-----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, k+8ntJVACmaT+LEDKvDtDf74VuNZdwgoZw85vpa2IUNJe+Y2PUSz71+iW5LLac/j l/dt5UtWEJp4mWcmN/IX0Q== 0000042293-94-000007.txt : 19941117 0000042293-94-000007.hdr.sgml : 19941117 ACCESSION NUMBER: 0000042293-94-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941114 SROS: NONE 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: 94558935 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 SEPTEMBER 30, 1994, LIVE 10-Q FILING PAGE 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q For Quarter Ended September 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 October 31, 1994, was 60,478,055 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 nine months ended September 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 nine month periods have been included. The operating results for the nine months ended September 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) September 30 September 30 December 31 1994 1993 1993 ------------ ------------ ----------- Assets: Cash $ 151,581 $ 109,515 $ 243,185 Securities available for sale 1,655,133 659,387 1,636,586 Other investments 207,800 1,517,141 538,100 Mortgage-backed securities available for sale at fair value 716,709 -0- 1,114,069 Mortgage-backed securities held to maturity at cost 522,700 1,414,363 408,467 Loans receivable 25,670,613 23,660,080 23,912,571 Interest earned but uncollected 202,009 173,828 175,080 Investment in capital stock of Federal Home Loan Banks--at cost, which approximates fair value 328,660 367,698 325,737 Real estate held for sale or investment 64,920 76,836 67,156 Prepaid expenses and other assets 213,362 160,925 108,832 Premises and equipment--at cost less accumulated depreciation 196,087 156,558 162,751 Goodwill arising from acquisitions 136,927 136,432 136,754 ----------- ----------- ----------- $30,066,501 $28,432,763 $28,829,288 =========== =========== =========== Liabilities and Stockholders' Equity: Customer deposits $18,530,133 $17,565,432 $17,422,484 Advances from Federal Home Loan Banks 6,229,344 6,286,870 6,281,691 Securities sold under agreements to repurchase 626,687 280,868 442,874 Medium-term notes 664,199 676,367 676,540 Accounts payable and accrued expenses 416,666 366,585 355,799 Taxes on income 314,718 312,898 364,235 Subordinated notes--net of discount 1,221,181 1,021,467 1,220,061 Stockholders' equity 2,063,573 1,922,276 2,065,604 ----------- ----------- ----------- $30,066,501 $28,432,763 $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 Nine Months Ended September 30 September 30 ------------------------ ---------------------------- 1994 1993 1994 1993 -------- -------- ---------- ---------- Interest Income: Interest on loans $411,573 $413,134 $1,205,624 $1,230,269 Interest on mortgage-backed securities 25,037 32,568 79,454 108,592 Interest and dividends on investments 31,551 28,111 92,239 70,052 -------- -------- ---------- ---------- 468,161 473,813 1,377,317 1,408,913 Interest Expense: Interest on customer deposits 180,584 179,898 512,580 531,711 Interest on advances 69,119 68,531 191,031 211,543 Interest on repurchase agreements 8,221 9,310 25,316 29,396 Interest on other borrowings 33,051 30,811 96,482 88,642 -------- -------- ---------- ---------- 290,975 288,550 825,409 861,292 -------- -------- ---------- ---------- Net Interest Income 177,186 185,263 551,908 547,621 Provision for loan losses 15,996 16,196 50,434 40,837 -------- -------- ---------- ---------- Net Interest Income after Provision for Loan Losses 161,190 169,067 501,474 506,784 Non-Interest Income: Fees 6,598 7,636 22,278 21,759 Gain (loss) on the sale of securities and mortgage-backed securities (73) 2,767 (106) 7,015 Other 3,261 4,041 10,473 11,005 -------- -------- ---------- ---------- 9,786 14,444 32,645 39,779 Non-Interest Expense: General and administrative: Personnel 37,221 33,740 109,139 96,892 Occupancy 11,297 10,604 32,417 29,932 Deposit insurance 10,204 9,768 30,325 25,892 Advertising 2,722 2,921 7,957 8,231 Other 13,691 13,410 41,834 38,625 -------- -------- ---------- ---------- 75,135 70,443 221,672 199,572 Amortization of goodwill arising from acquisitions 682 (366) 1,907 (1,264) -------- -------- ---------- ---------- 75,817 70,077 223,579 198,308 -------- -------- ---------- ---------- Earnings Before Taxes on Income 95,159 113,434 310,540 348,255 Taxes on income 39,034 49,666 127,176 142,320 -------- -------- ---------- ---------- Net Earnings $ 56,125 $ 63,768 $ 183,364 $ 205,935 ======== ======== ========== ========== Net earnings per share $ .91 $ 1.00 $ 2.91 $ 3.22 ======== ======== ========== ==========
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Golden West Financial Corporation Consolidated Statement of Cash Flows (Unaudited) ($000s Omitted) Three Months Ended Nine Months Ended September 30 September 30 -------------------------- -------------------------- 1994 1993 1994 1993 ----------- ----------- ----------- ----------- Cash Flows From Operating Activities: Net earnings $ 56,125 $ 63,768 $ 183,364 $ 205,935 Adjustments to reconcile net earnings to net cash provided by operating activities: Provision for loan losses 15,996 16,196 50,434 40,837 Amortization of loan fees and discounts (6,241) (11,511) (23,063) (33,233) Depreciation and amortization 4,837 3,796 13,809 10,319 Reduction of a valuation allowance on investments -0- (2,750) -0- (7,000) Loans originated for sale (5,596) (117,889) (90,083) (284,441) Sales of loans originated for sale 5,413 137,864 142,996 297,688 (Increase) in interest earned but uncollected (2,747) (7,015) (26,929) (16,105) Federal Home Loan Bank stock dividends (4,126) (4,327) (14,743) (9,454) (Increase) in prepaid expenses and other assets (22,852) (14,080) (97,591) (25,946) Increase (decrease) in accounts payable and accrued expenses (6,949) (11,688) 60,867 5,459 Increase (decrease) in taxes on income (12,049) 11,880 (14,689) 79,034 Other, net (5,578) (4,616) (18,700) (10,083) ----------- ----------- ----------- ----------- Net cash provided by operating activities 16,233 59,628 165,672 253,010 Cash Flows From Investing Activities: New loan activity: New real estate loans originated for portfolio (1,777,064) (1,459,586) (4,545,842) (4,558,509) Real estate loans purchased (880) (878) (1,744) (1,920) Other, net 44 3,765 2,862 21,266 ----------- ----------- ----------- ----------- (1,777,900) (1,456,699) (4,544,724) (4,539,163) Real estate loan principal payments: Monthly payments 149,388 146,961 448,882 427,199 Payoffs, net of foreclosures 470,388 748,676 1,853,002 1,980,520 Refinances 66,835 94,799 261,139 270,257 ----------- ----------- ----------- ----------- 686,611 990,436 2,563,023 2,677,976 Purchases of mortgage-backed securities available for sale (919) -0- (1,500) -0- Purchases of mortgage-backed securities held to maturity (25,724) (582) (46,067) (99,140) Sales of mortgage-backed securities available for sale -0- -0- 119 -0- Sales of mortgage-backed securities held to maturity -0- -0- -0- 138 Repayments of mortgage-backed securities 49,903 180,791 279,153 476,254 Sales of real estate 53,455 58,431 159,315 151,815 Purchases of securities available for sale (398,094) (811,869) (2,401,279) (3,253,660) Sales and maturities of securities available for sale 515,510 835,147 2,355,417 2,758,507 Decrease (increase) in other investments 159,400 426,913 330,300 (719,952) Redemptions of Federal Home Loan Bank stock -0- -0- 7,775 7,591 Purchases of Federal Home Loan Bank stock -0- -0- -0- (79,713) Additions to premises and equipment (23,639) (9,799) (46,877) (24,582) ----------- ----------- ----------- ----------- Net cash provided (used) by investing activities (761,397) 212,769 (1,345,345) (2,643,929)
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Golden West Financial Corporation Consolidated Statement of Cash Flows (Continued) (Unaudited) ($000s Omitted) Three Months Ended Nine Months Ended September 30 September 30 -------------------------- -------------------------- 1994 1993 1994 1993 ----------- ----------- ----------- ---------- Cash Flows From Financing Activities: Customer deposit activity: Increase in deposits, net $ 466,639 $ 358,392 $ 687,565 $ 653,319 Interest credited 148,668 145,816 420,084 425,867 ----------- ----------- ----------- ---------- 615,307 504,208 1,107,649 1,079,186 Additions to Federal Home Loan Bank advances 14,000 17,000 37,000 1,696,200 Repayments of Federal Home Loan Bank advances (7,521) (570,048) (89,543) (908,948) Increase (decrease) in securities sold under agreements to repurchase 246,291 (252,479) 183,813 (275,842) Proceeds from medium-term notes -0- 56 -0- 609,235 Repayments of medium-term notes -0- -0- (12,865) (14,500) Proceeds from subordinated debt -0- -0- -0- 98,786 Dividends on common stock (4,612) (4,161) (14,163) (12,479) Purchase and retirement of Company stock (80,290) -0- (123,822) -0- ----------- ----------- ----------- ---------- Net cash provided (used) by financing activities 783,175 (305,424) 1,088,069 2,271,638 ----------- ----------- ----------- ---------- Net Increase (Decrease) in Cash 38,011 (33,027) (91,604) (119,281) Cash at beginning of period 113,570 142,542 243,185 228,796 ----------- ----------- ----------- ---------- Cash at end of period $ 151,581 $ 109,515 $ 151,581 $ 109,515 =========== =========== =========== ========== Supplemental cash flow information: Cash paid for: Interest $ 288,514 $ 355,304 $ 828,705 $ 911,813 Income taxes 51,362 37,786 142,144 65,483 Cash received for interest and dividends 465,414 466,798 1,350,388 1,392,808 Noncash investing activities: Loans transferred to foreclosed real estate 60,313 64,491 174,468 176,603
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Golden West Financial Corporation Consolidated Statement of Stockholders' Equity (Unaudited) ($000s omitted except per share figures) Nine Months Ended September 30 1994 1993 ---------- ---------- Common Stock: Balance at January 1 $ 6,393 $ 6,392 Common stock issued upon exercise of stock options - 146,900 shares (1994) and 91,800 shares (1993) 14 10 Common stock retired upon purchase of treasury stock - 3,114,080 shares (1994) and -0- shares (1993) (311) -0- ---------- ---------- Balance at September 30 6,096 6,402 ---------- ---------- Paid-in Capital: Balance at January 1 40,899 36,186 Common stock issued upon exercise of stock options - 146,900 shares (1994) and 91,800 shares (1993) 2,109 1,412 ---------- ---------- Balance at September 30 43,008 37,598 ---------- ---------- Retained Earnings: Balance at January 1 1,933,593 1,684,820 Net earnings 183,364 205,935 Cash dividends on common stock - $.225 per share (1994) and $.195 per share (1993) (14,163) (12,479) Retirement of treasury stock (123,511) -0- ---------- ---------- Balance at September 30 1,979,283 1,878,276 ---------- ---------- Unrealized Gains on Securities Available for Sale: Balance at January 1 84,719 -0- Change during period (49,533) -0- ---------- ---------- Balance at September 30 35,186 -0- ---------- ---------- Total Stockholders' Equity at September 30 $2,063,573 $1,922,276 ========== ==========
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 nine month periods ended September 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 September 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) September 30 September 30 December 31 1994 1993 1993 ------------ ------------ ----------- Assets $30,066,501 $28,432,763 $28,829,288 Loans receivable 25,670,613 23,660,080 23,912,571 Mortgage-backed securities 1,239,409 1,414,363 1,522,536 Customer deposits 18,530,133 17,565,432 17,422,484 Stockholders' equity 2,063,573 1,922,276 2,065,604 Stockholders' equity/total assets 6.86% 6.76% 7.16% Book value per common share $ 33.85 $ 30.03 $ 32.31 Common shares outstanding 60,961,755 64,016,610 63,928,935 Yield on loan portfolio 6.62% 6.89% 6.73% Yield on mortgage-backed securities 8.44% 9.09% 8.67% Yield on investments 5.16% 3.58% 3.80% Yield on earning assets 6.60% 6.74% 6.61% Cost of deposits 4.05% 4.02% 3.92% Cost of borrowings 5.23% 4.83% 4.69% Cost of funds 4.42% 4.28% 4.18% Yield on earning assets less cost of funds 2.18% 2.46% 2.43% Ratio of nonperforming assets to total assets 1.35% 1.32% 1.37% Ratio of troubled debt restructured to total assets .20%(a) .08% .13% World Savings and Loan Association: Net worth $ 2,325,607 $ 2,051,047 $ 2,164,651 Net worth/total assets 7.83% 7.39% 7.72% Regulatory capital ratios: Tangible capital 7.41% 6.94% 7.27% Core capital 7.79% 7.69% 8.02% Risk-based capital(b) 15.67% 16.72% 17.42%
Three Months Ended Nine Months Ended September 30 September 30 -------------------------- -------------------------- 1994 1993 1994 1993 ----------- ----------- ----------- ----------- New real estate loans originated $ 1,782,660 $ 1,577,475 $ 4,635,925 $ 4,842,950 Average yield on new real estate loans 6.35% 6.80% 6.37% 6.94% Increase in customer deposits $ 615,307 $ 504,208 $ 1,107,649 $ 1,079,186 Net earnings 56,125 63,768 183,364 205,935 Net earnings per share .91 1.00 2.91 3.22 Cash dividends on common stock .075 .065 .225 .195 Average common shares outstanding 61,655,775 64,005,260 62,955,404 63,988,501 Ratios:(c) Net earnings/average net worth 10.77% 13.47% 11.70% 15.02% Net earnings/average assets .76% .89% .83% .98% Net interest income/average assets 2.38% 2.58% 2.51% 2.62% General and administrative expense/average assets 1.01% .98% 1.01% .95%
