-----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, mz9hEmIKsdWR8TLqksDH9G7/EbT1kXOnTW8JtBURNbXtA3lo6yzIiYNsCWbaGGq2 Jky1sJQa6fQ5nVYDhM253Q== 0000042293-95-000005.txt : 19950616 0000042293-95-000005.hdr.sgml : 19950616 ACCESSION NUMBER: 0000042293-95-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950323 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOLDEN WEST FINANCIAL CORP /DE/ CENTRAL INDEX KEY: 0000042293 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 952080059 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04629 FILM NUMBER: 95522543 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-K 1 PAGE 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 for the fiscal year ended December 31, 1994 Commission File No. 1-4629 GOLDEN WEST FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Delaware 95-2080059 (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 1901 Harrison Street, Oakland, California 94612 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (510) 446-3420 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $.10 par value New York Stock Exchange, Inc., Pacific Stock Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The approximate aggregate market value of the Registrant's common stock held by nonaffiliates of the Registrant on February 28, 1995, was $2,233,347,441. The number of shares outstanding of the Registrant's common stock on February 28, 1995, was 58,579,605 shares. DOCUMENTS INCORPORATED BY REFERENCE Documents Incorporated by Reference Applicable Part of Form 10-K Proxy Statement Dated March 10, 1995, Part III Furnished to Stockholders in Connection with Registrant's Annual Meeting of Stockholders. PAGE 2 PART I ITEM 1. BUSINESS REGISTRANT Golden West Financial Corporation (Golden West or Company) is a savings and loan holding company, the principal business of which is the operation of a savings and loan business through its wholly owned subsidiary, World Savings and Loan Association, a Federal Savings and Loan Association (World or Association). Golden West also has two other subsidiaries, Atlas Advisers, Inc., and Atlas Securities, Inc. These companies were formed to provide services to Atlas Assets, Inc., a series open-end registered investment company sponsored by the Company. Atlas Advisers, Inc., is a registered investment adviser and the investment manager of Atlas Assets, Inc.'s twelve portfolios (the Atlas Funds). Atlas Securities, Inc., is a registered broker-dealer and the sole distributor of Atlas Fund shares. The Company was incorporated in 1959 and has its headquarters in Oakland, California. THE ASSOCIATION World was incorporated in 1912 as a capital stock savings and loan association and has its home office in Oakland, California. World became a federally chartered savings and loan association in September 1981. See Note V to the Financial Statements included in Item 14 for the contribution of the Association to the earnings of the Company. REGULATORY FRAMEWORK The Company is a savings and loan holding company within the meaning of the National Housing Act, as amended, (the Holding Company Act), and is subject to the regulation, examination, supervision, and reporting requirements of the Holding Company Act. The Association is a member of the Federal Home Loan Bank System and owns stock in the Federal Home Loan Bank (FHLB) of San Francisco. The Association's savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC) Savings Association Insurance Fund (SAIF), up to the maximum amounts provided by law. The Company and the Association are subject to extensive examination, supervision, and regulation by the Office of Thrift Supervision (OTS) and the FDIC. Applicable regulations govern, among other things, the Associa- tion's lending and investment powers, the types of accounts it is permitted to offer, the types of business in which it may engage, and capital requirements. The Association is also subject to regulations of the Board of Governors of the Federal Reserve System (Federal Reserve Board) with respect to reserve requirements and certain other matters (see Regulation). PAGE 3 ITEM 1. BUSINESS (Continued) OFFICE STRUCTURE As of December 31, 1994, the Company operated 117 savings branch offices in California, 59 in Colorado (seven of which were subsequently sold in January 1995 with $153 million in deposits), 20 in Florida, 14 in Texas, ten in Kansas, nine in Arizona, and eight in New Jersey. The Company also operates 198 loan origination offices of which 170 are located in the same states as savings branch offices. The remaining 28 loan origination offices are located in Connecticut, Delaware, Idaho, Illinois, Maryland, Minnesota, Missouri, Nevada, New Mexico, Oregon, Pennsylvania, Utah, Virginia, Washington, and Wisconsin. Of the 198 offices mentioned earlier, 17 are fully-staffed offices that are located in the same premises as savings branch offices and 86 others are savings branch offices that have a single loan officer on site. The remaining loan origination offices are located in facilities that are separate from savings branch offices. ACQUISITIONS/DIVESTITURES On May 6, 1994, the Company acquired $78 million in deposits in New Jersey from Polifly Savings and Loan. On August 13, 1993, the Company acquired $320 million in deposits and seven branches in Arizona from PriMerit Bank. On September 17, 1993, the Company sold two branches with $133 million of deposits in Ohio to Trumbull Savings and Loan. On October 15, 1993, the Company sold its remaining five Ohio branches with $131 million in deposits to Fifth Third Bancorp. During 1992, the Company sold one branch in California containing $40 million in deposits to American Savings Bank and two branches in the state of Washington containing $37 million in deposits to Washington Mutual Savings Bank. The foregoing acquisitions and divestitures are not material to the financial position or net earnings of Golden West and pro forma information is not deemed necessary. OPERATIONS The principal business of the Company, through the Association, is attracting funds, primarily in the form of savings deposits acquired from the general public, and investing those funds principally in loans secured by deeds of trust or mortgages on residential and other real estate, and mortgage-backed securities (MBS)--securities backed by pools of residential loans that have many of the characteristics of mortgages including the monthly payment of principal and interest. Funds for the Association's operations are also provided through earnings, loan repayments, borrowings from the Federal Home Loan Banks, and debt collateralized by mortgages, MBS, or other securities. In addition, the Association has a number of other alternatives available to provide liquidity or finance operations. These include public offerings of debt or equity, sales of loans, issuance of negotiable certificates of deposit, issuance of commercial paper, and borrowings from commercial banks. Furthermore, under certain conditions, PAGE 4 ITEM 1. BUSINESS (Continued) OPERATIONS (continued): 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 on policies of the FHLB, the Federal Reserve Bank of San Francisco, and the Federal Reserve Board. The principal sources of funds for the holding company, Golden West, are dividends from 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 Golden West are for payment of interest on subordinated debt securities, dividends to stockholders, the purchase of Company stock, and general and administrative expenses. CUSTOMER DEPOSIT ACTIVITIES Customer deposit flows are affected by changes in general economic conditions, changes in prevailing interest rates, and competition among depository institutions and other investment alternatives. The Company currently offers a number of alternatives for depositors, including passbook, checking, and money market deposit accounts from which funds may be withdrawn at any time without penalty, and certificate accounts with varying maturities ranging up to seven years. The Company's certificate accounts are issued in non-negotiable form through its branch offices. All types of accounts presently offered by the Company have rates that are set by the Company consistent with prevailing interest rates. PAGE 5 ITEM 1. BUSINESS (Continued) CUSTOMER DEPOSIT ACTIVITIES (continued) During 1994, customer deposits increased $1.8 billion, including interest credited of $585 million and including $78 million from acquisitions compared to an increase of $936 million, including interest credited of $567 million and including $320 million from acquisitions and $264 from divestitures during 1993. Customer deposits decreased $332 million in 1992, including $676 million of interest credited and including $77 million from divestitures. The increase in customer deposits during 1994 resulted from the improvement in the savings market as interest rates rose, as well as aggressive promotions by the Company. Consumer funds were attracted during 1993 as a result of special promotions in the Company's savings market. The Company experienced a net outflow of deposits during 1992 because the Company elected to emphasize other, more cost-effective sources of funds, primarily Federal Home Loan Bank advances. The table below summarizes the Company's customer deposits by original term to maturity at December 31.
TABLE 1 Customer Deposits by Original Term to Maturity ($000s Omitted) 1994 1993 1992 1991 1990 ----------- ----------- ----------- ----------- ----------- Interest-bearing checking . . . . $ 730,290 $ 736,767 $ 710,851 $ 574,068 $ 457,532 Passbook . . . . . 638,905 611,606 541,701 391,205 332,421 Money market deposit accounts 1,818,426 2,378,087 2,731,338 2,310,518 1,749,417 Term certificate accounts with original matur- ities of: 4 weeks to 1 year 5,159,037 4,334,208 4,762,359 6,148,044 4,512,000 1 to 2 years . . 5,636,301 4,614,059 3,494,606 4,415,462 4,622,991 2 to 3 years . . 1,997,826 1,448,779 1,246,978 907,858 994,267 3 to 4 years . . 817,631 1,149,108 1,267,707 1,232,213 890,346 4 years and over 2,098,984 2,021,350 1,612,784 730,057 595,936 Retail jumbo CDs 312,413 109,250 94,651 82,331 189,397 All other. . . . . 9,576 19,270 23,271 26,754 28,177 ----------- ----------- ----------- ----------- ----------- Total customer deposits. . . . $19,219,389 $17,422,484 $16,486,246 $16,818,510 $14,372,484 =========== =========== =========== =========== ===========
PAGE 6 ITEM 1. BUSINESS (Continued) CUSTOMER DEPOSIT ACTIVITIES (continued) The table below sets forth the Company's customer deposits by interest rate at December 31.
TABLE 2 Customer Deposits by Interest Rate ($000s Omitted) 1994 1993 ----------- ----------- 0.00% - 4.00% . . . . . . . . . . $ 6,040,355 $ 9,344,231 4.01% - 6.00% . . . . . . . . . . 10,309,411 5,807,364 6.01% - 8.00% . . . . . . . . . . 2,789,033 1,935,573 8.01% - 10.00% . . . . . . . . . . 62,805 296,998 10.01% - 12.00% . . . . . . . . . . 17,685 38,018 12.01% - 14.00% . . . . . . . . . . 100 300 ----------- ----------- $19,219,389 $17,422,484 =========== ===========
The table below shows the maturities of customer deposits at December 31, 1994, by interest rate.
TABLE 3 Customer Deposit Maturities by Interest Rate ($000s Omitted) 1999 and 1995(a) 1996 1997 1998 thereafter Total ----------- ---------- -------- -------- ---------- ----------- 0.00% - 4.00% . $ 6,011,162 $ 22,051 $ 17 $ 5,050 $ 2,075 $ 6,040,355 4.01% - 6.00% . 7,611,119 1,995,768 359,222 242,146 101,156 10,309,411 6.01% - 8.00% . 557,668 780,518 621,805 166,669 662,373 2,789,033 8.01% - 10.00% . 57,185 1,552 1,794 1,729 545 62,805 10.01% - 12.00% . 11,197 91 859 5,184 354 17,685 12.01% - 14.00% . -- -- 100 -- -- 100 ----------- ---------- -------- -------- -------- ----------- $14,248,331 $2,799,980 $983,797 $420,778 $766,503 $19,219,389 =========== ========== ======== ======== ======== ===========
(a) Includes passbook, checking, and money market deposit accounts, which have no stated maturity. PAGE 7 ITEM 1. BUSINESS (Continued) CUSTOMER DEPOSIT ACTIVITIES (continued) As of December 31, 1994, the aggregate amount outstanding of time certificates of deposits in amounts of $100,000 or more was $1.7 billion of which $312 million were retail jumbo CDs. The following table presents the maturity of these time certificates of deposit at December 31, 1994.
TABLE 4 Time Certificate of Deposit Maturities ($000s Omitted) 3 months or less $ 397,739 Over 3 months through 6 months 316,633 Over 6 months through 12 months 435,743 Over 12 months 569,179 ---------- $1,719,294 ==========
More information regarding customer deposits is included in Note K to the Financial Statements, in Item 14. BORROWINGS The Company generally may borrow from the FHLB of San Francisco upon the security of a) the capital stock of the FHLB owned by the Company, b) certain of its residential mortgage loans or c) certain other assets (principally obligations of, or guaranteed by, the United States Government or a federal agency). The Company uses FHLB borrowings, also known as "advances" to supplement cash flow and to provide funds for loan origination activities. Advances offer strategic advantages for asset- liability management, including long-term maturities and, in certain cases, prepayment at the Company's option. Each advance has a specified maturity and interest rate, which may be fixed or variable, as negotiated with the FHLB. At December 31, 1994, the Company had $6.5 billion in FHLB advances outstanding, compared to $6.3 billion at yearend 1993. From time to time, the Company enters into reverse repurchase agreements with selected major government securities dealers, as well as large banks. A reverse repurchase agreement involves the sale and delivery of U.S. Government securities or mortgage-backed securities by the Company to a broker or dealer coupled with an agreement to buy the securities back at a later date. Under generally accepted accounting principles, these transactions are properly accounted for as borrowings secured by securities. The Company pays the brokers and dealers a variable or fixed rate of interest for the use of the funds for the period involved, usually less than one year. At maturity, the borrowings are repaid (by repurchase of the same securities) and the same securities are returned to the Company. These transactions are used to take advantage of arbitrage investment opportunities and to supplement cash flow. PAGE 8 ITEM 1. BUSINESS (Continued) BORROWINGS (continued) The Company also enters into dollar reverse repurchase agreements (dollar reverses) with selected major government securities dealers, as well as large banks. A dollar reverse involves the sale and delivery of mortgage-backed securities by the Company to a broker or dealer, coupled with an agreement to purchase securities of the same type and interest coupon at a fixed price for settlement at a later date. Under generally accepted accounting principles, these transactions are properly accounted for as borrowings secured by mortgage-backed securities. The Company pays the brokers and dealers a fixed rate of interest for the use of the funds for the period involved, which is generally short-term. At maturity, the secured borrowings are repaid (by purchase of similar securities) and similar securities are delivered to the Company. These transactions are used to take advantage of arbitrage investment opportunities and to supplement cash flow. The Company monitors the level of activity with any one party in connection with reverse repurchase agreements and dollar reverses in order to minimize its risk exposure in these transactions. Reverse repurchase agreements and dollar reverses with dealers and banks amounted to $602 mil- lion at December 31, 1994, compared to $443 million at yearend 1993. In December 1994, the Company borrowed $250 million in short-term federal funds, due February 1, 1995, from the Federal Home Loan Bank of San Francisco. These borrowings are convertible into either Federal Home Loan Bank advances or repurchase agreements due in 1997. Federal funds provide the Company an additional source of short-term unsecured borrowings. These funds are utilized as part of the Company's normal cash management activities. 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 December 31, 1994. As of December 31, 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 a shelf registration with the OTS for the issuance of $1.0 billion of unsecured medium-term notes. As of December 31, 1994, $700 million was available for issuance. The Association had $1.2 billion of medium-term notes outstanding at December 31, 1994, under the current and prior registrations compared to $677 million at yearend 1993. As of December 31, 1994, the Association's medium-term notes were rated A1 and A+ from 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 December 31, 1994, the Association had outstanding a total of $199 million PAGE 9 ITEM 1. BUSINESS (Continued) BORROWINGS (continued) of subordinated notes. As of December 31, 1994, World's subordinated notes were rated A2 and A from Moody's and S&P, respectively. The subordinated notes are included in the Association's risk-based regulatory capital as supplementary capital. The table below sets forth the composition of the Company's borrowings at December 31.
TABLE 5 Composition of Borrowings ($000s Omitted) 1994 1993 1992 1991 1990 ---------- ---------- ---------- ---------- ---------- FHLB advances. . . . . . . . . $6,488,418 $6,281,691 $5,499,363 $4,159,796 $3,834,755 Reverse repurchase agreements. 316,865 205,821 372,409 302,400 648,841 Dollar reverse repurchase agreements . . . . . . . . . 284,956 237,053 184,301 349,813 691,926 Medium-term notes. . . . . . . 1,164,079 676,540 81,267 166,750 960,869 Federal funds purchased. . . . 250,000 -0- -0- -0- -0- Other borrowings . . . . . . . -0- -0- -0- 21,395 12,415 Subordinated debt. . . . . . . 1,221,559 1,220,061 921,701 625,105 426,200 ---------- ---------- ---------- ---------- ---------- Total borrowings . . . . . . $9,725,877 $8,621,166 $7,059,041 $5,625,259 $6,575,006 ========== ========== ========== ========== ========== Weighted average interest rate of total borrowings. . . . 5.85% 4.69% 5.58% 7.48% 8.73% ===== ===== ===== ===== =====
More information concerning the borrowings of the Company is included in Notes L, M, N, and O to the Financial Statements, in Item 14. LENDING ACTIVITIES Income from real estate loans provides the principal source of revenue to the Company in the form of interest, loan origination fees, and other fees. Loans made by the Company are generally secured by first liens primarily on residential properties. Although the Company has from time to time made commercial real estate and construction loans, the Company is not currently active in these segments of the lending market. The Company has the power to originate loans in any part of the United States. The Company is currently originating loans primarily in California, as well as in Arizona, Colorado, Connecticut, Delaware, Florida, Idaho, Illinois, Kansas, Maryland, Minnesota, Missouri, Nevada, New Mexico, New Jersey, Oregon, Pennsylvania, Texas, Utah, Virginia, Washington, Washington D.C., and Wisconsin. The Company also makes loans to customers on the security of their deposit accounts. Customer deposit loans constituted less than one percent of the Company's total loans outstanding as of December 31, 1994, and 1993. The tables on the following two pages set forth the Company's loan portfolio by state as of December 31, 1994, and 1993. PAGE 10 ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued)
TABLE 6 Loan Portfolio by State December 31, 1994 ($000s Omitted) Residential Commercial Loans as Real Estate Real Total a % of State 1 - 4 5+ Land Estate Loans (a) Portfolio - ------------ ----------- ---------- ------ ---------- ----------- --------- California $17,760,372 $3,299,657 $ 289 $ 82,917 $21,143,235 77.52% Colorado 692,843 160,443 -0- 8,514 861,800 3.16 Illinois 639,709 161,397 -0- 2,990 804,096 2.95 New Jersey 652,257 40 -0- 151 652,448 2.39 Texas 537,218 11,732 603 1,771 551,324 2.02 Washington 289,847 255,196 -0- 817 545,860 2.00 Florida 465,573 -0- 319 1,852 467,744 1.72 Virginia 355,608 742 -0- 1,709 358,059 1.31 Arizona 280,037 24,837 -0- 1,808 306,682 1.12 Pennsylvania 270,409 -0- -0- 4,828 275,237 1.01 Connecticut 244,191 -0- -0- -0- 244,191 0.90 Maryland 217,713 -0- -0- 643 218,356 0.80 Oregon 150,078 9,094 -0- 3,923 163,095 0.60 Kansas 123,964 5,324 -0- 225 129,513 0.47 Nevada 123,414 1,321 -0- -0- 124,735 0.46 Missouri 60,758 8,252 -0- 78 69,088 0.25 Utah 60,383 70 -0- 2,170 62,623 0.23 New York 57,602 168 -0- -0- 57,770 0.21 Georgia 49,386 -0- -0- 2,479 51,865 0.19 Ohio 30,502 3,083 640 6,609 40,834 0.15 Wisconsin 30,093 3,964 -0- -0- 34,057 0.12 Washington D.C. 23,202 -0- -0- -0- 23,202 0.09 Minnesota 20,793 -0- -0- -0- 20,793 0.08 New Mexico 14,823 -0- -0- -0- 14,823 0.05 North Carolina 9,439 419 -0- 3,120 12,978 0.05 Delaware 9,690 -0- -0- -0- 9,690 0.04 Idaho 7,464 -0- -0- -0- 7,464 0.03 Other 13,876 43 -0- 7,423 21,342 0.08 ----------- ---------- ------ -------- ----------- ------ Totals $23,191,244 $3,945,782 $1,851 $134,027 27,272,904 100.00% =========== ========== ====== ======== ====== FAS 91 deferred loan fees (92,861) Loan discount on purchased loans (6,663) Undisbursed loan funds (2,781) Allowance for loan losses (124,003) LTF interest reserve (792) TDR interest reserve (4,998) Loans on customer deposits 30,460 ----------- Total loan portfolio $27,071,266 ===========
(a) The Company has no commercial loans. PAGE 11 ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued)
TABLE 7 Loan Portfolio by State December 31, 1993 ($000s Omitted) Residential Commercial Loans as Real Estate Real Total a % of State 1 - 4 5+ Land Estate Loans (a) Portfolio - ------------ ----------- ---------- ------ ---------- ----------- --------- California $16,349,385 $3,277,630 $ 308 $ 89,076 $19,716,399 81.80% Colorado 585,359 116,491 -0- 9,763 711,613 2.95 Illinois 421,926 132,602 -0- 5,311 559,839 2.32 New Jersey 536,330 41 -0- 169 536,540 2.23 Washington 215,185 215,668 -0- 843 431,696 1.79 Florida 313,146 -0- 408 2,463 316,017 1.31 Texas 244,334 2,795 615 1,855 249,599 1.04 Virginia 238,655 934 -0- 1,845 241,434 1.00 Connecticut 179,831 -0- -0- -0- 179,831 0.75 Arizona 171,201 4,323 -0- 1,885 177,409 0.74 Pennsylvania 140,034 -0- -0- 9,405 149,439 0.62 Kansas 126,134 5,464 -0- 238 131,836 0.55 Oregon 117,800 8,245 -0- 4,089 130,134 0.54 Maryland 123,447 -0- -0- 685 124,132 0.51 Nevada 90,295 1,407 -0- -0- 91,702 0.38 Missouri 62,012 9,059 -0- 80 71,151 0.29 New York 66,714 174 -0- 656 67,544 0.28 Georgia 58,607 -0- -0- 2,747 61,354 0.25 Ohio 42,550 6,153 1,076 7,557 57,336 0.24 Utah 37,399 141 -0- 2,338 39,878 0.17 Other 40,963 4,342 -0- 11,703 57,008 0.24 ----------- ---------- ------ -------- ----------- ------ Totals $20,161,307 $3,785,469 $2,407 $152,708 24,101,891 100.00% =========== ========== ====== ======== ====== FAS 91 deferred loan fees (102,184) Loan discount on purchased loans (8,340) Undisbursed loan funds (1,882) Allowance for loan losses (106,698) LTF interest reserve (914) TDR interest reserve (1,314) Loans on customer deposits 32,012 ----------- Total loan portfolio $23,912,571 ===========
(a) The Company has no commercial loans. PAGE 12 ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued) The table below sets forth the composition of the Company's loan portfolio (excluding mortgage-backed securities) by type of security at December 31.
TABLE 8 Loan Portfolio by Type of Security ($000s Omitted) 1994 1993 1992 1991 1990 ----------- ----------- ----------- ----------- ----------- Loans collateralized primarily by first deeds of trust: One-to four-family units. . . $23,217,564 $20,197,613 $18,487,247 $17,065,371 $15,060,960 Over four-family units. . . . 3,946,446 3,785,673 3,509,105 2,989,908 2,606,502 Commercial real estate. . . . 134,189 153,396 176,900 214,706 233,720 Construction loans. . . . . . -0- 580 580 580 -0- Land. . . . . . . . . . . . . 1,851 2,407 1,763 1,989 1,212 Loans on customer deposits. . . 30,460 32,012 33,230 36,607 34,428 Less: Undisbursed loan funds. . . . 2,781 1,882 2,687 1,924 598 Unearned fees and discounts . 105,314 112,751 109,446 92,472 81,593 Unamortized discount arising from acquisitions . . . . . 27,146 37,779 57,092 79,297 97,385 Allowance for loan losses 124,003 106,698 70,924 48,036 26,799 ----------- ----------- ----------- ----------- ----------- $27,071,266 $23,912,571 $21,968,676 $20,087,432 $17,730,447 =========== =========== =========== =========== ===========
At December 31, 1994, 99% of the loans in the portfolio had remaining terms to maturity in excess of 10 years. The table below sets forth the amount of loans due after one year that have predetermined interest rates and the amount that have floating interest rates at December 31, 1994.
TABLE 9 Loans Due After One Year ($000s Omitted) Adjustable Rate $23,845,982 Fixed Rate 3,173,425 ----------- $27,019,407 ===========
The table on the following page sets forth information concerning new loans made by the Company during 1994, 1993, and 1992 by type and purpose of loan. PAGE 13 ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued)
TABLE 10 New Loan Originations By Type and Purpose ($000s Omitted) 1994 1993 1992 ---------------------------- ---------------------------- ---------------------------- No. of % of No. of % of No. of % of Type Loans Amount Total Loans Amount Total Loans Amount Total - ---------------------- ------ ---------- ------ ------ ---------- ------ ------ ---------- ------ Residential (one unit) 42,543 $5,769,339 86.9% 41,999 $5,459,456 85.2% 36,756 $5,264,481 81.6% Residential (2 to 4 units) 2,194 307,480 4.6 2,380 351,349 5.5 2,191 382,901 5.9 Residential (5 or more units) 1,073 560,834 8.5 1,209 598,972 9.3 1,323 807,652 12.5 Commercial real estate -0- -0- 0.0 1 2,100 0.0 1 56 0.0 ------ ---------- ----- ------ ---------- ----- ------ ---------- ----- Totals 45,810 $6,637,653 100.0% 45,589 $6,411,877 100.0% 40,271 $6,455,090 100.0% ====== ========== ===== ====== ========== ===== ====== ========== =====
1994 1993 1992 ---------------------------- ---------------------------- ---------------------------- No. of % of No. of % of No. of % of Purpose Loans Amount Total Loans Amount Total Loans Amount Total - ---------------------- ------ ---------- ------ ------ ---------- ------ ------ ---------- ------ Purchase 26,973 $3,941,719 59.4% 18,236 $2,654,769 41.4% 18,188 $2,819,943 43.7% Refinance 18,837 2,695,934 40.6 27,353 3,757,108 58.6 22,083 3,635,147 56.3 ------ ---------- ----- ------ ---------- ----- ------ ---------- ----- Totals 45,810 $6,637,653 100.0% 45,589 $6,411,877 100.0% 40,271 $6,455,090 100.0% ====== ========== ===== ====== ========== ===== ====== ========== =====
Note: During 1994, 1993, and 1992, the Company also purchased $69 million, $14 million, and $5 million, respectively, of loans (not included above) of which $60 million, $304 thousand, and $1 million, respectively, were one-unit residential loans. PAGE 14 ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued) New loan originations in 1994, 1993, and 1992 amounted to $6.6 billion, $6.4 billion, and $6.5 billion, respectively. Refinanced loans constituted 41% of new loan originations in 1994 compared to 59% in 1993 and 56% in 1992. Higher interest rates during 1994 caused the volume of refinance activity in the marketplace to drop considerably from the record high levels of 1993. Refinance activity is expected to decline further if rates remain at current high levels or continue to increase. 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 total portfolio growth for the years ended December 31, 1994, and 1993, were $3.2 billion or 13% and $1.9 billion or 9%, respectively. While the primary mortgage origination focus continues to be on residential properties in California, the loans originated in California decreased to $4.1 billion in 1994 from $4.7 billion in 1993 and $5.4 billion in 1992. Residential loans originated in California as a percentage of total originations were 62% in 1994, 73% in 1993 and 83% in 1992. The increased lending activity in 1994 over 1993 was due to the increase in loan originations in the other 21 states in which the Company has lending operations. Federal regulations permit federally chartered savings and loan associations to make or purchase both fixed-rate loans and loans with periodic adjustments to the interest rate. These latter types of loans are subject to the following primary limitations: (i) the adjustments must be based on changes in a specified interest rate index, which may be selected by the association but which must be beyond the control of the association and readily verifiable by the borrower; and (ii) adjustments to the interest rate may be implemented through changes in the monthly payment amount and/or adjustment to the outstanding principal balance or terms, except that the original loan term may not be increased to more than 40 years. Pursuant to these powers, the Company began offering adjustable rate mortgages (ARMs) in the early 1980s and this type of mortgage continues to be the Company's primary real estate loan. The portion of the mortgage portfolio (excluding mortgage-backed securities) composed of rate-sensitive loans was 89% at yearend 1994 compared to 87% at yearends 1993 and 1992. While rates offered on fixed-rate mortgages rose significantly during 1994, lower rates on ARM loans made adjustable instruments more attractive in the marketplace. Golden West's ARM originations constituted approximately 93% of new mortgage loans made by the Company in 1994, compared with 75% in 1993 and 80% in 1992. Most of the Company's ARMs carry an interest rate that changes monthly based on movements in certain interest rate or cost of funds indices. During the life of the loan, the interest rate may not be raised above a PAGE 15 ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued) lifetime cap, set at the time of origination or assumption. Lifetime caps on the Company's ARMs are typically between 350 and 625 basis points (a basis point is one one-hundredth of one percent) higher than the loan's initial fully-indexed contract rate. On most of the Company's ARMs, monthly payments of principal and interest are adjusted annually with a maximum increase or decrease of 7-1/2% of the prior year's payment. At five year intervals, the payment may be adjusted without limit, to amortize the loan fully within the then remaining term. Within these five year periods, negative amortization (deferred interest) may occur to the extent that the loan balance remains below 125% of the original mortgage amount, unless the original loan to value ratio exceeded 85%, in which case the loan balance cannot exceed 110% of the original mortgage amount. On certain other ARMs, the payment and interest rate change every six months, with the maximum rate per change capped at one percent. These ARMs do not allow negative amortization and, consequently, do not have the 7-1/2% payment change limitation. The Company also offers a "modified" ARM, a loan that usually offers a low fixed rate from 1% to 3% below the initial fully indexed contract rate for an initial period, normally three to 36 months. (However, the borrower must generally qualify at the initial fully-indexed contract rate.) The weighted average maximum lifetime cap rate on the Company's ARM loan portfolio was 13.36%, or 6.83% above the actual weighted average rate at December 31, 1994, versus 13.82%, or 7.39% above the weighted average rate at yearend 1993. Approximately $4.8 billion of the Company's loans have terms that state that the interest rate may not fall below a lifetime floor, set at the time of origination or assumption. As of December 31, 1994, $948 million of these ARM loans had reached their rate floors. The weighted average floor rate on these loans was 7.56% at yearend 1994. Without the floor, the average yield on these loans would have been 6.47%. Interest rates charged by the Company on real estate loans are affected principally by competition, and also by the supply of money available for lending, loan demand, and factors that are, in turn, affected by general economic conditions, regulatory and monetary policies of the federal government, the OTS and the Federal Reserve Board, and legislation and other governmental action dealing with budgetary and tax matters. The Company originates loans through offices that are staffed by salaried personnel who primarily contact local real estate brokers regard- ing possible lending opportunities. All loan applications are completed, reviewed, and approved in the loan field offices and forwarded to the Company's central offices in Oakland, California; Costa Mesa, California; Denver, Colorado; or San Antonio, Texas, for processing. PAGE 16 ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued) The Company also utilizes the services of selected mortgage brokers to obtain completed loan applications. In such cases, the Company, in addition to the review by the mortgage broker, performs its own quality review, including a physical inspection of the property, before processing the application and funding the loan. The Company's loan approval process is intended to assess both the borrower's ability to repay the loan and the adequacy of the proposed security. Documentation for all loans is maintained in the Company's loan servicing offices in San Antonio, Texas. The Company generally lends up to 80% of the appraised value of residential real property and, under certain circumstances, up to 90% of the appraised value of single-family residences. The great majority of all loans originated in excess of 80% of the appraised value of the property have mortgage insurance except loans to facilitate the sale of REO. During 1994, 8% of loans originated were in excess of 80% of the appraised value of the residence. During 1993, and 1992, less than 3% of loans originated were in excess of 80% of the appraised value of the residence. The Company requires title insurance for all mortgage loans and requires that fire and casualty insurance be maintained on all improved properties that are security for its loans. The original contractual loan payment period for residential loans normally ranges from 15 to 40 years with most having original terms of 30 years. However, the majority of such loans remain outstanding for a shorter period of time. To generate income and to provide additional funds for lending and liquidity, the Company has from time to time sold, without recourse, whole loans and participations in pools of loans to the Federal Home Loan Mort- gage Corporation (FHLMC), the Federal National Mortgage Association (FNMA), and to institutional purchasers. Under loan participation sale agreements, the Company usually continues to collect payments on the loans as they become due, and otherwise to service the loans. The Company pays an agreed- upon yield on the participant's portion of the loans. This yield is usually less than the interest agreed to be paid by the borrower, with the differ- ence being retained by the Company as servicing fee income. At December 31, 1994, the Company was engaged in servicing approximately $844 million of loan participations and whole loans for others. For the year ended December 31, 1994, fees received for such servicing activities totalled $3 million, or approximately one-tenth of one percent of total revenues. The Company sold $146 million of loans during 1994 compared to $432 million and $281 million in 1993 and 1992, respectively. The Company recognized pre-tax gains of $1.7 million in 1994 compared to $5.7 million in 1993 and $1.7 million in 1992. The Company originated $94 million of loans held for sale during 1994 compared to $443 million in 1993 and $278 million in 1992. The loans held for sale portfolio had a balance of $4 million at December 31, 1994, and is carried at the lower of cost or market. PAGE 17 ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued) The Company also purchases, on a selective basis and only after a strict underwriting review, residential mortgage whole loans in the secondary market. Loan purchases in 1994, 1993, and 1992 amounted to $69 million, $14 million, and $5 million, respectively. Loan repayments consist of monthly loan amortization, loan payoffs, and loan refinances. During 1994, 1993, and 1992, repayments amounted to $3.2 billion, $3.8 billion, and $4.1 billion, respectively. The decrease in repayments in 1994 compared to 1993 was due to lower mortgage payoffs and lower refinances within the Company's loan portfolio primarily as a result of higher interest rates. In addition to interest earned on loans, the Company receives fees for originating loans and for making loan commitments. The income represented by such fees varies with the volume and types of loans made. The Company also charges fees for loan prepayments, loan assumptions and modifications, late payments and other miscellaneous services. The table below sets forth information relat-ing to interest rates and loan fees charged for the years indicated.
TABLE 11 Weighted Average Interest Rates and Fees on New Loan Originations 1994 1993 1992 1991 1990 ------ ------ ------ ------ ------ Weighted average interest rate on new real estate loans originated(a) . . . . 6.44% 6.86% 8.06% 9.83% 10.64% Weighted average loan fees received on new real estate loans originated(a) . . . . .29% .59% .81% .85% .71%
(a) excludes loans purchased NONPERFORMING ASSETS If a borrower fails to make required payments on a loan, the Company usually takes the steps required under applicable law to foreclose upon the security for the loan. If a delinquency is not cured, the property is generally acquired by the Company in a foreclosure sale or by taking a deed in lieu of foreclosure. If the applicable period of redemption by the borrower (which varies from state to state and by method of foreclosure pursued) has expired, the Company is free to sell the property. The property may then be sold generally with a loan conforming to normal loan requirements, or with a "loan to facilitate sale" involving terms more favorable to the borrower than those normally permitted. PAGE 18 ITEM 1. BUSINESS (Continued) NONPERFORMING ASSETS (continued) Various antideficiency and homeowner protective provisions of state law may limit the remedies available to lenders when a residential mortgage borrower is in default. The effect of these provisions, in most cases, is to limit the Company to foreclosing upon, or otherwise obtaining ownership of, the property securing the loan after default and to prevent the Company from recovering from the borrower any deficiency between the amount real- ized from the sale of such property and the amount owed by the borrower. One measure of the soundness of the Company's portfolio is its ratio of nonperforming assets (NPAs) to total assets. Nonperforming assets include nonaccrual 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 Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (FAS 114), during December 1993. At December 31, 1994, and 1993, loans in-substance foreclosed were included in the Company's total loan portfolio. No interest is recognized on nonaccrual loans. The table below sets forth the components of the Company's nonperforming assets and the ratio of nonperforming assets to total assets at December 31.
TABLE 12 Nonperforming Assets ($000s Omitted) 1994 1993 1992 1991 1990 -------- -------- -------- -------- -------- Nonaccrual loans $284,103 $330,062 $263,065 $232,803 $148,884 Real estate acquired through foreclosure 70,981 62,724 56,642 38,163 13,001 Loans in-substance foreclosed -0- -0- 9,351 6,908 7,427 Real estate in judgement 390 1,366 1,030 4,049 4,571 -------- -------- -------- -------- -------- Total nonperforming assets $355,474 $394,152 $330,088 $281,923 $173,883 ======== ======== ======== ======== ======== Ratio of nonperforming assets to total assets 1.12% 1.37% 1.27% 1.16% .77% ===== ===== ===== ===== =====
The decrease in NPAs in 1994 was primarily due to a decrease in slow loans in the fourth quarter of 1994. We believe this improvement is a result of the improvement in the California economy. The Company continues to closely monitor all delinquencies and takes appropriate steps to protect its interests. Interest foregone on nonaccrual loans amounted to $17 million in 1994, $20 million in 1993, and $17 million in 1992. The tables on the following two pages show the Company's nonperforming assets by state at December 31, 1994, and 1993. PAGE 19 ITEM 1. BUSINESS (Continued) NONPERFORMING ASSETS (continued)
TABLE 13 Nonperforming Assets By State December 31, 1994 ($000s Omitted) Nonaccrual 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 $234,923 $10,795 $870 $56,690 $9,242 $3,716 $316,236 1.50% Colorado 1,497 287 -0- 19 43 -0- 1,846 0.21% Illinois 3,520 892 -0- 84 -0- -0- 4,496 0.56% New Jersey 10,241 -0- -0- 1,068 -0- -0- 11,309 1.73% Texas 1,736 -0- -0- -0- -0- -0- 1,736 0.31% Washington 303 -0- -0- -0- -0- -0- 303 0.06% Florida 2,794 -0- 36 182 -0- -0- 3,012 0.64% Virginia 1,697 -0- -0- 220 -0- -0- 1,917 0.54% Arizona 1,241 -0- -0- 59 -0- -0- 1,300 0.42% Pennsylvania 2,433 -0- -0- 67 -0- -0- 2,500 0.91% Connecticut 3,743 -0- -0- 94 -0- -0- 3,837 1.57% Maryland 149 -0- -0- 724 -0- -0- 873 0.40% Oregon 257 -0- -0- -0- -0- -0- 257 0.16% Kansas 429 41 -0- 134 -0- -0- 604 0.47% Nevada 614 -0- -0- -0- -0- -0- 614 0.49% Missouri 851 69 -0- 23 -0- -0- 943 1.36% Utah 259 -0- -0- -0- -0- -0- 259 0.41% New York 2,985 51 -0- 508 -0- -0- 3,544 6.13% Georgia 1,185 -0- -0- 58 -0- -0- 1,243 2.40% Ohio 3 -0- 58 -0- 331 -0- 392 0.96% New Mexico 4 -0- -0- -0- -0- -0- 4 0.03% North Carolina 43 -0- -0- -0- -0- -0- 43 0.33% Other 97 -0- -0- 8 -0- -0- 105 0.61% -------- ------- ---- ------- ------ ------ -------- ------ Totals $271,004 $12,135 $964 $59,938 $9,616 $3,716 $357,373 1.31% ======== ======= ==== ======= ====== ====== REO general valuation allowance (1,899) 0.00% -------- ------ $355,474 1.31% ======== ======
(a) Nonaccrual loans are 90 days or more past due and have no unpaid interest accrued. PAGE 20 ITEM 1. BUSINESS (Continued) NONPERFORMING ASSETS (continued)
TABLE 14 Nonperforming Assets By State December 31, 1993 ($000s Omitted) Nonaccrual 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 $270,325 $18,922 $532 $47,133 $7,169 $4,622 $348,703 1.77% Colorado 1,560 83 -0- 346 842 261 3,092 0.43% Illinois 2,141 340 -0- 64 -0- -0- 2,545 0.45% New Jersey 12,491 -0- -0- 1,085 -0- -0- 13,576 2.53% Washington 351 -0- -0- -0- -0- -0- 351 0.08% Florida 4,463 -0- 316 1,156 -0- -0- 5,935 1.88% Texas 1,400 -0- -0- 95 -0- -0- 1,495 0.60% Virginia 1,437 -0- -0- 373 -0- -0- 1,810 0.75% Connecticut 3,578 -0- -0- 566 -0- -0- 4,144 2.30% Arizona 1,342 -0- -0- 333 -0- -0- 1,675 0.94% Pennsylvania 1,302 -0- -0- 114 -0- -0- 1,416 0.95% Kansas 815 40 -0- 375 -0- -0- 1,230 0.93% Oregon 354 -0- -0- -0- -0- -0- 354 0.27% Maryland 1,525 -0- -0- 149 -0- -0- 1,674 1.35% Nevada 606 -0- -0- 77 -0- -0- 683 0.74% Missouri 253 377 -0- 14 -0- -0- 644 0.91% New York 3,738 -0- -0- 750 -0- -0- 4,488 6.64% Georgia 1,395 -0- -0- 174 -0- -0- 1,569 2.56% Ohio 15 -0- 55 41 -0- 80 191 0.33% Utah 156 -0- -0- -0- -0- -0- 156 0.39% Other 150 -0- -0- 74 -0- -0- 224 0.43% -------- ------- ---- ------- ------ ------ -------- ------ Totals $309,397 $19,762 $903 $52,919 $8,011 $4,963 $395,955 1.64% ======== ======= ==== ======= ====== ====== REO general valuation allowance (1,803) 0.00% -------- ------ $394,152 1.64% ======== ======
(a) Nonaccrual loans are 90 days or more past due and have no unpaid interest accrued. The Company's troubled debt restructured (TDRs) were $73 million, or 0.23% of assets, at December 31, 1994, compared to $37 million, or 0.13% of assets, at yearend 1993 and $13 million, or 0.06% of assets, at yearend 1992. At December 31, 1994, TDRs included $22 million or 0.07% of loans modified as a result of the Southern California earthquake in January 1994. 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 $811 thousand in 1994 compared to $275 thousand in 1993 and $217 thousand in 1992. PAGE 21 ITEM 1. BUSINESS (Continued) NONPERFORMING ASSETS (continued) At December 31, 1994, approximately $229 million of the Company's loans were 30 to 89 days past due and an additional $103 million of loans were performing under bankruptcy protection. Management has included its estimate of potential losses on these loans in the allowance for possible loan losses. The Company provides allowances for probable losses on loans and real estate owned when any significant and permanent decline in value is identified and based upon trends in the basic portfolio. The Company evaluates trends in the basic portfolio by utilizing 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. In addition, periodic reviews are made of major loans and real estate owned, and major lending areas are regularly reviewed to determine potential problems. Where indicated, valuation allowances are established or adjusted. In estimating possible losses, consideration is given to the estimated sale price, cost of refurbishing, payment of delinquent taxes, cost of disposal, and cost of holding the property. Additions to and reductions from the allowances are reflected in current earnings. The table below shows the changes in the allowance for loan losses for the years indicated:
TABLE 15 Changes in the Allowance for Loan Losses ($000s Omitted) 1994 1993 1992 1991 1990 -------- -------- -------- -------- -------- Beginning allowance for loan losses $106,698 $ 70,924 $ 48,036 $ 26,799 $ 20,963 Provision charged to expense 62,966 65,837 43,218 34,984 18,701 Less loans charged off (46,556) (38,475) (21,227) (15,274) (13,165) Add recoveries 895 1,145 897 1,527 300 Reclassification of in-substance foreclosure allowances -0- 7,267 -0- -0- -0- -------- -------- -------- -------- -------- Ending allowance for loan losses $124,003 $106,698 $ 70,924 $ 48,036 $ 26,799 ======== ======== ======== ======== ======== Ratio of net chargeoffs to average loans outstanding (excluding MBS) .18% .16% .10% .07% .08% ======== ======== ======== ======== ======== Ratio of allowance for loan losses to nonperforming assets 34.9% 27.1% 21.5% 17.0% 15.4% ======== ======== ======== ======== ========
PAGE 22 ITEM 1. BUSINESS (Continued) NONPERFORMING ASSETS (continued) The Company has provided for any known losses related to the January 1994 Northridge (Southern California) earthquake. The December 31, 1994, allowance for loan losses and the 1994 provision for loan losses included $3.7 million specifically identified for earthquake losses. Chargeoffs increased as a result of the increase in real estate owned and the increased losses on real estate owned primarily due to weakness in the California economy. INVESTMENT ACTIVITIES Golden West's investment securities portfolio is composed primarily of federal funds, short-term repurchase agreements collateralized by mortgage-backed securities, short-term money market securities, and collateralized mortgage obligations. In determining the amounts of assets to invest in each class of investments, the Company considers relative rates, liquidity, and credit quality. When opportunities arise, the Company enters into arbitrage transactions with secured borrowings and short-term investments to profit from the rate differential. The level of the Company's investments position in excess of its liquidity requirements at any time depends on liquidity needs and available arbitrage opportunities. The Company holds collateralized mortgage obligations (CMOs) on which both principal and interest are received. It does not hold any interest-only or principal-only CMOs. At December 31, 1994, the great 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 prepayments and interest rate risk similar to fixed-rate loans. Effective December 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 115 (FAS 115), "Accounting for Certain Investments in Debt and Equity Securities." FAS 115 establishes classifications of investments into three categories: 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. At December 31, 1994, and 1993, the Company had no securities held to maturity. Securities available for sale increase the Company's portfolio management flexibility for investments and are reported PAGE 23 ITEM 1. BUSINESS (Continued) INVESTMENT ACTIVITIES (continued) 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. At December 31, 1994, and 1993, the Company had securities available for sale in the amount of $1.5 billion and $1.6 billion, respectively, and unrealized gains on investment securities available for sale included in stockholders' equity of $13 million and $41 million, respectively. Gains or losses on sales of investment securities are realized and recorded in earnings at the time of sale and are determined by the difference between the net sales proceeds and the cost of the security, using specific identification, adjusted for any unamortized premium or discount. The Company has other investments, which are recorded at cost with any discount or premium amortized using a method that is not materially different from the interest method. Prior to December 31, 1993, securities were classified as either securities held for sale or investment securities. Securities held for sale were recorded at the aggregate portfolio's lower of amortized cost or market, with the unrealized gains and losses included in earnings. Investment securities were recorded at amortized cost. The table below sets forth the composition of the Company's securities available for sale at December 31.
TABLE 16 Composition of Securities Available For Sale ($000s Omitted) 1994 1993 ---------- ---------- Certificates of deposit and short-term bank notes $ 29,969 $ 482,100 U.S. Treasury and Government agency obligations 637,069 419,815 Collateralized mortgage obligations 668,128 275,408 Commercial paper 1,269 230,389 Bankers acceptances -0- 58,395 Equity securities 152,410 170,479 ---------- ---------- $1,488,845 $1,636,586 ========== ==========
The weighted average yields on the securities available for sale portfolio were 5.24% and 3.93% at December 31, 1994, and 1993, respectively. PAGE 24 ITEM 1. BUSINESS (Continued) INVESTMENT ACTIVITIES (continued) The table below sets forth the composition of the Company's other investments at December 31. The reduction in 1993 versus 1992 resulted from the classification required under FAS 115.
TABLE 17 Composition of Other Investments ($000s Omitted) 1994 1993 1992 -------- -------- -------- Interest-bearing deposits $152,000 $ 25,000 $245,021 U.S. Treasury and Government agencies -0- -0- 43,434 Short-term repurchase agreements collater- alized by mortgage-backed securities 382,600 513,100 273,991 Corporate notes and bonds -0- -0- 10,001 Bankers acceptances -0- -0- 17,962 Collateralized mortgage obligations -0- -0- 94,237 Other securities -0- -0- 105,543 -------- -------- -------- $534,600 $538,100 $790,189 ======== ======== ========
The weighted average yield on the other investments portfolio was 5.92%, 3.42%, and 4.23% at December 31, 1994, 1993, and 1992, respectively. As of December 31, 1994, the entire other investments portfolio matures in 1995. 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. Mortgage- backed securities held to maturity are recorded at cost because the Company has the ability to hold these MBS to maturity and because Management intends to hold these securities to maturity. Premiums and discounts on MBS are amortized or accreted using the interest method, also known as the level yield method, over the life of the security. At December 31, 1994, and 1993, the Company had mortgage-backed securities held to maturity in the amount of $871 million and $408 million, respectively. MBS available for sale are reported at fair value, with unrealized gains and losses excluded from earnings and reported net of applicable income taxes as a separate component of stockholders' equity until realized. At December 31, 1994, and 1993, the Company had mortgage-backed securities PAGE 25 ITEM 1. BUSINESS (Continued) MORTGAGE-BACKED SECURITIES (continued) available for sale in the amount of $323 million and $1.1 billion, respectively, and unrealized gains on mortgage-backed securities included in stockholders' equity of $6 million and $44 million, respectively. Gains or losses on sales of MBS are realized and recorded in earnings at the time of sale and are determined by the difference between the net sales proceeds and the cost of the MBS, using specific identification, adjusted for any unamortized premium or discount. Prior to December 31, 1993, all MBS were recorded at amortized cost. During 1994, after reviewing the opportunities to sell MBS together with the capacity to hold MBS for investment, the Company decided to retain a larger volume for investment. Consequently, as permitted by FAS 115, during 1994, the Company transferred $454 million of its available for sale portfolio of MBS to its held to maturity portfolio. The unrealized holding gain on these securities in the amount of $7 million will be amortized as a yield adjustment over the remaining life of these securities. Repayments of MBS during the years 1994, 1993, and 1992 amounted to $311 million, $646 million, and $552 million, respectively. 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 as exhibited in the reduction of repayments between 1994 and 1993. The increase in repayments in 1993 over 1992 was primarily due to an increase in refinance activity as many borrowers took advantage of lower interest rates available at that time. GOODWILL ARISING FROM ACQUISITIONS Positive goodwill, or the excess of the cost over the fair value of net assets acquired resulting from acquisitions, of $223 million (1994) and $236 million (1993) is stated net of accumulated amortization of $200 million (1994) and $184 million (1993). Negative goodwill, or the excess of the fair value of net assets acquired over the cost resulting from acquisitions, of $86 million (1994) and $99 million (1993) is shown net of accumulated amortization of $60 million (1994) and $47 million (1993). Positive and negative goodwill are being amortized on the straight-line method over periods ranging from 5 to 40 years. Amortization of goodwill arising from acquisitions was an expense of $2.6 million for the year ended 1994, income of $1.6 million for the year ended 1993, and expense of $661 thousand for the year ended 1992. The increase in goodwill amortization expense in 1994 was due to the addition of positive goodwill amortization resulting from the May 1994 Polifly acquisition and the completion as of December 1993 of the amortization of negative goodwill that resulted from the World of Ohio acquisition. PAGE 26 ITEM 1. BUSINESS (Continued) STOCKHOLDERS' EQUITY The Company's stockholders' equity decreased during 1994 due to the $216 million cost of the repurchase of Company stock, the $66 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 $19 million of common stock dividends. These decreases in stockholders' equity were partially offset by 1994's net earnings. The Company increased its total stockholders' equity in 1993 and 1992 through the retention of a high percentage of net earnings. In addition, stockholders' equity increased in 1993 by $85 million due to the adoption of FAS 115 as of December 31, 1993. 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 3.088 million shares of Golden West's common stock. As of December 31, 1994, 5.8 million of such shares had been repurchased and retired at a cost of $223 million since October 28, 1993. During 1994, 5.6 million of the shares were purchased and retired at a cost of $216 million. 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 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. YIELD ON INTEREST-EARNING ASSETS/COST OF FUNDS Information regarding the Company's yield on interest-earning assets and cost of funds at December 31, 1994, 1993, and 1992 is contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and is incorporated herein by reference. The gap table and related discussion included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, gives information on the repricing characteristics of the Company's interest-earning assets and interest-bearing liabilities at December 31, 1994, and is incorporated herein by reference. PAGE 27 ITEM 1. BUSINESS (Continued) YIELD ON INTEREST-EARNING ASSETS/COST OF FUNDS (continued) The dollar amounts of the Company's interest income and interest expense fluctuate depending both on changes in the respective interest rates and on changes in the respective amounts (volume) of interest-earning assets and interest-bearing liabilities. The following table sets forth certain information with respect to the yields earned and rates paid on the Company's interest-earning assets and interest-bearing liabilities.
TABLE 18 Average Interest-Earning Assets and Interest-Bearing Liabilities At or for the Years Ended December 31 ($000s Omitted) 1994 1993 1992 ---------------------------- ---------------------------- ---------------------------- End of End of End of Average Average Period Average Average Period Average Average Period Balances Yield Yield Balances Yield Yield Balances Yield Yield ----------- ------- ------ ----------- ------- ------ ----------- ------- ------ ASSETS Investment securities $ 2,149,385 4.98% 5.42% $ 2,178,164 3.67% 3.80% $ 1,365,679 4.41% 4.17% Mortgage-backed securities 1,276,615 8.14% 8.37% 1,595,255 8.71% 8.67% 1,909,819 9.32% 9.30% Loans receivable(a) 24,963,935 6.61% 6.85% 23,101,066 7.09% 6.73% 20,906,573 8.33% 7.52% Invest. in capital stock of FHLB 328,998 4.89% 4.81% 342,586 3.99% 3.49% 289,529 1.87% 0.43% ----------- ---- ----------- ---- ----------- ---- Interest-earning assets $28,718,933 6.53% $27,217,071 6.87% $24,471,600 8.11% =========== ==== =========== ==== =========== ==== LIABILITIES AND STOCKHOLDERS' EQUITY Customer deposits: Checking accounts $ 730,956 1.30% 1.28% $ 706,245 1.62% 1.35% $ 630,541 1.96% 1.91% Savings accounts 2,835,339 2.05% 2.92% 3,069,143 2.23% 3.11% 3,081,417 3.20% 3.80% Term accounts 14,496,937 4.46% 4.98% 13,239,960 4.73% 4.24% 12,763,873 5.75% 4.69% ----------- ---- ---- ----------- ---- ---- ----------- ---- ---- Total customer deposits 18,063,232 3.96% 4.57% 17,015,348 4.15% 3.92% 16,475,831 5.13% 4.40% Advances from FHLB 6,251,431 4.30% 5.21% 6,416,250 4.27% 3.87% 4,852,544 5.53% 4.62% Reverse repurchases 574,487 6.55% 6.67% 464,091 7.76% 6.06% 905,145 7.27% 8.09% Other borrowings 1,961,828 6.84% 7.25% 1,611,046 7.56% 7.07% 949,587 9.31% 9.41% ----------- ---- ----------- ---- ----------- ---- Interest-bearing liabilities $26,850,978 4.30% $25,506,735 4.46% $23,183,107 5.47% =========== ==== =========== ==== =========== ==== Net yield on interest-earning assets 2.23% 2.41% 2.64% ==== ==== ====
(a) Includes nonaccrual loans (90 days or more past due). The table on the following page presents the changes for 1994 and 1993 from the respective preceding year of the interest income and expense associated with each category of interest-bearing asset and liability as allocated to changes in volume and changes in rates. PAGE 28 ITEM 1. BUSINESS (Continued) YIELD ON INTEREST-EARNING ASSETS/COST OF FUNDS (continued)
TABLE 19 Volume and Rate Analysis of Interest Income and Interest Expense Years Ended December 31 ($000s Omitted) Increase/Decrease in Income/Expense Due to Changes in Due to Changes in Volume and Rate(a) --------------------------------------------------------------- 1994 1993 1992 1994 versus 1993 1993 versus 1992 ---------- ---------- ---------- ------------------------------ ------------------------------ Income/ Income/ Income/ Expense(b) Expense(b) Expense(b) Volume Rate Total Volume Rate Total ---------- ---------- ---------- -------- --------- --------- -------- --------- --------- Interest Income: Investments $ 107,059 $ 79,874 $ 60,231 $ (1,041) $ 28,226 $ 27,185 $ 27,407 $ (7,764) $ 19,643 Mortgage-backed securities 103,927 138,874 178,010 (26,381) (8,566) (34,947) (27,938) (11,198) (39,136) Loans receivable 1,649,413 1,637,764 1,740,845 74,556 (62,907) 11,649 248,072 (351,153) (103,081) Invest. in capital stock of Federal Home Loan Banks 16,078 13,660 5,424 (516) 2,934 2,418 1,151 7,085 8,236 ---------- ---------- ---------- Total interest income 1,876,477 1,870,172 1,984,510 Interest Expense: Customer deposits Checking accounts $ 9,463 $ 11,426 $ 12,376 $ 417 $ (2,380) $ (1,963) $ 2,049 $ (2,999) $ (950) Savings accounts 58,163 68,382 98,538 (5,007) (5,212) (10,219) (390) (29,766) (30,156) Term accounts 646,727 625,892 733,796 51,199 (30,364) 20,835 28,662 (136,566) (107,904) ---------- ---------- ---------- -------- --------- --------- -------- --------- --------- Total customer deposits 714,353 705,700 844,710 46,609 (37,956) 8,653 30,321 (169,331) (139,010) Advances from Federal Home Loan Banks 268,952 273,816 268,320 (7,117) 2,253 (4,864) 18,836 (13,340) 5,496 Securities sold under agreements to repurchase 37,620 36,023 65,779 4,659 (3,062) 1,597 (34,590) 4,834 (29,756) Other borrowings 134,182 121,875 88,371 21,990 (9,683) 12,307 45,809 (12,305) 33,504 ---------- ---------- ---------- -------- --------- --------- -------- --------- --------- Total interest expense 1,155,107 1,137,414 1,267,180 ---------- ---------- ---------- Net interest income $ 721,370 $ 732,758 $ 717,330 $(19,523) $ 8,135 $ (11,388) $188,316 $(172,888) $ 15,428 ========== ========== ========== ======== ========= ========= ======== ========= ========= Net interest income increase (decrease) as a percentage of average earning assets(c) (0.07)% 0.03% (0.04)% 0.77% (0.71)% 0.06% ====== ==== ====== ==== ====== ====
(a) The change in volume is calculated by multiplying the difference between the average balance of the current year and the prior year by the prior year's average yield. The change in rate is calculated by multiplying the difference between the average yield of the current year and the prior year by the prior year's average balance. The mixed changes in rate/volume is calculated by multiplying the difference between the average balance of the current year and the prior year by the difference between the average yield of the current year and the prior year. This amount is then allocated proportionately to the volume and rate changes calculated previously. (b) The effects of hedging activity have been included in income and expense of the related assets and liabilities. (c) Includes nonaccrual loans (90 days or more past due). PAGE 29 ITEM 1. BUSINESS (Continued) COMPETITION AND OTHER MATTERS The Company experiences strong competition in both attracting customer deposits and making real estate loans. Competition for savings deposits has historically come from money market mutual funds, other savings associa- tions, commercial banks, credit unions, and government and corporate debt securities. In addition, traditional financial institutions have found themselves in competition with other financial services entities, such as securities dealers, insurance companies, and others. The principal methods used by the Company to attract customer deposits, in addition to the interest rates and terms offered, include the offering of a variety of services and the convenience of office locations and hours of public operation. Competition in making real estate loans comes principally from other savings associations, mortgage banking companies, and commercial banks. Many of the nation's largest savings associations, mortgage banking companies, and commercial banks are head-quartered or have a significant number of branch offices in the areas in which the Company competes. Changes in the government's monetary, tax, or housing financing policies can also affect the ability of lenders to compete profitably. The primary factors in competing for real estate loans are interest rates, loan fee charges, underwriting standards, and the quality of service to borrowers and their real estate brokers. SAVINGS AND LOAN INDUSTRY The operations of savings associations are significantly influenced by general economic conditions, by the related monetary and fiscal policies of the federal government, and by the policies of financial institution regulatory authorities. Customer deposit flows and costs of funds are impacted by interest rates on competing investments and general market rates of interest. Lending and other investment activities are affected by the demand for mortgage financing and for consumer and other types of loans, which in turn are affected by the interest rates at which such financing may be offered and other factors affecting the supply of housing and the availability of funds. REGULATION FEDERAL HOME LOAN BANK SYSTEM. The FHLB system functions in a reserve credit capacity for its members, which may include savings associations, commercial banks and credit unions. As a member, World is required to own capital stock of an FHLB in an amount that depends generally upon its outstanding home mortgage loans or advances from such FHLB, and is authorized to borrow funds from such FHLB (see Borrowings). PAGE 30 ITEM 1. BUSINESS (Continued) REGULATION (continued) LIQUIDITY. The OTS requires insured institutions, such as World, 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 December 31, 1994, 1993, and 1992, World's regulatory average liquidity ratio was 7%, 8%, and 7%, respectively, consistently exceeding the requirement. FEDERAL DEPOSIT INSURANCE CORPORATION. The customer deposit accounts of World are insured by the FDIC as part of the Savings Association Insurance Fund up to the maximum amount permitted by law, currently $100,000 per insured depositor. As a result, the Association is subject to supervision by regulation and examination by the FDIC. FDIC insurance is required for all federally chartered associations. Such insurance may be terminated by the FDIC under certain circumstances involving violations of regulations or unsound practices. The annual premium charged for FDIC-SAIF insurance is determined by the FDIC using a risk-based system beginning in 1993. Under the system, associations are charged a variable rate ranging from a low of $.23 to a high of $.31 per $100 of deposits. The amount of capital an institution maintains and its examination scores are the most important factors determining the assessment. World qualifies for the lowest premium assessment of $.23 per $100 of deposits under the system. Current law generally imposes a moratorium on conversions from SAIF membership to Bank Insurance Fund (BIF) membership until such time as the SAIF meets or exceeds the designated reserve ratio for such fund. However, a savings institution may convert to a bank charter if the resulting bank remains a member of SAIF. After expiration of the moratorium, such conversion requires payment of an exit fee to the insurance fund that the institution leaves and an entrance fee to the insurance fund the institution enters. In addition, bank holding companies, which were previously authorized to acquire savings institutions only in connection with supervisory transactions, may now acquire savings institutions generally. OFFICE OF THRIFT SUPERVISION. As a federally chartered savings and loan association, the principal regulator of World is the OTS. Under various regulations of the OTS, savings and loan associations are required, among other things, to pay assessments to the OTS, maintain required regulatory capital, maintain liquid assets at levels fixed from time to time, and to comply with various limitations on loans to one borrower and limitations on equity investments, investments in real estate, and investments in corporate debt securities that are not investment grade. World is subject to examination by the OTS and is in compliance with its current requirements. PAGE 31 ITEM 1. BUSINESS (Continued) REGULATION (continued) FEDERAL RESERVE SYSTEM. Federal Reserve Board regulations require savings institutions to maintain noninterest-earning reserves against their checking accounts. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements. World is currently in compliance with all applicable Federal Reserve Board reserve requirements. Savings and loan associations have authority to borrow from the Federal Reserve Bank "Discount Window," but the Federal Reserve Board requires savings and loan associations to exhaust all FHLB sources before borrowing from the Federal Reserve Bank. REGULATORY CAPITAL. The OTS requires federally insured institutions such as World to meet certain minimum capital requirements. The table below summarizes World's regulatory capital ratios and compares them to the OTS minimum requirements at December 31.
TABLE 20 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 $1,931,375 6.26% $ 462,564 1.50% $2,030,992 7.27% $ 419,052 1.50% Core 2,047,016 6.64 925,129 3.00 2,240,518 8.02 838,103 3.00 Risk-based 2,353,781 13.54 1,390,391 8.00 2,533,738 17.42 1,163,650 8.00
During the first quarter of 1994, the OTS 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. World Savings has taken a conservative approach and has weighted the Association's entire multi-family portfolio at 100%. This change caused a decrease in the risk-based capital ratio from December 1993 to December 1994 and reduced our December 31, 1994, risk-based capital ratio by approximately 100 basis points. In addition, the decrease in the regulatory capital ratios from December 1994 to December 1993 was also due to the payment in 1994 by World Savings of $275 million in dividends to its parent, Golden West Financial Corporation. The main purpose for the dividend was to fund Golden West's stock repurchase program. PAGE 32 ITEM 1. BUSINESS (Continued) REGULATION (continued) The table below summarizes World's regulatory capital ratios and compares them to the fully phased-in OTS minimum requirements at December 31.
TABLE 21 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 $1,931,375 6.26% $ 462,564 1.50% $2,030,992 7.27% $ 419,052 1.50% Core 1,931,375 6.26 925,129 3.00 2,030,992 7.27 838,103 3.00 Risk-based 2,238,140 12.96 1,381,140 8.00 2,323,040 16.21 1,146,794 8.00
The OTS has adopted rules based upon five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The determination of whether an association falls into a certain classification depends primarily on its capital ratios. The table on the following page summarizes the capital ratios for each of the five classifications and shows that World Savings met the "well capitalized" standard as of December 31, 1994. PAGE 33 The table below shows a reconciliation of World's equity capital to regulatory capital at December 31, 1994.
TABLE 22 Reconciliation of Equity Capital to Regulatory Capital ($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 1,830,998 Unrealized gains on securities available for sale 25,966 ----------- Equity capital $ 2,090,555 $ 2,090,555 $ 2,090,555 $ 2,090,555 $ 2,090,555 $ 2,090,555 =========== Positive goodwill (1) (219,493) (219,493) (219,493) (219,493) (219,493) Negative goodwill (1) 86,279 86,279 86,279 86,279 86,279 Qualifying supervisory positive goodwill (1) 115,641 115,641 115,641 115,641 Unrealized gains on securities available for sale (25,966) (25,966) (25,966) (25,966) (25,966) Equity/direct investments (2) (709) Subordinated debt 199,089 General valuation allowances 108,385 ----------- ----------- ----------- ----------- ----------- Regulatory capital $ 1,931,375 $ 2,047,016 $ 2,047,016 $ 2,047,016 $ 2,353,781 =========== =========== =========== =========== =========== Total assets $31,005,571 =========== Adjusted total assets $30,837,628 $30,837,628 $30,837,628 =========== =========== =========== Risk-weighted assets $17,379,889 $17,379,889 =========== =========== CAPITAL RATIO - ACTUAL 6.74% 6.26% 6.64% 6.64% 11.78% 13.54% =========== =========== =========== =========== =========== =========== 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) Required to be deducted from core and risk-based capital on a phased-in basis through December 1994. Goodwill must be deducted for the tangible capital calculation. Goodwill in excess of a sliding scale limit must also be deducted from the core and risk-based capital calculations. As of January 1, 1995, 100% of goodwill was required to be deducted for all three capital calculations. (2) Equity investments were required to be deducted from risk-based capital on a phased-in basis through June 1994. PAGE 34 The table below shows a reconciliation of World's equity capital to regulatory capital at December 31, 1993.
TABLE 23 Reconciliation of Equity Capital to Regulatory Capital ($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 1,848,761 Unrealized gains on securities available for sale 82,299 ----------- Equity capital $ 2,164,651 $ 2,164,651 $ 2,164,651 $ 2,164,651 $ 2,164,651 $ 2,164,651 =========== Positive goodwill (1) (2) (232,758) (232,758) (232,758) (232,758) (232,758) Negative goodwill (1) (3) 99,099 99,099 99,099 99,099 99,099 Qualifying supervisory positive goodwill (1) (2) 209,526 209,526 209,526 209,526 Equity/other investments (4) (1,757) Subordinated debt 198,879 General valuation allowances 96,098 ----------- ----------- ----------- ----------- ----------- Regulatory capital $ 2,030,992 $ 2,240,518 $ 2,240,518 $ 2,240,518 $ 2,533,738 =========== =========== =========== =========== =========== Total assets $28,028,596 =========== Adjusted total assets $27,936,774 $27,936,774 $27,936,774 =========== =========== =========== Risk-weighted assets $14,545,620 $14,545,620 =========== =========== CAPITAL RATIO - ACTUAL 7.72% 7.27% 8.02% 8.02% 15.40% 17.42% =========== =========== =========== =========== =========== =========== 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 (.75% of assets at December 31, 1993), 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 $2,443 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 December 31, 1993) through June 1994. PAGE 35 ITEM 1. BUSINESS (Continued) REGULATION (continued) The table below compares World's regulatory capital to the well capitalized classification at December 31.
TABLE 24 World Savings and Loan Association Regulatory Capital Compared to Well Capitalized Classification ($000s Omitted) 1994 1993 ---------------------------------------- ---------------------------------------- ACTUAL WELL CAPITALIZED ACTUAL WELL-CAPITALIZED ------------------- ------------------- ------------------- ------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ---------- ------ ---------- ------ ---------- ------ ---------- ------ Leverage $2,047,016 6.64% $1,541,881 5.00% $2,240,518 8.02% $1,396,839 5.00% Tier 1 risk-based 2,047,016 11.78 1,042,793 6.00 2,240,518 15.40 872,737 6.00 Total risk-based 2,353,781 13.54 1,737,989 10.00 2,533,738 17.42 1,454,562 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 December 31, 1994, were 6.26%, 11.19%, and 12.96%, respectively. World's leverage, Tier 1 risk-based, and total risk-based capital ratios under the fully phased-in 1995 OTS minimum requirements at December 31, 1993, were 7.27%, 14.17%, and 16.21%, respectively. CAPITAL DISTRIBUTIONS BY SAVINGS ASSOCIATIONS. The OTS limits capital distributions by savings associations such as World. Under these regulations, a savings association is classified as either Tier 1, if it meets each of its fully phased-in capital requirements immediately prior to and after giving effect to the proposed capital distribution; Tier 2, if it meets each of its current capital requirements but does not meet one or more of its fully phased-in capital requirements immediately prior to or after giving effect to the proposed capital distribution; or Tier 3, if it does not meet its current capital requirements immediately prior to or after giving effect to the proposed capital distribution. A savings association that would otherwise be classified as Tier 1 is treated as Tier 2 or Tier 3 if the OTS so notifies the association based on OTS' conclusion that the association is in need of more than normal supervision. Under the regulations, a Tier 1 association may make capital distributions during a calendar year up to 100% of its net income to date during the calendar year plus up to one-half of its capital in excess of the fully phased-in requirement at the end of the prior year. A Tier 2 association may make capital distributions from 25% to 75% of its net income over the most recent four quarter period, with the percentage varying based on its level of risk-based capital. Any capital distributions by a Tier 3 association or in excess of the foregoing amounts by a Tier 1 or Tier 2 association are subject to either prior OTS approval or notice must be given to the OTS, which may disapprove the distribution. However, current law prohibits capital distributions by an institution that PAGE 36 ITEM 1. BUSINESS (Continued) REGULATION (continued) does not meet its capital requirements. Savings associations are required to give the OTS 30-day advance written notice of all proposed capital distributions. For purposes of capital distributions, the OTS has classified World as a Tier 1 association. World paid a total of $275 million in upstream dividends to Golden West during 1994. The main purpose for the dividend was to fund Golden West's stock repurchase program. LIMITATION ON LOANS TO ONE BORROWER. Current law subjects savings associations to the same loans-to-one borrower restrictions that are applicable to national banks with limited provisions for exceptions. In general, the national bank standard restricts loans to a single borrower to no more than 15% of a bank's unimpaired capital and unimpaired surplus, plus an additional 10% if the loan is collateralized by certain readily marketable collateral. (Real estate is not included in the definition of "readily marketable collateral.") At December 31, 1994, the maximum amount that World could have loaned to one borrower (and related entities) was $314 million. At such date, the largest amount of loans that World had outstanding to any one borrower was $39 million. DEPOSITOR PRIORITIES. In the event of the appointment of a receiver of 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 as subrogee or transferee) over general creditors (including holders of debt of the Association). Thus, in the event of a liquidation of the Association or a similar event, claims for deposits would have a priority over claims of holders of debt. As of December 31, 1994, the Association had approximately $19.2 billion of deposits outstanding. At December 31, 1994, the Association owed $250 million of debt to Golden West. POWERS OF THE FDIC IN CONNECTION WITH THE INSOLVENCY OF AN INSURED DEPOSITORY INSTITUTION. If the FDIC is appointed a receiver or conservator of an insured depository institution, such as the Association, the FDIC may disaffirm or repudiate any contract or lease to which such institution is a party, the performance of which is determined to be burdensome, and the disaffirmance or repudiation of which is determined to promote the orderly administration of the institution's affairs. The FDIC may contend that its power to repudiate "contracts" extends to obligations such as the debt of the depository institution and at least one court has held that the FDIC can repudiate publicly-traded debt obligations. The effect of any such repudiation should be to accelerate the maturity of debt. Such repudiation would result in a claim by each holder of debt against the receivership. The claim may be for principal and interest accrued through the date of the appointment of the conservator or receiver. Alternatively, at least one court has held that the claim would be in the amount of the fair market PAGE 37 ITEM 1. BUSINESS (Continued) REGULATION (continued) value of the debt as of the date of the repudiation, which amount could be more or less than accrued principal and interest. The amount paid on the claims of the holders of the debt would depend, among other factors, upon the amount of receivership assets available for the payment of unsecured claims and the priority of the claim relative to the claims of other unsecured creditors and depositors, and may be less than the amount owed to the holders of the debt. See "Depositor Priorities" on the previous page. If the maturity of the debt were so accelerated, and a claim relating to the debt paid by the receivership, the holders of the debt might not be able, depending upon economic conditions, to reinvest any amounts paid on the debt at a rate of interest comparable to that paid on the debt. In addition, although the holders of the debt may have the right to accelerate the debt in the event of the appointment of a conservator or receiver of the depository institution, the FDIC as conservator or receiver may enforce most types of contracts, including the debt pursuant to their terms, notwithstanding any such acceleration provision. The FDIC as conservator or receiver may also transfer to a new obligor any of the depository institution's assets and liabilities, without the approval or consent of its creditors. In its resolutions of the problems of an insured depository institution in default or in danger of default, the FDIC is generally obligated to satisfy its obligations to insured depositors at the least possible cost to the deposit insurance fund. In addition, the FDIC may not take any action that would have the effect of increasing the losses to a deposit insurance fund by protecting depositors for more than the insured portion of deposits (generally $100,000) or by protecting creditors other than depositors. Existing law authorizes the FDIC to settle all uninsured and unsecured claims in the insolvency of an insured institution by making a final payment after the declaration of insolvency. Such a payment would constitute full payment and disposition of the FDIC's obligations to claimants. Existing law provides that the rate of such final payment is to be a percentage reflecting the FDIC's receivership recovery experience. Similarly, the Resolution Trust Corporation may be appointed as a receiver or conservator of an insured depository institution with powers and duties similar to the FDIC. SAVINGS AND LOAN HOLDING COMPANY LAW. The Company is a "savings and loan holding company" under the National Housing Act of 1934. As such, it has registered with the OTS and is subject to OTS regulation and OTS and FDIC examination, supervision, and reporting requirements. Among other things, the OTS has authority to determine that an activity of a savings and loan holding company constitutes a serious risk to the financial safety, soundness, or stability of its subsidiary savings institutions and thereupon may impose, among other things, restrictions on the payment of dividends by the subsidiary institutions and on transactions between the subsidiary institutions, the holding company and subsidiaries or affiliates of either. PAGE 38 ITEM 1. BUSINESS (Continued) REGULATION (continued) As World's parent company, Golden West is considered an "affiliate" of the Association for regulatory purposes. Savings associations are subject to the rules relating to transactions with affiliates and loans to insiders generally applicable to commercial banks that are members of the Federal Reserve System set forth in Sections 23A, 23B, and 22(h) of the Federal Reserve Act, as well as additional limitations set forth in current law and as adopted by the OTS. In addition, current law generally prohibits a savings association from lending or otherwise extending credit to an affiliate, other than the association's subsidiaries, unless the affiliate is engaged only in activities that the Federal Reserve Board has determined to be permissible for bank holding companies and that the OTS has not disapproved. OTS regulations provide guidance in determining an affiliate of a savings association and in calculating compliance with the quantitative limitations on transactions with affiliates. TAXATION. Savings and loan associations that meet certain definitional tests and other conditions prescribed by the Internal Revenue Code are allowed a bad debt reserve deduction computed as a percentage of taxable income before such deduction. Accordingly, qualifying savings and loan associations are subject to a lower effective federal income tax rate than that applicable to corporations generally. The effective federal income tax rate applicable to qualifying savings and loan associations is approximately 32.2%. The bad debt reserve deduction computed as a percentage of taxable income is available only to the extent that amounts accumulated in the bad debt reserve for certain real estate loans defined as "qualifying real estate loans" do not exceed 6% of such loans at yearend. In addition, the deduction is further limited to the amount by which 12% of customer deposits at yearend exceeds the sum of surplus, undivided profits and reserves at the beginning of the year. At December 31, 1994, the 6% and 12% limitations did not restrict the bad debt reserve deduction of World, and it is expected that such limitations will not be restricting factors in the future. Qualifying savings and loan associations that file income tax returns as members of a consolidated group are required to reduce their bad debt reserve deduction for tax losses attributable to non-savings and loan association members of the group whose activities are functionally related to the activities of the savings and loan association member. If the accumulated bad debt reserves are used for any purpose other than to absorb bad debt losses, federal income taxes may be imposed at the then applicable rates. In addition, if such reserves are used to pay dividends or to make other distributions with respect to a savings and loan association stock (such as redemption or liquidation), special additional taxes would be imposed. PAGE 39 ITEM 1. BUSINESS (Continued) REGULATION (continued) Although generally similar, differences exist, with respect to the determination of taxable income, among the Internal Revenue Code and the tax codes of the states in which the Company operates. These states do not allow the special percentage of taxable income method of computing the bad debt reserve, discussed above, which can cause the Company's taxable income at the state level to be significantly different from its taxable income at the federal level. Golden West utilizes the accrual method of accounting for income tax purposes and for preparing its published financial statements. For financial reporting purposes only, the Company uses "purchase accounting" in connection with certain assets acquired through mergers. The purchase accounting portion of income is not subject to tax. In the first quarter of 1993, the Company adopted Statement of Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes." FAS 109 required a change from the deferred to the liability method of computing deferred income taxes. The Company has applied FAS 109 prospectively. The cumulative effect of this change in accounting for income taxes for the periods ending prior to January 1, 1993, is not material. 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. EMPLOYEE RELATIONS The Company had a total of 3,877 full-time and 682 permanent part-time employees at December 31, 1994. None of the employees of the Company are represented by any collective bargaining group. The management of the Company considers employee relations to be good. ITEM 2. PROPERTIES Properties owned by the Company are located in Arizona, California, Colorado, Florida, Kansas, New Jersey, and Texas. The executive offices of the Company are located at 1901 Harrison Street, Oakland, California, in leased facilities. The Company continuously evaluates the suitability and adequacy of the offices of the Company and has a program of relocating or remodeling them as necessary to maintain efficient and attractive facilities. The Company completed building a 300,000 square-foot office complex on an 111-acre site in San Antonio, Texas, during 1994. This complex houses its Loan Service, Savings Operations, and Information Systems Departments. PAGE 40 ITEM 2. PROPERTIES (Continued) The Company owns 177 of its branches, some of which are located on leased land. For further information regarding the Company's investment in premises and equipment and expiration dates of long-term leases, see Note J to the Financial Statements, in Item 14. ITEM 3. LEGAL PROCEEDINGS Savings and loan associations and other financial institutions that take consumer deposits and make mortgage loans in California have been named from time to time in class action proceedings that question the legality of certain terms of deposit and loan agreements and the implementation of such agreements. World is named as a defendant in one action that purports to be a class action relating to certain deposit products of World. This action was dismissed at the trial court level, and, upon appeal, the dismissal was affirmed in part and reversed in part. The action was subsequently remanded to the trial court level, where a class has been certified and a trial scheduled for the end of March 1995. World is also named as a defendant in four actions that purport to be class actions relating to certain loan products of World. No class has been certified in any of these four actions, all of which are in their preliminary stages. In the opinion of management, the result of these actions will not have a material effect on the Company's consolidated financial condition or results of operations. The Company and its subsid- iaries are parties to other actions arising in the ordinary course of business, none of which, in the opinion of management, is material to the Company's consolidated financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Inapplicable. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS MARKET PRICES OF STOCK Golden West's stock is listed on the New York Stock Exchange and Pacific Stock Exchange and traded on the Boston and Midwest Stock Exchanges under the ticker symbol GDW. The quarterly price ranges for the Company's common stock during 1994 and 1993 were as follows:
TABLE 25 Common Stock Price Range 1994 1993 --------------- --------------- First Quarter 37 1/2 - 46 41 - 50 3/8 Second Quarter 37 3/8 - 41 1/8 39 1/2 - 48 7/8 Third Quarter 38 5/8 - 44 1/4 38 3/8 - 44 Fourth Quarter 34 1/4 - 40 1/4 37 1/8 - 44 3/4
PAGE 41 ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS (Continued) PER SHARE CASH DIVIDENDS DATA Golden West's cash dividends paid per share for 1994 and 1993 were as follows:
TABLE 26 Cash Dividends Per Share 1994 1993 ----- ----- First Quarter $.075 $.065 Second Quarter $.075 $.065 Third Quarter $.075 $.065 Fourth Quarter $.085 $.075
The principal sources of funds for the payment by Golden West of cash dividends are cash dividends paid to it by World Savings, investment income, and short-term borrowings. Under OTS regulations, the OTS must be given at least 30 days' advance notice by the Association of any proposed dividend to be paid to the parent. Under OTS regulations, World Savings is classified as a Tier 1 association and is, therefore, allowed to distribute dividends up to 100% of its net income in any year plus one-half of its capital in excess of the OTS fully phased-in capital requirement as of the end of the prior year. At December 31, 1994, $328 million of the Association's retained earnings had not been subjected to federal income taxes due to the application of the bad debt deduction, and $1.8 billion of the Association's retained earnings were available for the payment of cash dividends without the imposition of additional federal income taxes. STOCKHOLDERS At the close of business on March 17, 1995, 58,591,005 shares of Golden West's Common Stock were outstanding and were held by 1,850 stockholders of record. At the close of business on March 17, 1995, the Company's common stock price was 37 3/4. The transfer agent and registrar for the Golden West Common Stock is First Interstate Bank, San Francisco, California 94104. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected consolidated financial and other data for Golden West for the years indicated. Such information is qualified in its entirety by the more detailed financial information set forth in the financial statements and notes thereto appearing in the documents incorporated herein by reference. PAGE 42 ITEM 6. SELECTED FINANCIAL DATA (Continued)
TABLE 27 Five Year Consolidated Summary of Operations ($000s Omitted, Except Per Share Amounts) Year Ended December 31 --------------------------------------------------------------- 1994 1993 1992 1991 1990 ---------- ---------- ---------- ---------- ---------- Interest Income: Interest on loans $1,649,413 $1,637,764 $1,740,845 $1,877,955 $1,730,408 Interest on MBS 103,927 138,874 178,010 210,834 209,846 Interest and dividends on investments 123,137 93,534 65,655 125,801 158,068 ---------- ---------- ---------- ---------- ---------- 1,876,477 1,870,172 1,984,510 2,214,590 2,098,322 Interest Expense: Interest on customer deposits 714,353 705,700 844,710 1,094,383 1,022,706 Interest on advances and other borrowings 440,754 431,714 422,470 488,431 578,771 ---------- ---------- ---------- ---------- ---------- 1,155,107 1,137,414 1,267,180 1,582,814 1,601,477 ---------- ---------- ---------- ---------- ---------- Net interest income 721,370 732,758 717,330 631,776 496,845 Provision for loan losses 62,966 65,837 43,218 34,984 18,701 ---------- ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 658,404 666,921 674,112 596,792 478,144 Non-Interest Income: Fees 28,816 31,061 24,458 20,889 17,069 Gain (loss) on the sale of securities and mortgage-backed securities (120) 22,541 4,058 (1,021) 3,127 Other 8,790 8,440 12,601 7,008 8,698 ---------- ---------- ---------- ---------- ---------- 37,486 62,042 41,117 26,876 28,894 Non-Interest Expense: General and administrative: Personnel 150,220 132,472 118,553 107,759 95,476 Occupancy 44,472 40,443 38,521 35,619 31,750 Advertising 10,761 10,782 8,968 10,486 11,017 Other 97,466 89,470 84,833 81,557 69,450 ---------- ---------- ---------- ---------- ---------- 302,919 273,167 250,875 235,421 207,693 Amortization of goodwill arising from acquisitions 2,589 (1,586) 661 1,532 16,657 ---------- ---------- ---------- ---------- ---------- 305,508 271,581 251,536 236,953 224,350 ---------- ---------- ---------- ---------- ---------- Earnings before taxes on income 390,382 457,382 463,693 386,715 282,688 Taxes on income 159,933 183,528 180,155 148,116 101,231 ---------- ---------- ---------- ---------- ---------- Net earnings $ 230,449 $ 273,854 $ 283,538 $ 238,599 $ 181,457 ========== ========== ========== ========== ========== Net earnings per share $ 3.71 $ 4.28 $ 4.46 $ 3.76 $ 2.87 ========== ========== ========== ========== ==========
PAGE 43 ITEM 6. SELECTED FINANCIAL DATA (Continued)
TABLE 28 Five Year Summary of Financial Condition ($000s Omitted) At December 31 ------------------------------------------------------------------- 1994 1993 1992 1991 1990 ----------- ----------- ----------- ----------- ----------- Assets $31,683,741 $28,829,288 $25,890,921 $24,297,784 $22,562,101 Cash, securities available for sale, and other investments 2,265,886 2,417,871 1,179,868 1,289,327 1,343,464 Mortgage-backed securities 1,194,378 1,522,536 1,791,615 2,000,167 2,485,695 Loans receivable 27,071,266 23,912,571 21,968,676 20,087,432 17,730,447 Goodwill arising from acquisitions 136,245 136,754 155,873 181,733 304,266 Customer deposits 19,219,389 17,422,484 16,486,246 16,818,510 14,372,484 Advances from Federal Home Loan Banks 6,488,418 6,281,691 5,499,363 4,159,796 3,834,755 Securities sold under agreements to repurchase and other borrowings 601,821 1,119,414 637,977 840,358 2,314,051 Medium-term notes 1,164,079 676,540 81,267 166,750 960,869 Subordinated debt 1,221,559 1,220,061 921,701 625,105 426,200 Stockholders' equity 2,000,274 2,065,604 1,727,398 1,449,135 1,220,403
PAGE 44 ITEM 6. SELECTED FINANCIAL DATA (Continued)
TABLE 29 Five Year Selected Other Data ($000s Omitted) Year Ended December 31 --------------------------------------------------------------- 1994 1993 1992 1991 1990 ---------- ---------- ---------- ---------- ---------- New real estate loans originated $6,637,653 $6,411,877 $6,455,090 $4,877,157 $4,309,494 Average yield on new real estate loans 6.44% 6.86% 8.06% 9.83% 10.64% Customer deposits increase (decrease) ($) $1,796,905 $ 936,238 $ (332,264) $2,446,026 $2,585,100 Customer deposits increase (decrease) (%) 10.3% 5.7% (2.0)% 17.0% 21.9% Net earnings/average net worth 11.11% 14.68% 17.86% 17.92% 15.98% Net earnings/average assets .78% .98% 1.12% 1.00% .86% General and administrative expense to: Total revenues 15.83% 14.14% 12.39% 10.50% 9.76% Average assets 1.02% .97% .99% .99% .99% Ratio of earnings to fixed charges:(a) Including interest on customer deposits 1.34x 1.40x 1.36x 1.24x 1.18x Excluding interest on customer deposits 1.87x 2.05x 2.08x 1.78x 1.48x Yield on loan portfolio 6.85% 6.73% 7.52% 9.30% 10.50% Yield on MBS 8.37% 8.67% 9.30% 9.74% 9.81% Yield on investments 5.42% 3.80% 4.17% 5.41% 8.11% Yield on earning assets 6.81% 6.61% 7.52% 9.16% 10.29% Cost of deposits 4.57% 3.92% 4.40% 6.09% 7.76% Cost of borrowings 5.85% 4.69% 5.58% 7.48% 8.73% Cost of funds 5.00% 4.18% 4.75% 6.44% 8.06% Spread 1.81% 2.43% 2.77% 2.72% 2.23% Nonperforming asset/total assets(b) 1.12% 1.37% 1.27% 1.16% .77% Stockholders' equity/total assets 6.31% 7.16% 6.67% 5.96% 5.41% Average stockholders' equity/average assets 6.98% 6.65% 6.27% 5.60% 5.40% World Savings and Loan Association regulatory capital ratios:(c) Tangible capital 6.26% 7.27% 6.54% 5.79% 4.61% Core capital 6.64% 8.02% 7.54% 6.96% 6.00% Risk-based capital 13.54% 17.42% 16.28% 14.98% 13.52% Number of savings branch offices 237 227 227 231 211 Cash dividends per share $.31 $.27 $.23 $.19 $.165 Dividend payout ratio 8.34% 6.31% 5.16% 5.05% 5.75%
(a) Earnings represent income from continuing operations before income taxes and fixed charges. Fixed charges include interest expense and amortization of debt expense. (b) The definition of nonperforming assets includes nonaccrual loans (loans that are 90 days or more past due) and real estate owned acquired through foreclosure. (c) The requirements were 1.5%, 3.0%, and 8.0% (7.2% prior to December 31, 1992) for tangible, core, and risk-based capital, respectively, at December 31, 1993, and 1994. World Savings and Loan Association currently meets its fully phased-in capital requirement. PAGE 45 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the year ended December 31, 1994, Golden West Financial Corporation (Golden West or Company) reported net earnings of $230 million, or $3.71 per share, compared with $274 million, or $4.28 per share, in 1993 and $284 million, or $4.46 per share, in 1992. Golden West's principal subsidiary, World Savings and Loan Association (World Savings or Association), headquartered in Oakland, California, had 237 savings branch offices and $31 billion in assets at December 31, 1994. World Savings is the third largest thrift in the country. At December 31, 1994, the Association's savings network included 117 branches in California, 59 in Colorado (seven of which were subsequently sold in January 1995 with $153 million in deposits), 20 in Florida, 14 in Texas, ten in Kansas, nine in Arizona, and eight in New Jersey. By virtue of being a federally chartered thrift, World Savings can originate mortgages anywhere in the nation, even though the Association may not be authorized to conduct deposit gathering business in the same jurisdictions. In addition to the states with savings operations referenced above, World Savings had lending operations in Connecticut, Delaware, Idaho, Illinois, Maryland, Minnesota, Missouri, Nevada, New Mexico, Oregon, Pennsylvania, Utah, Virginia, Washington, and Wisconsin. The following narrative focuses on the significant financial statement changes that have taken place at Golden West over the past three years and includes a discussion of the Company's financial condition, results of operations, and liquidity and capital resources. FINANCIAL CONDITION The table on the following page summarizes the Company's major asset, liability, and equity components in percentage terms at yearends 1994, 1993, 1992, and 1991. As the 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. PAGE 46 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued)
TABLE 30 Asset, Liability, and Equity Components as Percentages of the Total Balance Sheet December 31 ---------------------------- 1994 1993 1992 1991 ------ ------ ------ ------ Assets: Cash and investments 7.2% 8.4% 4.6% 5.3% Mortgage-backed securities 3.8 5.3 6.9 8.2 Loans receivable 85.4 82.9 84.9 82.7 Other assets 3.6 3.4 3.6 3.8 ----- ----- ----- ----- 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== Liabilities and Stockholders' Equity: Customer deposits 60.7% 60.4% 63.7% 69.2% FHLB advances 20.5 21.8 21.2 17.1 Securities sold under agreements to repurchase 1.9 1.5 2.2 2.7 Medium-term notes 3.7 2.4 0.3 0.7 Federal funds purchased 0.8 0.0 0.0 0.0 Other liabilities 2.3 2.5 2.3 1.7 Subordinated debt 3.8 4.2 3.6 2.6 Stockholders' equity 6.3 7.2 6.7 6.0 ----- ----- ----- ----- 100.0% 100.0% 100.0% 100.0% ===== ===== ===== =====
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 of assets and liabilities is commonly referred to as the gap. The gap table on the following page shows that, as of December 31, 1994, the Company's assets are scheduled to reprice sooner than its liabilities. Consequently, one would expect falling interest rates to lower Golden West's earnings and rising rates to increase the Company's earnings. However, Golden West's earnings are also affected by the built-in lag inherent in the Eleventh District Cost of Funds Index (COFI), which is the benchmark the Company uses to determine the rate on the great majority of its adjustable rate mortgages. Specifically, there is a two-month delay in reporting the COFI because of the time required to gather the data needed to compute the index. As a result, the current COFI actually reflects the Eleventh District's cost of funds at the level it was two months prior. Consequently, when the interest rate environment changes, the COFI reporting lag causes assets to initially reprice more slowly than liabilities, enhancing earnings when rates are falling and holding down PAGE 47 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) income when rates rise. In addition to the COFI reporting lag, other elements of ARM loans also have an impact on earnings. These elements are the interest rate adjustment frequency of ARM loans, interest rate caps or limits on individual rate changes, interest rate floors, and introductory rates on new ARM loans.
TABLE 31 Repricing of Interest-Earning Assets and Interest-Bearing Liabilities, Repricing Gaps, and Gap Ratio As of December 31, 1994 (Dollars in Millions) Projected Repricing(a) ------------------------------------------- 0-3 4-12 1-5 Over 5 Months Months Years Years Total ------- ------- ------- ------- ------- Interest-Earning Assets: Investments $ 1,144 $ 119 $ 657 $ 103 $ 2,023 Mortgage-backed securities 107 98 396 593 1,194 Loans Receivable: Rate-sensitive 20,789 2,655 396 -0- 23,840 Fixed-rate 65 196 957 1,789 3,007 Other(b) 481 -0- -0- -0- 481 Impact of hedging 1,026 180 (521) (685) -0- ------- ------- ------- ------- ------- Total $23,612 $ 3,248 $ 1,885 $1,800 $30,545 Interest-Bearing Liabilities(c): Customer deposits $ 6,786 $ 7,462 $ 4,823 $ 148 $19,219 FHLB advances 4,634 1,225 540 89 6,488 Other borrowings 1,292 120 1,018 808 3,238 Impact of hedging 4,086 (1,793) (2,324) 31 -0- ------- ------- ------- ------- ------- Total $16,798 $ 7,014 $ 4,057 $1,076 $28,945 ------- ------- ------- ------- ------- Repricing gap $ 6,814 $(3,766) $(2,172) $ 724 ======= ======= ======= ====== Cumulative gap $ 6,814 $ 3,048 $ 876 $1,600 ======= ======= ======= ====== Cumulative gap as a percentage of total assets 21.5% 9.6% 2.8% ======= ======= =======
(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 Golden West's investment portfolio is composed primarily of federal funds, short-term repurchase agreements collateralized by mortgage-backed securities, short-term money market securities, and collateralized mortgage PAGE 48 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) obligations. In determining the amounts of assets to invest in each class of investments, the Company considers relative rates, liquidity, and credit quality. When opportunities arise, the Company enters into arbitrage transactions with secured borrowings and short-term investments to profit from the rate differential. The level of the Company's investments position in excess of its liquidity requirements at any time depends on liquidity needs and available arbitrage opportunities. The Office of Thrift Supervision (OTS) requires insured institutions, such as World Savings, 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 December 31, 1994, 1993, and 1992, World's regulatory average liquidity ratio was 7%, 8%, and 7%, respectively, consistently exceeding the requirement. Effective December 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 115 (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 December 31, 1994, the Company had no securities held to maturity or for trading. At December 31, 1994, and 1993, the Company had securities available for sale in the amount of $1.5 billion and $1.6 billion, respectively, and unrealized gains on securities available for sale included in stockholders' equity of $13 million and $41 million, respectively. 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. Included in the securities available for sale at December 31, 1994, and 1993, were collateralized mortgage obligations (CMOs) in the amount of $668 million and $275 million, respectively. The Company holds CMOs on which both principal and interest are received. At December 31, 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. 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 December 31, 1994, and 1993, the Company had mortgage-backed securities PAGE 49 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) held to maturity in the amount of $871 million and $408 million, respectively. At December 31, 1994, and 1993, the Company had mortgage-backed securities available for sale in the amount of $323 million and $1.1 billion, respectively, and unrealized gains on mortgage-backed securities included in stockholders' equity of $6 million and $44 million, respectively. Effective December 31, 1993, the Company adopted the provisions of FAS 115, "Accounting for Certain Investments in Debt and Equity Securities" and, in accordance with FAS 115, placed a portion of its MBS portfolio from held to maturity status to its available for sale portfolio. After reviewing the opportunities to sell MBS together with the capacity to hold MBS for investment, the Company decided to retain a larger volume for investment. Consequently, as permitted by FAS 115, during 1994, the Company transferred $454 million of its available for sale portfolio of MBS to its held to maturity portfolio. The unrealized holding gain on these securities in the amount of $7 million will be amortized as a yield adjustment over the remaining life of these securities. Repayments of MBS during the years 1994, 1993, and 1992 amounted to $311 million, $646 million, and $552 million, respectively. 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 as exhibited in the reduction of repayments between 1994 and 1993. The increase in repayments in 1993 over 1992 was primarily due to an increase in refinance activity as many borrowers took advantage of lower interest rates available at that time. LOAN PORTFOLIO New loan originations in 1994, 1993, and 1992 amounted to $6.6 billion, $6.4 billion, and $6.5 billion, respectively. Refinanced loans constituted 41% of new loan originations in 1994 compared to 59% in 1993 and 56% in 1992. Higher interest rates during 1994 caused the volume of refinance activity in the marketplace to drop considerably from the record high levels of 1993. Refinance activity is expected to decline further if rates remain at current levels or continue to increase. 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. PAGE 50 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) 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 MBS) composed of rate-sensitive loans was 89% at yearend 1994 compared to 87% at yearends 1993 and 1992. While rates offered on fixed-rate mortgages rose significantly during 1994, lower rates on ARM loans made adjustable instruments more attractive in the marketplace. Golden West's ARM originations constituted approximately 93% of new mortgage loans made by the Company in 1994, compared with 75% in 1993 and 80% in 1992. Approximately $4.8 billion of the Association's ARMs have terms that state that the interest rate may not fall below a lifetime floor set at the time of origination. As of December 31, 1994, $948 million of these ARMs were at their rate floors. The weighted average floor rate on these loans was 7.56% at December 31, 1994. Without the floor, the average yield on these loans would have been 6.47%. Although the Company has lending operations in 22 states, the primary mortgage origination focus continues to be on residential property in California. In 1994, 62% of total loan originations were on residential properties in California, compared to 73% and 83% in 1993 and 1992, respectively. While there was a decrease in originations in California, the increase in total originations in 1994 as compared to 1993 and 1992 was due to increased activity by the Company in markets outside California. The percentage of the total loan portfolio (excluding mortgage-backed securities) that is comprised of residential loans in California was 77% at December 31, 1994, 81% at December 31, 1993, and 83% at December 31, 1992. The total growth in the portfolio for the year ended December 31, 1994, was $3.2 billion or 13% compared to $1.9 billion or 9% for the year ended December 31, 1993. Loan repayments consisting of monthly loan amortization, payoffs, and refinances during the years 1994, 1993, and 1992 amounted to $3.2 billion, $3.8 billion, and $4.1 billion, respectively. The decrease in repayments in 1994 compared with 1993 was due to lower mortgage payoffs and lower refinances within the Company's loan portfolio. The Company adopted Statement of Financial Accounting Standards No. 114 (FAS 114), "Accounting by Creditors for Impairment of a Loan," during December 1993. FAS 114 requires that impaired loans for which foreclosure is probable should be accounted for as loans. As a result, at December 31, 1993, $16 million of in-substance foreclosed loans, with a valuation allowance of $7 million, were reclassified from real estate held for sale to loans receivable. PAGE 51 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) One measure of the soundness of the Company's portfolio is its ratio of nonperforming assets (NPAs) to total assets. Nonperforming assets include nonaccrual loans (loans that are 90 days or more past due) and real estate acquired through foreclosure. NPAs amounted to $355 million, $394 million, and $330 million at yearends 1994, 1993, and 1992, respectively. The decrease in NPAs in 1994 was primarily due to a decrease in slow loans in the fourth quarter of 1994. We believe this improvement is a result of the improvement in the California economy. The Company continues to closely monitor all delinquencies and takes appropriate steps to protect its interests. The Company's troubled debt restructured (TDRs) were $73 million, or 0.23% of assets, at December 31, 1994, compared to $37 million, or 0.13% of assets, at December 31, 1993, and $13 million, or 0.06% of assets, at December 31, 1992. At December 31, 1994, TDRs included $22 million or 0.07% of loans modified as a result of the January 1994 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 and who are expected to perform in the future. The Company's ratio of NPAs and TDRs to total assets was 1.35% at December 31, 1994, compared to 1.50% and 1.33% at yearends 1993 and 1992, respectively. The Company has other impaired loans on which specific loss reserves have been provided that are not otherwise included in nonperforming loans or troubled debt restructured. Other impaired loans amounted to $41 million and $26 million at yearends 1994 and 1993. ALLOWANCE FOR LOAN LOSSES The Company's allowance for loan losses was $124 million at December 31, 1994, compared to $107 million and $71 million at yearends 1993 and 1992, respectively. The provision for loan losses was $63 million, $66 million, and $43 million in 1994, 1993, and 1992, respectively. 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. PAGE 52 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) The Company has provided for any known losses related to the January 1994 Northridge (Southern California) earthquake. The 1994 loan loss reserve and provision for loan losses included $3.7 million in loss reserves specifically identified for earthquake losses. REAL ESTATE HELD FOR SALE Real estate held for sale increased to $71 million at December 31, 1994, from $64 million a year earlier. The increase occurred primarily due to the increase in nonaccrual loans in prior periods, which resulted from the weakening in the California economy and the decrease in real estate prices. The components of the real estate held for sale portfolio at December 31, 1994, 1993, and 1992, are shown as follows:
TABLE 32 Real Estate Held for Sale(a) (Dollars In Thousands) December 31 --------------------------- 1994 1993 1992 ------- ------- ------- Real estate acquired through foreclosure $70,981 $62,724 $56,642 Real estate in judgement 390 1,366 1,030 Loans in-substance foreclosed(b) -0- -0- 9,351 ------- ------- ------- $71,371 $64,090 $67,023 ======= ======= =======
(a) All amounts are net of general valuation allowance. (b) Loans in-substance foreclosed were reclassified to be included in the Company's total loan portfolio. See Note A in the audited financial statements. CUSTOMER DEPOSITS Customer deposits increased by $1.8 billion compared to an increase of $936 million in 1993 and a decrease of $332 million in 1992. The increase in customer deposits during 1994 resulted from the improvement in the savings market as interest rates rose as well as aggressive promotions. Consumer funds were attracted during 1993 as a result of special promotions in the Company's savings markets. In 1994 the Company acquired three branches in New Jersey with $78 million in deposits. In 1993, the Company acquired seven branches in Arizona containing $320 million in deposits and sold all seven of the Ohio branches with $264 million in deposits. PAGE 53 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) ADVANCES FROM FEDERAL HOME LOAN BANKS The Company uses Federal Home Loan Bank (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 $6.5 billion at December 31, 1994, compared to $6.3 billion and $5.5 billion at December 31, 1993, and 1992, 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 $602 million, $443 million, and $557 million at yearends 1994, 1993, and 1992, respectively. OTHER BORROWINGS At December 31, 1994, Golden West had on file a registration statement with the Securities and Exchange Commission for the sale of up to $100 million of subordinated notes. The Company had issued a total of $1.0 billion of subordinated debt at December 31, 1994. As of December 31, 1994, the Company's subordinated debt was rated A3 and A- by Moody's Investors Service (Moody's) and Standard & Poor's Corporation (S&P), respectively. World Savings currently has on file a shelf registration with the OTS for the issuance of $1.0 billion of unsecured medium-term notes. As of December 31, 1994, $700 million was available for issuance. The Association has medium-term notes outstanding under the current and prior registrations with principal amounts of $1.2 billion at December 31, 1994, compared to $677 million at December 31, 1993, and $81 million at December 31, 1992. As of December 31, 1994, the Association's medium-term notes were rated A1 and A+ by Moody's and S&P, respectively. World Savings 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 December 31, 1994, World Savings had issued a total of $200 million of subordinated notes. As of December 31, 1994, World Savings' subordinated notes were rated A2 and A by Moody's and S&P, respectively. The subordinated notes are included in World Savings' risk-based regulatory capital as supplementary capital. PAGE 54 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) STOCKHOLDERS' EQUITY The Company's stockholders' equity decreased during 1994 due to the $216 million cost of the repurchase of Company stock and the $66 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. These decreases in stockholders' equity were partially offset by 1994's net earnings. The Company increased its total stockholders' equity in 1993 and 1992 through the retention of a high percentage of net earnings. In addition, stockholders' equity increased in 1993 by $85 million due to the adoption of FAS 115 as of December 31, 1993. 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 3.088 million shares of Golden West's common stock. As of December 31, 1994, 5,765,180 of such shares had been repurchased and retired at a cost of $223 million since October 28, 1993. During 1994, 5,561,180 of the shares were purchased and retired at a cost of $216 million. 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 issued in one or more series, may have varying provisions and designations, and may be represented by depository shares. The preferred stock is not convertible into common stock. No preferred stock has yet been issued under the registration. The Company's preferred stock has been preliminarily rated a2 by Moody's. The OTS requires federally insured institutions, such as World, to meet minimum capital requirements. Under these regulations, a savings institution is required to meet three separate capital requirements. The first requirement is to have tangible capital of 1.5% of adjusted total assets. At December 31, 1994, World Savings had tangible capital of $1.9 billion, or 6.26% of adjusted total assets, $1.5 billion in excess of the regulatory requirement. The second requirement is to have core capital of 3% of adjusted total assets. Core capital is defined as tangible capital plus certain allowable amounts of supervisory goodwill and direct investments. However, the amount of supervisory goodwill and direct investments that can be counted as core capital was phased-down to zero at January 1, 1995. At December 31, 1994, World Savings had core capital of $2.0 billion, or 6.64% of adjusted total assets, $1.1 billion in excess of the regulatory requirement. PAGE 55 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) The third capital requirement is to have risk-based capital equal to 8.0% of risk-weighted assets. At December 31, 1994, World Savings had risk-based capital in the amount of $2.4 billion, or 13.54% of risk-weighted assets, exceeding the current requirement by $964 million. During the first quarter of 1994, the OTS 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. World Savings has taken a conservative approach and has weighted the Association's entire multi-family portfolio at 100%. This change caused a decrease in the risk-based capital ratio from December 1993 to December 1994 and reduced our December 31, 1994, risk-based capital ratio by approximately 100 basis points. It should be noted that World Savings also continues to exceed all three capital requirements on a fully phased-in basis, which became effective January 1, 1995. The OTS has adopted rules based upon five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The determination of whether an association falls into a certain classification depends primarily on its capital ratios. The table on the following page summarizes the capital ratios for each of the five classifications and shows that World Savings met the "well capitalized" standard as of December 31, 1994. PAGE 56 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued)
TABLE 33 Relationship of Capital Ratios to FDIC Capital Adequacy Classifications - -------------------------------------------------------------------------------- Ratio of Leverage Ratio of Tier 1 Total Capital to Capital Capital to Risk- Risk-Weighted Ratio(a) Weighted Assets(b) Assets(c) - -------------------------------------------------------------------------------- Well capitalized 5.0% or 6.0% or greater 10.0% or greater greater Adequately 4.0% or 4.0% or greater 8.0% or greater capitalized greater Undercapitalized 3.0% or 3.0% or greater 6.0% or greater greater Significantly less than undercapitalized 3.0% less than 3.0% less than 6.0% Critically less than 2.0% undercapitalized on a fully phased-in basis - -------------------------------------------------------------------------------- World Savings' ratios at December 31, 1994 6.64% 11.78% 13.54% - --------------------------------------------------------------------------------
(a) Core capital divided by adjusted total assets. (b) Core capital divided by risk-weighted assets. (c) Total capital is the same as risk-based capital and consists of common equity, retained earnings, non-cumulative perpetual preferred stock, and supplemental capital including such items as qualifying subordinated debt, cumulative perpetual and intermediate-term preferred stock, certain convertible debt securities, and general allowances for loan losses. The OTS limits capital distributions by savings and loan associations. For purposes of capital distributions, the OTS has classified World Savings as a Tier 1 association; thus, the Association may pay dividends during a calendar year of up to 100% of net earnings to date during the calendar year plus up to one-half of capital in excess of the fully phased-in requirement at the end of the prior year subject to thirty days' advance notice to the OTS. World Savings paid a total of $275 million in upstream dividends to Golden West during 1994. The main purpose for the dividend was to fund Golden West's stock repurchase program. RESULTS OF OPERATIONS PROFIT MARGINS/SPREADS An important determinant of Golden West's earnings is its primary spread--the difference between its yield on earning assets and its cost of funds. PAGE 57 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued) The following table shows the components of the Company's primary spread at the end of the years 1992 through 1994. As shown in the following table, the primary spread narrowed during 1994 as interest rates have begun to rise.
TABLE 34 Yield on Earning Assets, Cost of Funds, and Primary Spread Including the Effect of Purchase Accounting December 31 ------------------------- 1994 1993 1992 ----- ----- ----- Yield on loan portfolio 6.91% 6.84% 7.66% Yield on investments 5.42 3.80 4.17 ----- ----- ----- Yield on earning assets 6.81 6.61 7.52 ----- ----- ----- Cost of customer deposits 4.57 3.92 4.40 Cost of borrowings 5.85 4.69 5.58 ----- ----- ----- Cost of funds 5.00 4.18 4.75 ----- ----- ----- Primary spread 1.81% 2.43% 2.77% ===== ===== =====
YIELD ON EARNING ASSETS Golden West originates ARMs to manage the rate sensitivity of the asset side of the balance sheet. Most of the Company's ARMs have interest rates that change monthly in accordance with an index based on the cost of deposits and borrowings of savings institutions that are members of the FHLB of San Francisco (the COFI). The yield on earning assets showed a decline throughout 1992, 1993, and the first five months of 1994 due to a decline in interest rates during 1992 and the stable interest rate environment in 1993 and early 1994. Interest rates began to rise in early 1994; subsequently, the yield on the Company's loan portfolio began to increase in mid-1994 as the COFI started to respond to the rising rates. During 1992 and 1993, the Company experienced large payoffs of high-rate fixed loans and MBS, which also contributed to the decrease in the yield on loans. COST OF FUNDS Approximately 82% of Golden West's liabilities are subject to repricing in less than one year. Because the cost of these liabilities is affected by short-term interest rates, a fall in the general level of interest rates led to a decrease in the Company's cost of funds during 1993 and 1992, while the increase in the interest rates during 1994 led to an increase in the Company's cost of funds during 1994. PAGE 58 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued) HEDGING ACTIVITY The Company enters into a variety of derivative financial instruments as 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 were 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 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 alter the impact of changes in interest rates on customer deposits, mortgage loans, or on other specified assets or borrowings. Some interest rate swaps have been entered into with starting dates in the future. 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. When interest rates increase, the excess that may be received on interest rate cap agreements reduces the impact of the rate increases on consumer deposit costs and enhances 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. Hedging decreased net interest income by $23 million, $71 million, and $93 million for the years ended December 31, 1994, 1993, and 1992, respectively. The table on the following page summarizes the unrealized gains and losses for derivative instruments at December 31, 1994, and 1993. PAGE 59 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued)
TABLE 35 Unrealized Gains and Losses on Derivative Products (Dollars in Thousands) December 31, 1994 ----------------------------------- Net Unrealized Unrealized Unrealized Gains Losses Gain (Loss) ---------- ---------- ----------- Interest rate swaps $68,987 $113,134 $(44,147) Interest rate caps 589 -0- 589 Total $69,576 $113,134 $(43,558) ======= ======== =========
December 31, 1993 ----------------------------------- Net Unrealized Unrealized Unrealized Gains Losses Gain (Loss) ---------- ---------- ----------- Interest rate swaps $71,195 $160,137 $(88,942) Interest rate caps -0- 1,422 (1,422) Total $71,195 $161,559 $(90,364) ======= ======== =========
TABLE 36 Derivative Activity (Dollars in Millions) 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 2,575 124 200 -0- -0- Maturities (365) (481) -0- -0- (137) Terminations -0- -0- (600) -0- -0- Forward starting becoming effective 75 -0- -0- (75) -0- ------ ------ ----- ---- ----- Balance at December 31, 1994 $4,991 $2,225 $ 200 $135 $ 300 ====== ====== ===== ==== =====
(a) Receives floating, pays floating. INTEREST ON LOANS In 1994, interest on loans increased due to an increase in the average portfolio balance, which was partially offset by a decrease in the average portfolio yield. In 1993, interest on loans decreased due to a decline in PAGE 60 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued) the average portfolio yield partially offset by an increase in the average portfolio balance. INTEREST ON MBS In 1994 and 1993, interest on MBS decreased due to a decline in the average portfolio yield and a 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. Interest and dividends on investments was higher in 1994 than in 1993 due to an increase in the average portfolio balance and an increase in the average portfolio yield. Income from the Company's investments was higher in 1993 than in 1992 due to a higher average portfolio balance and increased FHLB dividends. INTEREST ON CUSTOMER DEPOSITS The major portion of the Company's customer deposit base consists of savings accounts with remaining 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. The increase in interest on customer deposits in 1994 was due to an increase in the average balance of customer deposits partially offset by a decrease in the average cost of deposits. The decrease in interest on customer deposits in 1993 was due to a decrease in the average cost of deposits. INTEREST ON ADVANCES Interest paid on FHLB advances was lower in 1994 as compared to 1993 due to a decrease in the average balance of these borrowings, which was partially offset by an increase in the average cost of these borrowings. Interest paid on FHLB advances was higher in 1993 than in 1992 due to an increase in the average balance of these liabilities partially offset by a decrease in the average cost. INTEREST ON OTHER BORROWINGS Interest expense on other borrowings amounted to $172 million, $158 million, and $154 million for the years ended 1994, 1993, and 1992, respectively. The increase in the expense from 1994 over 1993 and 1993 over 1992 was due to an increase in the average balance of these liabilities partially offset by a decrease in the average cost. PAGE 61 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued) PROVISION FOR LOAN LOSSES The provision for loan losses was $63 million, $66 million, and $43 million for the years ended 1994, 1993, and 1992, respectively. The decrease in the provision in 1994 compared with 1993 reflected the decrease in nonaccrual loans as a result of the improvement in the California economy. The 1994 provision included $3.7 million in specific earthquake loss reserves. The increase in the provision from 1993 over 1992 reflected increased chargeoffs, the continued buildup of the loan loss reserves, and the weak California economy. GAIN (LOSS) ON THE SALE OF SECURITIES AND MORTGAGE-BACKED SECURITIES The gain (loss) on the sale of securities and mortgage-backed securities was a loss of $120 thousand for the year ended 1994 and a gain of $23 million and $4 million for the years ended 1993 and 1992, respectively. The 1993 gain included a $24 million reduction of a valuation allowance on investments charged to income in a previous year compared to a $4 million reduction in 1992. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses increased during the three years under discussion. The primary reasons for the increases in 1994 and 1993 were the expansion of loan origination capacity and savings branches, primarily outside of 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. General and administrative expense as a percentage of average assets was 1.02%, 0.97%, and 0.99% for the years ended December 31, 1994, 1993, and 1992, respectively. TAXES ON INCOME Golden West utilizes the accrual method of accounting for income tax purposes and for preparing its published financial statements. For financial reporting purposes only, the Company uses "purchase accounting" in connection with certain assets acquired through mergers. The purchase accounting portion of income is not subject to tax. In the first quarter of 1993, the Company adopted Statement of Financial Accounting Standards No. 109 (FAS 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. PAGE 62 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued) The consolidated financial statements presented for the years prior to 1993 reflect income taxes under the deferred method required by previous accounting standards. Taxes as a percentage of earnings increased in 1993 over 1992 due to the effect of the amortization of the deferred tax asset related to the $23 million adjustment arising from the adoption of FAS 109, as well as 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%. ACQUISITIONS During 1994, the Company acquired $78 million in deposits and three branches in New Jersey from Polifly Savings and Loan. During 1993, the Company acquired $320 million in deposits and seven branches in Arizona from PriMerit Bank. DIVESTITURES During 1993, the Company sold $133 million of savings in two Ohio branches to Trumbull Savings and Loan and its remaining five Ohio branches with $131 million in deposits to Fifth Third Bancorp. During 1992, the Company sold one branch in California containing $40 million in deposits and two branches in the state of Washington containing $37 million in deposits. 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 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 Savings 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. PAGE 63 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued) The principal sources of funds for the Association's parent, Golden West, are dividends from World Savings 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. COMMON STOCK The quarterly price ranges for the Company's common stock during 1994 and 1993 were as follows:
TABLE 37 Common Stock Price Range 1994 1993 --------------- --------------- First Quarter 37 1/2 - 46 41 - 50 3/8 Second Quarter 37 3/8 - 41 1/8 39 1/2 - 48 7/8 Third Quarter 38 5/8 - 44 1/4 38 3/8 - 44 Fourth Quarter 34 1/4 - 40 1/4 37 1/8 - 44 3/4
PAGE 64 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index included on page 72 and the financial statements, which begin on page F-1, which are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Inapplicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and executive officers of the Company are as follows (see footnote explanations on the following page): Name and Age Position ------------ -------- Herbert M. Sandler, 63 Chairman of the Board and Chief Executive Officer Marion O. Sandler, 64 Chairman of the Board and Chief Executive Officer (a) James T. Judd, 56 Senior Executive Vice President (b) Russell W. Kettell, 51 President (c)* J. L. Helvey, 63 Group Senior Vice President (d) David C. Welch, 52 Group Senior Vice President and Treasurer (e)* Dirk S. Adams, 43 Group Senior Vice President (f) Robert C. Rowe, 39 Vice President and Secretary (g) Louis J. Galen, 69 Director Patricia A. King, 52 Director William D. McKee, 68 Director Bernard A. Osher, 67 Director Kenneth T. Rosen, 46 Director Paul Sack, 67 Director * At the January 31, 1995, Board of Directors' meeting, David C. Welch resigned as Treasurer of Golden West Financial Corporation, and Russell W. Kettell was elected to the additional title of Treasurer of Golden West Financial Corporation. PAGE 65 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (Continued) Each of the above persons holds the same position with World with the exception of James T. Judd who is President, Chief Operating Officer, and Director of World and Russell W. Kettell who is a Senior Executive Vice President and Director of World. Each executive officer has had the principal occupations shown for the prior five years except as follows: (a) Marion O. Sandler was elected Chairman of the Board of the Company in February 1993. Prior thereto, Mrs. Sandler served as President and Chief Executive Officer since 1980. (b) James T. Judd was elected Senior Executive Vice President of the Company in July 1989. Prior thereto, Mr. Judd served as Executive Vice President since 1984 and Senior Vice President since 1975. (c) Russell W. Kettell was elected President of the Company in February 1993. Prior thereto, Mr. Kettell served as Senior Executive Vice President since 1989, Executive Vice President since 1984, Senior Vice President since 1980, and Treasurer from 1976 until 1984. (d) J. L. Helvey was elected Group Senior Vice President of the Company in November 1988. Prior thereto, Mr. Helvey served as Senior Vice President since 1973. (e) David C. Welch was elected Group Senior Vice President and Treasurer of the Company in -November 1988. Prior thereto, Mr. Welch served as Senior Vice President and Treasurer since 1985, Vice President and Treasurer since 1984, and Vice President and Assistant Treasurer since 1980. (f) Dirk S. Adams was elected Group Senior Vice President of the Company in November 1990. Prior thereto, Mr. Adams served as Senior Vice President since 1987. Prior to that, Mr. Adams served as Senior Vice President and General Counsel to the Federal Home Loan Bank of San Francisco since 1983. (g) Robert C. Rowe was elected Vice President and Secretary of the Company in February 1991. Prior thereto, Mr. Rowe served as Assistant Vice President and Secretary since 1989 and as General Counsel since 1988. Prior to that, Mr. Rowe was a legal counsel to the Federal Home Loan Bank of San Francisco since 1984. For further information concerning the directors and executive officers of the Registrant, see pages 2, 3, and 6 of the Registrant's Proxy Statement dated March 10, 1995, which are incorporated herein by reference. PAGE 66 ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 is set forth in Registrant's Proxy Statement dated March 10, 1995, on pages 3 through 6 and 8 through 11 and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item 12 is set forth on pages 2, 3, and 7 of Registrant's Proxy Statement dated March 10, 1995, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See "Indebtedness of Management" on page 8 of the Registrant's Proxy statement dated March 10, 1995, which is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Index to Financial Statements See Index included on page 72 and the financial statements, which begin on page F-1. PAGE 67 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued) (a) (2) Index to Financial Statement Schedules Financial statement schedules are omitted because they are not required or because the required information is included in the financial statements or the notes thereto. (3) Index To Exhibits Exhibit No. Description ----------- ----------- 3 (a) Certificate of Incorporation, as amend- ed, and amendments thereto, are incorpo- rated by reference from Exhibit 3(a) to the Company's Annual Report on Form 10-K (file No. 1-4629) for the year ended December 31, 1990. 3 (b) By-Laws, as amended, are incorporated by reference from Exhibit 3(b) to the Company's Annual Report on Form 10-K (file No. 1-4629) for the year ended December 31, 1987. 4 (a) The Registrant agrees to furnish to the Commission, upon request, a copy of each instrument with respect to issues of long-term debt, the authorized principal amount of which does not exceed 10% of the total assets of the Company. 10 (a) 1978 Stock Option Plan, as amended, is incorporated by reference from Exhibit 10(a) to the Company's Annual Report on Form 10-K (file No. 1-4629) for the year ended December 31, 1987. 10 (b) 1987 Stock Option Plan, as amended, is incorporated by reference from Exhibit 10(b) to the Company's Annual Report on Form 10-K (file No. 1-4629) for the year ended December 31, 1991. PAGE 68 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued) (a) (3) Index To Exhibits (continued) Exhibit No. Description ----------- ----------- 10 (c) Deferred Compensation Agreement between the Company and James T. Judd is incorporated by reference from Exhibit 10(b) of the Company's Annual Report on Form 10-K (file No. 1-4629) for the year ended December 31, 1986. 10 (d) Deferred Compensation Agreement between the Company and Russell W. Kettell is incorporated by reference from Exhibit 10(c) of the Company's Annual Report on Form 10-K (file No. 1-4629) for the year ended December 31, 1986. 10 (e) Deferred Compensation Agreement between the Company and J. L. Helvey is incorpo- rated by reference from Exhibit 10(d) of the Company's Annual Report on Form 10-K (file No. 1-4629) for the year ended December 31, 1986. 10 (f) Deferred Compensation Agreement between the Company and David C. Welch is incorporated by reference from Exhibit 10(f) of the Company's Annual Report on Form 10-K (file No. 1-4629) for the year ended December 31, 1987. 10 (g) Operating lease on Company headquarters building, 1901 Harrison Street, Oakland, California 94612, is incorporated by reference from Exhibit 10(e) of the Company's Annual Report on Form 10-K (file No. 1-4629) for the year ended December 31, 1986. 10 (h) Form of Supplemental Retirement Agreement between the Company and cer- tain executive officers is incorporated by reference from Exhibit 10(j) to the Company's Annual Report on Form 10-K (file No. 1-4629) for the year ended December 31, 1990. 21 (a) Subsidiaries of the Registrant is incorporated by reference from Exhibit 22(a) of the Company's Annual Report on Form 10-K (file No. 1-4629) for the year ended December 31, 1987. 23 (a) Independent Auditors' Consent. 27 Financial Data Schedule PAGE 69 ITEM l4. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued) (b) Financial Statement Schedules The response to this portion of Item 14 is submitted as a part of section (a), Exhibits. (c) Reports on Form 8-K The Registrant did not file any current reports on Form 8-K with the commission in the fourth quarter. For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into Registrant's Registration Statements on Form S-8 Nos. 2-66913 (filed January 19, 1982) and 33-14833 (filed June 5, 1987): Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. PAGE 70 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued) SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. GOLDEN WEST FINANCIAL CORPORATION By: /s/ Herbert M. Sandler 3/22/95 Chairman of the Board and Chief Executive Officer By: /s/ Marion O. Sandler 3/22/95 Chairman of the Board and Chief Executive Officer By: /s/ J. L. Helvey 3/22/95 Group Senior Vice President and Chief Financial and Accounting Officer Dated: March 22, 1995 PAGE 71 Pursuant to the requirements of the Securities Exchange Act of l934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated: /s/ Louis J. Galen 3/22/95 /s/ Kenneth T. Rosen 3/22/95 Louis J. Galen, Kenneth T. Rosen, Director Director /s/ Patricia A. King 3/22/95 /s/ Paul Sack 3/22/95 Patricia A. King, Paul Sack, Director Director /s/ Herbert M. Sandler 3/22/95 William D. McKee, Herbert M. Sandler, Director Director /s/ Bernard A. Osher 3/22/95 /s/ Marion O. Sandler 3/22/95 Bernard A. Osher, Marion O. Sandler, Director Director PAGE 72 INDEX TO FINANCIAL STATEMENTS Page ---- Independent Auditors' Report F-1 Golden West Financial Corporation and Subsidiaries: Consolidated Statement of Financial Condition as of December 31, 1994, and 1993 F-2 Consolidated Statement of Net Earnings for the years ended December 31, 1994, 1993, and 1992 F-3 Consolidated Statement of Stockholders' Equity for the years ended December 31, 1994, 1993, and 1992 F-4 Consolidated Statement of Cash Flows for the years ended December 31, 1994, 1993, and 1992 F-5 Notes to Consolidated Financial Statements F-6 All supplemental schedules are omitted as inapplicable or because the required information is included in the financial statements or notes thereto. PAGE F-1 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Golden West Financial Corporation Oakland, California We have audited the accompanying consolidated statement of financial condition of Golden West Financial Corporation and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of net earnings, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Golden West Financial Corporation and subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. Oakland, California January 23, 1995 PAGE F-2 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Dollars in thousands except per share figures)
ASSETS December 31 ------------------------------ 1994 1993 ----------- ----------- Cash $ 242,441 $ 243,185 Securities available for sale at fair value (Note C) 1,488,845 1,636,586 Other investments at cost (fair value of $534,600 and $538,100) (Notes D and M) 534,600 538,100 Mortgage-backed securities available for sale at fair value (Notes E and M) 323,339 1,114,069 Mortgage-backed securities held to maturity at cost (fair value of $831,436 and $412,243) (Notes F and M) 871,039 408,467 Loans receivable less allowance for loan losses of $124,003 and $106,698 (Notes G and L) 27,071,266 23,912,571 Interest earned but uncollected (Note H) 202,456 175,080 Investment in capital stock of Federal Home Loan Bank, at cost which approximates fair value (Note L) 332,940 325,737 Real estate held for sale or investment (Note I) 72,217 67,156 Prepaid expenses and other assets 206,478 108,832 Premises and equipment, net (Note J) 201,875 162,751 Goodwill arising from acquisitions (Notes A and B) 136,245 136,754 ----------- ----------- $31,683,741 $28,829,288 =========== ===========
See notes to consolidated financial statements.
LIABILITIES AND STOCKHOLDERS' EQUITY December 31 ------------------------------ 1994 1993 ----------- ----------- Customer deposits (Note K) $19,219,389 $17,422,484 Advances from Federal Home Loan Bank (Note L) 6,488,418 6,281,691 Securities sold under agreements to repurchase (Note M) 601,821 442,874 Medium-term notes (Note N) 1,164,079 676,540 Federal funds purchased, due 1995, at 6.4825% to 6.6075% 250,000 -0- Accounts payable and accrued expenses 443,693 355,799 Taxes on income (Note P) 294,508 364,235 ----------- ----------- 28,461,908 25,543,623 Subordinated notes (Note O) 1,221,559 1,220,061 Stockholders' equity (Notes Q and R): Preferred stock, par value $1.00: Authorized 20,000,000 shares Issued and outstanding, none Common stock, par value $.10: Authorized 200,000,000 shares Issued and outstanding 58,589,955 and 63,928,935 shares 5,859 6,393 Paid-in capital 45,689 40,899 Retained earnings - substantially restricted 1,929,740 1,933,593 ----------- ----------- 1,981,288 1,980,885 Unrealized gains on securities available for sale 18,986 84,719 ----------- ----------- Total Stockholders' Equity 2,000,274 2,065,604 ----------- ----------- $31,683,741 $28,829,288 =========== ===========
PAGE F-3 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF NET EARNINGS (Dollars in thousands except per share figures)
Year Ended December 31 -------------------------------------- 1994 1993 1992 ---------- ---------- ---------- Interest Income: Interest on loans $1,649,413 $1,637,764 $1,740,845 Interest on mortgage-backed securities 103,927 138,874 178,010 Interest and dividends on investments 123,137 93,534 65,655 ---------- ---------- ---------- 1,876,477 1,870,172 1,984,510 Interest Expense: Interest on customer deposits (Note K) 714,353 705,700 844,710 Interest on advances 268,952 273,816 268,320 Interest on repurchase agreements 37,620 36,023 65,779 Interest on other borrowings 134,182 121,875 88,371 ---------- ---------- ---------- 1,155,107 1,137,414 1,267,180 ---------- ---------- ---------- Net Interest Income 721,370 732,758 717,330 Provision for loan losses 62,966 65,837 43,218 ---------- ---------- ---------- Net Interest Income after Provision for Loan Losses 658,404 666,921 674,112 Non-Interest Income: Fees 28,816 31,061 24,458 Gain (loss) on the sale of securities and mortgage-backed securities (120) 22,541 4,058 Other 8,790 8,440 12,601 ---------- ---------- ---------- 37,486 62,042 41,117 Non-Interest Expense: General and administrative: Personnel 150,220 132,472 118,553 Occupancy 44,472 40,443 38,521 Deposit insurance 40,220 35,706 37,621 Advertising 10,761 10,782 8,968 Other 57,246 53,764 47,212 ---------- ---------- ---------- 302,919 273,167 250,875 Amortization of goodwill arising from acquisitions (Note B) 2,589 (1,586) 661 ---------- ---------- ---------- 305,508 271,581 251,536 ---------- ---------- ---------- Earnings Before Taxes on Income 390,382 457,382 463,693 Taxes on income (Note P) 159,933 183,528 180,155 ---------- ---------- ---------- Net Earnings $ 230,449 $ 273,854 $ 283,538 ========== ========== ========== Net earnings per share $3.71 $4.28 $4.46 ===== ===== =====
See notes to consolidated financial statements. PAGE F-4 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Dollars in thousands except per share figures)
Unrealized Gains Total Common Paid-in Retained on Securities Stockholders' Stock Capital Earnings Available For Sale Equity ------- ------- ---------- ------------------ ------------- Balance at January 1, 1992 $6,350 $26,879 $1,415,906 $1,449,135 Common stock issued upon exercise of stock options, including tax benefits - 425,890 shares 42 9,307 -0- 9,349 Net earnings -0- -0- 283,538 283,538 Cash dividends on common stock ($.23 per share) -0- -0- (14,624) (14,624) ------ ------- ---------- ---------- Balance at December 31, 1992 6,392 36,186 1,684,820 1,727,398 Common stock issued upon exercise of stock options, including tax benefits - 208,125 shares 21 4,713 -0- 4,734 Net earnings -0- -0- 273,854 273,854 Cash dividends on common stock ($.27 per share) -0- -0- (17,280) (17,280) Purchase and retirement of 204,000 shares of Company stock (Note Q) (20) -0- (7,801) (7,821) Unrealized gains on securities available for sale -0- -0- -0- $ 84,719 84,719 ------ ------- ---------- -------- ---------- Balance at December 31, 1993 6,393 40,899 1,933,593 84,719 2,065,604 Common stock issued upon exercise of stock options, including tax benefits - 222,200 shares 22 4,790 -0- 4,812 Net earnings -0- -0- 230,449 230,449 Cash dividends on common stock ($.31 per share) -0- -0- (19,220) (19,220) Purchase and retirement of 5,561,180 shares of Company stock (Note Q) (556) -0- (215,082) (215,638) Change in unrealized gains on securities available for sale -0- -0- -0- (65,733) (65,733) ------ ------- ---------- -------- ---------- Balance at December 31, 1994 $5,859 $45,689 $1,929,740 $ 18,986 $2,000,274 ====== ======= ========== ======== ==========
See notes to consolidated financial statements. PAGE F-5 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in thousands)
Year Ended December 31 ---------------------------------------- 1994 1993 1992 ----------- ----------- ----------- Cash Flows From Operating Activities: Net earnings $ 230,449 $ 273,854 $ 283,538 Adjustments to reconcile net earnings to net cash provided by operating activities: Provision for loan losses 62,966 65,837 43,218 Amortization of loan fees and discounts (28,832) (45,666) (53,125) Depreciation and amortization 19,454 13,978 14,990 Reduction of a valuation allowance on investments -0- (24,000) (4,000) Loans originated for sale (93,951) (442,880) (278,346) Sales of loans originated for sale 146,115 432,362 280,832 Decrease (increase) in interest earned but uncollected (27,376) (17,357) 11,955 Federal Home Loan Bank stock dividends (19,007) (12,744) (4,598) Decrease (increase) in prepaid expenses and other assets (91,751) 26,020 (51,777) Increase (decrease) in accounts payable and accrued expenses 87,894 (5,327) 37,860 Increase (decrease) in taxes on income (23,448) 72,828 179,301 Other, net (20,019) (12,806) 1,571 ----------- ----------- ----------- Net cash provided by operating activities 242,494 324,099 461,419 Cash Flows From Investing Activities: New loan activity: New real estate loans originated for portfolio (6,543,702) (5,968,997) (6,176,744) Real estate loans purchased (68,926) (13,567) (4,678) Other, net 3,816 25,836 47,390 ----------- ----------- ----------- (6,608,812) (5,956,728) (6,134,032) Real estate loan principal payments: Monthly payments 600,879 574,459 502,431 Payoffs, net of foreclosures 2,232,214 2,852,722 3,230,825 Refinances 326,447 388,171 374,363 ----------- ----------- ----------- 3,159,540 3,815,352 4,107,619 Purchases of mortgage-backed securities available for sale (1,656) -0- -0- Purchases of mortgage-backed securities held to maturity (47,086) (302,313) (343,736) Sales of mortgage-backed securities available for sale 121 -0- -0- Sales of mortgage-backed securities held to maturity -0- 138 243 Repayments of mortgage-backed securities 310,704 645,647 552,045 Proceeds from sales of real estate 217,965 206,009 145,247 Purchases of securities available for sale (2,623,315) (4,326,544) (1,388,319) Sales and maturities of securities available for sale 2,732,562 3,771,617 1,227,427 Decrease (increase) in other investments 3,500 (569,697) 257,204 Purchases of Federal Home Loan Bank stock -0- (79,713) (1,440) Redemptions of Federal Home Loan Bank stock 7,775 52,969 6,111 Additions to premises and equipment (58,827) (37,496) (15,462) ----------- ----------- ----------- Net cash used in investing activities (2,907,529) (2,780,759) (1,587,093)
See notes to consolidated financial statements
Year Ended December 31 ---------------------------------------- 1994 1993 1992 ----------- ----------- ----------- Cash Flows From Financing Activities: Customer deposit activity: Increase (decrease) in deposits, net 1,211,544 368,749 (1,008,304) Interest credited 585,361 567,489 676,040 1,796,905 936,238 (332,264) Additions to Federal Home Loan Bank advances 304,500 1,701,200 2,428,850 Repayments of Federal Home Loan Bank advances (98,034) (919,195) (1,088,000) Increase (decrease) in securities sold under agreements to repurchase 158,947 (113,836) (95,503) Proceeds from medium-term notes 499,696 609,235 66,766 Repayments of medium-term notes (12,865) (14,500) (152,305) Proceeds from federal funds purchased 250,000 -0- -0- Proceeds from subordinated debt -0- 297,008 295,616 Dividends on common stock (19,220) (17,280) (14,624) Purchase and retirement of Company stock (215,638) (7,821) -0- ----------- ----------- ----------- Net cash provided by financing activities 2,664,291 2,471,049 1,108,536 ----------- ----------- ----------- Net Increase (Decrease) in Cash (744) 14,389 (17,138) Cash at beginning of period 243,185 228,796 245,934 ----------- ----------- ----------- Cash at end of period $ 242,441 $ 243,185 $ 228,796 =========== =========== =========== Supplemental cash flow information: Cash paid for: Interest $ 1,152,572 $ 1,176,338 $ 1,253,610 Income taxes 182,332 112,970 51,917 Cash received for interest and dividends 1,849,101 1,852,815 1,996,465 Noncash investing activities: Loans transferred to foreclosed real estate 246,612 234,149 172,920 Securities transferred to available for sale -0- 845,786 -0- Mortgage-backed securities transferred to available for sale -0- 1,114,069 -0- Mortgage-backed securities transferred from available for sale to held to maturity (at fair value) 453,564 -0- -0-
PAGE F-6 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 1994, 1993, and 1992 (Dollars in thousands except per share figures) NOTE A - Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Golden West Financial Corporation, a Delaware corporation, and its wholly owned subsidiaries (the Company or Golden West). World Savings and Loan Association, a federally chartered association (the Association or World Savings), is the Company's principal operating subsidiary with $31 billion in assets on December 31, 1994. Intercompany accounts and transactions have been eliminated. Cash and Investments The Association is required by regulation to maintain liquid assets in the form of cash and securities approved by federal regulations at a monthly average of not less than 5% of customer deposits and short-term borrowings. Effective December 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 115 (FAS 115), "Accounting for Certain Investments in Debt and Equity Securities." FAS 115 establishes classifications of investments into three categories: 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. At December 31, 1994, the Company had no securities held 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. Gains or losses on sales of securities are realized and recorded in earnings at the time of sale and are determined by the difference between the net sales proceeds and the cost of the security, using specific identification, adjusted for any unamortized premium or discount. The Company has other investments which are recorded at cost with any discount or premium amortized using a method that is not materially different from the interest method. 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. Mortgage-backed securities held to maturity are recorded at cost because the Company has the ability to hold these MBS to maturity and because management intends to hold these securities to maturity. Premiums and discounts on MBS are amortized or accreted using the interest method, also known as the level yield method, over the estimated life of the security. MBS available for sale are reported at fair value, with unrealized gains and losses excluded from earnings and reported net of applicable income taxes as a separate component of stockholders' equity until realized. Gains or losses on sales of MBS are realized and recorded in earnings at the time of sale and are determined by the difference between the net sales proceeds and the cost of MBS, using specific identification, adjusted for any unamortized premium or discount. Prior to December 31, 1993, all MBS were recorded at amortized cost. PAGE F-7 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993, and 1992 (Dollars in thousands except per share figures) Loans Receivable The Association's real estate loan portfolio consists primarily of long-term loans collateralized by first trust deeds on single-family residences and multi-family residential property. In addition to real estate loans, the Association makes loans on the security of savings accounts. The adjustable rate mortgage (ARM) is the Association's primary real estate loan. The ARM carries an interest rate that may change as often as monthly, based on movements in certain cost of funds or other indexes. Interest rate changes and monthly payments of principal and interest may be subject to maximum increases or decreases. Negative amortization may occur during periods when payments are limited. The Association also offers "modified" ARMs, loans that offer a low fixed rate generally from 1% to 3% below the contract rate for an initial period, usually three to 36 months. The Association does make a limited number of loans that are held for sale, primarily fixed-rate loans. These loans are usually originated against firm commitments to sell. These loans are recorded at the lower of cost or market. 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. FAS 114 requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate. As a practical expedient, impairment may be measured based on the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance. The valuation allowance and provision for loan losses are adjusted for changes in the present value of impaired loans for which impairment is measured based on the present value of expected future cash flows or for the changes in the appraised value of the loans that are collateral dependent. 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 requires that impaired loans for which foreclosure is probable should be accounted for as loans. As a result, $16,258 of in-substance foreclosed loans, with a valuation allowance of $7,267, were reclassified from real estate held for sale to loans receivable at December 31, 1993. In October 1994, Statement of Financial Accounting Standards No. 118 (FAS 118) was issued as an amendment of FAS 114. FAS 118 allows a creditor to use existing methods for recognizing interest income on an impaired loan and modifies disclosure requirements concerning impaired loans. The only effect of FAS 118 on the Company's financial statements is the additional disclosure in NOTE G. Loan origination fees and certain direct loan origination costs are deferred and amortized, as an interest income yield adjustment, over the life of the related loans using the interest method. "Fees," which include fees for prepayment of loans, income for servicing loans, late charges for delinquent payments, fees from customer deposit accounts, and miscellaneous fees, are recorded when collected. Premiums and discounts on purchased loans, including premiums and discounts arising from acquisitions of other associations, are generally amortized using the interest method over the actual life of the loans. Nonperforming assets consist of loans 90 days or more delinquent, with balances not reduced for loan loss reserves, and real estate owned through foreclosure. For loans past due 90 days or more, all interest earned but uncollected is fully reserved. PAGE F-8 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993, and 1992 (Dollars in thousands except per share figures) Troubled debt restructured consists of loans that have been modified by the lender to grant a concession to the borrower because of a perceived temporary weakness in the collateral and/or borrower. Real Estate Held for Sale or Investment Real estate held for sale or investment is comprised primarily of improved property acquired through foreclosure. All real estate owned is recorded at the lower of cost or fair value. Included in the fair value is the estimated selling price in the ordinary course of business less estimated costs to repair, hold, and dispose of the property. Costs relating to holding property, net of rental and option income, are expensed in the current period. Gains on the sale of real estate are recognized at the time of sale. Losses realized and expenses incurred in connection with the disposition of foreclosed real estate are charged to current earnings. Provision for Loan Losses The Company provides valuation allowances for probable losses on loans and on real estate owned when any significant and permanent decline in value is identified. Additions to and reductions from allowances are reflected in current earnings. Periodic reviews are made of major loans and real estate owned. 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. Goodwill Positive goodwill, or the excess of the cost over the fair value of net assets acquired resulting from acquisitions, of $222,524 (1994) and $235,853 (1993) is stated net of accumulated amortization of $199,693 (1994) and $184,284 (1993). Negative goodwill, or the excess of the fair value of net assets acquired over the cost resulting from acquisitions, of $86,279 (1994) and $99,099 (1993) is shown net of accumulated amortization of $59,921 (1994) and $47,101 (1993). Positive and negative goodwill are being amortized on the straight-line method over periods ranging from 5 to 40 years. See NOTE B for additional information. Securities Sold Under Agreements to Repurchase The Company enters into sales of securities under agreements to repurchase (reverse repurchase agreements) only with selected dealers. Fixed- coupon reverse repurchase agreements are treated as financings and the obligations to repurchase securities sold are reflected as a liability in the Consolidated Statement of Financial Condition. The securities underlying the agreements remain in the asset accounts. Derivative Financial Instruments The Company utilizes a variety of derivative financial instruments as a part of its interest rate risk management strategy. The most frequently used derivative products are various types of interest rate swaps. However, interest rate caps, floors, futures, options, and forwards are also utilized. The Company does not hold any derivative financial instruments for trading purposes. An interest rate swap is an agreement between two parties in which one party exchanges cash payments based on a fixed or floating rate of interest for a counterparty's cash payment based on a floating rate of interest. The amounts to be paid are defined by agreement and determined by applying the specified interest rates to a notional principal amount. Interest rate swap agreements are entered into to limit the impact of changes in interest rates on customer deposits, mortgage loans, or other specified assets or borrowings. Some PAGE F-9 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993, and 1992 (Dollars in thousands except per share figures) interest rate swaps are 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 assets or liabilities with similar interest rate characteristics. 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 that may be received on interest rate cap agreements limits the impact of changes in interest rates. Amounts that 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 assets or liabilities with similar interest rate characteristics. Futures and option contracts are either an obligation or right, respectively, to buy or sell an interest in a financial commodity on a specific day for a preset price. Futures contracts and long put options for futures contracts for Eurodollars, Treasury Bills, and interest rate contracts may be entered into by the Company to limit the Company's sensitivity to changes in interest rates. Gains and losses on futures contracts are deferred until the contracts are closed, at which time gains and losses are included in the cost basis of the related assets and liabilities and amortized, using the straight- line or level yield method, into interest income or expense over the remaining life of the asset or liability. Taxes on Income The Company files consolidated federal income tax returns with its subsidiaries. The provision for federal and state taxes on income is based on taxes currently payable and taxes expected to be payable in the future as a result of events that have been recognized in the financial statements or tax returns. The Association is permitted by the Internal Revenue Code to deduct from taxable income an annual addition to a reserve for bad debts subject to certain limitations. An effective rate of 8% of taxable income has been used in computing the amount of the addition to the bad debt reserve. In the event distributions (which are subject to the regulatory restrictions described below) are made from these reserves, such distributions will be subject to federal income taxes at the then prevailing corporate rates. It is not contemplated that accumulated reserves will be used in a manner that will create income tax liabilities. In the first quarter of 1993, the Company adopted Statement of Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes." FAS 109 required a change from the deferred to the liability method of computing deferred income taxes. The Company has applied FAS 109 prospectively. The consolidated financial statements presented for the years prior to 1993 reflect income taxes under the deferred method under previous accounting standards. Regulatory Capital Requirements The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) established capital standards. Under FIRREA, thrifts must have core capital equal to 3% of adjusted total assets and have tangible capital equal to 1.5% of adjusted total assets. FIRREA also established risk-based capital standards as a percentage of risk-weighted assets of 8% after December 30, 1992. PAGE F-10 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993, and 1992 (Dollars in thousands except per share figures) At December 31, the Association had the following regulatory capital calculated in accordance with FIRREA's capital standards:
1994 1993 ----------------------------------------- --------------------------------------- ACTUAL REQUIRED ACTUAL REQUIRED ------------------- ------------------ ------------------- ------------------ Capital Ratio Capital Ratio Capital Ratio Capital Ratio ---------- ------ ---------- ----- ---------- ------ ---------- ----- Tangible $1,931,375 6.26% $ 462,564 1.50% $2,030,992 7.27% $ 419,052 1.50% Core 2,047,016 6.64 925,129 3.00 2,240,518 8.02 838,103 3.00 Risk-based 2,353,781 13.54 1,390,391 8.00 2,533,738 17.42 1,163,650 8.00
The Office of Thrift Supervision (OTS) has adopted rules based upon five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The rules provide that a savings association is "well capitalized" if its total risk-based capital ratio is 10% or greater, its Tier 1 risk-based capital ratio is 6% or greater, its leverage ratio is 5% or greater, and the institution is not subject to a capital directive. As used herein, total risk-based capital ratio is the ratio of total capital to risk-weighted assets, Tier 1 risk-based capital ratio means the ratio of core capital to risk-weighted assets, and leverage ratio is the ratio of core capital to adjusted total assets, in each case as calculated in accordance with current OTS capital regulations. Under these regulations, World Savings is deemed to be "well capitalized." At December 31, the Association had the following regulatory capital calculated in accordance with FDICIA's capital standards:
1994 1993 ------------------------------------------ ---------------------------------------- ACTUAL WELL CAPITALIZED ACTUAL WELL-CAPITALIZED ------------------- ------------------- ------------------- ------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ---------- ------ ---------- ------ ---------- ------ ---------- ------ Leverage $2,047,016 6.64% $1,541,881 5.00% $2,240,518 8.02% $1,396,839 5.00% Tier 1 risk-based 2,047,016 11.78 1,042,793 6.00 2,240,518 15.40 872,737 6.00 Total risk-based 2,353,781 13.54 1,737,989 10.00 2,533,738 17.42 1,454,562 10.00
Retained Earnings Under OTS regulations, the OTS must be given at least 30 days' advance notice by the Association of any proposed dividend to be paid to the Company. Under OTS regulations, World Savings is classified as a Tier 1 association and is, therefore, allowed to distribute dividends up to 100% of its net income in any year plus one-half of its capital in excess of the OTS fully phased-in capital requirement as of the end of the prior year. At December 31, 1994, $328 million of the Association's retained earnings had not been subjected to federal income taxes due to the application of the bad debt deduction, and $1.8 billion of the Association's retained earnings were available for the payment of cash dividends without the imposition of additional federal income taxes. The Company is not subject to the same tax and reporting restrictions as is World Savings. Earnings Per Share Earnings per share have been computed by dividing net earnings by the weighted average number of common shares outstanding, 62,128,719 (1994), 63,977,876 (1993), and 63,578,168 (1992). PAGE F-11 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993, and 1992 (Dollars in thousands except per share figures) NOTE B - Business Combinations/Divestitures On May 6, 1994, the Company acquired $78 million in deposits in New Jersey from Polifly Savings and Loan. On August 13, 1993, the Company acquired $320 million in deposits and seven branches in Arizona from PriMerit Bank. On September 17, 1993, the Company sold $133 million of savings in two Ohio branches to Trumbull Savings and Loan. On October 15, 1993, the Company sold its remaining Ohio branches with $131 million in deposits to Fifth Third Bancorp. On March 6, 1992, the Company sold its two Washington branches with $37 million in deposits. The acquisitions described above are not material to the financial position or net earnings of the Company and pro forma information is not deemed necessary. NOTE C - Securities Available for Sale The following is a summary of securities available for sale:
December 31, 1994 ---------------------------------------------------- Unrealized Unrealized Cost Gains Losses Fair Value ---------- ---------- ---------- ---------- Certificates of deposit and short-term bank notes $ 30,004 $ -0- $ 35 $ 29,969 U.S. Treasury and Government agency obligations 644,279 275 7,485 637,069 Collateralized mortgage obligations 692,065 -0- 23,937 668,128 Commercial paper 1,076 193 -0- 1,269 Equity securities 98,504 66,172 12,266 152,410 ---------- ------- ------- ---------- $1,465,928 $66,640 $43,723 $1,488,845 ========== ======= ======= ==========
December 31, 1993 ---------------------------------------------------- Unrealized Unrealized Cost Gains Losses Fair Value ---------- ---------- ---------- ---------- Certificates of deposit and short-term bank notes $ 482,069 $ 33 $ 2 $ 482,100 U.S. Treasury and Government agency obligations 419,056 821 62 419,815 Collateralized mortgage obligations 275,304 865 761 275,408 Commercial paper 230,385 4 -0- 230,389 Bankers acceptances 58,395 -0- -0- 58,395 Equity securities 101,592 68,887 -0- 170,479 ---------- ------- ---- ---------- $1,566,801 $70,610 $825 $1,636,586 ========== ======= ==== ==========
The weighted average portfolio yields on securities available for sale were 5.24% and 3.93% at December 31, 1994, and 1993, respectively. Sales of securities held for sale resulted in realized gains of $83 (1994) and $22 (1993) and realized losses of $226 (1994) and $13 (1993). PAGE F-12 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993, and 1992 (Dollars in thousands except per share figures) At December 31, 1994, the securities available for sale had maturities as follows:
Amortized Fair Maturity Cost Value ------------------- ---------- ---------- No maturity $ 98,504 $ 152,410 1995 499,138 496,554 1996 through 1999 737,604 715,091 2000 through 2004 96,195 92,204 2005 and thereafter 34,487 32,586 ---------- ---------- $1,465,928 $1,488,845 ========== ==========
NOTE D - Other Investments At following is a summary of other investments not subject to FAS 115:
December 31 ----------------------- 1994 1993 Cost Cost -------- -------- Federal funds $152,000 $ 25,000 Short-term repurchase agreements collateralized by mortgage-backed securities 382,600 513,100 -------- -------- $534,600 $538,100 ======== ========
At December 31, 1994, and 1993, cost approximated fair market value and there were no unrealized gains or losses. The weighted average portfolio yields on other investments were 5.92% and 3.42% at December 31, 1994, and 1993, respectively. Sales of other investments resulted in gains of $-0- (1994), $24,000 (1993), and $4,009 (1992) and losses of $-0- (1994), $1,473 (1993), and $-0- (1992). As of December 31, 1994, the entire other investments portfolio matures in 1995. NOTE E - Mortgage-Backed Securities Available for Sale Mortgage-backed securities available for sale are summarized as follows:
December 31, 1994 -------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- -------- FNMA $130,528 $2,580 $2,658 $130,450 FHLMC 108,676 2,900 669 110,907 GNMA 76,323 4,282 101 80,504 Other 1,485 41 48 1,478 -------- ------ ------ -------- $317,012 $9,803 $3,476 $323,339 ======== ====== ====== ========
PAGE F-13 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993, and 1992 (Dollars in thousands except per share figures)
December 31, 1993 ----------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- FNMA $ 439,817 $25,957 $268 $ 465,506 FHLMC 326,354 24,480 27 350,807 GNMA 271,390 24,164 25 295,529 Other 2,115 112 -0- 2,227 ---------- ------- ---- ---------- $1,039,676 $74,713 $320 $1,114,069 ========== ======= ==== ==========
The weighted average portfolio yields on mortgage-backed securities available for sale were 9.57% and 9.35% at December 31, 1994, and 1993, respectively. Principal proceeds from the sales of securities from the mortgage-backed securities available for sale portfolio were $120 (1994) and $-0- (1993) and resulted in realized gains of $-0- (1994) and $-0- (1993) and realized losses of $1 (1994) and $-0- (1993). At December 31, 1994, mortgage-backed securities available for sale had contractual maturities as follows:
Amortized Fair Maturity Cost Value ------------------- --------- -------- 1996 through 1999 $ 2,137 $ 2,144 2000 through 2004 1,803 1,860 2005 and thereafter 313,072 319,335 -------- -------- $317,012 $323,339 ======== ========
NOTE F - Mortgage-Backed Securities Held to Maturity Mortgage-backed securities held to maturity are summarized as follows:
December 31, 1994 ---------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- -------- FNMA $656,142 $ 95 $39,779 $616,458 FHLMC 113,977 249 342 113,884 GNMA 100,920 199 25 101,094 -------- ---- ------- -------- $871,039 $543 $40,146 $831,436 ======== ==== ======= ========
December 31, 1993 ---------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- -------- FNMA $408,467 $7,103 $3,327 $412,243 ======== ====== ====== ========
The weighted average portfolio yields of mortgage-backed securities held to maturity were 7.99% and 6.94% at December 31, 1994, and 1993, respectively. Principal proceeds from the sales of securities from the mortgage-backed securities held to maturity portfolio amounted to $-0- (1994), $144 (1993), and $252 (1992) and resulted in realized gains of $-0- (1994), $7 (1993), and $9 (1992) and realized losses of $-0- (1994), $-0- (1993), and $-0- (1992). PAGE F-14 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993, and 1992 (Dollars in thousands except per share figures) At December 31, 1994, mortgage-backed securities held to maturity had contractual maturities as follows:
Amortized Fair Maturity Cost Value ------------------- --------- -------- 1996 through 1999 $ 146 $ 145 2000 through 2004 40 41 2005 and thereafter 870,853 831,250 -------- -------- $871,039 $831,436 ======== ========
NOTE G - Loans Receivable
December 31 ----------------------------- 1994 1993 ----------- ----------- Loans collateralized primarily by first deeds of trust: One- to four-family dwelling units $23,217,564 $20,197,613 Over four-family dwelling units 3,946,446 3,785,673 Commercial property 134,189 153,396 Construction loans -0- 580 Land 1,851 2,407 ----------- ----------- 27,300,050 24,139,669 Loans on savings accounts 30,460 32,012 ----------- ----------- 27,330,510 24,171,681 Less: Undisbursed loan funds 2,781 1,882 Unearned fees and discounts 105,314 112,751 Unamortized discount arising from acquisitions 27,146 37,779 Allowance for loan losses 124,003 106,698 ----------- ----------- $27,071,266 $23,912,571 =========== ===========
In addition to loans receivable, the Association services loans for others. At December 31, 1994, and 1993, the amount of loans serviced for others was $843,963 and $806,504, respectively. At December 31, 1994, and 1993, the Company had $4 million and $56 million, respectively, in loans held for sale, all of which are carried at the lower of cost or market. A summary of the changes in the allowance for loan losses is as follows:
Year Ended December 31 ------------------------------ 1994 1993 1992 -------- -------- ------- Balance at January 1 $106,698 $ 70,924 $48,036 Provision for loan losses charged to expense 62,966 65,837 43,218 Less loans charged off (46,556) (38,475) (21,227) Recoveries 895 1,145 897 Reclassification of in-substance foreclosure allowances -0- 7,267 -0- -------- -------- ------- Balance at December 31 $124,003 $106,698 $70,924 ======== ======== =======
PAGE F-15 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993, and 1992 (Dollars in thousands except per share figures) The following is a summary of nonperforming loans, troubled debt restructured, and other impaired loans:
December 31 --------------------- 1994 1993 -------- -------- Nonperforming loans $284,103 $330,062 Troubled debt restructured 72,827 37,190 Other impaired loans 40,504 25,769 -------- -------- $397,434 $393,021 ======== ========
The portion of the allowance for loan losses that was provided for impaired loans was $15,618 and $10,600 at December 31, 1994, and 1993, respectively. The average recorded investment in total impaired loans was $395,228 and $339,338 during 1994 and 1993, respectively. The amount of interest income recognized on total impaired loans was $16,449 and $15,124 during 1994 and 1993, respectively. NOTE H - Interest Earned But Uncollected
December 31 --------------------- 1994 1993 -------- -------- Loans receivable $108,130 $ 99,657 Mortgage-backed securities 7,135 10,368 Interest rate swaps 81,684 53,358 Other 5,507 11,697 -------- -------- $202,456 $175,080 ======== ========
NOTE I - Real Estate Held for Sale or Investment
December 31 ------------------- 1994 1993 ------- ------- Real estate acquired through foreclosure of loans, net of allowance for losses $70,981 $62,724 Real estate in judgement, net of allowance for losses 390 1,366 Real estate held for investment, net of allowance for losses 846 3,066 ------- ------- $72,217 $67,156 ======= =======
NOTE J - Premises and Equipment
December 31 --------------------- 1994 1993 -------- -------- Land $ 47,509 $ 43,738 Buildings and leasehold improvements 143,065 122,465 Furniture, fixtures and equipment 123,688 102,056 -------- -------- 314,262 268,259 Accumulated depreciation and amortization 112,387 105,508 -------- -------- $201,875 $162,751 ======== ========
PAGE F-16 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993, and 1992 (Dollars in thousands except per share figures) Depreciation and amortization, computed by the straight-line method for financial statement purposes, are provided over the useful lives of the various classes of premises and equipment. The aggregate rentals under long-term operating leases on land or premises in effect on December 31, 1994, and which expire between 1995 and 2064, amounted to approximately $134,927. The approximate minimum payments during the five years ending 1999 are $13,916 (1995), $13,527 (1996), $12,482 (1997), $11,204 (1998), and $9,592 (1999). Certain of the leases provide for options to renew and for the payment of taxes, insurance, and maintenance costs. The rental expense for the year amounted to $16,979 (1994), $15,579 (1993), and $14,823 (1992). NOTE K - Customer Deposits
December 31 --------------------------------------- 1994 1993 ------------------ ------------------ Rate* Amount Rate* Amount ----- ----------- ----- ----------- Customer deposits by rate: Interest-bearing checking accounts 1.28% $ 730,290 1.35% $ 736,767 Passbook accounts 2.23 638,905 2.12 611,606 Money market deposit accounts 3.13 1,818,426 2.35 2,378,087 Term certificate accounts with original maturities of: 4 weeks to 1 year 4.56 5,159,037 3.24 4,334,208 1 to 2 years 4.59 5,636,301 3.85 4,614,059 2 to 3 years 4.85 1,997,826 4.62 1,448,779 3 to 4 years 5.22 817,631 6.11 1,149,108 4 years and over 6.99 2,098,984 6.72 2,021,350 Retail jumbo CDs 5.44 312,413 5.03 109,250 All other 7.78 9,576 7.76 19,270 ----------- ----------- $19,219,389 $17,422,484 =========== ===========
*Weighted average interest rate including the impact of hedging
December 31 -------------------------------- 1994 1993 ----------- ----------- Customer deposits by remaining maturity at year end: No contractual maturity $ 3,187,621 $ 3,726,460 Maturity within one year: 1st quarter 3,598,746 3,811,037 2nd quarter 3,319,067 2,991,744 3rd quarter 2,377,766 1,666,045 4th quarter 1,765,131 1,391,652 ----------- ----------- 11,060,710 9,860,478 1 to 2 years 2,799,980 1,865,989 2 to 3 years 983,797 460,472 3 to 4 years 420,778 651,243 Over 4 years 766,503 857,842 ----------- ----------- $19,219,389 $17,422,484 =========== ===========
At December 31, the weighted average cost of deposits was 4.57% (1994) and 3.92% (1993). PAGE F-17 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993, and 1992 (Dollars in thousands except per share figures) Interest expense on customer deposits is summarized as follows:
Year Ended December 31 ------------------------------ 1994 1993 1992 -------- -------- -------- Interest-bearing checking accounts $ 9,463 $ 11,426 $ 12,376 Passbook accounts 19,733 21,043 23,315 Money market deposit accounts 38,430 47,339 75,223 Term certificate accounts 646,727 625,892 733,796 -------- -------- -------- $714,353 $705,700 $844,710 ======== ======== ========
NOTE L - Advances from Federal Home Loan Bank Advances are secured by pledges of $11,085,361 of certain loans and capital stock of the Federal Home Loan Bank, and these borrowings have maturities and interest rates as follows:
December 31, 1994 ------------------------------------------------------------------------------------------------------- Receive Stated Fixed Adjusted Maturity Amount Rate Swaps Rate* ------------------- ---------- ------ ------- -------- 1995 $ 325,469 5.82% (1.45)% 4.37% 1996 170,070 7.93 (1.28) 6.65 1997 400,532 6.38 (0.09) 6.29 1998 1,048,750 5.87 5.87 1999 550,000 4.10 4.10 2000 and thereafter 3,993,597 5.18 (0.09) 5.09 ---------- $6,488,418 ==========
December 31, 1993 ------------------------------------------------------------------------------------------------------- Treasury Bill Receive and Eurodollar Stated Fixed Basis Futures Adjusted Maturity Amount Rate Swaps Swaps Contracts Rate* ------------------- ---------- ------ ------- ----- -------------- -------- 1994 $ 72,549 8.05% 8.05% 1995 325,424 5.83 (3.70)% (0.12)% 2.01 1996 170,051 7.89 (3.27) (0.10) 4.52 1997 150,524 5.73 (0.62) 5.11 1998 1,048,621 3.63 0.03 3.66 1999 and thereafter 4,514,522 3.96 (0.10) 0.04% 0.03 3.93 ---------- $6,281,691 ==========
*Weighted average interest rate adjusted for hedging At December 31, the weighted average cost of advances was 5.21% (1994) and 3.87% (1993). PAGE F-18 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993, and 1992 (Dollars in thousands except per share figures) NOTE M - Securities Sold Under Agreements to Repurchase Securities sold under agreements to repurchase are collateralized by government obligations and mortgage-backed securities with a market value of $657,325 and $483,899 at December 31, 1994, and 1993, respectively.
December 31, 1994 ------------------------------------------------------------------------------------------------------- Pay Receive Stated Fixed Fixed Adjusted Maturity Amount Rate Swaps Swaps Rate* ------------------- -------- ------ ----- ------ -------- 1995 $595,221 5.29% 1.38% 0.02% 6.69% 1999 and thereafter 6,600 8.09 (3.27) 4.82 -------- $601,821 ========
December 31, 1993 ------------------------------------------------------------------------------------------------------- Treasury Bill Pay Receive and Eurodollar Stated Fixed Fixed Futures Adjusted Maturity Amount Rate Swaps Swaps Contracts Rate* ------------------- -------- ------ ----- ------ -------------- -------- 1994 $383,213 1.87% 4.15% (0.27)% 0.02% 5.77% 1995 53,061 8.52 8.52 1999 and thereafter 6,600 8.09 (5.11) 2.98 -------- $442,874 ========
*Weighted average interest rate adjusted for hedging At December 31, these liabilities had a weighted average interest rate of 6.67% (1994) and 6.06% (1993). These borrowings averaged $574,487 (1994) and $464,091 (1993) and the maximum outstanding at any monthend was $930,072 (1994) and $773,140 (1993). At the end of 1994 and 1993, respectively, $316,865 and $205,821 of the agreements to repurchase with broker/dealers were to reacquire the same securities. Agreements with broker/dealers to repurchase substantially the same securities amounted to $284,956 (1994) and $237,053 (1993). PAGE F-19 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993, and 1992 (Dollars in thousands except per share figures) NOTE N - Medium-Term Notes Medium-term notes are unsecured obligations of the Association. They have maturities and interest rates as follows:
December 31, 1994 ------------------------------------------------------------------------------------------ Pay Receive Stated Fixed Fixed Basis Adjusted Maturity Amount Rate Swaps Swaps Swaps Rate* -------- ---------- ------ ------- ------- ----- -------- 1995 $ 266,926 5.90% 0.47% 6.37% 1996 697,362 5.38 (0.05)% 0.68% 6.01 1997 199,791 6.05 6.05 ---------- $1,164,079 ==========
December 31, 1993 ------------------------------------------------------------------------------------------ Pay Receive Stated Fixed Fixed Adjusted Maturity Amount Rate Swaps Swaps Rate* -------- -------- ------ ----- ------- -------- 1995 $ 66,848 6.03% 6.03% 1996 609,692 5.17 0.15% (1.30)% 4.02 -------- $676,540 ========
*Weighted average interest rate adjusted for hedging PAGE F-20 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993, and 1992 (Dollars in thousands except per share figures) NOTE O - Subordinated Notes
December 31 ----------------------------- 1994 1993 ---------- ---------- Parent: Subordinated notes, unsecured, due from 1997 to 2003 at coupon rates of 6.00% to 10.25%, net of unamortized discount of $7,530 (1994) and $8,818 (1993) $1,022,470 $1,021,182 Association: Subordinated notes, unsecured, due from 1997 to 2000 at coupon rates of 9.90% to 10.25%, net of unamortized discount of $911 (1994) and $1,121 (1993) 199,089 198,879 ---------- ---------- $1,221,559 $1,220,061 ========== ==========
At December 31, subordinated notes had a weighted average interest rate of 8.64% (1994) and 8.65% (1993). At December 31, 1994, subordinated notes had maturities and interest rates as follows:
Maturity Rate* Amount -------- ------ ---------- 1997 10.38% $ 214,439 1998 9.05 199,148 2000 9.31 312,738 2002 8.07 296,794 2003 6.14 198,440 ---------- $1,221,559 ==========
*Weighted average interest rate NOTE P - Taxes on Income The following is a comparative analysis of the provision for federal and state taxes on income. Income taxes for 1992 have not been restated for the effect of adopting FAS 109.
Year Ended December 31 ---------------------------------- 1994 1993 1992 -------- -------- -------- Federal income tax: Current $121,124 $141,016 $149,678 Deferred 1,765 3,599 (11,622) State tax: Current 39,941 42,014 47,019 Deferred (2,897) (3,101) (4,920) -------- -------- -------- $159,933 $183,528 $180,155 ======== ======== ========
PAGE F-21 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993, and 1992 (Dollars in thousands except per share figures) The amounts of net deferred liability included in taxes on income in the Consolidated Statement of Financial Condition are:
December 31 --------------------- 1994 1993 ------- -------- Federal income tax $75,396 $111,369 State tax 40,033 53,460
The deferred tax liability results from changes in the amounts of temporary differences during the year. The components of the net deferred tax liability are as follows:
December 31 ---------------------------- 1994 1993 -------- -------- Deferred tax liabilities: Loan fees and interest income $ 64,116 $ 60,550 FHLB stock dividends 62,524 57,695 Bad debt reserve 39,085 54,458 Unrealized gains on debt and equity securities 13,328 59,459 Depreciation 11,282 10,518 Other deferred tax liabilities 751 1,032 -------- -------- Gross deferred tax liabilities 191,086 243,712 Deferred tax assets: Provision for losses on loans 47,869 41,293 State taxes 14,112 15,251 Loan discount primarily related to acquisitions 11,460 15,678 Other deferred tax assets 2,216 6,661 -------- -------- Gross deferred tax assets 75,657 78,883 -------- -------- Net deferred tax liability $115,429 $164,829 ======== ========
For 1992, deferred tax expense under APB 11 results from timing differences in the recognition of revenue and expense for tax and financial statement purposes. The sources of these differences and the tax effects of each are as follows:
Year Ended December 31 1992 ---------------------------- Federal State -------- ------- Loan fees and interest income $ 506 $ 143 Revenue and expense reported on the cash basis (4,801) (1,355) Effect of allowable federal bad debt deduction applied to timing differences 1,016 -0- State tax (10,888) -0- FHLB stock dividends 2,693 760 Other (148) (4,468) -------- ------- $(11,622) $(4,920) ======== =======
PAGE F-22 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993, and 1992 (Dollars in thousands except per share figures) A reconciliation of income taxes at the federal statutory corporate rate to the effective tax rate follows:
Year Ended December 31 ----------------------------------------------------------- 1994 1993 1992 ----------------- ----------------- ----------------- Percent Percent Percent of of of Pretax Pretax Pretax Amount Income Amount Income Amount Income -------- ------- -------- ------- -------- ------- Computed standard corporate tax expense $136,634 35.0% $160,083 35.0% $157,655 34.0% Increases (reductions) in taxes resulting from: Bad debt deduction based on a percentage of income -0- -0- -0- -0- 3,906 0.8 Net financial income, not subject to income tax, primarily related to acquisitions 393 0.1 (3,293) (0.7) (7,773) (1.6) State tax, net of federal income tax benefit 24,325 6.2 27,783 6.0 27,785 6.0 Adjustment of deferred tax liability due to tax rate increase -0- -0- 1,793 0.4 -0- -0- Other (1,419) (0.3) (2,838) (0.6) (1,418) (0.3) -------- ---- -------- ---- -------- ---- $159,933 41.0% $183,528 40.1% $180,155 38.9% ======== ==== ======== ==== ======== ====
In 1993, the Company adopted FAS 109 and elected to apply it prospectively. In accordance with FAS 109, a deferred tax liability has not been recognized for the tax bad debt reserve of World Savings and Loan Association that arose in tax years that began prior to December 31, 1987. At December 31, 1994, and 1993, the portion of the tax bad debt reserve attributable to pre-1988 tax years was approximately $252 million. The amount of unrecognized deferred tax liability at December 31, 1994, and 1993, was approximately $88 million. This deferred tax liability could be recognized if, in the future, there is a change in Federal tax law, the savings institution fails to meet the definition of a "qualified savings institution," certain distributions are made with respect to the stock of the savings institution, or the bad debt reserve is used for any purpose other than absorbing bad debt losses. NOTE Q - Stockholders' Equity 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 December 31, 1994, 5,765,180 of such shares had been repurchased and retired at a cost of $223 million since October 28, 1993. During 1994, 5,561,180 of the shares were purchased and retired at a cost of $216 million. PAGE F-23 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993, and 1992 (Dollars in thousands except per share figures) NOTE R - Stock Options The Company's 1987 stock option plan authorizes the granting of options to key employees to purchase up to 7 million shares of the Company's common stock. The plan permits the issuance of either non-qualified stock options or incentive stock options. Under terms of the plan, incentive stock options have been granted at fair market value as of the date of grant and are exercisable any time after two to six years and prior to either five or ten years from the grant date. Non-qualified options have been granted at fair market value as of the date of grant and are exercisable after two to six years and prior to ten years and one month from the grant date. A summary of the transactions of the stock option plan follows:
Average Price per Shares Share --------- --------- Outstanding, January 1, 1992 2,993,400 $15.94 Granted 278,650 $38.13 Exercised (425,890) $12.15 Canceled (9,300) $26.73 --------- ------ Outstanding, December 31, 1992 2,836,860 $18.66 Granted 329,950 $39.53 Exercised (208,125) $13.54 Canceled (30,100) $29.62 --------- ------ Outstanding, December 31, 1993 2,928,585 $21.26 Granted 381,000 $35.67 Exercised (222,200) $13.46 Canceled (19,800) $37.30 --------- ------ Outstanding, December 31, 1994 3,067,585 $23.51 ========= ======
At December 31, shares available for option amounted to 3,104,200 (1994), 3,465,400 (1993), and 3,765,250 (1992); and shares exercisable amounted to 2,114,335 (1994), 1,792,235 (1993), and 1,225,210 (1992). Outstanding options at December 31, 1994, were held by 347 employees and had expiration dates ranging from July 29, 1995, to January 9, 2005. NOTE S - Financial Instruments with Off-Balance-Sheet Risk and Concentrations of Credit Risk As of December 31, 1994, the Company's loans receivable balance was $27.1 billion. Of that $27.1 billion balance, 78% were California loans, 3% were Colorado loans, 3% were Illinois loans, 2% were New Jersey loans, 2% were Texas loans, and 2% were Washington loans. No other single state made up more than 2% of the total loan portfolio. The majority of these loans are secured by first deeds of trust on one- to four-family residential property. Economic conditions and real estate values in the states in which the Company lends are the key factors that affect the credit risk of the Company's loan portfolio. PAGE F-24 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993, and 1992 (Dollars in thousands except per share figures) In order to reduce its exposure to fluctuations in interest rates, the Company is a party to financial instruments with off-balance-sheet risk entered into in the normal course of business. These financial instruments include commitments to fund loans; commitments to purchase or sell securities, mortgage- backed securities, loans, and mortgage derivative products; interest rate swaps and caps; and futures and options contracts. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statement of financial condition. The contract or notional amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. To limit credit exposure, among other things, the Company enters into financial instrument contracts only with the Federal Home Loan Bank of San Francisco and with major banks and securities dealers selected by the Company upon the basis of their creditworthiness and other matters. The Company initially has not required collateral or other security to support these financial instruments because of the creditworthiness of the contra parties. Commitments to originate mortgage loans are agreements to lend to a customer providing that the customer satisfies the terms of the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Prior to entering each commitment, the Company evaluates the customer's creditworthiness. The amount of outstanding loan commitments at December 31, 1994, and 1993, was $412 million and $350 million, respectively. Most of these commitments were for adjustable rate mortgages. The Company enters into commitments to purchase or sell mortgage-backed securities and other mortgage derivative products. The commitments generally have a fixed delivery or receipt settlement date. The Company controls the credit risk of such commitments through credit evaluations, limits, and monitoring procedures. The interest rate risk of the commitment is considered by the Company and may be matched with the appropriate funding sources. Interest rate risk during the commitment period may also be managed by use of over-the-counter options, options on futures and futures contracts. The Company had no outstanding commitments to purchase or sell mortgage-backed securities as of December 31, 1994, and 1993. Interest rate swaps and caps are utilized to limit the Company's sensitivity to interest rate changes. The Company is exposed to credit risk in the event of nonperformance by the other parties to the interest rate swap and cap agreements; however, the Company does not anticipate nonperformance by the other parties. The Company manages the credit risk of its futures contracts, long put options for futures contracts, interest rate swap agreements, and interest rate cap agreements through credit approvals, limits, and monitoring procedures. The contract or notional amount of these contracts does not represent exposure to credit risk; rather, credit risk relates only to unsettled amounts on contracts. NOTE T - Derivative Financial Instruments The Company has entered into interest rate swap and cap agreements with selected banks and government security dealers to reduce its exposure to fluctuations in interest rates. The possible inability of counterparties to satisfy the terms of the contracts exposes the Company to credit risk to the extent of the net difference between the calculated pay and receive amounts on each transaction. Net differences of that amount are generally settled quarterly. The Company has not experienced any credit losses from interest rate swaps or caps. The information presented below is based on interest rates at December 31, 1994. To the extent that rates change, variable interest rate information will change. The basis swaps are contracts in which the Company receives an amount based on one interest rate index and pays an amount based on a different interest rate index. The Company has entered into two basis swap contracts on which it makes payments based on three PAGE F-25 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993, and 1992 (Dollars in thousands except per share figures) month LIBOR and in one case receives an amount based on the average Federal Funds rate published by the Federal Reserve and in the other case receives an amount based on the Bank Prime Loan rate published by the Federal Reserve. The forward starting swaps were entered into to convert floating rate assets to fixed-rate in the future in anticipation of future prepayments of matched fixed- rate assets. