND RESERVE FOR LOSSES ON LOANS SOLD WITH RECOURSE OR SECURITIZED AND RETAINED The Company provides specific valuation allowances for losses on loans when impaired and on real estate owned when any significant and permanent decline in value is identified. The Company also utilizes a methodology 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 data base 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 sales 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 years ended December 31, 1999, 1998, and 1997.
TABLE 46 Changes in Allowance for Loan Losses (Dollars in thousands) 1999 1998 1997 ------------ ------------ ------------ Beginning allowance for loan losses $244,466 $233,280 $195,702 Provision for (recovery of) losses charged to expense (2,089) 11,260 57,609 Transfer of allowance to reserve for losses on loans sold or securitized and retained (12,043) -0- -0- Less loans charged off -0- (1,387) (20,818) Add recoveries 1,800 1,313 787 ------------ ------------ ------------ Ending allowance for loan losses $232,134 $244,466 $233,280 ============ ============ ============ Provision for (recovery of) loan losses to loan portfolio (including MBS with recourse and MBS-REMICs) (.01%) .03% .16% ============ ============ ============ Ratio of net chargeoffs (recovery) to average loans outstanding (including (MBS with recourse and MBS-REMICs) (.01%) .00% .06% ============ ============ ============
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) As previously mentioned, the Company has securitized loans from its portfolio into FNMA MBS with recourse and MBS-REMICs. The Company's intent is to hold these MBS and MBS-REMICs to maturity. Because the loans underlying the MBS and MBS-REMICs are similar to the loans in its loan portfolio, the Company estimates its reserve on these securities in a manner similar to the method it uses for the allowance for loan losses. The Company also sells loans with full credit recourse and has established a reserve for potential losses on these loans. The liability for the reserve for losses on loans sold or securitized and retained is included in accounts payable and accrued expenses. The Company's reserve for losses on loans sold or securitized and retained was $15.6 million at December 31, 1999, compared to $2.3 million at December 31, 1998 and $886 thousand at December 31, 1997. The ratio to nonperforming assets of the allowance for loan losses and the reserve for losses on loans sold with recourse or securitized and retained was 104.82%, 80.90%, and 61.76% at December 31, 1999, 1998, and 1997, respectively. The ratio to total loans (including MBS with recourse and MBS-REMICs) of the allowance for loan losses and the reserve for losses on loans sold with recourse or securitized and retained was .63% for the year ended December 31, 1999 as compared to .70% and .65% for the years ended December 31, 1998 and 1997, respectively. REAL ESTATE HELD FOR SALE At December 31, 1999, the Company had real estate held for sale in the amount of $11 million, compared to $43 million a year earlier. The largest balance of real estate held for sale continues to be in one- to four-family properties in California. The decline in the real estate held for sale balance in 1999 reflected the strong economy and housing market, especially in California. DEPOSITS Retail deposits increased by $896 million in 1999 compared to increases of $2.6 billion and $1.5 billion in 1998 and 1997, respectively. During 1999, the Company sold four branches with a total of $149 million in deposits. During 1998, the Company sold one branch with $36 million in deposits. Retail deposits increased during 1999 as the Company concentrated marketing efforts on building the loyalty of existing depositors. Retail deposits increased during 1998 and 1997 primarily due to ongoing marketing efforts as well as active promotions of market rate transaction accounts. At December 31, 1999, 1998, 1997, transaction accounts (which includes checking, passbook, and money market accounts) represented 35%, 35%, and 20%, respectively, of the total balance of deposits. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) Beginning in January 1997, the Company began a program to use government securities dealers to sell certificates of deposit (CDs) to institutional investors (wholesale CDs). The Company's deposit balance at December 31, 1999 and 1997 included $600 million and $525 million, respectively, of these wholesale CDs. There were no outstanding wholesale CDs at December 31, 1998. ADVANCES FROM THE FEDERAL HOME LOAN BANK The Company uses borrowings from the Federal Home Loan Banks (FHLBs), also known as "advances," to supplement cash flow and to provide funds for loan originations. Advances are secured by pledges of certain loans, MBS-REMICs, other MBS, and capital stock of the FHLBs. FHLB advances amounted to $8.9 billion at December 31, 1999, compared to $6.2 billion and $8.5 billion at December 31, 1998, and 1997, respectively. During 1998, the Company paid off, before maturity, $4.4 billion of high-cost FHLB of San Francisco advances and, as a result, incurred a $21 million pre-tax charge for the penalties associated with these prepayments. See "Extraordinary Item" discussion on page 74. 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 amounted to $1.0 billion, $1.3 billion, and $2.3 billion at yearends 1999, 1998, and 1997, respectively. OTHER BORROWINGS As of December 31, 1999, Golden West, at the holding company level, had a total of $813 million of subordinated debt issued and outstanding. At yearend 1999, 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 December 31, 1999, 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 had no medium-term notes outstanding at December 31, 1999 and 1998, compared to $110 million at December 31, 1997. During 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 December 31, 1999, WFSB had not issued any notes under this authority. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) STOCKHOLDERS' EQUITY The Company's stockholders' equity increased by $71 million during 1999 as a result of earnings partially offset by the $345 million cost of the repurchase of Company stock, decreased market values of securities available for sale, and the payment of quarterly dividends to stockholders. The Company's stockholders' equity increased by $426 million during 1998 as a result of earnings and increased market values of securities available for sale. These 1998 increases were partially offset by the $80 million cost of the repurchase of Company stock and the payment of quarterly dividends to stockholders. The Company's stockholders' equity increased by $348 million during 1997 as a result of earnings and increased market values of securities available for sale. These increases in 1997 were partially offset by the $48 million cost of the repurchase of Company stock and the payment of quarterly dividends to stockholders. During the fourth quarter of 1999, the Company acted to effect a three-for-one stock split of its Common Stock in the form of a 200% stock dividend. Since 1993, through four separate actions, Golden West's Board of Directors has authorized the purchase by the Company of up to a total of 44.7 million shares of Golden West's common stock. As of December 31, 1999, 39,223,848 million shares had been repurchased and retired at a cost of $806 million since October 28, 1993, of which 10.7 million shares were purchased and retired at a cost of $345 million during 1999. 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. 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. The OTS requires federally insured institutions, such as WFSB and WSL, to meet minimum capital requirements. Under these regulations, a savings institution is required to meet three separate capital requirements. The first requirement is to have tangible capital of 1.5% of adjusted total assets. At December 31, 1999, WFSB had tangible capital of $2.5 billion, or 6.64% of adjusted total assets, $1.9 billion in excess of the regulatory requirement. At December 31, 1999, WSL had tangible capital of $383 million, or 7.86% of adjusted total assets, $310 million in excess of the regulatory requirement. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) The second requirement is to have core capital of 4% of adjusted total assets. At December 31, 1999, WFSB had core capital of $2.5 billion, or 6.64% of adjusted total assets, $1.0 billion in excess of the regulatory requirement. At December 31, 1999, WSL had core capital of $383 million, or 7.86% of adjusted total assets, $188 million in excess of the regulatory requirement. The third capital requirement is to have risk-based capital equal to 8% of risk-weighted assets. At December 31, 1999, WFSB had risk-based capital in the amount of $2.7 billion or 11.95% of risk-weighted assets, exceeding the current requirement by $882 million. At December 31, 1999, WSL had risk-based capital in the amount of $414 million or 15.47% of risk-weighted assets, exceeding the current requirement by $200 million. Under OTS regulations which implement the prompt corrective action system mandated by the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), an institution is well-capitalized if its ratio of total capital to risk-weighted assets is 10% or more, its ratio of core capital to risk-weighted assets is 6% or more, its ratio of core capital to total assets is 5% or more and it is not subject to any written agreement, order or directive to meet a specified capital level. WFSB and WSL exceed the qualifications for well-capitalized institutions under the rules applicable to them. Because they are subsidiaries of a savings and loan holding company, WFSB and WSL must at least file a notice with the OTS prior to making capital distributions and, in some cases, may need to file applications. The OTS may disapprove a notice or deny an application, in whole or in part, if the OTS finds that: (a) the insured subsidiary would be undercapitalized or worse following the proposed capital distribution; (b) the proposed capital distribution raises safety and soundness concerns; or (c) the proposed capital distribution violates a prohibition contained in any statute, regulation, agreement with the OTS, or a condition imposed upon the insured subsidiary in an OTS approved application or notice. In general, WFSB and WSL may, with prior notice to the OTS, make capital distributions during a calendar year in an amount equal to that year's net income plus retained net income for the preceding two years, as long as immediately after such distributions they remain at least adequately capitalized. Capital distributions in excess of such amount, or which would cause WFSB or WSL to no longer be adequately capitalized, require specific OTS approval. During 1999, WSL paid a total of $225 million in dividends to Golden West. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) WSSB is regulated by the FDIC and the state of Texas. Under these regulations, a savings bank is required to meet three capital requirements. The first capital requirement is to have tier 1 leverage capital of 3% of adjusted average regulatory assets. The second requirement is to have tier 1 risk-based capital of 4% of risk-weighted assets. The third requirement is to have total risk-based capital of 8% of risk-weighted assets. At December 31, 1999, WSSB had tier 1 leverage capital of $203 million or 5.66% of adjusted average regulatory assets, tier 1 risk-based capital of $203 million or 26.90% of risk-weighted assets, and total risk-based capital of $203 million or 26.93% of risk-weighted assets. NEW ACCOUNTING PRONOUNCEMENTS 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 derivative instruments as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133" (SFAS 137) which delayed the effective date of SFAS 133 until fiscal years beginning after June 15, 2000. The Company has not yet adopted SFAS 133, but if SFAS had been adopted at December 31, 1999, given the interest rate environment at that time, it would not have had a significant effect on the Company's financial statements or financial position. RESULTS OF OPERATIONS Net earnings increased in 1999 as compared to 1998 primarily due to an increase in net interest income, a decrease in the provision for loan losses made possible by the Company's declining chargeoffs and nonperforming assets, an increase in noninterest income, and a lower effective tax rate. These increases to net earnings were partially offset by an increase in general and administrative expenses. Net earnings before the extraordinary item increased in 1998 as compared to 1997 primarily due to an increase in net interest income, a decrease in the provision for loan losses made possible by the Company's declining chargeoffs and nonperforming assets, and an increase in noninterest income. These increases to net earnings were partially offset by an increase in general and administrative expenses. In addition, net earnings for 1998 included a gain of $13 million before tax from the redemption of preferred stock which was called by the issuer. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued) EARNINGS PER SHARE (EPS) The Company's Basic EPS before the extraordinary item was $2.90 for the year ended December 31, 1999, compared to $2.60 and $2.07 for the years ended December 31, 1998 and 1997, respectively. The Company reported Diluted EPS before the extraordinary item of $2.87 for the year ended December 31, 1999 as compared to $2.58 and $2.04 for the years ended December 31, 1998 and 1997, respectively. PROFIT MARGINS/SPREADS An important determinant of Golden West's earnings is its primary spread--the difference between its yield on earning assets and its cost of funds. The following table shows the components of the Company's primary spread at the end of the years 1997 through 1999.
TABLE 47 Yield on Earning Assets, Cost of Funds, And Primary Spread December 31 -------------------------------- 1999 1998 1997 -------- --------- --------- Yield on loan portfolio 7.16% 7.32% 7.50% Yield on investments 5.88 5.53 6.48 -------- --------- --------- Yield on earning assets 7.15 7.30 7.48 -------- --------- --------- Cost of deposits 4.69 4.67 5.04 Cost of borrowings 5.77 5.87 5.99 -------- --------- --------- Cost of funds 5.00 4.96 5.36 -------- --------- --------- Primary spread 2.15% 2.34% 2.12% ======== ========= =========
YIELD ON EARNING ASSETS The yield on earning assets decreased in 1999 versus 1998 principally due to a lower yield on the loan portfolio. Although market interest rates rose in 1999, the indexes to which most of the loans in the adjustable rate mortgage portfolio are tied lagged changes in market yields. As a consequence, the yield on the portfolio decreased before increasing in the later part of 1999. In addition, the large volume of originations lowered the yield on the loan portfolio because of the introductory rates offered on new loans. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued) COST OF FUNDS Approximately 92% of Golden West's liabilities are subject to repricing in less than one year. Golden West's cost of funds increased during 1999 due to an increase in the cost of deposits, as well as an increase in borrowings as a proportion of interest-costing liabilities. Lower rates on deposit accounts as well as lower rates on borrowings led to a decrease in the Company's cost of funds during 1998. 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 $11 million, $9 million, and $5 million for the years ended December 31, 1999, 1998, and 1997, respectively. The table below summarizes the unrealized gains and losses for interest rate swaps at December 31, 1999 and 1998.
TABLE 48 Unrealized Gains and Losses on Interest Rate Swaps (Dollars in Thousands) December 31, 1999 ------------------------------------------------- Unrealized Unrealized Net Gains Losses Unrealized (Loss) -------------- -------------- -------------- Interest rate swaps $ 7,109 $ 8,986 $ (1,877) ============== ============== ============== December 31, 1998 ------------------------------------------------- Unrealized Unrealized Net Gains Losses Unrealized (Loss) -------------- -------------- -------------- Interest rate swaps $ 8,924 $ 45,923 $ (36,999) ============== ============== ==============
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued)
TABLE 49 Interest Rate Swap Activity (Notional Amounts in Millions) Receive Pay Fixed Fixed Swaps Swaps ----------- ----------- Balance at January 1, 1998 $ 1,679 $ 1,108 Maturities (1,167) (209) ----------- ----------- Balance at December 31, 1998 512 899 Additions 80 -0- Maturities (329) (172) ----------- ----------- Balance at December 31, 1999 $ 263 $ 727 =========== ===========
INTEREST ON LOANS Interest on loans was $1.9 billion, $2.3 billion, and $2.4 billion for the years ended December 31, 1999, 1998, and 1997, respectively. The decrease in 1999 was due to a decrease in the average portfolio balance and a decrease in the average portfolio yield. The decrease in 1998 was due to a decrease in the average portfolio balance which was partially offset by an increase by an increase in the average portfolio yield. The decreases in the average loan portfolio balances during 1999 and 1998 were primarily due to the securitization of loans into FNMA MBS and MBS-REMICs as discussed in " Loans Receivable and Mortgage-Backed Securities" on pages 58 and 59. INTEREST ON MBS Interest on MBS was $769 million, $498 million, and $282 million for the years ended December 31, 1999, 1998, and 1997, respectively. The increase in 1999 was due to an increase in the average portfolio balance which was partially offset by a decrease in the average portfolio yield. The increase in 1998 was due to an increase in the average portfolio balance and an increase in the in the average portfolio yield. The increases in the MBS portfolio during 1999 and 1998 were primarily due to the securitization of loans into FNMA MBS and MBS-REMICs, as previously discussed. 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. Interest and dividends on investments was $205 million, $210 million, and $158 million for the years ended December 31, 1999, 1998, and 1997, respectively. The decrease in 1999 was primarily due to a decrease in the average portfolio yield which was partially offset by an increase in the average portfolio balance. The increase in 1998 was primarily due to an increase in the average portfolio balance which was partially offset by a decrease in the average portfolio yield. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued) INTEREST ON DEPOSITS The major portion of the Company's deposit base consists of savings accounts with remaining maturities of one year or less and market rate transaction accounts. Thus, the amount of interest paid on these funds depends upon the level of short-term interest rates and the savings and the market rate transaction account balances outstanding. Interest on deposits was $1.3 billion, $1.3 billion, and $1.2 billion for the years ended December 31, 1999, 1998, and 1997, respectively. Interest on deposits in 1999 was comparable to 1998. The increase in interest expense in 1998 was due to the increase in the average balance of deposits partially offset by a decrease in the average cost of deposits. INTEREST ON ADVANCES Interest paid on FHLB advances was $380 million, $439 million, and $437 million for the years ended December 31, 1999, 1998, and 1997, respectively. The decrease in 1999 was due to a decrease in the average cost of these borrowings and a decrease in the average outstanding balance. The slight increase in 1998 was due to an increase in the average cost of these borrowings partially offset by a decrease in the average balance of these borrowings. INTEREST ON OTHER BORROWINGS Interest expense on other borrowings, including interest on reverse repurchase agreements, amounted to $192 million, $271 million, and $295 million for the years ended 1999, 1998, and 1997, respectively. The decrease in the expense in 1999 compared with 1998 was due to a decrease in the average balance of these liabilities and a decrease in the average cost. The decrease in the expense in 1998 compared with 1997 was due to an decrease in the average balance of these liabilities and a decrease in the average cost. PROVISION FOR (RECOVERY OF) LOAN LOSSES The recovery of loan losses was $2 million compared to a provision for loan losses of $11 million and $58 million for the years ended 1999, 1998, and 1997, respectively. The decrease in the provision in 1999 and 1998 reflected the declining nonperforming assets and lower loan losses as a result of the strong California economy and housing market. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued) NONINTEREST INCOME Noninterest income was $143 million, $138 million, and $81 million for the years ended December 31, 1999, 1998, and 1997, respectively. For the year ended December 31, 1999 , noninterest income included gains of $8 million from the sale of four savings offices located in markets with limited growth potential. Noninterest income for the year ended December 31, 1998 included a gain of $13 million from the redemption of preferred stock which was called by the issuer and a gain of $2.5 million from the sale of one savings branch. Without the effects of these one-time gains, noninterest income in 1999 was only slightly higher than 1998. The large increase in noninterest income in 1998 as compared to 1997 was mainly due to greater revenues from mortgage prepayment fees and loan servicing fees, and gains on the sale of more fixed-rate loans in the secondary market. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses were $386 million, $355 million, and $327 million for the years ended 1999, 1998, and 1997, respectively. Expenses increased in 1999 because of normal increases in employee compensation, the expansion of the loan origination organization to take advantage of opportunities to increase mortgage volume, investments in new computers to enhance customer service in the Company's branches, enhancements to data processing systems to take advantage of new technologies, and the completion of the "Year 2000" (Y2K) project that was necessary to resolve the Y2K computer programming problem. The 1998 increase was due to 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 Y2K computer issue. General and administrative expenses as a percentage of average assets was .98% for the year ended December 31, 1999 compared with .90% and .84% for the years ended December 31, 1998, and 1997, respectively. TAXES ON INCOME Golden West 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. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued) Taxes as a percentage of earnings before the extraordinary item decreased slightly in 1999 compared with 1998 and in 1998 over 1997. The decrease in the tax rate in 1999 as compared to 1998 was due to a lower overall state tax rate due to the expansion of business in lower taxing states and the tax benefit associated with the donation of land to the Alamo Community College district in San Antonio, Texas. EXTRAORDINARY ITEM During 1998, the Company paid off, before maturity, $4.4 billion of high-cost FHLB of San Francisco advances and, as a result, incurred a $21 million pre-tax charge for the penalties associated with these prepayments. LIQUIDITY AND CAPITAL RESOURCES WFSB's principal sources of funds are cash flows generated from earnings; deposits; loan repayments; sales of loans; wholesale 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, 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. WSL's principal sources of funds are cash flows generated from earnings; deposits; loan repayments; borrowings from the FHLB; and debt collateralized by mortgages, MBS, or securities. In addition, WSL has a number of other alternatives available to provide liquidity or finance operations. These include federal funds purchased; borrowings from its affiliates, borrowings from public offerings of debt, sales of loans, wholesale 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. WSSB's principal sources of funds are cash flows generated from earnings; deposits; loan repayments; borrowings from the FHLB Dallas; debt collateralized by mortgages or securities, and borrowings from its affiliates. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued) The principal sources of funds for WFSB's, WSL's, and WSSB'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 ($117 thousand in 1999 and $489 million in 1998), dividends to stockholders, the purchase of Golden West stock, and general and administrative expenses. YEAR 2000 The Company's systems functioned normally at January 1, 2000 and thereafter. COMMON STOCK The quarterly price ranges for the Company's common stock during 1999 and 1998 were as follows:
TABLE 50 Common Stock Price Range 1999 1998 -------------------------------- ------------------------------ First Quarter $29 17/64 - $34 33/64 $27 7/16 - $32 55/64 Second Quarter $30 41/64 - $34 61/64 $31 11/16 - $38 5/64 Third Quarter $30 17/64 - $33 9/16 $25 17/64 - $36 45/64 Fourth Quarter $31 1/4 - $38 1/64 $24 1/8 - $32 35/64
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See pages 53 through 56 in Item 7. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index included on page 83 and the financial statements, which begin on page F-1, which are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Inapplicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and executive officers of the Company are as follows (see footnote explanations on the following page): Name and Age Position ------------ -------- Herbert M. Sandler, 68 Chairman of the Board and Chief Executive Officer Marion O. Sandler, 69 Chairman of the Board and Chief Executive Officer James T. Judd, 61 Senior Executive Vice President Russell W. Kettell, 56 President and Treasurer (a) Michael Roster, 54 Executive Vice President, General Counsel and Secretary (b) J. L. Helvey, 68 Executive Vice President (c) Dirk S. Adams, 48 Executive Vice President (d) Carl M. Andersen, 39 Group Senior Vice President (e) William C. Nunan, 48 Group Senior Vice President (f) Maryellen B. Cattani, 56 Director Louis J. Galen, 74 Director Antonia Hernandez, 52 Director Patricia A. King, 57 Director Bernard A. Osher, 72 Director Kenneth T. Rosen, 51 Director Leslie Tang Schilling, 45 Director Each of the above persons holds the same position with WFSB and WSL with the exception of James T. Judd who is President, Chief Operating Officer, and Director of WFSB and WSL and Russell W. Kettell who is a Senior Executive Vice President and Director of WFSB and WSL. Each executive officer has had the principal occupations shown for the prior five years except as follows: ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (Continued) (a) Russell W. Kettell was elected Treasurer of the Company in January 1995 and has held the position of President of the Company since February 1993. Prior thereto, Mr. Kettell served as Senior Executive Vice President since 1989, Executive Vice President since 1984, Senior Vice President since 1980, and Treasurer from 1976 until 1984. (b) Michael Roster was elected Executive Vice President, General Counsel and Secretary in February 2000. Prior thereto, Mr. Roster was General Counsel at Stanford University. (c) J. L. Helvey was elected Executive Vice President of the Company in 1996. Prior thereto, Mr. Helvey served as Group Senior Vice President since 1988 and Senior Vice President since 1973. (d) Dirk S. Adams was elected Executive Vice President of the Company in 1998. Prior thereto, Mr. Adams served as Group Senior Vice President since 1990. (e) Carl M. Andersen was elected Group Senior Vice President in 1999 and Senior Vice President of the Company in 1997. He had held the position of Senior Vice President with WFSB, WSL, and WSSB since 1996. Prior thereto, he served as Vice President of WSL since 1990. (f) William C. Nunan was elected Group Senior Vice President in 1999 and Senior Vice President of the Company in 1997. He had held the position of Senior Vice President with WFSB, WSL, and WSSB since 1995. Prior thereto, he served as Vice President of WSL since 1985. For further information concerning the directors and executive officers of the Registrant, see pages 2 and 3 of the Registrant's Proxy Statement dated March 13, 2000, which are incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 is set forth in Registrant's Proxy Statement dated March 13, 2000, on pages 3 through 5 and 7 through 9 and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item 12 is set forth on pages 2, 3, 5 and 6 of Registrant's Proxy Statement dated March 13, 2000, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See "Indebtedness of Management" on page 8 of the Registrant's Proxy Statement dated March 13, 2000, which is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Index to Financial Statements See Index included on page 83 and the financial statements, which begin on page F-1. (2) Index to Financial Statement Schedules Financial statement schedules are omitted because they are not required or because the required information is included in the financial statements or the notes thereto. (3) Index To Exhibits Exhibit No. Description ---------- ----------- 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, as amended in 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. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued) (a) (3) Index To Exhibits (continued) Exhibit No. Description ----------- ----------- 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 16, 1998, for the Company's 1998 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. 10(g) Operating lease on Company headquarters building, 1901 Harrison Street, Oakland, California 94612, is incorporated by reference to Exhibit 10(h) of the Company's Quarterly Report on Form 10-Q (File No. 1-4629) for the quarter ended September 30, 1998. 10(h) 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. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued) (a) (3) Index To Exhibits (continued) Exhibit No. Description ----------- ----------- 21(a) Subsidiaries of the Registrant. 23(a) Independent Auditors' Consent. 27 Financial Data Schedule (b) Financial Statement Schedules The response to this portion of Item 14 is submitted as a part of section (a), Exhibits. (c) Reports on Form 8-K The Registrant did not file any current reports on Form 8-K with the Commission in the fourth quarter. For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned Registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into Registrant's Registration Statement on Form S-8 No. 33-14833 (filed June 5, 1987): Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued) SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. GOLDEN WEST FINANCIAL CORPORATION By: /s/ Herbert M. Sandler 3/29/2000 ---------------------------------------- Herbert M. Sandler, Chairman of the Board and Chief Executive Officer By: /s/ Marion O. Sandler 3/29/2000 ---------------------------------------- Marion O. Sandler, Chairman of the Board and Chief Executive Officer By: /s/ Russell W. Kettell 3/29/2000 ---------------------------------------- Russell W. Kettell, President and Chief Financial Officer Dated: March 29, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated: /s/ Maryellen B. Cattani 3/29/2000 /s/ Bernard A. Osher 3/29/2000 - ------------------------------------- ---------------------------------- Maryellen B. Cattani Bernard A. Osher Director Director /s/ Louis J. Galen 3/29/2000 /s/ Kenneth T. Rosen 3/29/2000 - ------------------------------------- ---------------------------------- Louis J. Galen Kenneth T. Rosen Director Director /s/ Antonia Hernandez 3/29/2000 /s/ Herbert M. Sandler 3/29/2000 - ------------------------------------- ---------------------------------- Antonia Hernandez Herbert M. Sandler Director Director /s/ Patricia A. King 3/29/2000 /s/ Marion O. Sandler 3/29/2000 - ------------------------------------- ---------------------------------- Patricia A. King Marion O. Sandler Director Director /s/ Leslie Tang Schilling 3/29/2000 ---------------------------------- Leslie Tang Schilling Director INDEX TO FINANCIAL STATEMENTS Page ---- Independent Auditors' Report F-1 Golden West Financial Corporation and Subsidiaries: Consolidated Statement of Financial Condition as of December 31, 1999, and 1998 F-2 Consolidated Statement of Net Earnings for the years ended December 31, 1999, 1998, and 1997 F-3 Consolidated Statement of Stockholders' Equity for the years ended December 31, 1999, 1998, and 1997 F-4 Consolidated Statement of Cash Flows for the years ended December 31, 1999, 1998, and 1997 F-5, F-6 Notes to Consolidated Financial Statements F-7 All supplemental schedules are omitted as inapplicable or because the required information is included in the financial statements or notes thereto. F-1 Independent Auditors' Report ---------------------------- Board of Directors and Stockholders Golden West Financial Corporation Oakland, California We have audited the accompanying consolidated statement of financial condition of Golden West Financial Corporation and subsidiaries (the "Company") as of December 31, 1999 and 1998, and the related consolidated statements of net earnings, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Golden West Financial Corporation and subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. Oakland, California January 20, 2000 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION --------------------------------------------- (Dollars in thousands except per share figures) ASSETS ------ December 31 -------------------------------- 1999 1998 --------------- -------------- Cash $ 333,793 $ 250,875 Securities available for sale at fair value (cost of $59,585 and $18,788) (Note B) 319,444 377,005 Other investments at cost (fair value of $466,086 and $422,508) (Note C) 467,156 422,385 Purchased mortgage-backed securities available for sale at fair value (cost of $77,796 and $109,083) (Notes D and L) 79,009 113,585 Purchased mortgage-backed securities held to maturity at cost (fair value of $429,007 and $588,950) (Notes E, K and L) 434,711 572,376 Mortgage-backed securities with recourse held to maturity at cost (fair value of $10,960,785 and $9,443,577) (Notes E, K and L) 11,147,901 9,346,004 Loans receivable less allowance for loan losses of $232,134 and $244,466 (Notes F and K) 27,919,817 25,721,288 Interest earned but uncollected (Note G) 175,351 209,328 Investment in capital stock of Federal Home Loan Banks, at cost which approximates fair value (Note K) 541,013 780,303 Real estate held for sale or investment (Note H) 13,711 45,696 Other assets 431,806 357,363 Premises and equipment, net (Note I) 278,493 272,521 --------------- -------------- $42,142,205 $38,468,729 =============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ December 31 -------------------------------- 1999 1998 --------------- -------------- Deposits (Note J) $ 27,714,910 $ 26,219,095 Advances from Federal Home Loan Banks (Note K) 8,915,218 6,163,472 Securities sold under agreements to repurchase (Note L) 1,045,176 1,252,469 Accounts payable and accrued expenses (Note F) 183,571 468,213 Taxes on income (Note N) 275,526 329,409 --------------- -------------- 38,134,401 34,432,658 Subordinated notes (Note M) 812,950 911,753 Stockholders' equity (Notes O and Q): Preferred stock, par value $1.00: Authorized 20,000,000 shares Issued and outstanding, none Common stock, par value $.10: Authorized 200,000,000 shares Issued and outstanding, 161,357,833 and 170,583,372 shares 16,136 5,686 Additional paid-in capital 135,555 122,159 Retained earnings 2,885,346 2,781,925 --------------- -------------- 3,037,037 2,909,770 Accumulated other comprehensive income from unrealized gains on securities, net of tax $103,255 (1999) and $148,171 (1998) 157,817 214,548 --------------- -------------- Total Stockholders' Equity 3,194,854 3,124,318 --------------- -------------- $ 42,142,205 $ 38,468,729 =============== ==============
See notes to consolidated financial statements. F-2 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF NET EARNINGS -------------------------------------- (Dollars in thousands except per share figures)
Year Ended December 31 ---------------------------------------------- 1999 1998 1997 ------------- -------------- ------------- Interest Income: Interest on loans $1,851,790 $2,254,427 $2,392,175 Interest on mortgage-backed securities 769,314 498,319 282,499 Interest and dividends on investments 204,741 209,807 157,823 ------------- -------------- ------------- 2,825,845 2,962,553 2,832,497 Interest Expense: Interest on deposits (Note J) 1,250,364 1,285,343 1,209,646 Interest on advances 380,189 438,660 437,028 Interest on repurchase agreements 61,565 112,942 150,557 Interest on other borrowings 130,242 158,286 144,771 ------------- -------------- ------------- 1,822,360 1,995,231 1,942,002 ------------- -------------- ------------- Net Interest Income 1,003,485 967,322 890,495 Provision for (recovery of) loan losses (2,089) 11,260 57,609 ------------- -------------- ------------- Net Interest Income after Provision for (Recovery of) Loan Losses 1,005,574 956,062 832,886 Noninterest Income: Fees 65,456 62,820 45,910 Gain on the sale of securities, mortgage-backed securities, and loans 22,764 38,784 8,197 Other 55,082 36,009 27,161 ------------- -------------- ------------- 143,302 137,613 81,268 Noninterest Expense: General and administrative: Personnel 215,483 196,153 180,917 Occupancy 67,015 62,549 55,508 Deposit insurance 5,358 5,925 7,454 Advertising 11,928 10,412 11,525 Other 86,363 79,468 71,555 ------------- -------------- ------------- 386,147 354,507 326,959 Earnings before Taxes on Income 762,729 739,168 587,195 Taxes on income (Note N) 282,750 292,077 233,057 ------------- -------------- ------------- Earnings before Extraordinary Item 479,979 447,091 354,138 Extraordinary item (Note A) -0- (12,511) -0- ------------- -------------- ------------- Net Earnings $ 479,979 $ 434,580 $ 354,138 ============= ============== ============= Basic earnings per share before extraordinary item $ 2.90 $ 2.60 $ 2.07 Extraordinary item 0.00 (.07) 0.00 ------------- -------------- ------------- Basic earnings per share (Note P) $ 2.90 $ 2.53 $ 2.07 ============= ============== ============= Diluted earnings per share before extraordinary item $ 2.87 $ 2.58 $ 2.04 Extraordinary item 0.00 (.07) 0.00 ------------- -------------- ------------- Diluted earnings per share (Note P) $ 2.87 $ 2.51 $ 2.04 ============= ============== =============
See notes to consolidated financial statements. F-3 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY ---------------------------------------------- (Dollars in thousands except per share figures)
Accumulated Additional Other Total Common Paid-in Retained Comprehensive Stockholders' Comprehensive Stock Capital Earnings Income Equity Income --------- --------- ---------- -------------- ------------- --------------- Balance at January 1, 1997 $ 5,734 $ 67,953 $2,177,098 $ 99,692 $ 2,350,477 Net earnings -0- -0- 354,138 -0- 354,138 $ 354,138 Change in unrealized gains on securities available for sale -0- -0- -0- 51,993 51,993 51,993 Reclassification adjustment for gains included in income -0- -0- -0- (1,948) (1,948) (1,948) --------------- Comprehensive Income $ 404,183 =============== Common stock issued upon exercise of stock options, including tax benefits - 1,371,645 shares 46 17,579 -0- -0- 17,625 Purchase and retirement of 2,193,300 shares of Company stock (Note O) (73) -0- (48,278) -0- (48,351) Cash dividends on common stock ($.152 per share) -0- -0- (25,903) -0- (25,903) --------- --------- ---------- -------------- ------------- Balance at December 31, 1997 5,707 85,532 2,457,055 149,737 2,698,031 Net earnings -0- -0- 434,580 -0- 434,580 $ 434,580 Change in unrealized gains on securities available for sale -0- -0- -0- 72,833 72,833 72,833 Reclassification adjustment for gains included in income -0- -0- -0- (8,022) (8,022) (8,022) --------------- Comprehensive Income $ 499,391 =============== Common stock issued upon exercise of stock options, including tax benefits - 2,382,960 shares 80 36,627 -0- -0- 36,707 Purchase and retirement of 3,005,100 shares of Company stock (Note O) (101) -0- (80,222) -0- (80,323) Cash dividends on common stock ($.172 per share) -0- -0- (29,488) -0- (29,488) --------- --------- ---------- -------------- ------------- Balance at December 31, 1998 5,686 122,159 2,781,925 214,548 3,124,318 Net earnings -0- -0- 479,979 -0- 479,979 $ 479,979 Change in unrealized gains on securities available for sale -0- -0- -0- (55,981) (55,981) (55,981) Reclassification adjustment for gains included in income (750) (750) (750) --------------- Comprehensive Income $ 423,248 =============== Common stock issued upon exercise of stock options, including tax benefits -1,508,461 shares 78 24,172 -0- -0- 24,250 Purchase and retirement of 10,734,000 shares of Company stock (Note O) (404) -0- (344,655) -0- (345,059) Common stock split effected by means of a 200% stock dividend (Note O) 10,776 (10,776) -0- -0- -0- Cash dividends on common stock ($.193 per share) -0- -0- (31,903) -0- (31,903) --------- --------- ---------- -------------- ------------- Balance at December 31, 1999 $ 16,136 $135,555 $2,885,346 $ 157,817 $ 3,194,854 ========= ========= ========== ============== =============
Note: All shares of common stock shown above reflect the three-for-one split of the Company's common stock which occurred on December 10, 1999. See notes to consolidated financial statements. F-4 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS ------------------------------------ (Dollars in thousands) Year Ended December 31 ----------------------------------------------- 1999 1998 1997 ------------- ------------- ------------- Cash Flows From Operating Activities: Net earnings $ 479,979 $ 434,580 $ 354,138 Adjustments to reconcile net earnings to net cash provided by operating activities: Extraordinary item -0- 21,152 -0- Provision for (recovery of) loan losses (2,089) 11,260 57,609 Amortization of loan fees and discounts (14,100) (22,410) (17,958) Depreciation and amortization 28,215 25,913 21,270 Loans originated for sale (793,443) (1,155,912) (217,264) Sales of loans 1,196,403 1,423,084 208,826 Decrease in interest earned but uncollected 33,977 7,595 4,681 Federal Home Loan Bank stock dividends (36,383) (51,156) (42,590) (Increase) in other assets (76,669) (99,601) (12,259) Increase (decrease) in accounts payable and accrued expenses (296,685) 21,888 (5,857) Increase (decrease) in taxes on income (8,967) 19,532 24,069 Other, net 717 12,782 (4,504) ------------- ------------- ------------- Net cash provided by operating activities 510,955 648,707 370,161 Cash Flows From Investing Activities: New loan activity: Real estate loans originated for portfolio (11,878,768) (7,032,022) (7,265,709) Real estate loans purchased (1,375) (2,683) (2,480) Other, net (100,285) (188,393) (46,781) ------------- ------------- ------------- (11,980,428) (7,223,098) (7,314,970) Real estate loan principal payments: Monthly payments 580,428 648,331 693,134 Payoffs, net of foreclosures 4,366,672 5,552,187 3,093,780 ------------- ------------- ------------- 4,947,100 6,200,518 3,786,914 Repayments of mortgage-backed securities 2,759,224 2,093,124 518,224 Proceeds from sales of real estate 109,165 146,202 226,135 Purchases of securities available for sale (6,413,774) (368,151) (2,916) Sales of securities available for sale 19 81,373 11,944 Matured securities available for sale 6,381,785 632,284 249,029 Decrease (increase) in other investments (44,771) (169,737) 826,184 Purchases of Federal Home Loan Bank stock -0- (149,662) (56,239) Redemptions of Federal Home Loan Bank stock 275,673 -0- -0- Additions to premises and equipment (38,063) (64,143) (53,834) ------------- ------------- ------------- Net cash provided by (used in) investing activities (4,004,070) 1,178,710 (1,809,529)
See notes to consolidated financial statements. F-5
Year Ended December 31 ----------------------------------------------- 1999 1998 1997 -------------- -------------- -------------- Cash Flows From Financing Activities: Net increase in deposits 1,495,815 2,109,378 2,009,783 Additions to Federal Home Loan Bank advances 4,332,230 8,363,135 2,571,200 Repayments of Federal Home Loan Bank advances (1,580,482) (10,737,644) (2,853,217) Proceeds from agreements to repurchase securities 7,826,377 6,555,115 6,385,060 Repayments of agreements to repurchase securities (8,033,670) (7,636,694) (5,959,138) Repayments of medium-term notes -0- (110,000) (480,000) Repayments of subordinated notes (100,000) (200,000) (215,000) Dividends on common stock (31,903) (29,488) (25,903) Exercise of stock options 12,725 17,738 8,456 Purchase and retirement of Company stock (345,059) (80,323) (48,351) -------------- -------------- -------------- Net cash provided by (used in) financing activities 3,576,033 (1,748,783) 1,392,890 -------------- -------------- -------------- Net Increase (Decrease) in Cash 82,918 78,634 (46,478) Cash at beginning of period 250,875 172,241 218,719 -------------- -------------- -------------- Cash at end of period $ 333,793 $ 250,875 $ 172,241 ============== ============== ============== Supplemental cash flow information: Cash paid for: Interest $ 1,814,859 $ 2,018,128 $ 1,948,021 Income taxes 280,536 248,086 201,306 Cash received for interest and dividends 2,859,822 2,970,148 2,837,178 Noncash investing activities: Loans converted from adjustable rate to fixed-rate 522,047 228,529 -0- Loans transferred to foreclosed real estate 65,392 112,406 201,304 Mortgage-backed securities transferred from available for sale to held to maturity (at fair value) -0- -0- 30,003 Loans securitized into mortgage-backed securities with recourse held to maturity 4,773,615 8,189,190 1,022,455 Mortgage-backed securities with recourse held to maturity desecuritized into adjustable rate mortgages -0- -0- 856,038
F-6 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years ended December 31, 1999, 1998, and 1997 (Dollars in thousands except per share figures) NOTE A - Summary of Significant Accounting Policies Principles of Consolidation - --------------------------- The consolidated financial statements include the accounts of Golden West Financial Corporation, a Delaware corporation, and its wholly owned subsidiaries (the Company or Golden West). Intercompany accounts and transactions have been eliminated. The Company's principal operating subsidiaries are World Savings Bank, a federally chartered savings bank (WFSB), World Savings and Loan Association, a federally chartered association (WSL), and World Savings Bank, a state chartered savings bank (WSSB), (collectively, the Insured Subsidiaries). At December 31, 1999, the assets of these subsidiaries were $37.8 billion, $5.1 billion and $3.5 billion, respectively. Certain reclassifications have been made to prior year financial statements to conform to current presentation. Nature of Operations - -------------------- Golden West Financial Corporation, through its financial institution subsidiaries, operates 249 savings branches in eight states and 269 loan offices in 29 states, of which 120 loan offices are located in savings branches. The Company's primary source of revenue is interest from loans on residential real estate and mortgage-backed securities. Use of Estimates in the Preparation of Financial Statements - ----------------------------------------------------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash - ---- For the purpose of presentation in the Consolidated Statement of Cash Flows, cash is defined as cash held in office and amounts due from banks. Securities Available for Sale and Other Investments - --------------------------------------------------- The Office of Thrift Supervision requires insured institutions to maintain a minimum amount of liquid assets in the form of cash and securities approved by federal regulations at either a) 4% of the quarterly average of daily balances of short-term deposits and borrowings for the prior quarter or b) 4% of the prior quarter's ending balance of short-term deposits and borrowings. The Company classifies its investment securities as either held to maturity or available for sale. The Company has no trading securities. Held to maturity securities are recorded at cost with any discount or premium amortized using a method that is not materially different from the interest method, which is also known as the level yield method. Securities held to maturity are recorded at cost because the Company has the ability to hold these securities to maturity and because it is Management's intention to hold them to maturity. Securities available for sale increase the Company's portfolio management flexibility for investments and are reported at fair value. Net unrealized gains and losses are excluded from earnings and reported net of applicable income taxes in other comprehensive income and as a separate component of stockholders' equity until realized. Realized gains or losses on sales of securities are recorded in earnings at the time of sale and are determined by the difference between the net sales proceeds and the cost of the security, using specific identification, adjusted for any unamortized premium or discount. The Company has other investments, consisting of overnight investments such as Eurodollar time deposits and federal funds, and longer-term investments such as Bank notes, medium-term notes, and collateralized mortgage obligations. These other investments are recorded at cost with any discount or premium amortized using a method that is not materially different from the interest method. F-7 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1999, 1998, and 1997 (Dollars in thousands except per share) Mortgage-Backed Securities - -------------------------- The Company has no mortgage-backed securities (MBS) classified as trading. Mortgage-backed securities held to maturity are recorded at cost because the Company has the ability to hold these MBS to maturity and because Management intends to hold these securities to maturity. Premiums and discounts on MBS are amortized or accreted using the interest method over the estimated life of the security. MBS available for sale are reported at fair value, with unrealized gains and losses excluded from earnings and reported net of applicable income taxes as a separate component of stockholders' equity until realized. Realized gains or losses on sales of MBS are recorded in earnings at the time of sale and are determined by the difference between the net sales proceeds and the cost of MBS, using specific identification, adjusted for any unamortized premium or discount. The Company has securitized certain loans from its investment loan portfolio into MBS with recourse and into Real Estate Mortgage Investment Conduits (REMICs) which are held to maturity and available to be used as collateral for borrowings. Loans Receivable - ---------------- The Company's real estate loan portfolio consists primarily of long-term loans collateralized by first deeds of trust on single-family residences and multi-family residential property. In addition to real estate loans, the Company makes loans on the security of savings accounts. The adjustable rate mortgage (ARM) is the Company's primary real estate loan. The ARM carries an interest rate that may change as often as monthly, based on movements in certain cost of funds or other indexes. Interest rate changes and monthly payments of principal and interest may be subject to maximum increases or decreases. Negative amortization may occur during periods when payments are limited. The Company also offers "modified" ARMs, loans that offer a low, fixed rate generally from 1% to 3% below the contract rate for an initial period, primarily one to 12 months. The Company originates loans that are held for sale, primarily fixed-rate loans. These loans are recorded at the lower of cost or market. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company's policy is to measure impairment based on the fair value of the collateral. When the value of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance. The valuation allowance and provision for loan losses are adjusted for changes in the fair value of the collateral. Loan origination fees, net of certain direct loan origination costs, are deferred and amortized as an interest income yield adjustment over the actual life of the related loans using the interest method. Loan origination fees, net of certain direct loan origination costs, on loans originated for sale are deferred until the loans are sold and recognized at the time of sale. "Fees," which include fees for prepayment of loans, income for servicing loans, late charges for delinquent payments, fees from deposit accounts, and miscellaneous fees, are recorded when collected. Nonperforming assets consist of loans 90 days or more delinquent, with balances not reduced for loan loss reserves, and real estate owned through foreclosure. For loans past due 90 days or more, all interest earned but uncollected is fully reserved. Troubled debt restructured consists of loans that have been modified by the lender to grant a concession to the borrower because of a perceived temporary weakness in the collateral and/or borrower. F-8 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1999, 1998, and 1997 (Dollars in thousands except per share figures) Real Estate Held for Sale or Investment - --------------------------------------- Real estate held for sale or investment is comprised primarily of improved property acquired through foreclosure. All real estate owned is recorded at the lower of cost or fair value. Included in the fair value is the estimated selling price in the ordinary course of business less estimated costs to repair, hold, and dispose of the property. Costs relating to holding property, net of rental and option income, are expensed in the current period. Gains on the sale of real estate are recognized at the time of sale. Losses realized and expenses incurred in connection with the disposition of foreclosed real estate are charged to current earnings. Allowance for Loan Losses - ------------------------- The Company provides specific valuation allowances for losses on loans when impaired and on real estate owned when any significant and permanent decline in value is identified. The Company also utilizes a methodology 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 sales 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. Reserve for Losses on Loans Sold with Recourse and Securitized and Retained - --------------------------------------------------------------------------- The Company has securitized loans from its portfolio into FNMA MBS with recourse and MBS-REMICs. The Company's intent is to hold these MBS and MBS-REMICs to maturity. Because these loans underlying the MBS and MBS-REMICs are similar in all respects to the loans in its loan portfolio, the Company estimates its reserve on these securities in a manner similar to the method it uses for the allowance for loan losses. The Company also sells certain loans with full credit recourse and has established a reserve for potential losses on these loans. The liability for the reserve for losses on loans sold or securitized and retained is included in accounts payable and accrued expenses. Mortgage Servicing Rights - ------------------------- Capitalized Mortgage Servicing Rights (CMSRs) are periodically reviewed for impairment based on fair value. The fair value of the CMSRs, for the purposes of impairment measurement, is determined by using a discounted cash flow analysis based on the Company's estimated annual cost of servicing, market prepayment rates, and market discount rates. At December 31, 1999 and 1998, there was no impairment. The balance of CMSRs is included in "Other assets" in the Consolidated Statement of Financial Condition and is being amortized over the projected servicing period. The amortization of the CMSRs is included in "Fee income" in the Consolidated Statement of Net Earnings. Securities Sold Under Agreements to Repurchase - ---------------------------------------------- The Company enters into sales of securities under agreements to repurchase (reverse repurchase agreements) only with selected dealers and banks. Reverse repurchase agreements are treated as financings and the obligations to repurchase securities sold are reflected as a liability in the Consolidated Statement of Financial Condition. The securities underlying the agreements remain in the asset accounts. F-9 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1999, 1998, and 1997 (Dollars in thousands except per share figures) Interest Rate Swaps - ------------------- The Company utilizes certain derivative financial instruments, primarily various types of 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. An interest rate swap is an agreement between two parties in which one party exchanges cash payments based on a fixed or floating rate of interest for a counterparty's cash payment based on a floating rate of interest. The amounts to be paid are defined by agreement and determined by applying the specified interest rates to a notional principal amount. Interest rate swap agreements are entered into to limit the impact of changes in interest rates on mortgage loans, or other designated assets, deposits or borrowings. The interest rate differential paid or received on interest rate swap agreements is recognized over the life of the agreements, with income and expense recorded in the same category as the designated balance sheet item. The designated balance sheet item is generally a pool of assets or liabilities with similar interest rate characteristics. Some interest rate swaps are entered into with starting dates in the future in anticipation of future prepayments on fixed-rate assets. Taxes on Income - --------------- The Company files consolidated federal income tax returns with its subsidiaries. The provision for federal and state taxes on income is based on taxes currently payable and taxes expected to be payable in the future as a result of events that have been recognized in the financial statements or tax returns. Regulatory Capital Requirements - ------------------------------- The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) established capital standards for OTS regulated institutions, such as WFSB and WSL. Under FIRREA, thrifts and savings banks must have tangible capital equal to 1.5% of adjusted total assets, have core capital equal to 4% of adjusted total assets, and have risk-based capital equal to 8% of risk-weighted assets. At December 31, WFSB had the following regulatory capital calculated in accordance with FIRREA's capital standards:
1999 1998 --------------------------------------------------- --------------------------------------------------- ACTUAL REQUIRED ACTUAL REQUIRED ------------------------- ------------------------- ------------------------- ------------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ------------- -------- -------------- -------- ------------- -------- ------------- -------- Tangible $ 2,514,211 6.64% $ 567,705 1.50% $ 2,163,838 6.77% $ 479,370 1.50% Core 2,514,211 6.64 1,513,880 4.00 2,163,838 6.77 1,278,319 4.00 Risk-based 2,668,878 11.95 1,786,623 8.00 2,311,286 12.93 1,430,371 8.00
At December 31, WSL had the following regulatory capital calculated in accordance with FIRREA's capital standards:
1999 1998 --------------------------------------------------- --------------------------------------------------- ACTUAL REQUIRED ACTUAL REQUIRED ------------------------- ------------------------- ------------------------- ------------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ------------- -------- -------------- -------- ------------- -------- ------------- -------- Tangible $ 382,972 7.86% $ 73,120 1.50% $ 473,523 7.25% $ 97,909 1.50% Core 382,972 7.86 194,986 4.00 473,523 7.25 261,091 4.00 Risk-based 413,636 15.47 213,950 8.00 617,654 16.24 304,286 8.00
F-10 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1999, 1998, and 1997 (Dollars in thousands except per share figures) The Office of Thrift Supervision (OTS) has adopted rules based upon five capital tiers: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The rules provide that a savings association is "well-capitalized" if its total risk-based capital ratio is 10% or greater, its Tier 1 risk-based capital ratio is 6% or greater, its leverage ratio is 5% or greater, and the institution is not subject to a capital directive. As used herein, the total risk-based capital ratio is the ratio of total capital to risk-weighted assets, Tier 1 risk-based capital ratio means the ratio of core capital to risk-weighted assets, and the leverage ratio is the ratio of core capital to adjusted total assets, in each case as calculated in accordance with current OTS capital regulations. WFSB and WSL are both regulated by the OTS. As of December 31, 1999, 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 exceeded the well-capitalized classification at December 31, 1999 and 1998.
1999 1998 ----------------------------------------------- ------------------------------------------------- ACTUAL WELL-CAPITALIZED ACTUAL WELL-CAPITALIZED ----------------------- ---------------------- ---------------------- ----------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ------------ --------- ------------ -------- ----------- --------- ------------ --------- Leverage $2,514,211 6.64% $ 1,892,349 5.00% $ 2,163,838 6.77% $ 1,597,898 5.00% Tier 1 risk-based 2,514,211 11.26 1,339,967 6.00 2,163,838 12.10 1,072,778 6.00 Total risk-based 2,668,878 11.95 2,233,279 10.00 2,311,286 12.93 1,787,964 10.00
The table below shows that WSL's regulatory capital exceeded the well-capitalized classification at December 31, 1999 and 1998.
1999 1998 ----------------------------------------------- ------------------------------------------------- ACTUAL WELL-CAPITALIZED ACTUAL WELL-CAPITALIZED ----------------------- ---------------------- ---------------------- ----------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ------------ --------- ------------ -------- ----------- --------- ------------ --------- Leverage $ 382,972 7.86% $ 243,732 5.00% $ 473,523 7.25% $ 326,364 5.00% Tier 1 risk-based 382,972 14.32 160,462 6.00 473,523 12.45 228,214 6.00 Total risk-based 413,636 15.47 267,437 10.00 617,654 16.24 380,357 10.00
WSSB is a state chartered savings bank regulated by the FDIC. At December 31, WSSB had the following regulatory capital calculated in accordance with FDIC's capital standards:
1999 1998 ----------------------------------------------- ------------------------------------------------- ACTUAL REQUIRED ACTUAL REQUIRED ----------------------- ---------------------- ---------------------- ----------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ------------ --------- ------------ -------- ----------- --------- ------------ --------- Tier 1 leverage $ 202,846 5.66% $ 107,593 3.00% $ 186,411 5.26% $ 106,220 3.00% Tier 1 risk-based 202,846 26.90 30,161 4.00 186,411 25.12 29,686 4.00 Total risk-based 203,087 26.93 60,322 8.00 186,647 25.15 59,372 8.00
F-11 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1999, 1998, and 1997 (Dollars in thousands except per share figures) Retained Earnings - ----------------- Because they are subsidiaries of a savings and loan holding company, WFSB and WSL must at least file a notice with the OTS prior to making capital distributions and, in some cases, may need to file applications. The OTS may disapprove a notice or deny an application, in whole or in part, if the OTS finds that: (a) the insured subsidiary would be undercapitalized or worse following the capital distribution; (b) the proposed capital distribution raises safety and soundness concerns; or (c) the proposed capital distribution violates a prohibition contained in any statute, regulation, agreement with the OTS, or a condition imposed upon the insured subsidiary in an OTS approved application or notice. In general, WFSB and WSL may, with prior notice to the OTS, make capital distributions during a calendar year in an amount equal to that year's net income plus retained net income for the preceding two years, as long as immediately after such distributions they remain at least adequately capitalized. Capital distributions in excess of such amount, or which would cause WFSB or WSL to no longer be adequately capitalized, require specific OTS approval. At December 31, 1999, $1.0 billion of the Insured Subsidiaries' retained earnings were available for the payment of cash dividends without the imposition of additional federal income taxes. The Company is not subject to the same tax and reporting restrictions as are WFSB and WSL. Extraordinary Item - ------------------ During 1998, the Company paid off, before maturity, $4.4 billion of high-cost FHLB of San Francisco advances and, as a result, incurred a $21 million pre-tax charge for the penalties associated with these prepayments. These penalties are reflected as an extraordinary charge on the Consolidated Statement of Net Earnings. New Accounting Pronouncements - ----------------------------- 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. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - - Deferral of the Effective Date of FASB Statement No. 133" (SFAS 137), which delayed the effective date of SFAS 133 until fiscal years beginning after June 15, 2000. The Company has not yet adopted SFAS 133, but if SFAS 133 had been adopted at December 31, 1999, given the interest rate environment at that time, it would not have had a significant effect on the Company's financial statements or financial position. F-12 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1999, 1998, and 1997 (Dollars in thousands except per share figures)
NOTE B - Securities Available for Sale The following is a summary of securities available for sale: December 31, 1999 --------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------ ------------ ------------ ------------- U.S. Treasury and government agency obligations $ 5,354 $ 990 $ -0- $ 6,344 Collateralized mortgage obligations 848 -0- 61 787 Equity securities 5,530 258,961 -0- 264,491 Certificate of deposit 4,998 -0- 2 4,996 Commercial paper 19,822 -0- 4 19,818 Medium-term notes 23,033 -0- 25 23,008 ------------ ------------ ------------ ------------- $ 59,585 $ 259,951 $ 92 $ 319,444 ============ ============ ============ ============= December 31, 1998 ---------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------- ------------- ------------ ------------ U.S. Treasury and government agency obligations $ 5,291 $ 523 $ -0- $ 5,814 Collateralized mortgage obligations 7,948 6 190 7,764 Equity securities 5,549 357,878 -0- 363,427 ------------- ------------- ------------ ------------ $ 18,788 $ 358,407 $ 190 $ 377,005 ============= ============= ============ ============
The weighted average portfolio yields on securities available for sale were 12.78% and 19.21% at December 31, 1999 and 1998, respectively. Principal proceeds from the sales of securities from the securities available for sale portfolio were $1,269 (1999), $94,846 (1998), and $14,937 (1997) and resulted in realized gains of $1,250 (1999), $13,480 (1998), and $3,039 (1997) and realized losses of $-0- (1999), $7 (1998), and $46 (1997). At December 31, 1999, the securities available for sale had maturities as follows:
Amortized Fair Maturity Cost Value ------------------------------------ -------------- ------------- No maturity $ 9,887 $ 269,816 2000 47,872 47,841 2001 through 2004 -0- -0- 2005 through 2009 1,579 1,559 2010 and thereafter 247 228 -------------- -------------- $ 59,585 $ 319,444 ============== =============
NOTE C - Other Investments The following is a summary of other investments:
December 31, 1999 --------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------ ------------ ------------ ------------- Overnight Investments: Federal funds $ 88,510 $ -0- $ -0- $ 88,510 Eurodollar time deposits 197,000 -0- -0- 197,000 Longer-Term Investments: Bank notes 25,000 -0- 109 24,891 Collateralized mortgage obligations 114,637 -0- 905 113,732 Medium-term notes 42,009 -0- 56 41,953 ------------ ------------ ------------ ------------- $ 467,156 $ -0- $ 1,070 $ 466,086 ============ ============ ============ =============
F-13 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------
Years ended December 31, 1999, 1998, and 1997 (Dollars in thousands except per share figures) December 31, 1998 --------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------ ------------ ------------ ------------- Overnight Investments: Federal funds $ 166,896 $ -0- $ -0- $ 166,896 Longer-Term Investments: Bank notes 25,000 94 -0- 25,094 Collateralized mortgage obligations 188,304 108 187 188,225 Medium-term notes 42,185 108 -0- 42,293 ------------ ------------ ------------ ------------- $ 422,385 $ 310 $ 187 $ 422,508 ============ ============ ============ =============
The weighted average portfolio yields on other investments were 5.00% and 4.92% at December 31, 1999 and 1998, respectively. There were no sales of other investments during 1999, 1998, or 1997. At December 31, 1999, the other investments portfolio had maturities as follows:
Amortized Fair Maturity Cost Value ------------------------------------ -------------- -------------- 2000 $ 352,519 $ 352,354 2001 through 2004 12,088 11,936 2005 through 2009 33,983 33,665 2010 and thereafter 68,566 68,131 -------------- -------------- $ 467,156 $ 466,086 ============== =============
NOTE D - Purchased Mortgage-Backed Securities Available for Sale Purchased mortgage-backed securities available for sale are summarized as follows:
December 31, 1999 ------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------- ------------- ------------- -------------- FNMA $ 34,185 $ 596 $ 474 $ 34,307 FHLMC 24,651 400 71 24,980 GNMA 18,918 795 31 19,682 Other 42 -0- 2 40 ------------- ------------- ------------- -------------- $ 77,796 $ 1,791 $ 578 $ 79,009 ============= ============= ============= ============== December 31, 1998 ------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------- ------------- ------------- -------------- FNMA $ 42,958 $ 1,168 $ 23 $ 44,103 FHLMC 39,234 1,536 47 40,723 GNMA 26,833 1,882 11 28,704 Other 58 -0- 3 55 ------------- ------------- ------------- -------------- $ 109,083 $ 4,586 $ 84 $ 113,585 ============= ============= ============= ==============
The weighted average portfolio yields on mortgage-backed securities available for sale were 8.95% and 9.15% at December 31, 1999, and 1998, respectively. There were no sales of securities from the mortgage-backed securities available for sale portfolio in 1999, 1998, or 1997. F-14 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1999, 1998, and 1997 (Dollars in thousands except per share figures) At December 31, 1999, purchased mortgage-backed securities available for sale had contractual maturities as follows:
Amortized Fair Maturity Cost Value -------------------------- -------------- -------------- 2000 through 2004 $ 233 $ 231 2005 through 2009 3,176 3,221 2010 and thereafter 74,387 75,557 -------------- -------------- $ 77,796 $ 79,009 ============== ==============
NOTE E - Mortgage-Backed Securities Held to Maturity Mortgage-backed securities held to maturity are summarized as follows:
December 31, 1999 ------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------------- ------------- ------------- ------------- Purchased MBS held to maturity ------------------------------------ FNMA $ 380,291 $ 1,351 $ 10,542 $ 371,100 FHLMC 27,886 2,137 -0- 30,023 GNMA 26,534 1,350 -0- 27,884 -------------- ------------- ------------- ------------- Subtotal 434,711 4,838 10,542 429,007 MBS with recourse held to maturity ------------------------------------ FNMA 3,910,417 -0- 51,321 3,859,096 REMIC 7,237,484 10,103 145,898 7,101,689 -------------- ------------- ------------- ------------- Subtotal 11,147,901 10,103 197,219 10,960,785 -------------- ------------- ------------- ------------- Total $ 11,582,612 $ 14,941 $ 207,761 $ 11,389,792 ============== ============= ============= ============= December 31, 1998 ------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------------- ------------- ------------- ------------- Purchased MBS held to maturity ------------------------------------ FNMA $ 493,466 $ 10,761 $ -0- $ 504,227 FHLMC 41,107 3,218 -0- 44,325 GNMA 37,803 2,595 -0- 40,398 -------------- ------------- ------------- ------------- Subtotal 572,376 16,574 -0- 588,950 MBS with recourse held to maturity ------------------------------------ FNMA 3,884,347 70,997 -0- 3,955,344 REMIC 5,461,657 26,576 -0- 5,488,233 -------------- ------------- ------------- ------------- Subtotal 9,346,004 97,573 -0- 9,443,577 -------------- ------------- ------------- ------------- Total $ 9,918,380 $ 114,147 $ -0- $10,032,527 ============== ============= ============= =============
The weighted average portfolio yields on mortgage-backed securities held to maturity were 7.13% and 7.18% at December 31, 1999 and 1998, respectively. There were no sales of securities from the mortgage-backed securities held to maturity portfolio during 1999, 1998, or 1997. At December 31, 1999, mortgage-backed securities held to maturity had contractual maturities as follows:
Amortized Fair Maturity Cost Value ------------------------------------- -------------- -------------- 2005 through 2009 $ 310 $ 319 2010 and thereafter 11,582,302 11,389,473 -------------- -------------- $11,582,612 $11,389,792 ============== ==============
F-15 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1999, 1998, and 1997 (Dollars in thousands except per share figures) NOTE F - Loans Receivable
December 31 -------------------------------- 1999 1998 -------------- -------------- Loans collateralized primarily by first deeds of trust: One- to four-family dwelling units $26,041,066 $21,639,015 Over four-family dwelling units 1,979,199 4,260,631 Commercial property 49,149 65,865 Land 612 798 -------------- -------------- 28,070,026 25,966,309 Loans on savings accounts 20,107 25,279 -------------- -------------- 28,090,133 25,991,588 Less: Undisbursed loan funds 5,022 3,080 Unearned fees (deferred costs) and discounts (66,840) 17,629 Unamortized discount arising from acquisitions -0- 5,125 Allowance for loan losses 232,134 244,466 -------------- -------------- $27,919,817 $25,721,288 ============== ==============
In addition to loans receivable and MBS with recourse held to maturity, the Company services loans for others. At December 31, 1999 and 1998, the amount of loans sold with servicing retained by the Company was $3,093,642 and $2,469,776, respectively. During 1997, the Company desecuritized $856 million of MBS with recourse into adjustable rate mortgages which had a balance of $585 million at December 31, 1999. These adjustable rate mortgages have been separately identified as "held to maturity" and it is the Company's intention to hold them to maturity. At December 31, 1999 and 1998, the Company had $88 million and $135 million, respectively, in loans held for sale, all of which are carried at the lower of cost or market. At December 31, 1999 and 1998, the balance outstanding of loans sold with recourse amounted to $2.1 billion and $1.4 billion, respectively. Capitalized mortgage servicing rights are included in "Other assets" on the Consolidated Statement of Financial Condition. The following is a summary of capitalized mortgage servicing rights:
Year Ended December 31 --------------------------- 1999 1998 ----------- ----------- Balance at January 1 $ 28,635 $ 11,116 New capitalized mortgage servicing rights from loan sales 20,556 22,680 Amortization of capitalized mortgage servicing rights (11,896) (5,161) ----------- ----------- Balance at December 31 $ 37,295 $ 28,635 =========== ===========
A summary of the changes in the allowance for loan losses is as follows:
Year Ended December 31 -------------------------------------------- 1999 1998 1997 ------------ ------------ ------------- Balance at January 1 $ 244,466 $ 233,280 $ 195,702 Provision for (recovery of) loan losses charged to expense (2,089) 11,260 57,609 Transfer of allowance to reserve for losses on loans sold or securitized and retained (12,043) -0- -0- Less loans charged off -0- (1,387) (20,818) Recoveries 1,800 1,313 787 ------------ ------------ ------------- Balance at December 31 $ 232,134 $ 244,466 $ 233,280 ============ ============ =============
F-16 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1999, 1998, and 1997 (Dollars in thousands except per share figures) A summary of the changes in the reserve for losses on loans sold or securitized and retained, included in "Accounts payable and accrued expenses," is as follows:
Year Ended December 31 ------------------------------------------- 1999 1998 1997 ------------ ------------ ------------- Balance at January 1 $ 2,256 $ 886 $ 602 Initial recourse liability recognized at time of sale 1,273 1,370 284 Net transfers from allowance for loan losses 12,043 -0- -0- ------------ ------------ ------------- Balance at December 31 $ 15,572 $ 2,256 $ 886 ============ ============ =============
The following is a summary of impaired loans:
December 31 ----------------------------- 1999 1998 ------------ ------------ Nonperforming loans $ 225,409 $ 262,332 Troubled debt restructured 10,542 22,774 Other impaired loans 60,177 70,621 ------------ ------------ $ 296,128 $ 355,727 ============ ============
The portion of the allowance for loan losses that was specifically provided for impaired loans was $9,443 and $18,409 at December 31, 1999 and 1998, respectively. The average recorded investment in total impaired loans was $328,029 and $394,938 during 1999 and 1998, respectively. All amounts involving impaired loans have been measured based upon the fair value of the related collateral. The amount of interest income recognized during the years ended December 31, 1999, 1998, and 1997 on the total of impaired loans at each yearend was $13,912 (1999), $17,265 (1998), and $20,064 (1997). NOTE G - Interest Earned But Uncollected
December 31 --------------------------------- 1999 1998 -------------- -------------- Loans receivable $ 89,629 $ 96,065 Mortgage-backed securities 70,120 81,051 Interest rate swaps 3,911 20,398 Other 11,691 11,814 -------------- -------------- $ 175,351 $ 209,328 ============== ==============
NOTE H - Real Estate Held for Sale or Investment
December 31 --------------------------------- 1999 1998 -------------- -------------- Real estate acquired through foreclosure of loans, net of valuation allowance $ 10,840 $ 42,572 Real estate in judgement, net of valuation allowance 69 74 Real estate held for investment, net of valuation allowance 2,802 3,050 -------------- -------------- $ 13,711 $ 45,696 ============== ==============
NOTE I - Premises and Equipment
December 31 ------------------------------- 1999 1998 -------------- -------------- Land $ 71,869 $ 69,319 Building and leasehold improvements 199,997 187,216 Furniture, fixtures, and equipment 190,749 185,827 -------------- -------------- 462,615 442,362 Accumulated depreciation and amortization 184,122 169,841 -------------- -------------- $ 278,493 $ 272,521 ============== ==============
Depreciation and amortization, computed by the straight-line method for financial statement purposes, are provided over the useful lives of the various classes of premises and equipment. F-17 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1999, 1998, and 1997 (Dollars in thousands except per share figures) The aggregate future rentals under long-term operating leases on land or premises in effect on December 31, 1999, and which expire between 2000 and 2064, amounted to approximately $197,963. The approximate minimum payments during the five years ending 2004 are $19,896 (2000), $18,173 (2001), $16,721 (2002), $14,712 (2003), and $12,267 (2004). Certain of the leases provide for options to renew and for the payment of taxes, insurance, and maintenance costs. The rental expense for the year amounted to $22,233 (1999), $20,350 (1998), and $19,531 (1997). NOTE J - Deposits
December 31 -------------------------------------------------------- 1999 1998 --------------------------- --------------------------- Rate* Amount Rate* Amount -------- -------------- -------------------------- Deposits by rate: Interest-bearing checking accounts 3.06% $ 128,677 2.06% $ 102,874 Interest-bearing checking accounts swept into money market deposit accounts 3.50 3,206,240 3.46 2,706,811 Passbook accounts 1.77 484,132 1.85 514,265 Money market deposit accounts 4.32 5,869,963 4.40 5,825,450 Term certificate accounts with original maturities of: 4 weeks to 1 year 5.11 8,554,573 4.70 5,893,772 1 to 2 years 4.99 5,947,712 5.19 7,717,692 2 to 3 years 5.26 1,349,180 5.39 1,417,606 3 to 4 years 5.29 368,540 5.29 368,615 4 years and over 5.58 582,275 5.67 1,150,056 Retail jumbo CDs 4.98 623,286 4.96 521,478 Wholesale CDs 5.82 600,000 0.00 -0- All other 7.23 332 7.14 476 -------------- -------------- $27,714,910 $26,219,095 ============== ==============
* Weighted average interest rate including the impact of interest rate swaps.
December 31 ------------------------------------ 1999 1998 -------------- -------------- Deposits by remaining maturity at yearend: No contractual maturity $ 9,689,012 $ 9,149,400 Maturity within one year 15,950,523 15,299,079 1 to 5 years 2,046,256 1,767,564 Over 5 years 29,119 3,052 -------------- -------------- $27,714,910 $26,219,095 ============== ==============
At December 31, the weighted average cost of deposits was 4.69% (1999) and 4.67% (1998). Interest expense on deposits is summarized as follows:
Year Ended December 31 ------------------------------------------------- 1999 1998 1997 -------------- --------------- -------------- Interest-bearing checking accounts $ 2,433 $ 1,184 $ 1,100 Passbook accounts 11,761 14,027 15,989 Money market deposit accounts 376,352 257,145 70,810 Term certificate accounts 859,818 1,012,987 1,121,747 -------------- --------------- -------------- $ 1,250,364 $ 1,285,343 $ 1,209,646 ============== =============== ==============
F-18 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1999, 1998, and 1997 (Dollars in thousands except per share figures) NOTE K - Advances from Federal Home Loan Banks Advances are secured by pledges of $13,530,725 of certain loans and MBS-REMIC principal, capital stock of the Federal Home Loan Banks, and other MBS with a market value of $441,051, and these borrowings have maturities and interest rates as follows:
December 31, 1999 -------------------------------------------------------- Stated Maturity Amount Rate ------------------- -------------- ---------- 2000 $ 2,344,443 5.56% 2001 2,526,428 5.78 2002 740,419 6.09 2003 2,111,286 5.43 2004 21,600 6.58 2005 and thereafter 1,171,042 5.57 -------------- $ 8,915,218 ==============
December 31, 1998 ---------------------------------------------------------------------------------- Receive Stated Fixed Adjusted Maturity Amount Rate Swaps Rate* ----------------------- ------------- ----------- ----------- ----------- 1999 $ 29,039 6.76% 6.76% 2000 1,591,070 5.74 5.74 2001 1,023,403 5.74 5.74 2002 237,707 5.60 5.60 2003 2,108,855 5.59 (.05)% 5.54 2004 and thereafter 1,173,398 5.72 5.72 ------------- $ 6,163,472 =============
*Weighted average interest rate adjusted for impact of interest rate swaps. At December 31, the weighted average adjusted interest rate was 5.64% (1999) and 5.67% (1998). These borrowings averaged $6,943,505 (1999) and $7,389,038 (1998) and the maximum outstanding at any monthend was $8,915,218(1999) and $8,625,262 (1998). F-19 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1999, 1998, and 1997 (Dollars in thousands except per share figures) NOTE L - Securities Sold Under Agreements to Repurchase Securities sold under agreements to repurchase are collateralized by mortgage-backed securities with a market value of $1,120,661 and $1,257,627 at December 31, 1999 and 1998, respectively.
December 31, 1999 ---------------------------------------------------- Stated Maturity Amount Rate ------------------------ ------------- --------- 2000 $ 1,001,133 5.43% 2001 44,043 6.15 ------------- $ 1,045,176 =============
December 31, 1998 ------------------------------------------------------------------------------------ Receive Stated Fixed Adjusted Maturity Amount Rate Swaps Rate* ------------------------ ------------- --------- ----------- ------------ 1999 $ 585,401 5.09% (.03)% 5.06 2000 600,000 5.72 5.72 2001 67,068 5.48 5.48 ------------- $ 1,252,469 =============
*Weighted average interest rate adjusted for impact of interest rate swaps. At December 31, these liabilities had a weighted average adjusted interest rate of 5.46% (1999) and 5.39% (1998). These borrowings averaged $909,329 (1999) and $1,877,396 (1998) and the weighted average interest rate on these averages was 5.22% for 1999 and 5.67% for 1998. The maximum outstanding at any monthend was $1,291,128 (1999) and $2,447,124 (1998). At the end of 1999 and 1998, all of the agreements to repurchase with brokers/dealers were to reacquire the same securities. F-20 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1999, 1998, and 1997 (Dollars in thousands except per share figures) NOTE M - Subordinated Notes
December 31 ------------------------------- 1999 1998 -------------- -------------- Parent: Subordinated notes, unsecured, due from 2000 to 2003, at coupon rates of 6.00% to 10.25%, net of unamortized discount of $2,050 (1999) and $3,065 (1998) $ 812,950 $ 811,935 WSL: Subordinated note, unsecured, due July 1, 2000, callable on April 1, 1999, at a coupon rate of 9.90%, net of unamortized discount $182 (1998) -0- 99,818 -------------- -------------- $ 812,950 $ 911,753 ============== ==============
At December 31, subordinated notes had a weighted average interest rate of 7.63% (1999) and 7.90% (1998). In 1999, WSL exercised its right to call the subordinated note due July 1, 2000. At December 31, 1999, subordinated notes had maturities and interest rates as follows:
Maturity Rate* Amount ---------------- ---------- -------------- 2000 8.88% $ 214,881 2002 7.71 398,737 2003 6.11 199,332 -------------- $ 812,950 ==============
*Weighted average interest rate. F-21 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1999, 1998, and 1997 (Dollars in thousands except per share figures) NOTE N - Taxes on Income The following is a comparative analysis of the provision for federal and state taxes on income.
Year Ended December 31 ----------------------------------------------- 1999 1998 1997 -------------- -------------- -------------- Federal income tax: Current $ 228,292 $ 225,271 $ 181,304 Deferred 19,153 6,052 3,193 State tax: Current 30,689 55,627 46,678 Deferred 4,616 5,127 1,882 -------------- -------------- -------------- $ 282,750 $ 292,077 $ 233,057 ============== ============== ==============
The amounts of net deferred liability included in taxes on income in the Consolidated Statement of Financial Condition are as follows:
December 31 ------------------------------ 1999 1998 -------------- -------------- Federal income tax $ 185,043 $ 197,659 State tax 53,882 74,454
The deferred tax liability results from changes in the amounts of temporary differences during the year. The components of the net deferred tax liability are as follows:
December 31 ----------------------------------- 1999 1998 --------------- --------------- Deferred tax liabilities: Unrealized gains on debt and equity securities $ 103,254 $ 148,171 FHLB stock dividends 101,675 108,212 Loan fees and interest income 118,987 92,874 Bad debt reserve 20,662 25,957 Depreciation 16,435 16,162 Other deferred tax liabilities 27 5,691 --------------- --------------- Gross deferred tax liabilities 361,040 397,067 Deferred tax assets: Provision for losses on loans 93,509 93,737 State taxes 16,626 21,092 Other deferred tax assets 11,980 10,125 --------------- --------------- Gross deferred tax assets 122,115 124,954 --------------- --------------- Net deferred tax liability $ 238,925 $ 272,113 =============== ===============
F-22 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1999, 1998, and 1997 (Dollars in thousands except per share figures) A reconciliation of income taxes at the federal statutory corporate rate to the effective tax rate follows:
Year Ended December 31 ------------------------------------------------------------------------------------ 1999 1998 1997 -------------------------- -------------------------- -------------------------- Percent Percent Percent of of of Pretax Pretax Pretax Amount Income Amount Income Amount Income ----------- ----------- ----------- ----------- ----------- ----------- Computed standard corporate tax expense $ 266,955 35.0% $ 258,709 35.0% $ 205,518 35.0% Increases (reductions) in taxes resulting from: State tax, net of federal income tax benefit 33,877 4.5 42,504 5.7 33,564 5.7 Net financial income, not subject to income tax, primarily related to acquisitions (8,953) (1.2) (7,754) (1.0) (4,163) (.7) Other (9,129) (1.2) (1,382) (.2) (1,862) (.3) ----------- ----------- ----------- ----------- ----------- ----------- $ 282,750 37.1% $ 292,077 39.5% $ 233,057 39.7% =========== =========== =========== =========== =========== ===========
In accordance with Financial Accounting Standards Board Pronouncement 109, "Accounting for Income Taxes," a deferred tax liability has not been recognized for the tax bad debt reserve of WSL that arose in tax years that began prior to December 31, 1987. At December 31, 1999 and 1998, the portion of the tax bad debt reserve attributable to pre-1988 tax years was approximately $252 million. The amount of unrecognized deferred tax liability at December 31, 1999 and 1998, was approximately $88 million. This deferred tax liability could be recognized if certain distributions are made with respect to the stock of WSL, or the bad debt reserve is used for any purpose other than absorbing bad debt losses. NOTE O - Stockholders' Equity The Company's Board of Directors, through four separate actions beginning in 1993, authorized the purchase by the Company of up to 44.7 million shares of Golden West's common stock. As of December 31, 1999, 39,223,848 of such shares had been repurchased and retired at a cost of $806 million since October 28, 1993. During 1999, 10,734,000 of the shares were purchased and retired at a cost of $345 million. In November 1999, the Company's Board of Directors authorized a three-for-one stock split of the outstanding common stock of the Company by declaring a 200 percent stock dividend. The stock split became effective on December 10, 1999. All references in the consolidated financial statements to the number of shares of common stock, prices per share, earnings and dividends per share, and other per share amounts have been restated to reflect the stock split, except where otherwise noted. F-23 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1999, 1998, and 1997 (Dollars in thousands except per share figures) NOTE P - 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 following is a summary of the calculation of basic and diluted EPS:
Year Ended December 31 ------------------------------------------------ 1999 1998 1997 -------------- -------------- -------------- Earnings before extraordinary item $ 479,979 $ 447,091 $ 354,138 Extraordinary item -0- (12,511) -0- -------------- -------------- -------------- Net earnings $ 479,979 434,580 $ 354,138 ============== ============== ============== Weighted average shares 165,767,526 171,731,268 170,821,482 Add: Options outstanding at yearend 5,650,829 5,086,890 6,629,250 Less: Shares assumed purchased back with proceeds from the exercise of options 4,466,889 3,356,223 4,132,437 -------------- -------------- -------------- Diluted average shares outstanding 166,951,466 173,461,935 173,318,295 ============== ============== ============== Basic Earnings Per Share Calculation: Basic earnings per share before extraordinary item $ 2.90 $ 2.60 $ 2.07 Extraordinary item 0.00 (0.07) 0.00 -------------- -------------- -------------- Basic earnings per share $ 2.90 $ 2.53 $ 2.07 ============== ============== ============== Diluted Earnings Per Share Calculation: Diluted earnings per share before extraordinary item $ 2.87 $ 2.58 $ 2.04 Extraordinary item 0.00 (0.07) 0.00 -------------- -------------- -------------- Diluted earnings per share $ 2.87 $ 2.51 $ 2.04 ============== ============== ==============
F-24 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1999, 1998, and 1997 (Dollars in thousands except per share figures) NOTE Q - Stock Options The Company's 1996 stock option plan authorizes the granting of options to key employees to purchase up to 21 million shares of the Company's common stock. The plan permits the issuance of either non-qualified stock options or incentive stock options. Under terms of the plan, incentive stock options have been granted at fair market value as of the date of grant and are exercisable any time after two to five years and prior to ten years from the grant date. Non-qualified options have been granted at fair market value as of the date of grant and are exercisable after two to five years and prior to ten years and one month from the grant date. At December 31, shares available for option amounted to 5,348,250 (1999), 7,420,650 (1998), and 8,261,250 (1997). Outstanding options at December 31, 1999, were held by 418 employees and had expiration dates ranging from November 1, 2000, to December 6, 2009. The following table sets forth the range of exercise prices on outstanding options at December 31, 1999:
Weighted Weighted Average Average Range of Number of Exercise Remaining Exercise Price Options Price Contractual Life - ------------------- -------------- ------------------ ------------------ $6.17 227,000 $ 6.17 0.9 year $11.50 - $15.33 1,859,979 12.97 3.9 years $17.42 - $21.67 640,950 17.70 6.2 years $27.60 - $30.83 1,723,950 29.31 8.7 years $31.58 - $34.35 1,198,950 31.60 9.7 years -------------- 5,650,829
All of the options in the range from $6.17 to $21.67 are exercisable. Of the options in the range from $27.60 to $30.83, 9,000 are exercisable. None of the options in the range $31.58 to $34.35 are exercisable. A summary of the transactions of the stock option plan follows:
Average Exercise Price per Shares Share ------------- ------------ Outstanding, January 1, 1997 8,022,645 $ 9.50 Granted 9,000 $ 30.67 Exercised (1,371,645) $ 6.17 Canceled (30,750) $ 14.54 ------------- ------------ Outstanding, December 31, 1997 6,629,250 $ 10.20 Granted 863,550 $ 27.62 Exercised (2,382,960) $ 7.44 Canceled (22,950) $ 27.60 ------------- ------------ Outstanding, December 31, 1998 5,086,890 $ 14.37 Granted 2,177,850 $ 31.27 Exercised (1,508,461) $ 8.44 Canceled (105,450) $ 30.37 ------------- ------------ Outstanding, December 31, 1999 5,650,829 $ 22.17 ============= ============
At December 31, options exercisable amounted to 2,736,929 (1999), 4,237,290 (1998), and 6,098,250 (1997). F-25 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1999, 1998, and 1997 (Dollars in thousands except per share figures) The weighted-average fair value per share of options granted during 1999 was $9.93 per share, $7.77 per share for those granted during 1998, and $9.03 per share for those granted during 1997. For these disclosure purposes, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1999, 1998 and 1997, respectively; dividend yield of 0.9% (1999 and 1998) and 0.7% (1997); expected volatility of 23% (1999), 24% (1998) and 21% (1997); expected lives of 5.3 years for all years; and risk-free interest rates of 6.28% (1999), 4.54% (1998) and 5.71% (1997). During the initial phase-in period, the effects of applying SFAS 123 may not be representative of the effects on reported net income for future years because options vest over several years and additional awards can be made each year. The Company applies APB 25 and related interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for the plan. Had compensation cost for the plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method prescribed by SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
Year Ended December 31 ----------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Net income As reported $ 479,979 $ 434,580 $ 354,138 Pro forma 477,235 432,661 352,773 Basic earnings per share As reported $ 2.90 $ 2.53 $ 2.07 Pro forma 2.88 2.52 2.07 Diluted earning per share As reported $ 2.87 $ 2.51 $ 2.04 Pro forma 2.86 2.49 2.03
NOTE R - Financial Instruments with Off-Balance-Sheet Risk and Concentrations of Credit Risk As of December 31, 1999, the balance of the Company's loans receivable and MBS with recourse held to maturity was $39 billion. Of that $39 billion balance, 32% were Northern California loans, 32% were Southern California loans, 5% were Florida loans, 4% were Texas loans, 3% were New Jersey loans, 3% were Illinois loans, 3% were Washington loans, 3% were Colorado loans, and 2% were Arizona loans. No other single state made up more than 2% of the total loan portfolio. The majority of these loans are secured by first deeds of trust on one- to four-family residential property. Economic conditions and real estate values in the states in which the Company lends are the key factors that affect the credit risk of the Company's loan portfolio. In order to reduce its exposure to fluctuations in interest rates, the Company is a party to financial instruments with off-balance-sheet risk entered into in the normal course of business. These financial instruments include commitments to fund loans; commitments to purchase or sell securities, mortgage-backed securities, and loans; and interest rate swaps. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statement of financial condition. The contract or notional amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. To limit credit exposure, among other things, the Company enters into financial instrument contracts only with the Federal Home Loan Bank of San Francisco and with major banks and securities dealers selected by the Company upon the basis of their creditworthiness and other matters. The Company initially has not required collateral or other security to support these financial instruments because of the creditworthiness of the counterparties. Commitments to originate mortgage loans are agreements to lend to a customer providing that the customer satisfies the terms of the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Prior to entering each commitment, the Company evaluates the customer's creditworthiness. The amount of outstanding loan commitments at December 31, 1999 and 1998, was $594 million and $408 million, respectively. Most of these commitments were for adjustable rate mortgages. F-26 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1999, 1998, and 1997 (Dollars in thousands except per share figures) The Company enters into commitments to purchase or sell mortgage-backed securities and other mortgage derivative products. The commitments generally have a fixed delivery or receipt settlement date. The Company controls the credit risk of such commitments through credit evaluations, limits, and monitoring procedures. The interest rate risk of the commitment is considered by the Company and may be matched with the appropriate funding sources. The Company had no outstanding commitments to purchase or sell mortgage-backed securities as of December 31, 1999 or 1998. Interest rate swaps are utilized to limit the Company's sensitivity to interest rate changes. The Company is exposed to credit risk in the event of nonperformance by the other parties to the interest rate swap agreements. However, the Company does not anticipate nonperformance by the other parties. NOTE S - Interest Rate Swaps The Company has entered into interest rate swap agreements with selected banks and government security dealers to reduce its exposure to fluctuations in interest rates. The possible inability of counterparties to satisfy the terms of these contracts exposes the Company to credit risk to the extent of the net difference between the calculated pay and receive amounts on each transaction. Net differences of that amount are generally settled quarterly. The Company has not experienced any credit losses from interest rate swaps. The information presented below is based on interest rates at December 31, 1999. To the extent that rates change, variable interest rate information will change. The following table illustrates the maturities and weighted average rates as of December 31, 1999 for interest rate swaps held by the Company by product type.
