-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, l8maXLqF95+lTQbM8HKF79x/jGuBnSOAyo5NkvoqhP0fa1iczMQq9UJLjsrdmUmG JwjceOZzLo5pvEHNtJbwHg== 0000042293-94-000005.txt : 19940822 0000042293-94-000005.hdr.sgml : 19940822 ACCESSION NUMBER: 0000042293-94-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940810 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOLDEN WEST FINANCIAL CORP /DE/ CENTRAL INDEX KEY: 0000042293 STANDARD INDUSTRIAL CLASSIFICATION: 6035 IRS NUMBER: 952080059 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04629 FILM NUMBER: 94542533 BUSINESS ADDRESS: STREET 1: 1901 HARRISON STREET CITY: OAKLAND STATE: CA ZIP: 94612 BUSINESS PHONE: 510-466-3420 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-Q 1 GOLDEN WEST JUNE 30, 1994, LIVE 10-Q FILING PAGE 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q For Quarter Ended June 30, 1994 Commission File Number 1-4629 GOLDEN WEST FINANCIAL CORPORATION Delaware 95-2080059 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1901 Harrison Street, Oakland, California 94612 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (510) 446-3420 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of the registrant's common stock on July 31, 1994, was 61,731,555 shares. PAGE 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The consolidated financial statements of Golden West Financial Corporation and subsidiaries (Golden West or the Company) for the three and six months ended June 30, 1994, and 1993, have been prepared from unaudited records of the Company and, in the opinion of the Company, all adjustments (consisting only of normal recurring accruals) that are necessary for a fair statement of the results for such three and six month periods have been included. The operating results for the six months ended June 30, 1994, are not necessarily indicative of the results for the full year.
Golden West Financial Corporation Consolidated Statement of Financial Condition (Unaudited) ($000s Omitted) June 30 June 30 December 31 1994 1993 1993 ----------- ----------- ----------- Assets: Cash $ 113,570 $ 142,542 $ 243,185 Securities available for sale 1,791,087 683,788 1,636,586 Other investments 367,200 1,941,304 538,100 Mortgage-backed securities available for sale at fair value 764,197 -0- 1,114,069 Mortgage-backed securities held to maturity at cost 506,134 1,594,572 408,467 Loans receivable 24,640,665 23,272,245 23,912,571 Interest earned but uncollected 199,262 166,813 175,080 Investment in capital stock of Federal Home Loan Banks--at cost, which approximates fair value 324,141 364,203 325,737 Real estate held for sale or investment 63,307 76,938 67,156 Prepaid expenses and other assets 188,009 146,013 108,832 Premises and equipment--at cost less accumulated depreciation 178,022 151,494 162,751 Goodwill arising from acquisitions 137,609 133,526 136,754 ----------- ----------- ----------- $29,273,203 $28,673,438 $28,829,288 =========== =========== =========== Liabilities and Stockholders' Equity: Customer deposits $17,914,826 $17,061,224 $17,422,484 Advances from Federal Home Loan Banks 6,222,799 6,839,843 6,281,691 Securities sold under agreements to repurchase 380,396 533,347 442,874 Medium-term notes 664,028 676,194 676,540 Accounts payable and accrued expenses 423,615 378,273 355,799 Taxes on income 338,309 301,018 364,235 Subordinated notes--net of discount 1,220,804 1,021,135 1,220,061 Stockholders' equity 2,108,426 1,862,404 2,065,604 ----------- ----------- ----------- $29,273,203 $28,673,438 $28,829,288 =========== =========== ===========
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Golden West Financial Corporation Consolidated Statement of Net Earnings (Unaudited) ($000s omitted except per share figures) Three Months Ended June 30 Six Months Ended June 30 1994 1993 1994 1993 -------- -------- -------- -------- Interest Income: Interest on loans $395,999 $410,080 $794,051 $817,135 Interest on mortgage-backed securities 26,144 37,145 54,417 76,024 Interest and dividends on investments 35,318 24,848 60,688 41,941 -------- -------- -------- -------- 457,461 472,073 909,156 935,100 Interest Expense: Interest on customer deposits 166,629 175,990 331,996 351,813 Interest on advances 63,022 75,872 121,912 143,012 Interest on repurchase agreements 10,156 9,464 17,095 20,086 Interest on other borrowings 31,826 30,505 63,431 57,831 -------- -------- -------- -------- 271,633 291,831 534,434 572,742 -------- -------- -------- -------- Net Interest Income 185,828 180,242 374,722 362,358 Provision for loan losses 17,946 13,182 34,438 24,641 -------- -------- -------- -------- Net Interest Income after Provision for Loan Losses 167,882 167,060 340,284 337,717 Non-Interest Income: Fees 7,739 7,096 15,680 14,123 Gain (loss) on the sale of securities and mortgage-backed securities (34) 2,724 (33) 4,248 Other 3,730 3,608 7,212 6,964 -------- -------- -------- -------- 11,435 13,428 22,859 25,335 Non-Interest Expense: General and administrative: Personnel 35,937 31,327 71,918 63,152 Occupancy 10,757 9,644 21,120 19,328 Deposit insurance 10,061 8,062 20,121 16,124 Advertising 2,800 3,485 5,235 5,310 Other 14,145 11,801 28,143 25,215 -------- -------- -------- -------- 73,700 64,319 146,537 129,129 Amortization of goodwill arising from acquisitions 647 (449) 1,225 (898) -------- -------- -------- -------- 74,347 63,870 147,762 128,231 -------- -------- -------- -------- Earnings Before Taxes on Income 104,970 116,618 215,381 234,821 Taxes on income 43,027 46,035 88,142 92,654 -------- -------- -------- -------- Net Earnings $ 61,943 $ 70,583 $127,239 $142,167 ======== ======== ======== ======== Net earnings per share $ .98 $ 1.10 $ 2.00 $ 2.22 ======== ======== ======== ========
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Golden West Financial Corporation Consolidated Statement of Cash Flows (Unaudited) ($000s Omitted) Three Months Ended June 30 Six Months Ended June 30 1994 1993 1994 1993 ----------- ----------- ----------- ----------- Cash Flows From Operating Activities: Net earnings $ 61,943 $ 70,583 $ 127,239 $ 142,167 Adjustments to reconcile net earnings to net cash provided by operating activities: Provision for loan losses 17,946 13,182 34,438 24,641 Amortization of loan fees and discounts (8,035) (11,427) (16,822) (21,722) Depreciation and amortization 4,519 3,322 8,972 6,523 Reduction of a valuation allowance on investments -0- (2,750) -0- (4,250) Loans originated for sale (16,584) (130,080) (84,487) (166,552) Sales of loans originated for sale 35,857 113,254 137,583 159,824 (Increase) in interest earned but uncollected (22,005) (3,965) (24,182) (9,090) Federal Home Loan Bank stock dividends (4,392) (2,859) (10,617) (5,127) (Increase) in prepaid expenses and other assets (17,681) (5,627) (74,739) (11,866) Increase in accounts payable and accrued expenses 26,271 5,982 67,816 17,147 Increase (decrease) in taxes on income (28,749) 23,886 (2,640) 67,154 Other, net (8,383) (5,836) (13,122) (5,467) ----------- ----------- ----------- ----------- Net cash provided by operating activities 40,707 67,665 149,439 193,382 Cash Flows From Investing Activities: New loan activity: New real estate loans originated for portfolio (1,607,747) (1,684,272) (2,768,778) (3,098,923) Real estate loans purchased (755) (852) (864) (1,042) Other, net 449 9,254 2,818 17,501 ----------- ----------- ----------- ----------- (1,608,053) (1,675,870) (2,766,824) (3,082,464) Real estate loan principal payments: Monthly payments 157,284 142,132 299,494 280,238 Payoffs, net of foreclosures 660,701 714,667 1,382,614 1,231,844 Refinances 100,099 109,338 194,304 175,458 ----------- ----------- ----------- ----------- 918,084 966,137 1,876,412 1,687,540 Purchases of mortgage-backed securities available for sale (196) -0- (581) -0- Purchases of mortgage-backed securities held to maturity (20,246) -0- (20,355) (98,558) Sales of mortgage-backed securities 119 -0- 131 138 Repayments of mortgage-backed securities 96,432 163,400 229,250 295,463 Sales of real estate 54,868 47,854 105,860 93,384 Purchases of securities available for sale (882,585) (1,381,111) (2,003,185) (2,441,791) Sales and maturities of securities available for sale 890,881 1,087,343 1,839,907 1,923,360 Decrease (increase) in other investments 418,425 (239,869) 170,900 (1,146,865) Redemptions of Federal Home Loan Bank stock 7,775 7,591 7,775 7,591 Purchases of Federal Home Loan Bank stock -0- (22,918) -0- (79,713) Additions to premises and equipment (13,387) (5,381) (23,238) (14,783) ----------- ----------- ----------- ----------- Net cash used in investing activities (137,883) (1,052,824) (583,948) (2,856,698)