(a) Included in TDR ratio is 0.07% or $20 million related to the January 1994 Southern California earthquake. (b) The decrease in the risk-based capital ratio from December 1993 to September 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 nine-month computation by one and one-third. Averages are computed by adding the beginning balance and each month end balance during the quarter and the nine-month period and dividing by four and ten, 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 September 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 September 30 ------------------ December 31 1994 1993 1993 ------ ------ ----------- Assets: Cash and investments 6.7% 8.0% 8.4% Mortgage-backed securities 4.1 5.0 5.3 Loans receivable 85.4 83.2 82.9 Other assets 3.8 3.8 3.4 ------ ------ ------ 100.0% 100.0% 100.0% ====== ====== ====== Liabilities and Stockholders' Equity: Customer deposits 61.6% 61.8% 60.4% Federal Home Loan Bank advances 20.7 22.1 21.8 Securities sold under agreements to repurchase 2.1 1.0 1.5 Medium-term notes 2.2 2.4 2.4 Other liabilities 2.4 2.3 2.5 Subordinated debt 4.1 3.6 4.2 Stockholders' equity 6.9 6.8 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. Assets tend to reprice more slowly than liabilities as commented in the spreads section on pages 26 and 27. 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 September 30, 1994. PAGE 10
TABLE 2 Repricing of Interest-Earning Assets and Interest-Bearing Liabilities, Repricing Gaps, and Gap Ratio (Dollars in Millions) September 30, 1994 Projected Repricing(a) ------------------------------------------------------ 0 - 3 4 - 12 1 - 5 Over 5 Months Months Years Years Total ------- ------- ------- ------ ------- Interest-Earning Assets: Investments $ 505 $ 462 $ 784 $ 112 $ 1,863 Mortgage-backed securities 109 100 413 618 1,240 Loans receivable: Rate-sensitive 18,756 2,975 616 -0- 22,347 Fixed-rate 73 224 975 1,766 3,038 Other(b) 413 -0- -0- -0- 413 Impact of hedging 1,186 145 (641) (690) -0- ------- ------- ------- ------ ------- Total $21,042 $ 3,906 $ 2,147 $1,806 $28,901 ======= ======= ======= ====== ======= Interest-Bearing Liabilities(c): Customer deposits $ 6,553 $ 6,558 $ 5,232 $ 187 $18,530 FHLB advances 4,609 1,000 540 80 6,229 Other borrowings 567 54 1,084 808 2,513 Impact of hedging 5,051 (2,307) (2,795) 51 -0- ------- ------- ------- ------ ------- Total $16,780 $ 5,305 $ 4,061 $1,126 $27,272 ======= ======= ======= ====== ======= Repricing gap $ 4,262 $(1,399) $(1,914) $ 680 ======= ======= ======= ====== Cumulative gap $ 4,262 $ 2,863 $ 949 $1,629 ======= ======= ======= ====== Cumulative gap as a percentage of total assets 14.2% 9.5% 3.2% ======= ======= =======
(a) Based on scheduled maturity or scheduled repricing; loans reflect scheduled repayments and projected prepayments of principal. (b) Includes cash in banks and FHLB stock. (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 depos- its and short-term borrowings. For the months ended September 30, 1994, and 1993, and December 31, 1993, World's average regulatory liquidity ratio was 7%, 9%, and 8%, respectively, consistently exceeding the requirement. PAGE 11 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 September 30, 1994, and December 31, 1993, the Company had no securities held to maturity or for trading. At September 30, 1994, and December 31, 1993, the Company had securities available for sale in the amount of $1.7 billion and $1.6 billion, respectively, and unrealized gains on securities available for sale included in stockholders' equity of $21 million and $41 million, respectively. For the impact on stockholders' equity, see page 23. 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 September 30, 1993, the Company had $659 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. Included in the securities available for sale at September 30, 1994, and December 31, 1993, were collateralized mortgage obligations (CMOs) in the amount of $742 million and $275 million, respectively. The Company holds CMOs on which both principal and interest are received. At September 30, 1994, the majority of the Company's CMOs had remaining terms to maturity of five years or less and qualified for inclusion in regulatory liquidity measurement. A majority of the CMOs are fixed rate and are subject to prepayment and interest rate risk. In rising interest rate environments, the rate of repayment of this type of CMO security tends to decrease because of the reduced volume of prepayments on the underlying mortgages. 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 September 30, 1994, September 30, 1993, and December 31, 1993, the Company had mortgage-backed securities held to maturity in the amount of $523 million, $1.4 billion, and $408 million, respectively. At September 30, 1994, and December 31, 1993, the Company had mortgage-backed securities available for sale in the amount of $717 million and $1.1 billion, respectively, and unrealized gains on mortgage-backed securities included in stockholders' equity of $14 million and $44 million, respectively. PAGE 12 Repayments of MBS during the third quarter and first nine months of 1994 were $50 million and $279 million, respectively, compared to $181 million and $476 million in the same periods of 1993. The mortgage-backed securities held are primarily fixed-rate pass-through obligations and are subject to prepayment and interest rate risk similar to fixed-rate loans. In rising interest rate environments, the rate of repayment on this type of mortgage-backed security tends to decrease because of lower prepayments on the underlying mortgages. LOAN PORTFOLIO LOAN VOLUME New loan originations for the quarter and nine months ended September 30, 1994, amounted to $1.8 billion and $4.6 billion, respectively, compared to $1.6 billion and $4.8 billion for the same periods in 1993. Refinanced loans constituted 33% and 44% of new loan originations for the quarter and nine months ended September 30, 1994, respectively, compared to 57% and 58% for the quarter and nine months ended September 30, 1993. In the first nine 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. Higher rates have brought other market changes as well, including a renewed consumer interest in adjustable rate mortgages, which are currently more attractively priced than traditional fixed-rate loans. The increased customer preference for adjustable rate instruments combined with the Company's expanded loan origination staff contributed to the 13% increase in 1994's third quarter originations as compared to the previous year. 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 nine months ended September 30, 1994, 59% and 64%, respectively, of total loan originations were on residential properties in California compared to 71% and 75% 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 79% at September 30, 1994, compared to 82% at September 30, 1993, and 81% at December 31, 1993. The tables on the following two pages show the Company's loan portfolio by state at September 30, 1994, and 1993. PAGE 13
TABLE 3 Loan Portfolio by State September 30, 1994 ($000s Omitted) Residential ------------------------ Commercial Loans as Real Estate Real Total a % of State 1 - 4 5+ Land Estate Loans (a) Portfolio - - - ------------ ----------- ---------- ------ ---------- ----------- --------- California $17,073,781 $3,272,319 $ 293 $ 83,959 $20,430,352 78.96% Colorado 637,409 151,320 -0- 8,632 797,361 3.08 Illinois 551,839 157,661 -0- 4,868 714,368 2.76 New Jersey 594,290 40 -0- 155 594,485 2.30 Washington 263,322 229,284 -0- 824 493,430 1.91 Texas 442,100 3,240 607 1,792 447,739 1.73 Florida 410,158 -0- 342 2,142 412,642 1.60 Virginia 320,910 791 -0- 1,736 323,437 1.25 Arizona 236,714 9,818 -0- 1,828 248,360 0.96 Pennsylvania 226,061 -0- -0- 4,978 231,039 0.89 Connecticut 218,598 -0- -0- -0- 218,598 0.85 Maryland 183,772 -0- -0- 654 184,426 0.71 Oregon 138,442 8,246 -0- 3,966 150,654 0.58 Kansas 121,968 5,347 -0- 230 127,545 0.49 Nevada 113,252 1,343 -0- -0- 114,595 0.44 Missouri 60,254 8,060 -0- 79 68,393 0.26 New York 58,568 169 -0- -0- 58,737 0.23 Utah 52,216 71 -0- 2,213 54,500 0.21 Georgia 50,459 -0- -0- 2,545 53,004 0.20 Ohio 32,297 3,762 835 6,508 43,402 0.17 Wisconsin 19,737 3,746 -0- -0- 23,483 0.09 Washington DC 18,612 -0- -0- -0- 18,612 0.07 New Mexico 11,708 -0- -0- -0- 11,708 0.05 Minnesota 6,192 -0- -0- -0- 6,192 0.02 Idaho 5,421 -0- -0- -0- 5,421 0.02 Delaware 5,057 -0- -0- -0- 5,057 0.02 Other 24,521 486 -0- 10,478 35,485 0.15 ----------- ---------- ------ -------- ----------- ------ Totals $21,877,658 $3,855,703 $2,077 $137,587 25,873,025 100.00% =========== ========== ====== ======== ====== FAS 91 deferred loan fees (95,173) Loan discount on purchased loans (7,141) Undisbursed loan funds (2,839) Allowance for loan losses (123,262) LTF interest reserve (809) TDR interest reserve (3,098) Loans on customer deposits 29,910 ----------- Total loan portfolio $25,670,613 ===========
(a) The Company has no commercial loans. PAGE 14
TABLE 4 Loan Portfolio by State September 30, 1993 ($000s Omitted) Residential ------------------------ Commercial Loans as Real Estate Real Total a % of State 1 - 4 5+ Land Estate Loans (a) Portfolio - - - ------------ ----------- ---------- ------ ---------- ----------- --------- California $16,290,559 $3,275,268 $ 313 $ 91,408 $19,657,548 82.49% Colorado 579,156 101,217 -0- 6,788 687,161 2.88 New Jersey 537,377 41 -0- 175 537,593 2.26 Illinois 388,296 124,426 -0- 5,463 518,185 2.17 Washington 194,503 205,920 -0- 849 401,272 1.68 Florida 303,359 118 32 4,267 307,776 1.29 Virginia 222,822 -0- -0- 2,819 225,641 0.95 Texas 195,237 4,328 619 1,364 201,548 0.85 Connecticut 174,272 -0- -0- -0- 174,272 0.73 Arizona 157,891 4,347 -0- 1,903 164,141 0.69 Kansas 125,678 5,483 -0- 238 131,399 0.55 Pennsylvania 120,577 110 -0- 9,649 130,336 0.55 Oregon 111,665 10,542 -0- 4,127 126,334 0.53 Maryland 112,540 -0- -0- 2,965 115,505 0.49 Nevada 87,201 1,428 -0- -0- 88,629 0.37 Missouri 62,565 8,202 -0- 80 70,847 0.30 New York 69,237 174 -0- 665 70,076 0.29 Georgia 63,574 -0- -0- 2,817 66,391 0.28 Ohio 48,283 6,279 1,114 4,734 60,410 0.25 Utah 34,581 142 -0- 2,390 37,113 0.16 Other 37,789 5,506 -0- 14,016 57,311 0.24 ----------- ---------- ------ -------- ----------- ------ Totals $19,917,162 $3,753,531 $2,078 $156,717 23,829,488 100.00% =========== ========== ====== ======== ====== FAS 91 deferred loan fees (103,733) Loan discount on purchased loans (9,358) Undisbursed loan funds (2,117) Allowance for loan losses (84,090) LTF interest reserve (953) TDR interest reserve (736) Loans on customer deposits 31,579 ----------- Total loan portfolio $23,660,080 ===========
(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 89% at September 30, 1994, compared to 87% at September 30, 1993, and December 31, 1993. While rates on fixed-rate mortgages rose significantly during the first nine months of 1994, lower rates on ARM loans made adjustable instruments more attractive in the marketplace. Golden West's ARM originations constituted approximately 90% of new mortgage loans made by the Company in the first nine months of 1994 compared to 76% in the first nine months of 1993. The weighted average maximum lifetime cap rate on the Association's ARM portfolio was 13.49%, or 7.18% above the actual weighted average rate, at September 30, 1994, versus 13.92%, or 7.33% above the weighted average rate, at September 30, 1993. Approximately $4.5 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 September 30, 1994, $1.2 billion of these loans were at their rate floors. The weighted average floor rate on these loans was 7.37% at September 30, 1994. Without the floor, the average yield on these loans would have been 6.17%. Loan repayments consisting of monthly loan amortization, payoffs, and refinances during the third quarter and first nine months of 1994 were $687 million and $2.6 billion, respectively, compared to $990 million and $2.7 billion in the same periods of 1993. The decrease in loan repayments for the first nine months of 1994 was primarily due to lower mortgage payoffs and lower refinances within our loan portfolio in the second and third quarters. 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. Based on current assessments of severity of damage, borrower equity, and levels of insurance coverage, the Company believes that any potential loss from the Northridge (Southern California) earthquake in January 1994 will not be material to the financial condition and results of operations of the Company. The first nine months of 1994 loan loss reserve and provision for loan losses included $3.7 million in loss reserves specifically identified as earthquake losses. In addition, at September 30, 1994, troubled debt restructured, which are loans that have been temporarily modified due to a weakness in the collateral and/or borrower, included $20 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 are 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 September 30, 1994, and 1993, and December 31, 1993.
TABLE 5 Nonperforming Assets ($000s Omitted) September ------------------------ December 31 1994 1993 1993 -------- -------- ----------- Non-accrual loans $342,192 $300,242 $330,062 Real estate acquired through foreclosure 62,239 63,985 62,724 Loans in-substance foreclosed -0- 9,068 -0- Real estate in judgement 805 1,084 1,366 -------- -------- -------- Total nonperforming assets $405,236 $374,379 $394,152 ======== ======== ======== Ratio of nonperforming assets to total assets 1.35% 1.32% 1.37% ======== ======== ========
The increase in NPAs in 1994 was primarily in California single-family loans. The weak economy and high unemployment in California resulted in an increase in loan delinquencies and foreclosures 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 third quarter and first nine months of 1994 amounted to $4 million and $14 million, respectively, compared to $4 million and $15 million in the same periods of 1993. The tables on the following two pages show the Company's nonperforming assets by state at September 30, 1994, and 1993. PAGE 17
TABLE 6 Nonperforming Assets by State September 30, 1994 ($000s Omitted) 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+ Commercial NPAs Loans - - - ------------ -------- ------- ----------- ------- ------ ---------- -------- ------- California $274,958 $25,550 $ 990 $47,826 $7,034 $4,471 $360,829 1.77% Colorado 1,810 -0- 3,141 177 -0- 153 5,281 0.66 Illinois 3,145 774 -0- 244 -0- -0- 4,163 0.58 New Jersey 10,866 -0- -0- 1,676 -0- -0- 12,542 2.11 Washington 519 -0- -0- 121 -0- -0- 640 0.13 Texas 1,003 -0- -0- 351 -0- -0- 1,354 0.30 Florida 2,493 -0- 372 418 -0- -0- 3,283 0.80 Virginia 1,687 -0- -0- 147 -0- -0- 1,834 0.57 Arizona 1,608 -0- -0- -0- -0- -0- 1,608 0.65 Pennsylvania 1,899 -0- -0- 66 -0- -0- 1,965 0.85 Connecticut 3,890 -0- -0- (252)(b) -0- -0- 3,638 1.66 Maryland 514 -0- -0- 678 -0- -0- 1,192 0.65 Oregon 324 -0- -0- -0- -0- -0- 324 0.22 Kansas 602 40 -0- 266 -0- -0- 908 0.71 Nevada 560 -0- -0- -0- -0- -0- 560 0.49 Missouri 359 44 -0- 117 287 -0- 807 1.18 New York 3,492 -0- -0- 778 -0- -0- 4,270 7.27 Utah 125 -0- -0- -0- -0- -0- 125 0.23 Georgia 1,026 -0- -0- 211 -0- -0- 1,237 2.33 Ohio 40 -0- 211 -0- -0- -0- 251 0.58 Wisconsin -0- -0- -0- -0- -0- -0- -0- 0.00 Washington DC -0- -0- -0- -0- -0- -0- -0- 0.00 New Mexico 4 -0- -0- -0- -0- -0- 4 0.03 Minnesota -0- -0- -0- -0- -0- -0- -0- 0.00 Idaho -0- -0- -0- -0- -0- -0- -0- 0.00 Delaware -0- -0- -0- -0- -0- -0- -0- 0.00 Other 146 -0- -0- -0- -0- -0- 146 0.47 -------- ------- ------ ------- ------ ------ -------- ----- Totals $311,070 $26,408 $4,714 $52,824 $7,321 $4,624 406,961 1.57 ======== ======= ====== ======= ====== ====== REO general valuation allowance (1,725) 0.00 -------- ----- $405,236 1.57% ======== =====
(a) Non-accrual loans are 90 days or more past due and have no unpaid interest accrued. (b) Amount is negative due to the cost of environmental cleanup. PAGE 18
TABLE 7 Nonperforming Assets by State September 30, 1993 ($000s Omitted) 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+ Land Commercial NPAs Loans - - - ------------ -------- ------- ----------- ------- ------- ---- ---------- -------- ------- California $243,779 $11,794 $1,222 $48,230 $ 6,754 $-0- $4,144 $315,923 1.61% Colorado 2,434 77 79 1,698 6,596 -0- 1,973 12,857 1.87 New Jersey 13,563 -0- 5 963 -0- 220 -0- 14,751 2.74 Illinois 2,124 -0- -0- 265 1,022 -0- -0- 3,411 0.66 Washington 259 -0- -0- -0- -0- -0- -0- 259 0.06 Florida 5,093 -0- 381 612 -0- -0- -0- 6,086 1.98 Virginia 1,338 -0- -0- 349 -0- -0- -0- 1,687 0.75 Texas 1,416 -0- -0- 186 -0- -0- -0- 1,602 0.79 Connecticut 3,555 -0- -0- 614 -0- -0- -0- 4,169 2.39 Arizona 1,552 -0- -0- 160 -0- -0- -0- 1,712 1.04 Kansas 1,213 -0- -0- 423 -0- -0- -0- 1,636 1.25 Pennsylvania 1,230 -0- -0- 114 -0- -0- -0- 1,344 1.03 Oregon 321 -0- -0- -0- -0- -0- -0- 321 0.25 Maryland 1,416 -0- -0- 149 -0- -0- -0- 1,565 1.35 Nevada 464 -0- -0- -0- -0- -0- -0- 464 0.52 Missouri 306 -0- -0- 16 626 -0- -0- 948 1.34 New York 4,002 -0- -0- 1,549 -0- -0- -0- 5,551 7.92 Georgia 1,991 -0- -0- 214 -0- -0- -0- 2,205 3.32 Ohio 16 -0- 213 -0- -0- -0- 80 309 0.51 Utah 157 -0- -0- -0- -0- -0- -0- 157 0.42 Other 242 -0- -0- -0- -0- -0- -0- 242 0.42 -------- ------- ------ ------- ------- ---- ------ -------- ----- Totals $286,471 $11,871 $1,900 $55,542 $14,998 $220 $6,197 377,199 1.58 ======== ======= ====== ======= ======= ==== ====== REO general valuation allowance (2,820) (0.01) -------- ----- $374,379 1.57% ======== =====
(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 $62 million or 0.20% of assets at September 30, 1994, compared to $23 million or 0.08% of assets at September 30, 1993, and $37 million or 0.13% of assets at December 31, 1993. The increase from September 1993 to September 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 September 30, 1994, $20 million or 0.07% was 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 $220 thousand and $465 thousand for the three and nine months ended September 30, 1994, respectively, compared to $61 thousand and $184 thousand for the quarter and nine months ended September 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 nine months ended September 30, 1994, and 1993.
TABLE 8 Changes in the Allowance for Loan Losses ($000s Omitted) Three Months Ended Nine Months Ended September 30 September 30 ------------------ ------------------ 1994 1993 1994 1993 -------- ------- -------- ------- Beginning allowance for loan losses $118,587 $78,617 $106,698 $70,924 Provision charged to expense 15,996 16,196 50,434 40,837 Less loans charged off (11,621) (11,002) (34,646) (28,493) Add recoveries 300 279 776 822 -------- ------- -------- ------- Ending allowance for loan losses $123,262 $84,090 $123,262 $84,090 ======== ======= ======== ======= Ratio of net chargeoffs to average loans outstanding (excluding MBS) .18% .18% .18% .16% ======== ======= ======== ======= Ratio of allowance for loan losses to nonperforming assets 30.4% 22.5% ======== =======
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 real estate owned, and the increased losses on real estate owned. CUSTOMER DEPOSITS Customer deposits increased during the third quarter of 1994 by $615 million, including interest credited of $149 million, compared to a customer deposit increase of $504 million, including interest credited of $146 million and the acquisition of seven branches in Arizona containing $320 million in deposits and the sale of two branches in Ohio containing $133 million in deposits, in the third quarter of 1993. Customer deposit balances for the first nine months of 1994 increased by $1.1 billion, including interest credited of $420 million and the acquisition of three branches in New Jersey containing $78 million in deposits, compared to an increase of $1.1 billion, including interest credited of $426 million and the acquisition of seven branches in Arizona containing $320 million in deposits and the sale of two branches in Ohio containing $133 million in deposits, in the same period of 1993. The net increase of customer deposits during the first nine months of 1994 resulted from the improvement in the savings market as interest rates rose. The increase in 1993 was a result of special promotions in the Company's savings markets. In the event of the appointment of a receiver for a federally chartered savings association, such as the Association, based upon the failure of the savings association 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 the Notes). Thus, claims for deposits would have a priority over claim of Holders of the Notes. As of September 30, 1994, the Association had approximately $18.5 million of deposits outstanding. PAGE 21 The table below shows the Company's customer deposits by interest rate and by remaining maturity at September 30, 1994, and 1993.
TABLE 9 Customer Deposits (Dollars in millions) September 30 ------------------------------------- 1994 1993 ---------------- ---------------- Rate* Amount Rate* Amount ---------------- ---------------- Customer deposits by interest rate: Interest-bearing checking accounts 1.27% $ 726 1.46% $ 705 Passbook accounts 2.16 667 2.21 607 Money market deposit accounts 2.95 2,048 3.40 2,413 Term certificate accounts with original maturities of: 4 weeks to 1 year 3.75 4,151 3.29 4,489 1 to 2 years 4.27 5,890 3.92 4,702 2 to 3 years 4.58 1,895 4.92 1,377 3 to 4 years 5.25 849 6.28 1,162 4 years and over 5.58 2,084 6.08 1,999 Retail jumbo CDs 4.81 208 5.59 90 All other 7.80 12 7.75 21 ------- ------- $18,530 $17,565 ======= ======= Customer deposits by remaining maturity: No contractual maturity $ 3,441 $ 3,725 Maturity within one year: 4th quarter 3,112 3,413 1st quarter 3,174 2,993 2nd quarter 1,780 1,922 3rd quarter 1,604 1,653 ------- ------- 9,670 9,981 1 to 2 years 3,236 1,886 2 to 3 years 901 466 3 to 4 years 508 577 4 years and over 774 930 ------- ------- $18,530 $17,565 ======= =======
*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 September 30, 1994, compared to $6.3 billion at September 30, 1993, and December 31, 1993. 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 $568 million, $217 million, and $377 million at September 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 September 30, 1994. As of September 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 September 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 September 30, 1994, compared to $676 million at September 30, 1993, and $677 million at December 31, 1993. As of September 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 September 30, 1994, the Association had issued a total of $200 million of subordinated notes. As of September 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. PAGE 23 STOCKHOLDERS' EQUITY The Company's stockholders' equity decreased during the first nine months of 1994 due to the $50 million decrease in unrealized gains on securities available for sale caused by the decrease in market values of securities available for sale since December 31, 1993, and due to the $124 million cost of repurchasing the Company stock. These decreases in stockholders' equity were partially offset by 1994's net earnings. The Company's stockholders' equity increased in the first nine months of 1993 through the retention of net earnings. On October 31, 1994, the Company received from World a dividend in the amount of $150 million. The primary purpose of the dividend was to finance the Company's stock repurchase program. 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 September 30, 1994, 3.3 million shares had been repurchased and retired at a cost of $131.6 million since October 28, 1993, of which 2.0 million shares were purchased and retired at a cost of $80.3 million during the third quarter of 1994. At September 30, 1994, the total remaining shares authorized for repurchase was 3.0 million shares. At the September 30, 1994, market price of $39.625 per share, the remaining authorized but unacquired shares would require $118 million to repurchase. The repurchase of Company 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 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 on the following page shows World's current regulatory capital ratios and compares them to the current OTS minimum requirements at September 30, 1994, and 1993. PAGE 24
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 $2,191,727 7.41% $ 443,548 1.50% $1,917,726 6.94% $ 414,249 1.50% Core 2,302,614 7.79 887,096 3.00 2,124,851 7.69 828,499 3.00 Risk-based 2,607,182 15.67 1,331,353 8.00 2,400,407 16.72 1,148,350 8.00
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 September 1993 to September 1994. The table below shows World's regulatory capital ratios and compares them to the fully phased-in 1995 OTS minimum requirements at September 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 $2,191,727 7.41% $ 443,548 1.50% $1,917,726 6.94% $ 414,249 1.50% Core 2,191,727 7.41 887,096 3.00 1,917,726 6.94 828,499 3.00 Risk-based 2,496,295 15.10 1,322,482 8.00 2,192,253 15.50 1,131,698 8.00
PAGE 25 The table below shows a reconciliation of World's equity capital to regulatory capital under OTS regulations at September 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 capital 233,441 Retained earnings 2,052,881 Unrealized gains on securities available for sale 39,135 ----------- Equity capital $ 2,325,607 $ 2,325,607 $ 2,325,607 $ 2,325,607 $ 2,325,607 $ 2,325,607 =========== Positive goodwill (1) (2) (223,364) (223,364) (223,364) (223,364) (223,364) Negative goodwill (1) (3) 89,484 89,484 89,484 89,484 89,484 Qualifying supervisory positive goodwill (1) (2) 110,887 110,887 110,887 110,887 Equity/other investments (1,739) Subordinated debt 199,036 General valuation allowances 107,271 ----------- ----------- ----------- ---------- ----------- Regulatory capital $ 2,191,727 $ 2,302,614 $ 2,302,614 $ 2,302,614 $ 2,607,182 =========== =========== =========== =========== =========== Total assets $29,695,969 =========== Adjusted total assets $29,569,881 $29,569,881 $29,569,881 =========== =========== =========== Risk-weighted assets $16,641,908 $16,641,908 =========== =========== CAPITAL RATIO - ACTUAL 7.83% 7.41% 7.79% 7.79% 13.84% 15.67% =========== =========== =========== =========== =========== =========== 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 September 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 $3,909 of the Association's positive goodwill arose prior to April 12, 1989. (3) The Association's negative goodwill arose after April 12, 1989. PAGE 26 The table below compares World's regulatory capital to the OTS well capitalized classification of capital standards at September 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 $2,302,614 7.79% $1,478,494 5.00% Tier 1 risk-based 2,302,614 13.84 998,514 6.00 Total risk-based 2,607,182 15.67 1,664,191 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 September 30, 1994, were 7.41%, 13.26%, and 15.10%, respectively. On October 31, 1994, World paid a dividend to Golden West in the amount of $150 million. After giving the effect to the dividend, the September 30, 1994, World fully phased-in leverage, Tier 1 risk-based, and total risk-based capital ratios on a pro-forma basis were 6.90%, 12.46%, and 14.32%, respectively. The primary purpose of the dividend was to finance Golden West's stock repurchase program. RESULTS OF OPERATIONS 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 table below shows the components of the Company's spread at September 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 September 30 -------------------- December 31 1994 1993 1993 ------ ------ ----------- Yield on loan portfolio 6.62% 6.89% 6.73% Yield on mortgage-backed securities 8.44 9.09 8.67 Yield on investments 5.16 3.58 3.80 ------ ------ ------ Yield on earning assets 6.60 6.74 6.61 ------ ------ ------ Cost of customer deposits 4.05 4.02 3.92 Cost of borrowings 5.23 4.83 4.69 ------ ------ ------ Cost of funds 4.42 4.28 4.18 ------ ------ ------ Primary spread 2.18% 2.46% 2.43% ====== ====== ======
PAGE 27 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 nine months of 1994, interest rates rose, leading to an increase in the cost of Golden West's liabilities during the third quarter. At the same time, however, the yield on the Company's major earning asset, the loan portfolio, declined slightly because most of Golden West's mortgages are tied to the Eleventh District FHLB Cost of Funds Index (the COFI), which lags changes in market rates by several months. Consequently, at September 30, 1994, the Company's primary spread was lower than at both December 31, 1993, and September 30, 1993. The Company enters into a variety of derivative financial instruments as a part of its interest rate risk management strategy. The Company does not hold any derivative financial instruments for trading purposes. During 1994, the most frequently used derivative products are various types of interest rate swaps and caps. 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 or fixed 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 reduce the impact of changes in interest rates on customer deposit rates, mortgage loan yields, or rates on other specified assets or borrowings. Some interest rate swaps have been entered into with starting dates in the future in anticipation of future prepayments on fixed-rate assets. 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 related balance sheet item. The related balance sheet item is generally a pool of similar assets or liabilities. An interest rate cap is an agreement between two parties in which one party pays a fee for the right to receive a payment from a counterparty based on the excess, if any, of an open market floating rate over a base rate applied to a notional principal amount. The excess which may be received on interest rate cap agreements reduces the impact of increases in interest rates on consumer deposit rates and mortgage loan yields. Amounts which may be received on interest rate cap agreements and fees paid to purchase the agreements are recognized over the life of the agreements, with income and expense recorded in the same category as the related balance sheet item. The related balance sheet item is generally a pool of similar assets or liabilities. Derivatives decreased net interest income by $3 million and $18 million for the three and nine month periods ended September 30, 1994, respectively, as compared to $15 million and $57 million for the same periods in 1993. PAGE 28 The table below summarizes the unrealized gains and losses for derivative instruments at September 30, 1994, and 1993.
TABLE 15 Supplemental Schedule of Unrealized Gains and Losses on Derivative Products ($000s Omitted) September 30, 1994 September 30, 1993 ------------------------------------- ------------------------------------- Net Net Unrealized Unrealized Unrealized Unrealized Unrealized Unrealized Gains Losses Gain (Loss) Gains Losses Gain (Loss) ---------- ---------- ----------- ---------- ---------- ----------- Interest rate caps $ 259 $ -0- $ 259 N/A N/A N/A Interest rate swaps 93,668 (79,950) 13,718 $96,869 $(201,773) $(104,904) ------- -------- ------- ------- --------- --------- Total $93,927 $(79,950) $13,977 $96,869 $(201,773) $(104,904) ======= ======== ======= ======= ========= =========
TABLE 16 Schedule of Derivative Activity (Notional Amounts in Millions) Nine Months Ended September 30, 1994 --------------------------------------------------- Receive Pay Forward Interest Fixed Fixed Basis Starting Rate Swaps Swaps Swaps(a) Swaps Caps ------- ------ ----- -------- -------- Balance at December 31, 1993 $2,706 $2,582 $600 $210 $ 437 Additions 2,561 124 -0- -0- -0- Maturities/amortization (350) (336) -0- -0- (115) Terminations -0- -0- -0- -0- -0- Forward starting becoming effective 75 -0- -0- (75) -0- Other -0- -0- -0- -0- -0- ------ ------ ---- ---- ----- Balance, September 30, 1994 $4,992 $2,370 $600 $135 $ 322 ====== ====== ==== ==== =====
(a) Receives floating, pays floating. The table on the following page shows the Company's revenues and expenses as a percentage of total revenues for the three and nine months ended September 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. PAGE 29
TABLE 17 Selected Revenue and Expense Items as Percentages of Total Revenues Three Months Nine Months Ended Ended September 30 September 30 ------------ ------------ 1994 1993 1994 1993 ----- ----- ----- ----- Interest on loans 86.1% 84.6% 85.5% 84.9% Interest on mortgage-backed securities 5.3 6.7 5.6 7.5 Interest and dividends on investments 6.6 5.7 6.6 4.9 ----- ----- ----- ----- 98.0 97.0 97.7 97.3 Less: Interest on customer deposits 37.8 36.8 36.4 36.7 Interest on advances and other borrowings 23.1 22.3 22.2 22.8 ----- ----- ----- ----- 60.9 59.1 58.6 59.5 Net interest income 37.1 37.9 39.1 37.8 Provision for loan losses 3.4 3.3 3.6 2.8 ----- ----- ----- ----- Net interest income after provision for loan losses 33.7 34.6 35.5 35.0 Add: Fees 1.3 1.6 1.6 1.5 Gain (loss) on the sale of securities and mortgage-backed securities 0.0 0.6 0.0 0.5 Other non-interest income 0.7 0.8 0.7 0.7 ----- ----- ----- ----- 2.0 3.0 2.3 2.7 Less: General and administrative expenses 15.7 14.4 15.7 13.8 Amortization of goodwill 0.1 (0.1) 0.1 (0.1) Taxes on income 8.2 10.2 9.0 9.8 ----- ----- ----- ----- Net earnings 11.7% 13.1% 13.0% 14.2% ===== ===== ===== =====
INTEREST ON LOANS In the third quarter of 1994, interest on loans was lower than in the comparable 1993 period by $1.6 million or 0.4%. The 1994 decrease was due to a 42 basis point decrease in the average portfolio yield and the $2.5 million decrease in the amortization of the loan acquisition discount offset by a $1.6 billion increase in the average portfolio balance. For the first nine months of 1994, interest on loans was lower than in the first nine months of 1993 by $24.6 million or 2.0% due to a 54 basis point decrease in the average portfolio yield and a $5.5 million decrease in the amortization of the loan acquisition discount, which was partially offset by a $1.5 billion increase in the average portfolio balance. The loan acquisition discount resulted from loans acquired in a 1982 merger and is amortized as loans are repaid. PAGE 30 INTEREST ON MORTGAGE-BACKED SECURITIES In the third quarter of 1994, interest on mortgage-backed securities was lower than in the comparable 1993 period by $7.5 million or 23.1%. The 1994 decrease was due to a 69 basis point decrease in the average portfolio yield and a $245 million decrease in the average portfolio balance. For the first nine months of 1994, interest on mortgage-backed securities was lower than in the comparable 1993 period by $29.1 million or 26.8% due to a 71 basis point decrease in the average portfolio yield and a $332 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 investments. For the third quarter of 1994, interest and dividends on investments was $3.4 million or 12.2% higher than for the same period in 1993. The increase was primarily due to a 128 basis point increase in the average portfolio yield, which was partially offset by a $481 million decrease in the average portfolio balance. For the first nine months of 1994, interest and dividends on investments was $22.2 million or 31.7% higher than for the same period in 1993. The increase was primarily due to a $79 million increase in the average portfolio balance and an 86 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 original maturities of two years or less. 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 third quarter of 1994, interest on customer deposits increased by $686 thousand or 0.4% from the comparable period of 1993. The third quarter increase was primarily due to an $807 million increase in the average deposit balance partially offset by a 17 basis point decrease in the average cost of deposits. For the first nine months of 1994, interest on customer deposits was $19.1 million or 3.6% lower than for the same period in 1993. The nine month decrease was primarily due to a 35 basis point decrease in the average cost of deposits partially offset by a $901 million increase in the average deposit balance. INTEREST ON ADVANCES AND OTHER BORROWINGS For the third quarter of 1994, interest on advances and other borrowings was $1.7 million or 1.6% higher than in the same period in 1993. The third quarter increase was primarily due to a 22 basis point increase in the average cost of these borrowings partially offset by a $130 million decrease in the average balance of these borrowings. For the first nine months of 1994, interest on advances and other borrowings decreased by $16.8 million or 5.1% compared to the same period a year earlier. The nine month decrease was primarily due to a 24 basis point decrease in the average cost of these borrowings, which was partially offset by a $97 million increase in their average balance. PAGE 31 PROVISION FOR LOAN LOSSES The provision for loan losses was $16.0 million and $50.4 million, respectively, for the three and nine months ended September 30, 1994, compared to $16.2 million and $40.8 million for the same periods in 1993. The 1994 increase in the provision over 1993 reflected increased chargeoffs and the continued buildup of the loan loss reserves reflecting an increase in nonperforming assets and the weak California economy. In addition, the provision for the first nine months of 1994 included $3.7 million in specific earthquake loss reserves. GENERAL AND ADMINISTRATIVE EXPENSES For the third quarter and first nine months of 1994, general and administrative expenses (G & A) increased by $4.7 million or 6.7% and $22.1 million or 11.1%, 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 nine months of 1993, the Company received a reduction in the FDIC premium due to the settlement of the FSLIC secondary reserve in the amount of $2.8 million, resulting in a reduction in deposit insurance expense for the first nine months of 1993. G & A as a percentage of average assets on an annualized basis was 1.01% for the third quarter and first nine months of 1994 compared to 0.98% and 0.95% 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 required 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 rate for the third quarter of 1994 was 41.0% compared to 43.8% for the same period a year ago. The third quarter of 1993 reflects the increase in the federal corporate income tax rate from 34% to 35% retroactive to January 1, 1993, and required an increase to the deferred tax liability. The corporate tax rate for the first nine months of 1994 was 41.0% compared to 40.9% for the same period a year ago. PAGE 32 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 September 30, 1994, and 1993, and December 31, 1993, see the cash and investments section on pages 10 and 11. 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 (see the stockholders' equity section on page 23), and general and administrative expenses. At September 30, 1994, and 1993, and December 31, 1993, the parent company's total cash and investments amounted to $771 million (including $400 million in short-term loans to the Association), $705 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 33 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: November 10, 1994. /s/ J. L. Helvey J. L. Helvey Group Senior Vice President (duly authorized and principal financial officer) PAGE 34
EXHIBIT 11 Golden West Financial Corporation Statement of Computation of Earnings Per Share ($000s omitted except per share amounts) Three Months Ended Nine Months Ended September 30 September 30 ------------------------ ------------------------ 1994 1993 1994 1993 ----------- ----------- ----------- ----------- Line 1: Average Number of Common Shares Outstanding 61,655,755 64,005,260 62,955,404 63,988,501 =========== =========== =========== =========== Line 2: Net Earnings $ 56,125 $ 63,768 $ 183,364 $ 205,935 =========== =========== =========== =========== Line 3: Earnings Per Common Share (Line 2 divided by Line 1) $ .91 $1.00 $2.91 $3.22 ===== ===== ===== =====
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