Maturities of December 31, 1999 Interest Rate Swaps - ---------------------------------------------------------------------------------------------------------------------- Maturity --------------------------------------------------------------- Balance at 2000 2001 2002 2003 2004+ December 31, 1999 ---------- ----------- ----------- ----------- ---------- ----------------- Receive fixed generic swaps: Notional amount $ 45,901 $ 114,401 $ 11,500 $ 91,300 $ -0- $ 263,102 Weighted average receive rate 6.73% 6.35% 6.52% 6.39% 0.00% 6.44% Weighted average pay rate 6.20% 6.24% 6.21% 6.31% 0.00% 6.26% Pay fixed generic swaps: Notional amount $ 10,000 $ 96,495 $ 305,000 $ 212,000 $ 103,600 $ 727,095 Weighted average receive rate 6.03% 6.10% 6.12% 6.11% 6.21% 6.12% Weighted average pay rate 6.08% 8.13% 7.54% 6.26% 6.65% 7.10% ---------- ----------- ----------- ----------- ---------- ------------ Total notional value $ 55,901 $ 210,896 $ 316,500 $ 303,300 $ 103,600 $ 990,197 ========== =========== =========== =========== ========== ============ Total weighted average rate on swaps: Receive rate 6.61% 6.23% 6.13% 6.19% 6.21% 6.21% ========== =========== =========== =========== ========== ============ Pay rate 6.18% 7.11% 7.49% 6.27% 6.65% 6.87% ========== =========== =========== =========== ========== ============
During 1999, the range of floating interest rates received on swap contracts was 4.94% to 6.22% and the range of floating interest rates paid on swap contracts was 4.97% to 6.22%. The range of fixed interest rates received on swap contracts was 5.17% to 8.68% and the range of fixed interest rates paid on swap contracts was 5.58% to 9.14%. F-27 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1999, 1998, and 1997 (Dollars in thousands except per share figures) Activity in interest rate swaps is summarized as follows:
Interest Rate Swap Activity For the Years Ended December 31, 1999, 1998, and 1997 (Notional amounts in millions) Receive Pay Forward Fixed Fixed Starting Swaps Swaps Swaps ----------- ----------- ----------- Balance, January 1, 1997 $ 2,581 $ 1,340 $ 10 Additions 100 -0- -0- Maturities (1,002) (232) -0- Forward starting, becoming effective -0- -0- (10) ----------- ----------- ----------- Balance, December 31, 1997 1,679 1,108 -0- Maturities (1,167) (209) -0- ----------- ----------- ----------- Balance, December 31, 1998 512 899 -0- Additions 80 -0- -0- Maturities (329) (172) -0- ----------- ----------- ----------- Balance, December 31, 1999 $ 263 $ 727 $ -0- =========== =========== ===========
Interest rate swap activity decreased net interest income by $11 million, $9 million, and $5 million for the years ended December 31, 1999, 1998, and 1997, respectively. F-28 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1998, 1997, and 1996 (Dollars in thousands except per share figures) NOTE T - Disclosure About Fair Value of Financial Instruments The Financial Accounting Standards Board Pronouncement No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of the fair value of financial instruments for which it is practicable to estimate that value. The statement provides for a variety of different valuation methods, levels of aggregation, and assessments of practicability of estimating fair value. Fair value estimates are not necessarily more relevant than historical cost values. Fair values may have limited usefulness in evaluating portfolios of long-term financial instrument assets and liabilities held by going concerns. Moreover, there are significant inherent weaknesses in any estimating techniques employed. Differences in the alternative methods and assumptions selected by various companies as well as differences in the methodology utilized between years may, and probably will, significantly limit comparability and usefulness of the data displayed. For these reasons, as well as others, management believes that the disclosure presented herein has limited relevance to the Company and its operations. The values presented are based upon information as of December 31, 1999 and 1998, and do not reflect any subsequent changes in fair value. Fair values may have changed significantly following the balance sheet dates. The estimates presented herein are not necessarily indicative of amounts that could be realized in a current transaction. The following methods and assumptions were used to estimate the fair value of each class of financial instruments: The historical cost amounts approximate the fair value of the following financial instruments: cash, interest earned but uncollected, investment in capital stock of Federal Home Loan Banks, other overnight investments, demand deposits, and securities sold under agreements to repurchase with brokers/dealers due within 90 days. Fair values are based on quoted market prices for securities available for sale, other long-term investments, mortgage-backed securities available for sale, mortgage-backed securities held to maturity, securities sold under agreements to repurchase with brokers/dealers with terms greater than 90 days, and subordinated notes. Fair values are estimated using projected cash flows present valued at replacement rates currently offered for instruments of similar remaining maturities for: term deposits, advances from Federal Home Loan Banks, and consumer repurchase agreements. For loans receivable and loan commitments, the fair value is estimated by present valuing projected future cash flows, using current rates at which similar loans would be made to borrowers and with assumed rates of prepayment. Adjustment for credit risk is estimated based upon the classification status of the loans. For mortgage servicing rights, the fair value is estimated using a discounted cash flow analysis based on the Company's estimated annual cost of servicing, market prepayment rates, and market discount rates. The fair value of interest rate swap agreements is the estimated amount the Company would receive or pay to terminate the swap agreements on the reporting date, considering current interest rates. F-29 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1999, 1998, and 1997 (Dollars in thousands except per share figures)
December 31 ---------------------------------------------------------------- 1999 1998 ------------------------------- ------------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------------- -------------- -------------- -------------- Financial Assets: Cash $ 333,793 $ 333,793 $ 250,875 $ 250,875 Securities available for sale 319,444 319,444 377,005 377,005 Other investments 467,156 466,086 422,385 422,508 Mortgage-backed securities available for sale 79,009 79,009 113,585 113,585 Mortgage-backed securities held to maturity 11,582,612 11,389,792 9,918,380 10,032,527 Loans receivable 27,919,817 27,877,258 25,721,288 25,703,930 Interest earned but uncollected 175,351 175,351 209,328 209,328 Investment in capital stock of Federal Home Loan Banks 541,013 541,013 780,303 780,303 Capitalized mortgage servicing rights 37,295 56,785 28,635 42,470 Financial Liabilities: Deposits 27,714,910 27,762,116 26,219,095 26,289,577 Advances from Federal Home Loan Banks 8,915,218 8,878,027 6,163,472 6,188,212 Securities sold under agreements to repurchase 1,045,176 1,042,395 1,252,469 1,253,982 Subordinated notes 812,950 812,545 911,753 954,772
Off-Balance Sheet Instruments (based on estimated fair value at December 31):
----------------------------------------------------------------------------------------- December 31 ----------------------------------------------------------------------------------------- 1999 1998 ------------------------------------------- ------------------------------------------- Net Net Unrealized Unrealized Unrealized Unrealized Unrealized Unrealized Gains Losses Gain (Loss) Gains Losses Gain (Loss) ------------ ------------ ------------- ------------ ------------ ------------- Interest rate swaps: Receive fixed $ 70 $ 2,106 $ (2,036) $ 8,924 $ -0- $ 8,924 Pay fixed 7,039 6,880 159 -0- 45,923 (45,923) Loan commitments 5,962 -0- 5,962 4,118 -0- 4,118 ------------ ------------ ------------- ------------ ------------ ------------- Total $ 13,071 $ 8,986 $ 4,085 $ 13,042 $ 45,923 $ (32,881) ============ ============ ============= ============ ============ =============
F-30 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1999 1998 and 1997 (Dollars in thousands except per share figures) NOTE U - Parent Company Financial Information Statement of Net Earnings - -------------------------
Year Ended December 31 -------------------------------------------- 1999 1998 1997 ------------ ------------ ------------- Revenues: Investment income $ 42,580 $ 71,480 $ 57,020 Insurance commissions 1,453 1,298 1,392 Other -0- 5 20 ------------ ------------ ------------- 44,033 72,783 58,432 Expenses: Interest 60,358 69,549 83,687 General and administrative 4,338 3,826 3,470 ------------ ------------ ------------- 64,696 73,375 87,157 ------------ ------------ ------------- Loss before earnings of subsidiaries and income tax credit (20,663) (592) (28,725) Income tax credit 8,091 1,122 13,296 Earnings of subsidiaries before extraordinary item 492,551 446,561 369,567 ------------ ------------ ------------- Earnings Before Extraordinary Item 479,979 447,091 354,138 Extraordinary item -0- (12,511) -0- ------------ ------------ ------------- Net Earnings $ 479,979 $ 434,580 $ 354,138 ============ ============ =============
Statement of Financial Condition - --------------------------------
Assets ------ December 31 -------------------------------- 1999 1998 -------------- -------------- Cash $ 6,675 $ 21,937 Securities available for sale 3,651 3,163 Overnight note receivable from subsidiary 3,962 72,977 Other investments 147,095 90 Notes receivable from subsidiary 600,000 800,000 Other assets 22,711 21,783 Investment in subsidiaries 3,242,576 3,035,222 -------------- -------------- $ 4,026,670 $ 3,955,172 ============== ==============
Liabilities and Stockholders' Equity ------------------------------------ Accounts payable and accrued expenses $ 18,866 $ 18,919 Subordinated notes, net 812,950 811,935 Stockholders' equity 3,194,854 3,124,318 -------------- -------------- $ 4,026,670 $ 3,955,172 ============== ==============
F-31 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1999, 1998 and 1997 (Dollars in thousands except per share figures) NOTE U- Parent Company Financial Information (Continued) Statement of Cash Flows - -----------------------
Year Ended December 31 ------------------------------------------ 1999 1998 1997 ------------- ------------ ------------ Cash flows from operating activities: Net earnings $ 479,979 $ 434,580 $ 354,138 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Earnings of subsidiaries before extraordinary item (492,551) (446,561) (369,567) Extraordinary item -0- 21,152 -0- Amortization of discount on subordinated notes 1,015 1,144 1,305 Other, net 10,388 (6,618) 12,543 ------------- ------------ ------------ Net cash provided by (used in)operating activities (1,169) 3,697 (1,581) Cash flows from investing activities: Loans purchased from subsidiary -0- (317,520) (80,661) Capital contributed to subsidiaries (117) (171,007) (203,769) Dividends received from subsidiary 228,267 731,215 515,225 Purchases of securities available for sale (17) (15) (2,878) Sales of securities available for sale -0- 73,648 11,944 Matured securities available for sale 1 -0- 50,000 Decrease (increase) in overnight notes receivable from subsidiary 69,015 3,169 (76,146) Decrease (increase) in other investments (147,005) 179,997 (27,602) Issuances of notes receivable from subsidiaries (600,000) (200,000) (600,000) Repayments of notes receivable from subsidiaries 800,000 -0- 600,000 ------------- ------------ ------------ Net cash provided by investing activities 350,144 299,487 186,113 Cash flows from financing activities: Repayment of subordinated notes -0- (200,000) (115,000) Dividends on common stock (31,903) (29,488) (25,903) Exercise of stock options 12,725 17,738 8,456 Purchase and retirement of Company stock (345,059) (80,323) (48,351) ------------- ------------ ------------ Net cash used in financing activities (364,237) (292,073) (180,798) Net increase (decrease) in cash (15,262) 11,111 3,734 Cash at beginning of period 21,937 10,826 7,092 ------------- ------------ ------------ Cash at end of period $ 6,675 $ 21,937 $ 10,826 ============= ============ ============ Supplemental cash flow information: Loans contributed to subsidiary $ -0- $ 317,520 $ 80,661
F-32 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued ----------------------------------------------------- Years ended December 31, 1999, 1998, and 1997 (Dollars in thousands except per share figures) NOTE V - Selected Quarterly Financial Data (Unaudited)
1999 ---------------------------------------------------------------- Quarter Ended ---------------------------------------------------------------- March 31 June 30 September 30 December 31 -------------- -------------- -------------- -------------- Interest income $ 694,961 $ 685,298 $ 702,253 $ 743,333 Interest expense 444,260 436,792 450,289 491,019 -------------- -------------- -------------- -------------- Net interest income 250,701 248,506 251,964 252,314 Provision for (recovery of) loan losses 574 (727) (1,253) (683) Noninterest income 35,299 42,548 31,438 34,017 Noninterest expense 93,046 96,026 96,047 101,028 -------------- -------------- -------------- -------------- Earnings before taxes on income 192,380 195,755 188,608 185,986 Taxes on income 72,012 73,368 70,537 66,833 -------------- -------------- -------------- -------------- Net earnings $ 120,368 $ 122,387 $ 118,071 $ 119,153 ============== ============== ============== ============== Basic earnings per share $ 0.71 $ 0.73 $ 0.72 $ 0.74 ============== ============== ============== ============== Diluted earnings per share $ 0.70 $ 0.72 $ 0.71 $ 0.73 ============== ============== ============== ============== Cash dividends per share $ .0467 $ .0467 $ .0467 $ .0525 ============== ============== ============== ==============
F-33 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ------------------------------------------------------ Years ended December 31, 1999, 1998, and 1997 (Dollars in thousands except per share figures)
1998 ---------------------------------------------------------------- Quarter Ended ---------------------------------------------------------------- March 31 June 30 September 30 December 31 -------------- -------------- -------------- -------------- Interest income $ 755,203 $ 740,569 $ 744,457 $ 722,324 Interest expense 511,489 501,372 506,315 476,055 -------------- -------------- -------------- -------------- Net interest income 243,714 239,197 238,142 246,269 Provision for loan losses 2,965 2,682 3,130 2,483 Noninterest income 26,003 43,097 30,823 37,690 Noninterest expense 83,674 87,036 87,505 96,292 -------------- -------------- -------------- -------------- Earnings before taxes on income and extraordinary item 183,078 192,576 178,330 185,184 Taxes on income 72,997 75,626 70,309 73,145 -------------- -------------- -------------- -------------- Earnings before extraordinary item 110,081 116,950 108,021 112,039 Extraordinary item (7,710) -0- (4,801) -0- -------------- -------------- -------------- -------------- Net earnings $ 102,371 $ 116,950 $ 103,220 $ 112,039 ============== ============== ============== ============== Basic earnings per share before extraordinary item $ 0.64 $ 0.68 $ 0.63 $ 0.66 Extraordinary item (0.04) 0.00 (0.03) 0.00 -------------- -------------- -------------- -------------- Basic earnings per share $ 0.60 $ 0.68 $ 0.60 $ 0.66 ============== ============== ============== ============== Diluted earnings per share before extraordinary item $ 0.63 $ 0.67 $ 0.62 $ 0.65 Extraordinary item (0.04) 0.00 (0.03) 0.00 -------------- -------------- -------------- -------------- Diluted earnings per share $ 0.59 $ 0.67 $ 0.59 $ 0.65 ============== ============== ============== ============== Cash dividends per share $ .0417 $ .0417 $ .0417 $ .0467 ============== ============== ============== ==============
F-34 EX-21 2 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21(a) SUBSIDIARIES OF REGISTRANT: --------------------------- WORLD SAVINGS AND LOAN ASSOCIATION California Corp. Inc. October 26, 1912 Federally Chartered September 24, 1981 WORLD SAVINGS BANK, FSB Federal Savings Bank, Inc. July 31, 1987 Federally Chartered January 20, 1995 WORLD SAVINGS BANK, SSB Texas State Savings Bank, Inc. January 12, 1995 THE 1901 CORPORATION California Corp. Inc. March 29, 1984 ATLAS ADVISORS, INC. California Corp. Inc. May 6, 1987 ATLAS SECURITIES, INC. California Corp. Inc. May 6, 1987 WORLD MORTGAGE INVESTORS, INC. Maryland Corp. Inc. March 13, 1998 WORLD REAL ESTATE INVESTORS, INC. Maryland Corp. Inc. March 13,1998 EX-23 3 CONSENTS OF EXPERTS AND COUNSEL EXHIBIT 23(a) INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-40572 on Form S-8, and Amendment No. 1 to Registration Statement No. 33-61293 on Form S-3 of our report dated January 20, 2000 appearing in this Annual Report on Form 10-K of Golden West Financial Corporation for the year ended December 31, 1999. /s/ Deloitte & Touche LLP Oakland, CA March 29, 2000 EX-27 4 FDS --
9 12-MOS DEC-31-1999 DEC-31-1999 333,793 0 88,510 0 398,453 11,582,612 11,389,792 27,919,817 232,134 42,142,205 27,714,910 3,560,457 459,097 7,212,887 0 0 16,136 3,178,718 42,142,205 1,851,790 204,741 769,314 2,825,845 1,250,364 1,882,360 1,003,485 (2,089) 1,250 386,147 762,729 479,979 0 0 479,979 2.90 2.87 7.15 225,409 0 10,542 60,177 244,466 0 1,800 232,134 232,134 0 0
-----END PRIVACY-ENHANCED MESSAGE-----