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Golden West Financial Corporation Consolidated Statement of Cash Flows (Continued) (Unaudited) ($000s Omitted) Three Months Ended June 30 Six Months Ended June 30 1994 1993 1994 1993 ---------- ---------- ---------- ---------- Cash Flows From Financing Activities: Customer deposit activity: Increase in deposits, net $ 257,749 $ 424,187 $ 220,926 $ 294,927 Interest credited 137,756 141,442 271,416 280,051 ---------- --------- ---------- ---------- 395,505 565,629 492,342 574,978 Additions to Federal Home Loan Bank advances 13,000 505,000 23,000 1,679,200 Repayments of Federal Home Loan Bank advances (16,883) (300,000) (82,022) (338,900) Increase (decrease) in securities sold under agreements to repurchase (267,137) 32,340 (62,478) (23,363) Proceeds from medium-term notes -0- 199,624 -0- 609,179 Repayments of medium-term notes (12,865) (1,500) (12,865) (14,500) Proceeds from subordinated debt -0- -0- -0- 98,786 Dividends on common stock (4,752) (4,160) (9,551) (8,318) Purchase and retirement of Company stock (27,041) -0- (43,532) -0- ---------- --------- ---------- ---------- Net cash provided by financing activities 79,827 996,933 304,894 2,577,062 ---------- --------- ---------- ---------- Net Increase (Decrease) in Cash (17,349) 11,774 (129,615) (86,254) Cash at beginning of period 130,919 130,768 243,185 228,796 ---------- --------- ---------- ---------- Cash at end of period $ 113,570 $ 142,542 $ 113,570 $ 142,542 ========== ========= ========== ========== Supplemental cash flow information: Cash paid for: Interest $ 270,841 $ 282,879 $ 540,191 $ 556,509 Income taxes 71,777 22,157 90,782 27,697 Cash received for interest and dividends 435,456 468,108 884,974 926,010 Noncash investing activities: Loans transferred to foreclosed real estate 60,719 61,810 114,155 112,112
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Golden West Financial Corporation Consolidated Statement of Stockholders' Equity (Unaudited) ($000s omitted except per share figures) Six Months Ended June 30 1994 1993 ---------- ---------- Common Stock: Balance at January 1 $ 6,393 $ 6,392 Common stock issued upon exercise of stock options - 130,600 shares (1994) and 75,250 shares (1993) 13 8 Common stock retired upon purchase of treasury stock - 1,121,400 shares (1994) and -0- shares (1993) (112) -0- ---------- ---------- Balance at June 30 6,294 6,400 ---------- ---------- Paid-in Capital: Balance at January 1 40,899 36,186 Common stock issued upon exercise of stock options - 130,600 shares (1994) and 75,250 shares (1993) 1,833 1,149 ---------- ---------- Balance at June 30 42,732 37,335 ---------- ---------- Retained Earnings: Balance at January 1 1,933,593 1,684,820 Net earnings 127,239 142,167 Cash dividends on common stock - $.15 per share (1994) and $.13 per share (1993) (9,551) (8,318) Retirement of treasury stock (43,420) -0- ---------- ---------- Balance at June 30 2,007,861 1,818,669 ---------- ---------- Unrealized Gains on Securities Available for Sale: Balance at January 1 84,719 -0- Change during period (33,180) -0- ---------- ---------- Balance at June 30 51,539 -0- ---------- ---------- Total Stockholders' Equity at June 30 $2,108,426 $1,862,404 ========== ==========
PAGE 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion and analysis included herein covers those material changes in liquidity and capital resources that have occurred since December 31, 1993, as well as certain material changes in results of operations during the three and six month periods ended June 30, 1994, and 1993, respectively. The following narrative is written with the presumption that the users have read or have access to the Company's 1993 Form 10-K, which contains the latest audited financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 1993, and for the year then ended. Therefore, only material changes in financial condition and results of operations are discussed herein. ACCOUNTING CHANGES At December 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 114 (FAS 114), "Accounting by Creditors for Impairment of a Loan." FAS 114 imposes certain requirements on the measurement of impaired loans. The Company had previously measured loan impairment in accordance with the methods prescribed in FAS 114. As a result, no additional loss provisions were required by early adoption of the pronouncement. FAS 114 also requires that impaired loans for which foreclosure is probable should be accounted for as loans. Amounts at June 30, 1993, have not been restated. Effective December 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." FAS 115 establishes three investment classifications: held to maturity, trading, and available for sale. In accordance with FAS 115, the Company modified its accounting policies as of December 31, 1993, to identify 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. 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 as a separate component of stockholders' equity until realized. PAGE 8
Golden West Financial Corporation Financial Highlights (Unaudited) ($000s omitted except per share figures) June 30 June 30 December 31 1994 1993 1993 ----------- ----------- ----------- Assets $29,273,203 $28,673,438 $28,829,288 Loans receivable 24,640,665 23,272,245 23,912,571 Mortgage-backed securities 1,270,331 1,594,572 1,522,536 Customer deposits 17,914,826 17,061,224 17,422,484 Stockholders' equity 2,108,426 1,862,404 2,065,604 Stockholders' equity/total assets 7.20% 6.50% 7.16% Book value per common share $ 33.50 $ 29.10 $ 32.31 Common shares outstanding 62,938,135 64,000,060 63,928,935 Yield on loan portfolio 6.62% 7.18% 6.84% Yield on investments 4.96% 3.45% 3.80% Yield on earning assets 6.50% 6.83% 6.61% Cost of deposits 3.82% 4.16% 3.92% Cost of borrowings 5.01% 4.98% 4.69% Cost of funds 4.20% 4.45% 4.18% Yield on earning assets less cost of funds 2.30% 2.38% 2.43% Ratio of nonperforming assets to total assets 1.37% 1.37% 1.37% Ratio of troubled debt restructured to total assets 0.20%(a) 0.07% 0.13% World Savings and Loan Association: Net worth $ 2,275,902 $ 1,982,715 $ 2,164,651 Net worth/total assets 7.93% 7.09% 7.72% Regulatory capital ratios: Tangible capital 7.49% 6.65% 7.27% Core capital 7.86% 7.40% 8.02% Risk-based capital(b) 15.91% 16.36% 17.42%
Three Months Ended June 30 Six Months Ended June 30 1994 1993 1994 1993 ----------- ----------- ----------- ----------- New real estate loans originated $ 1,624,331 $ 1,814,352 $ 2,853,265 $ 3,265,475 Average yield on new real estate loans 6.29% 6.99% 6.39% 7.01% Increase in customer deposits $ 395,505 $ 565,629 $ 492,342 $ 574,978 Net earnings 61,943 70,583 127,239 142,167 Net earnings per share .98 1.10 2.00 2.22 Cash dividends on common stock .075 .065 .15 .13 Average common shares outstanding 63,300,843 63,994,353 63,615,989 63,979,983 Ratios:(c) Net earnings/average net worth 11.80% 15.43% 12.14% 15.83% Net earnings/average assets 0.84% 1.00% 0.87% 1.03% Net interest income/average assets 2.53% 2.55% 2.58% 2.63% General and administrative expense/average assets 1.00% 0.91% 1.01% 0.94%
(a) Included in TDR ratio is 0.07% or $19 million related to the January 1994 Southern California earthquake. (b) The decrease in the risk-based capital ratio from December 1993 to June 1994 was due to the March 1994 change in regulations concerning the criteria used to determine the risk weighting for multi-family loans in the calculation of the risk-based capital ratio. Due to uncertainty over how the new regulations will be applied, World Savings has taken a conservative approach and, pending further clarification from the Office of Thrift Supervision, has weighted the Association's entire multi-family portfolio at 100%. (c) Ratios are annualized by multiplying the quarterly computation by four and the semi-annual computation by two. Averages are computed by adding the beginning balance and each month end balance during the quarter and the six-month period and dividing by four and seven, respectively. PAGE 9 FINANCIAL CONDITION The consolidated condensed balance sheet shown in the table below presents the Company's assets and liabilities in percentage terms at June 30, 1994, and 1993, and December 31, 1993. The reader is referred to page 43 of the Company's 1993 Form 10-K for similar information for the years 1990 through 1993 and a discussion of the changes in the composition of the Company's assets and liabilities in those years.
TABLE 1 Consolidated Condensed Balance Sheet June 30 December 31 ------------------ ----------- 1994 1993 1993 ------ ------ ----------- Assets: Cash and investments 7.8% 9.7% 8.4% Mortgage-backed securities 4.3 5.5 5.3 Loans receivable 84.2 81.2 82.9 Other assets 3.7 3.6 3.4 ------ ------ ------ 100.0% 100.0% 100.0% ====== ====== ====== Liabilities and Stockholders' Equity: Customer deposits 61.2% 59.5% 60.4% Federal Home Loan Bank advances 21.2 23.8 21.8 Securities sold under agreements to repurchase 1.3 1.9 1.5 Medium-term notes 2.3 2.3 2.4 Other liabilities 2.6 2.4 2.5 Subordinated debt 4.2 3.6 4.2 Stockholders' equity 7.2 6.5 7.2 ------ ------ ------ 100.0% 100.0% 100.0% ====== ====== ======
As the above table shows, customer deposits represent the majority of the Company's liabilities. On the other side of the balance sheet, the loan portfolio, which consists primarily of long-term mortgages, is the largest asset component. The disparity between the repricing (maturity or interest rate change) of deposits and other liabilities and the repricing of mortgage loans can affect the Company's liquidity and can have a material impact on the Company's results of operations. The difference between the repricing characteristics of assets and liabilities is commonly referred to as the gap. The gap table on the following page shows the repricing of the Company's assets and liabilities at June 30, 1994. PAGE 10
TABLE 2 Repricing of Interest-Earning Assets and Interest-Bearing Liabilities, Repricing Gaps, and Gap Ratio (Dollars in Millions) June 30, 1994 Projected Repricing(a) 0 - 3 4 - 12 1 - 5 Over 5 Months Months Years Years Total -------- ------- ------ ------ ------- Interest-Earning Assets: Investments $ 758 $ 463 $ 801 $ 136 $ 2,158 Mortgage-backed securities 141 137 421 571 1,270 Loans receivable: Rate-sensitive 17,933 2,695 640 -0- 21,268 Fixed-rate 1,071 530 551 936 3,088 Other(b) 390 -0- -0- -0- 390 -------- ------- ------ ------ ------- Total $ 20,293 $ 3,825 $2,413 $1,643 $28,174 ======== ======= ====== ====== ======= Interest-Bearing Liabilities(c): Customer deposits $ 9,955 $ 5,121 $2,303 $ 536 $17,915 FHLB advances 5,059 1,020 70 74 6,223 Other borrowings 693 (45) 810 808 2,266 -------- ------- ------ ------ ------- Total $ 15,707 $ 6,096 $3,183 $1,418 $26,404 ======== ======= ====== ====== ======= Repricing gap $ 4,586 $(2,271) $ (770) $ 225 ======== ======= ====== ====== Cumulative gap $ 4,586 $ 2,315 $1,545 $1,770 ======== ======= ====== ====== Cumulative gap as a percentage of total assets 15.7% 7.9% 5.3% ======== ======= ======
(a) Based on scheduled maturity or scheduled repricing; loans reflect scheduled repayments and projected prepayments of principal. Includes the effect of hedging. (b) Includes cash in banks, FHLB stock, and loans collateralized by customer deposits. (c) Liabilities with no maturity date, such as passbook and money market deposit accounts, are assigned zero months. CASH AND INVESTMENTS The Office of Thrift Supervision (OTS) requires insured institutions, such as the Company's principal subsidiary, World Savings and Loan Association (World or Association), to maintain a minimum amount of cash and certain qualifying investments for liquidity purposes. The current minimum requirement is equal to a monthly average of 5% of customer deposits and short-term borrowings. For the months ended June 30, 1994, and 1993, and December 31, 1993, World's average regulatory liquidity ratio was 8%, 11%, and 8%, respectively, consistently exceeding the requirement. Effective December 31, 1993, the Company adopted FAS 115, "Accounting for Certain Investments in Debt and Equity Securities." FAS 115 establishes three investment classifications: held to maturity, trading, and available for sale. At June 30, 1994, and December 31, 1993, the PAGE 11 Company had no securities held to maturity or for trading. At June 30, 1994, and December 31, 1993, the Company had securities available for sale in the amount of $1.8 billion and $1.6 billion, respectively, and unrealized gains on securities available for sale included in stockholders' equity of $34 million and $41 million, respectively. For the impact on stockholders' equity, see page 22. The Company has other investments that are recorded at cost with any discount or premium amortized using a method that is not materially different from the interest method. The adoption of FAS 115 resulted in the reclassification of certain securities from the investment securities portfolio to the securities available for sale portfolio. Prior to December 31, 1993, securities were classified as either securities held for sale or investment securities. At June 30, 1993, the Company had $684 million of securities held for sale. Securities held for sale were recorded at the aggregate portfolio's lower of amortized cost or market, with any unrealized losses included in earnings. MORTGAGE-BACKED SECURITIES FAS 115 also requires the same three classifications for mortgage-backed securities (MBS): held to maturity, trading, and available for sale. In accordance with FAS 115, the Company modified its accounting policies as of December 31, 1993, to identify MBS as either held to maturity or available for sale. The Company has no trading MBS. At June 30, 1994, June 30, 1993, and December 31, 1993, the Company had mortgage-backed securities held to maturity in the amount of $506 million, $1.6 billion, and $408 million, respectively. At June 30, 1994, and December 31, 1993, the Company had mortgage-backed securities available for sale in the amount of $764 million and $1.1 billion, respectively, and unrealized gains on mortgage-backed securities included in stockholders' equity of $18 million and $44 million, respectively. Repayments of MBS during the second quarter and first six months of 1994 were $96 million and $229 million, respectively, compared to $163 million and $295 million in the same periods of 1993. LOAN PORTFOLIO LOAN VOLUME New loan originations for the quarter and six months ended June 30, 1994, amounted to $1.6 billion and $2.9 billion, respectively, compared to $1.8 billion and $3.3 billion for the same periods in 1993. Refinanced loans constituted 45% and 51% of new loan originations for the quarter and six months ended June 30, 1994, respectively, compared to 59% for the quarter and six months ended June 30, 1993. In the first six months of 1994, the rising cost of new fixed-rate mortgages caused the volume of refinance activity in the marketplace to drop considerably from the high levels of 1993 with a corresponding decline in the overall mortgage demand. As a result of rising rates and increased competition PAGE 12 in a smaller market, the Company's 1994 total loan originations declined compared to 1993. Although the Company has lending operations in 22 states, the primary mortgage origination focus continues to be on residential properties in California. For the quarter and six months ended June 30, 1994, 65% and 67%, respectively, of total loan originations were on residential properties in California compared to 75% and 76% for the same periods in 1993. Although California originations continue to be a large portion of total originations, the decrease in 1994 as compared to 1993 was due to increased activity by the Company in markets outside California and the decrease of originations in California. The percentage of the total loan portfolio that is comprised of residential loans in California was 80% at June 30, 1994, compared to 83% at June 30, 1993, and 81% at December 31, 1993. The tables on the following two pages show the Company's loan portfolio by state at June 30, 1994, and 1993. PAGE 13
TABLE 3 Loan Portfolio by State June 30, 1994 ($000s Omitted) Residential Real Estate Commercial Loans as ------------------------ Real Total a % of State 1 - 4 5+ Land Estate Loans (a) Portfolio - - ------------ ----------- ---------- ------ ---------- ----------- --------- California $16,621,686 $3,266,714 $ 297 $ 85,099 $19,973,796 80.41% Colorado 593,853 139,100 -0- 8,697 741,650 2.98 Illinois 483,058 149,576 -0- 5,019 637,653 2.57 New Jersey 550,192 40 -0- 161 550,393 2.21 Washington 237,792 214,798 -0- 830 453,420 1.82 Florida 358,398 -0- 364 2,282 361,044 1.45 Texas 345,005 2,728 609 1,814 350,156 1.41 Virginia 283,513 840 -0- 1,763 286,116 1.15 Arizona 209,660 4,229 -0- 1,847 215,736 0.87 Connecticut 194,056 -0- -0- -0- 194,056 0.78 Pennsylvania 181,590 -0- -0- 8,662 190,252 0.77 Maryland 152,392 -0- -0- 665 153,057 0.62 Oregon 128,767 8,275 -0- 4,008 141,050 0.57 Kansas 121,488 5,370 -0- 232 127,090 0.51 Nevada 103,241 1,365 -0- -0- 104,606 0.42 Missouri 60,070 8,912 -0- 79 69,061 0.28 New York 61,206 170 -0- 1 61,377 0.25 Georgia 51,937 -0- -0- 2,611 54,548 0.22 Utah 47,023 138 -0- 2,256 49,417 0.20 Ohio 34,857 3,659 849 6,891 46,256 0.19 Wisconsin 10,471 3,760 -0- -0- 14,231 0.06 New Mexico 7,367 -0- -0- -0- 7,367 0.03 Idaho 2,980 -0- -0- -0- 2,980 0.01 Delaware 1,453 -0- -0- -0- 1,453 0.01 Other 41,020 511 -0- 11,474 53,005 0.21 ----------- ---------- ------ -------- ----------- ------ Totals $20,883,075 $3,810,185 $2,119 $144,391 24,839,770 100.00% =========== ========== ====== ======== ====== FAS 91 deferred loan fees (97,920) Loan discount on purchased loans (7,481) Undisbursed loan funds (2,550) Allowance for loan losses (118,587) LTF interest reserve (828) TDR interest reserve (1,991) Loans on customer deposits 30,252 ----------- Total loan portfolio $24,640,665 ===========
(a) The Company has no commercial loans. PAGE 14
TABLE 4 Loan Portfolio by State June 30, 1993 ($000s Omitted) Residential Real Estate Commercial Loans as ------------------------ Real Total a % of State 1 - 4 5+ Land Estate Loans (a) Portfolio - - ------------ ----------- ---------- ------ ---------- ----------- --------- California $16,114,935 $3,237,709 $ 319 $ 92,552 $19,445,515 82.97% Colorado 581,131 94,491 -0- 7,002 682,624 2.91 New Jersey 533,264 41 -0- 305 533,610 2.28 Illinois 351,552 120,848 -0- 5,590 477,990 2.04 Washington 176,557 206,793 -0- 1,328 384,678 1.64 Florida 291,132 118 33 4,719 296,002 1.26 Virginia 203,655 -0- -0- 2,888 206,543 0.88 Connecticut 169,178 -0- -0- -0- 169,178 0.72 Texas 150,339 4,970 622 5,129 161,060 0.69 Arizona 147,426 4,372 -0- 1,920 153,718 0.66 Kansas 127,590 5,508 -0- 240 133,338 0.57 Oregon 106,239 9,587 -0- 4,166 119,992 0.51 Pennsylvania 105,088 112 -0- 10,805 116,005 0.49 Maryland 99,034 -0- -0- 3,018 102,052 0.44 Nevada 82,946 1,447 -0- -0- 84,393 0.36 New York 73,011 176 -0- 672 73,859 0.32 Missouri 63,798 8,222 -0- 81 72,101 0.31 Georgia 67,153 -0- -0- 2,885 70,038 0.30 Ohio 53,122 5,978 1,136 3,431 63,667 0.27 Utah 27,324 144 -0- 2,416 29,884 0.13 Other 38,980 5,577 -0- 14,896 59,453 0.25 ----------- ---------- ------ -------- ----------- ------ Totals $19,563,454 $3,706,093 $2,110 $164,043 23,435,700 100.00% =========== ========== ====== ======== ====== FAS 91 deferred loan fees (102,128) Loan discount on purchased loans (10,577) Undisbursed loan funds (3,003) Allowance for loan losses (78,617) LTF interest reserve (973) TDR interest reserve (731) Loans on customer deposits 32,574 ----------- Total loan portfolio $23,272,245 ===========
(a) The Company has no commercial loans. PAGE 15 Golden West continues to emphasize adjustable rate mortgages (ARMs)--loans with interest rates that change periodically in accordance with movements in specified indexes. The portion of the mortgage portfolio (excluding mortgage-backed securities) composed of rate-sensitive loans was 88% at June 30, 1994, compared to 87% at June 30, 1993, and December 31, 1993. While rates on fixed-rate mortgages rose significantly during the first half of 1994, lower rates on ARM loans made adjustable instruments more attractive in the marketplace. Golden West's ARM originations constituted approximately 86% of new mortgage loans made by the Company in the first half of 1994 compared to 78% in the first six months of 1993. The weighted average maximum lifetime cap rate on the Association's ARM and modified ARM loan portfolio was 13.61%, or 7.40% above the actual weighted average rate, at June 30, 1994, versus 14.01%, or 7.25% above the weighted average rate, at June 30, 1993. Approximately $4.4 billion of the Association's loans have terms that state that the interest rate may not fall below a lifetime floor set at the time of origination. As of June 30, 1994, $1.4 billion of these loans were at their rate floors. The weighted average floor rate on these loans was 7.23% at June 30, 1994. Without the floor, the average yield on these loans would have been 5.98%. Loan repayments consisting of monthly loan amortization, payoffs, and refinances during the second quarter and first six months of 1994 were $918 million and $1.9 billion, respectively, compared to $966 million and $1.7 billion in the same periods of 1993. The increase in loan repayments for the first six months of 1994 was primarily due to higher mortgage payoffs within our loan portfolio. The Company adopted Statement of Financial Accounting Standards No. 114 (FAS 114), "Accounting by Creditors for Impairment of a Loan," in the fourth quarter of 1993, retroactive to January 1, 1993. See "Accounting Changes" on page 7. It is too early to predict with any precision all of the potential losses to the Company resulting from the Northridge (Southern California) earthquake in January 1994; however, based on preliminary assessments of severity of damage, borrower equity, and levels of insurance coverage, the Company believes that any potential loss to the Company will not be material to the financial condition and results of operations of the Company. The first six months of 1994 loan loss reserve and provision for loan losses included $3.4 million in loss reserves specifically identified as earthquake losses. In addition, at June 30, 1994, troubled debt restructured, which are loans that have been modified due to a weakness in the collateral and/or borrower, included $19 million of loans modified as a result of the Southern California earthquake. PAGE 16 NONPERFORMING ASSETS One measure of the soundness of the Company's portfolio is its ratio of nonperforming assets (NPAs) to total assets. Nonperforming assets include non-accrual loans (loans that are 90 days or more past due) and real estate acquired through foreclosure. Loans in-substance foreclosed were no longer classified as part of the real estate held for sale portfolio upon adoption of FAS 114 during December 1993 and are now included in the Company's total loan portfolio as previously discussed. No interest is recognized on non-accrual loans. The table below shows the components of the Company's nonperforming assets and the ratio of nonperforming assets to total assets at June 30, 1994, and 1993, and December 31, 1993.
TABLE 5 Nonperforming Assets ($000s Omitted) June 30 ------------------------ December 31 1994 1993 1993 -------- -------- ----------- Non-accrual loans $341,454 $317,954 $330,062 Real estate acquired through foreclosure 59,430 65,068 62,724 Loans in-substance foreclosed -0- 9,410 -0- Real estate in judgement 1,189 1,021 1,366 -------- -------- -------- Total nonperforming assets $402,073 $393,453 $394,152 ======== ======== ======== Ratio of nonperforming assets to total assets 1.37% 1.37% 1.37% ======== ======== ========
The increase in NPAs in 1994 and 1993 was primarily in single-family loans. The continued weak California economy and high unemployment resulted in an increase in loan delinquencies and, in certain areas, decreases in real estate prices. The growth in the total dollar amount of NPAs has also been impacted by a continued high level of bankruptcy filings, which often delay the collection process and extend the length of time a loan remains delinquent. The Company continues to closely monitor all delinquencies and takes appropriate steps to protect its interests. Interest foregone on non-accrual loans in the second quarter and first six months of 1994 amounted to $4 million and $10 million, respectively, compared to $5 million and $11 million in the same periods of 1993. The tables on the following two pages show the Company's nonperforming assets by state at June 30, 1994, and 1993. PAGE 17 TABLE 6 Nonperforming Assets by State June 30, 1994 ($000s Omitted) Non-Accrual Loans(a) ------------------------------ Real Estate Owned Residential ----------------------------- NPAs as Real Estate Commercial Residential Commercial Total a % of State 1-4 5+ Real Estate 1-4 5+ Real Estate NPAs Loans - - ------------ -------- ------- ----------- ------- ------- ----------- -------- ------- California $274,450 $23,714 $1,266 $42,428 $10,178 $4,565 $356,601 1.79% Colorado 2,222 -0- -0- 183 -0- 261 2,666 0.36 Illinois 2,747 775 -0- 320 -0- -0- 3,842 0.60 New Jersey 11,841 40 3 614 -0- -0- 12,498 2.27 Washington 477 -0- -0- 122 -0- -0- 599 0.13 Florida 3,508 -0- 375 411 -0- -0- 4,294 1.19 Texas 1,420 -0- -0- 227 -0- -0- 1,647 0.47 Virginia 1,912 -0- -0- -0- -0- -0- 1,912 0.67 Arizona 1,608 -0- -0- 132 -0- -0- 1,740 0.81 Connecticut 4,069 -0- -0- 482 -0- -0- 4,551 2.35 Pennsylvania 2,145 -0- -0- -0- -0- -0- 2,145 1.13 Maryland 1,190 -0- -0- 533 -0- -0- 1,723 1.13 Oregon 371 -0- -0- -0- -0- -0- 371 0.26 Kansas 760 40 -0- 317 -0- -0- 1,117 0.88 Nevada 507 -0- -0- -0- -0- -0- 507 0.48 Missouri 279 375 -0- 32 -0- -0- 686 0.99 New York 3,820 -0- -0- 971 -0- -0- 4,791 7.81 Georgia 1,025 -0- -0- 612 -0- -0- 1,637 3.00 Utah 155 -0- -0- -0- -0- -0- 155 0.31 Ohio 3 -0- 58 -0- -0- -0- 61 0.13 Wisconsin -0- -0- -0- -0- -0- -0- -0- 0.00 New Mexico 4 -0- -0- -0- -0- -0- 4 0.05 Idaho -0- -0- -0- -0- -0- -0- -0- 0.00 Delaware -0- -0- -0- -0- -0- -0- -0- 0.00 Other 295 -0- -0- 35 -0- -0- 330 0.62 -------- ------- ------ ------- ------- ------ -------- ----- Totals $314,808 $24,944 $1,702 $47,419 $10,178 $4,826 403,877 1.63 ======== ======= ====== ======= ======= ====== REO general valuation allowance (1,804) (0.01) -------- ----- $402,073 1.62% ======== =====
(a) Non-accrual loans are 90 days or more past due and have no unpaid interest accrued. PAGE 18
TABLE 7 Nonperforming Assets by State June 30, 1993 ($000s Omitted) Non-Accrual Loans(a) ------------------------------ Real Estate Owned Residential ----------------------------------- NPAs as Real Estate Commercial Residential Commercial Total a % of State 1-4 5+ Real Estate 1-4 5+ Land Real Estate NPAs Loans - - ------------ -------- ------- ----------- ------- ------- ---- ----------- -------- ------- California $251,919 $15,939 $1,222 $47,469 $10,230 $-0- $4,374 $331,153 1.70% Colorado 2,278 -0- -0- 1,615 6,596 -0- 2,693 13,182 1.93 New Jersey 14,461 -0- -0- 839 -0- 187 -0- 15,487 2.90 Illinois 2,492 2,108 -0- 164 -0- -0- -0- 4,764 1.00 Washington 360 -0- -0- -0- -0- -0- -0- 360 0.09 Florida 6,062 -0- 471 284 -0- -0- -0- 6,817 2.30 Virginia 1,736 -0- -0- 550 -0- -0- -0- 2,286 1.11 Connecticut 3,891 -0- -0- 536 -0- -0- -0- 4,427 2.62 Texas 1,512 -0- -0- 227 218 -0- -0- 1,957 1.22 Arizona 1,549 -0- -0- 69 -0- -0- -0- 1,618 1.05 Kansas 869 -0- -0- 485 -0- -0- -0- 1,354 1.02 Oregon 321 -0- -0- -0- -0- -0- -0- 321 0.27 Pennsylvania 968 -0- -0- -0- -0- -0- -0- 968 0.83 Maryland 1,610 -0- -0- 149 -0- -0- -0- 1,759 1.72 Nevada 243 -0- -0- -0- -0- -0- -0- 243 0.29 New York 4,396 -0- -0- 618 -0- -0- -0- 5,014 6.79 Missouri 433 -0- -0- 72 626 -0- -0- 1,131 1.57 Georgia 2,169 -0- -0- 401 -0- -0- -0- 2,570 3.67 Ohio 29 -0- 214 -0- -0- -0- 80 323 0.51 Utah 157 -0- -0- -0- -0- -0- -0- 157 0.53 Other 545 -0- -0- -0- -0- -0- -0- 545 0.92 -------- ------- ------ ------- ------- ---- ------ -------- ----- Totals $298,000 $18,047 $1,907 $53,478 $17,670 $187 $7,147 396,436 1.69 ======== ======= ====== ======= ======= ==== ====== REO general valuation allowance (2,983) (0.01) -------- ----- $393,453 1.68% ======== =====
(a) Non-accrual loans are 90 days or more past due and have no unpaid interest accrued. The Company's troubled debt restructured (TDRs) were $58 million or 0.20% of assets at June 30, 1994, compared to $21 million or 0.07% of assets at June 30, 1993, and $37 million or 0.13% of assets at December 31, 1993. The increase from June 1993 to June 1994 is due in part to the December 31, 1993, FAS 114 reclassification of in-substance foreclosed loans previously discussed, which included loans that had been modified. In addition, at June 30, 1994, $19 million or 0.07% is related to the Southern California earthquake. 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. Interest foregone on TDRs amounted to $125 thousand and $245 thousand for the three and six months ended June 30, 1994, respectively, compared to $61 thousand and $122 thousand for the quarter and six months ended June 30, 1993. PAGE 19 The Company provides allowances for losses on loans when impaired and real estate owned when any significant and permanent decline in value is identified and based upon trends in the basic portfolio. Additions to and reductions from the allowances are reflected in current earnings. 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 loan losses, consideration is given to the estimated sale price, cost of refurbishing, payment of delinquent taxes, cost of disposal, and cost of holding the property. The table below shows the changes in the allowance for loan losses for the three and six months ended June 30, 1994, and 1993.
TABLE 8 Changes in the Allowance for Loan Losses ($000s Omitted) Three Months Ended Six Months Ended June 30 June 30 ------------------ ------------------ 1994 1993 1994 1993 -------- ------- -------- ------- Beginning allowance for loan losses $113,497 $74,637 $106,698 $70,924 Provision charged to expense 17,946 13,182 34,438 24,641 Less loans charged off (13,071) (9,371) (23,025) (17,491) Add recoveries 215 169 476 543 -------- ------- -------- ------- Ending allowance for loan losses $118,587 $78,617 $118,587 $78,617 ======== ======= ======== ======= Ratio of net chargeoffs to average loans outstanding (excluding MBS) 0.21% 0.16% 0.19% 0.15% ======== ======= ======== ======= Ratio of allowance for loan losses to nonperforming assets 29.5% 20.0% ======== =======
The Company 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 loss allowances to cover losses in the portfolio. The increase in the allowance and the provision in 1994 over 1993 was considered prudent given the still weak California economy, the increase in the size of the loan portfolio, and the January 1994 Southern California earthquake previously noted. PAGE 20 Chargeoffs increased as a result of the increase in nonperforming loans, the increase in the percentage of nonperforming loans that became real estate owned, and the increased losses on real estate owned. CUSTOMER DEPOSITS Customer deposits increased during the second quarter of 1994 by $396 million, including interest credited of $138 million and the acquisition of three branches in New Jersey containing $78 million in deposits (two of which were subsequently consolidated with other branches), compared to a customer deposit increase of $566 million, including interest credited of $141 million, in the second quarter of 1993. Customer deposit balances in the first half of 1994 increased by $492 million, including interest credited of $271 million and the acquisition of three branches in New Jersey containing $78 million in deposits, compared to an increase of $575 million, including interest credited of $280 million, in the first half of 1993. The net increase of customer deposits during the first half of 1994 resulted from the improvement in the savings market. The increase in 1993 was a result of special promotions in the Company's savings markets. The Company has no brokered deposits. PAGE 21 The table below shows the Company's customer deposits by interest rate and by remaining maturity at June 30, 1994, and 1993.
TABLE 9 Customer Deposits (Dollars in millions) 1994 1993 ----------------- ----------------- Rate* Amount Rate* Amount ----------------- ----------------- Customer deposits by interest rate: Interest-bearing checking accounts 1.27% $ 721 1.67% $ 687 Passbook accounts 2.08 674 2.38 593 Money market deposit accounts 3.04 2,240 3.59 2,424 Term certificate accounts with original maturities of: 4 weeks to 1 year 3.21 3,656 3.31 4,337 1 to 2 years 3.95 5,487 4.00 4,482 2 to 3 years 4.48 1,882 5.20 1,315 3 to 4 years 5.68 1,040 6.68 1,251 4 years and over 5.30 2,025 6.25 1,851 Retail jumbo CDs 4.49 176 5.56 100 All other 7.79 14 7.75 21 ------- ------- $17,915 $17,061 ======= ======= Customer deposits by remaining maturity: No contractual maturity $ 3,635 $ 3,704 Maturity within one year: 3rd quarter 3,510 3,749 4th quarter 2,503 2,424 1st quarter 1,843 1,884 2nd quarter 1,400 1,387 ------- ------- 9,256 9,444 1 to 2 years 2,868 2,087 2 to 3 years 833 408 3 to 4 years 570 468 4 years and over 753 950 ------- ------- $17,915 $17,061 ======= =======
*Weighted average interest rate, including the effect of hedging transactions. PAGE 22 ADVANCES FROM FEDERAL HOME LOAN BANKS The Company uses FHLB borrowings, also known as "advances," to supplement cash flow and to provide funds for loan origination activities. Advances offer strategic advantages for asset-liability management, including long-term maturities and, in certain cases, prepayment at the Company's option. FHLB advances amounted to $6.2 billion at June 30, 1994, compared to $6.8 billion and $6.3 billion at June 30, 1993, and December 31, 1993, respectively. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE The Company borrows funds through transactions in which securities are sold under agreements to repurchase (Reverse Repos). These funds are used to take advantage of arbitrage investment opportunities and to supplement cash flow. Reverse Repos are entered into with selected major government securities dealers, as well as large banks, typically using MBS from the Company's portfolio. Reverse Repos with dealers and banks amounted to $319 million, $469 million, and $377 million at June 30, 1994, and 1993, and December 31, 1993, respectively. OTHER BORROWINGS Golden West currently has on file a registration statement with the Securities and Exchange Commission for the sale of up to $100 million of subordinated debt securities. The Company had issued a total of $1.0 billion of subordinated debt at June 30, 1994. As of June 30, 1994, 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. World currently has on file shelf registrations with the OTS for the issuance of $2.0 billion of unsecured medium-term notes. At June 30, 1994, $1.2 billion was available for issuance. The Association had medium-term notes outstanding under the current and prior registrations with principal amounts of $664 million at June 30, 1994, compared to $676 million at June 30, 1993, and $677 million at December 31, 1993. As of June 30, 1994, the Association's medium-term notes were rated A1 and A+ by Moody's and S&P, respectively. World also has on file a registration statement with the OTS for the sale of up to $250 million of subordinated notes. Under a prior filing with the OTS, $50 million of subordinated notes remain unissued. As of June 30, 1994, the Association had issued a total of $200 million of subordinated notes. As of June 30, 1994, World's subordinated notes were rated A2 and A by Moody's and S&P, respectively. The subordinated notes are included in the Association's risk-based regulatory capital as Supplementary Capital. STOCKHOLDERS' EQUITY The Company's stockholders' equity increased in the first six months of 1994 and 1993 through the retention of a percentage of net earnings. PAGE 23 However, the increase in stockholders' equity in 1994 was partially offset by a $33 million decrease in unrealized gains on securities available for sale due to the subsequent decrease in market values of securities available for sale since December 31, 1993, and by $44 million due to the purchase of Company stock. On October 28, 1993, the Company's Board of Directors authorized the purchase by the Company of up to 3.2 million shares of Golden West's common stock. On July 28, 1994, the Company's Board of Directors authorized the purchase by the Company of an additional 3.1 million shares of Golden West's common stock. As of June 30, 1994, 1,325,400 shares had been repurchased and retired at a cost of $51.4 million since October 28, 1993, of which 694,500 shares were purchased and retired at a cost of $27.0 million during the second quarter of 1994. 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 sold from time to time in one or more transactions for total proceeds of up to $200 million. The preferred stock may be issued in one or more series, may have varying provisions and designations, and may be represented by depository shares. The preferred stock is not convertible into common stock. No preferred stock has yet been issued under the registration. The Company's preferred stock has been preliminarily rated a2 by Moody's. REGULATORY CAPITAL The OTS requires federally insured institutions, such as World, to meet certain minimum capital requirements. The table below shows World's current regulatory capital ratios and compares them to the current OTS minimum requirements at June 30, 1994, and 1993.
TABLE 10 World Savings and Loan Association Regulatory Capital Ratios Under Current Requirements ($000s Omitted) 1994 1993 ----------------------------------------- ----------------------------------------- ACTUAL REQUIRED ACTUAL REQUIRED ------------------- ------------------ ------------------- ------------------ Capital Ratio Capital Ratio Capital Ratio Capital Ratio ---------- ------ ---------- ----- ---------- ------ ---------- ----- Tangible $2,141,356 7.49% $ 428,853 1.50% $1,852,316 6.65% $ 417,860 1.50% Core 2,248,569 7.86 857,705 3.00 2,061,246 7.40 835,719 3.00 Risk-based 2,549,328 15.91 1,282,036 8.00 2,333,410 16.36 1,141,171 8.00
PAGE 24 During the first quarter of 1994, the Office of Thrift Supervision changed the regulations concerning the criteria used to determine the risk weighting for multi-family loans in the calculation of the risk-based capital ratio. Due to uncertainty over how the new regulations will be applied, World Savings has taken the conservative approach and pending any further clarification from the OTS, has weighted the Association's entire multi-family portfolio at 100%. This change caused a decrease in the risk-based capital ratio from June 1993 to June 1994. The table below shows World's regulatory capital ratios and compares them to the fully phased-in 1995 OTS minimum requirements at June 30, 1994, and 1993.
TABLE 11 World Savings and Loan Association Regulatory Capital Ratios Under Fully Phased-In Requirements ($000s Omitted) 1994 1993 ----------------------------------------- --------------------------------------- ACTUAL REQUIRED ACTUAL REQUIRED ------------------- ------------------ ------------------- ------------------ Capital Ratio Capital Ratio Capital Ratio Capital Ratio ---------- ------ ---------- ----- ---------- ------ ---------- ----- Tangible $2,141,356 7.49% $ 428,853 1.50% $1,852,316 6.65% $ 417,860 1.50% Core 2,141,356 7.49 857,705 3.00 1,852,316 6.65 835,719 3.00 Risk-based 2,441,095 15.34 1,273,377 8.00 2,123,693 15.11 1,124,394 8.00
PAGE 25 The table below shows a reconciliation of World's equity capital to regulatory capital under OTS regulations at June 30, 1994.
TABLE 12 Reconciliation of Equity Capital to Regulatory Capital Under Current OTS Regulations ($000s Omitted) 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 1,990,548 Unrealized gains on securities available for sale 51,763 ----------- Equity capital $ 2,275,902 $ 2,275,902 $ 2,275,902 $ 2,275,902 $ 2,275,902 $ 2,275,902 =========== Positive goodwill (1) (2) (227,235) (227,235) (227,235) (227,235) (227,235) Negative goodwill (1) (3) 92,689 92,689 92,689 92,689 92,689 Qualifying supervisory positive goodwill (1) (2) 107,213 107,213 107,213 107,213 Equity/other investments (4) (1,531) Subordinated debt 198,983 General valuation allowances 103,307 ----------- ----------- ----------- ----------- ----------- Regulatory capital $ 2,141,356 $ 2,248,569 $ 2,248,569 $ 2,248,569 $ 2,549,328 =========== =========== =========== =========== =========== Total assets $28,715,839 =========== Adjusted total assets $28,590,171 $28,590,171 $28,590,171 =========== =========== =========== Risk-weighted assets $16,025,446 $16,025,446 =========== =========== CAPITAL RATIO - ACTUAL 7.93% 7.49% 7.86% 7.86% 14.03% 15.91% =========== =========== =========== =========== =========== =========== Regulatory Capital Ratio Requirements: Well capitalized, equal to or greater than 5.00% 6.00% 10.00% =========== =========== =========== Adequately capitalized, equal to or greater than 1.50% 4.00% 4.00% 8.00% =========== =========== =========== =========== Undercapitalized, less than 1.50% 4.00% 4.00% 8.00% =========== =========== =========== =========== Significantly undercapital- ized, less than 3.00% 3.00% 6.00% =========== =========== =========== Critically undercapitalized, equal to or less than 2.00% ===========
(1) All goodwill is required to be deducted from tangible capital. Goodwill arising prior to April 12, 1989, in excess of a sliding scale limit (0.375% of assets at June 30, 1994), is required to be deducted from all other capital computations on a phased-in basis through December 1994. Goodwill arising after April 12, 1989, must be deducted from all capital computations. (2) All but $4,160 of the Association's positive goodwill arose prior to April 12, 1989. (3) The Association's negative goodwill arose after April 12, 1989. (4) Equity and certain other investments are required to be deducted from total risk-based capital on a phased-in basis (60% at June 30, 1994) through June 1994. PAGE 26 The table below compares World's regulatory capital to the OTS well capitalized classification of capital standards at June 30, 1994.
TABLE 13 World Savings and Loan Association Regulatory Capital Compared to Well Capitalized Classification ($000s Omitted) ACTUAL WELL CAPITALIZED ------------------- ------------------- Capital Ratio Capital Ratio ---------- ------ ---------- ------ Leverage $2,248,569 7.86% $1,429,509 5.00% Tier 1 risk-based 2,248,569 14.03 961,527 6.00 Total risk-based 2,549,328 15.91 1,602,545 10.00 World's leverage, Tier 1 risk-based, and total risk-based capital ratios under the fully phased-in 1995 OTS minimum requirements at June 30, 1994, were 7.49%, 13.45%, and 15.34%, respectively. RESULTS OF OPERATIONS PROFIT MARGINS/SPREADS An important determinant of Golden West's earnings is its profit margin or primary spread--the difference between its yield on earning assets and its cost of funds. The table below shows the components of the Company's spread at June 30, 1994, and 1993, and December 31, 1993.
TABLE 14 Yield on Earning Assets, Cost of Funds, and Primary Spread, Including Effect of Purchase Accounting June 30 ------------------------ December 31 1994 1993 1993 ------ ------ ----------- Yield on loan portfolio 6.62% 7.18% 6.84% Yield on investments 4.96 3.45 3.80 ------ ------ ------ Yield on earning assets 6.50 6.83 6.61 ------ ------ ------ Cost of customer deposits 3.82 4.16 3.92 Cost of borrowings 5.01 4.98 4.69 ------ ------ ------ Cost of funds 4.20 4.45 4.18 ------ ------ ------ Primary spread 2.30% 2.38% 2.43% ====== ====== ======
The Company's primary spread is to some degree dependent on changes in interest rates because Golden West's liabilities tend to respond somewhat more rapidly to rate movements than its assets. During the first six months of 1994, interest rates began to rise, leading to an increase in the cost of Golden West's liabilities during the second quarter. At the same time, however, the yield on the Company's major earning asset, the loan portfolio, continued to decline slightly because most of Golden West's mortgages are tied to the Eleventh District FHLB Cost of Funds Index (the PAGE 27 COFI), which lags changes in market rates by several months. Consequently, at June 30, 1994, the Company's primary spread was lower than at both December 31, 1993, and June 30, 1993. The table below shows the Company's revenues and expenses as a percentage of total revenues for the three and six months ended June 30, 1994, and 1993, in order to focus on the changes in interest income between years as well as changes in other revenue and expense amounts.
TABLE 15 Selected Revenue and Expense Items as Percentages of Total Revenues Three Months Six Months Ended Ended June 30 June 30 ------------ ------------ 1994 1993 1994 1993 ----- ----- ----- ----- Interest on loans 84.4% 84.5% 85.2% 85.1% Interest on mortgage-backed securities 5.6 7.6 5.8 7.9 Interest and dividends on investments 7.5 5.1 6.5 4.3 ----- ----- ----- ----- 97.5 97.2 97.5 97.3 Less: Interest on customer deposits 35.5 36.2 35.6 36.6 Interest on advances and other borrowings 22.4 23.9 21.7 23.0 ----- ----- ----- ----- 57.9 60.1 57.3 59.6 Net interest income 39.6 37.1 40.2 37.7 Provision for loan losses 3.8 2.7 3.7 2.6 ----- ----- ----- ----- Net interest income after provision for loan losses 35.8 34.4 36.5 35.1 Add: Fees 1.7 1.5 1.7 1.5 Gain on the sale of securities and mortgage-backed securities 0.0 0.6 0.0 0.4 Other non-interest income 0.8 0.7 0.8 0.7 ----- ----- ----- ----- 2.5 2.8 2.5 2.6 Less: General and administrative expenses 15.8 13.3 15.7 13.4 Amortization of goodwill 0.1 (0.1) 0.1 (0.1) Taxes on income 9.2 9.5 9.5 9.6 ----- ----- ----- ----- Net earnings 13.2% 14.5% 13.7% 14.8% ===== ===== ===== =====
INTEREST ON LOANS In the second quarter of 1994, interest on loans was lower than in the comparable 1993 period by $14.1 million or 3.4%. The 1994 decrease was due primarily to a 57 basis point decrease in the average portfolio yield, which was partially offset by a $1.3 billion increase in the average portfolio balance. For the first half of 1994, interest on loans was lower than in the first six months of 1993 by $23.1 million or 2.8% due to a 60 basis point decrease in the average portfolio yield, which was partially offset by a $1.5 billion increase in the average portfolio balance. PAGE 28 INTEREST ON MORTGAGE-BACKED SECURITIES In the second quarter of 1994, interest on mortgage-backed securities was lower than in the comparable 1993 period by $11.0 million or 29.6%. The 1994 decrease was due primarily to a 72 basis point decrease in the average portfolio yield and a $388 million decrease in the average portfolio balance. For the first half of 1994, interest on mortgage-backed securities was lower than in the comparable 1993 period by $21.6 million or 28.4% due to a 71 basis point decrease in the average portfolio yield and a $376 million decrease in the average portfolio balance. INTEREST AND DIVIDENDS ON INVESTMENTS The income earned on the investment portfolio fluctuates, depending upon the volume outstanding and the yields available on short-term investments. For the second quarter of 1994, interest and dividends on investments was $10.5 million or 42.1% higher than for the same period in 1993. The increase was primarily due to a $108 million increase in the average portfolio balance and a 102 basis point increase in the average portfolio yield. For the first half of 1994, interest and dividends on investments was $18.7 million or 44.7% higher than for the same period in 1993. The increase was primarily due to a $359 million increase in the average portfolio balance and a 68 basis point increase in the average portfolio yield. INTEREST ON CUSTOMER DEPOSITS The major portion of the Company's customer deposit base consists of savings accounts with remaining maturities of less than one year. Thus, the amount of interest paid on these funds depends upon the level of short-term interest rates and the savings balances outstanding. In the second quarter and first half of 1994, interest on customer deposits decreased by $9.4 million or 5.3% and $19.8 million or 5.6%, respectively, from the comparable periods of 1993. The second quarter decrease was primarily due to a 45 basis point decrease in the average cost of deposits, which was partially offset by a $1.0 billion increase in the average deposit balance. The six month decrease was primarily due to a 45 basis point decrease in the average cost of deposits partially offset by a $948 million increase in the average deposit balance. INTEREST ON ADVANCES AND OTHER BORROWINGS For the second quarter and first half of 1994, interest on advances and other borrowings decreased by $10.8 million or 9.4 % and $18.5 million or 8.4%, respectively, compared to the same periods a year earlier. The second quarter decrease was primarily due to a $272 million decrease in the average balance of these borrowings and a 33 basis point decrease in the average cost of these borrowings. The six month decrease was primarily due to a 56 basis point decrease in the average cost of these borrowings, which was partially offset by a $211 million increase in their average balance. PAGE 29 PROVISION FOR LOAN LOSSES The provision for loan losses was $17.9 million and $34.4 million, respectively, for the three and six months ended June 30, 1994, compared to $13.2 million and $24.6 million for the same periods in 1993. The 1994 increase in provision over 1993 reflected increased chargeoffs, increased nonperforming assets, and the continued weak California economy. In addition, the provision for the first six months of 1994 included $3.4 million in specific earthquake loss reserves. GENERAL AND ADMINISTRATIVE EXPENSES For the second quarter and first half of 1994, general and administrative expenses (G & A) increased by $9.4 million or 14.6% and $17.4 million or 13.5%, respectively, from the comparable periods in 1993. The primary reasons for the increase in 1994 were the expansion of loan origination capacity and savings branches primarily outside California; the expenses of relocating some of our administrative operations to San Antonio, Texas; the installation of enhancements to data processing systems; and general inflation. In addition, during the first six months of 1993, the Company received a reduction in the FDIC premium due to the settlement of the FSLIC secondary reserve. As a result, deposit insurance expense for the first six months of 1993 included a credit of $2.8 million. G & A as a percentage of average assets on an annualized basis was 1.00% and 1.01% for the second quarter and first half of 1994, respectively, compared to 0.91% and 0.94% for the same periods in 1993. TAXES ON INCOME The Company utilizes the accrual method of accounting for income tax purposes and for preparing its published financial statements. For financial reporting purposes only, the Company uses purchase accounting in connection with certain assets acquired through mergers. The purchase accounting portion of income is not subject to tax. In the first quarter of 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." FAS 109 requires a change from the deferred method to the liability method of computing deferred income taxes. The Company has applied FAS 109 prospectively. FAS 109 required the Company to adjust its purchase accounting for prior business combinations by increasing deferred tax assets and reducing goodwill by $23 million to reflect the non-taxability of purchase accounting income. This deferred tax asset is being amortized over the remaining lives of the related purchased assets. The corporate tax rates for the second quarter and first half of 1994 were 41.0% and 40.9%, respectively, compared to 39.5% for the same periods a year ago. This increase is primarily due to the effect of the federal legislation enacted during the third quarter of 1993 that increased the federal corporate income tax rate from 34% to 35%. PAGE 30 LIQUIDITY AND CAPITAL RESOURCES The Association's principal sources of funds are cash flows generated from earnings; customer deposits; loan repayments; borrowings from the FHLB; issuance of medium-term notes; and debt collateralized by mortgages, MBS, or securities. In addition, the Association has a number of other alternatives available to provide liquidity or finance operations. These include borrowings from public offerings of debt or equity, sales of loans, negotiable certificates of deposit, issuances of commercial paper, and borrowings from commercial banks. Furthermore, under certain conditions, World may borrow from the Federal Reserve Bank of San Francisco to meet short-term cash needs. The availability of these funds will vary depending upon policies of the FHLB, the Federal Reserve Bank of San Francisco, and the Federal Reserve Board. For a discussion of the Association's liquidity positions at June 30, 1994, and 1993, and December 31, 1993, see the cash and investments section on page 10. The principal sources of funds for the Association's parent, Golden West, are dividends from World 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 Association can pay. The principal liquidity needs of the parent company are for payment of interest on subordinated debt securities, dividends to stockholders, the purchase of Company stock, and general and administrative expenses. At June 30, 1994, and 1993, and December 31, 1993, the parent company's total cash and investments amounted to $865 million (including a $300 million short-term loan to the Association), $714 million, and $956 million (including a $150 million short-term loan to the Association), respectively. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 11 - Statement of Computation of Earnings Per Share PAGE 31 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GOLDEN WEST FINANCIAL CORPORATION Dated: August 9, 1994. /s/ J. L. Helvey J. L. Helvey Group Senior Vice President (duly authorized and principal financial officer) PAGE 32 EXHIBIT 11 Golden West Financial Corporation Statement of Computation of Earnings Per Share ($000s omitted except per share amounts) Three Months Ended Six Months Ended June 30 June 30 ------------------------ ------------------------ 1994 1993 1994 1993 ----------- ----------- ----------- ----------- Line 1: Average Number of Common Shares Outstanding 63,300,843 63,994,353 63,615,989 63,979,983 =========== =========== =========== =========== Line 2: Net Earnings $ 61,943 $ 70,583 $ 127,239 $ 142,167 =========== =========== =========== =========== Line 3: Earnings Per Common Share (Line 2 divided by Line 1) $ .98 $1.10 $2.00 $2.22 ===== ===== ===== ===== -----END PRIVACY-ENHANCED MESSAGE-----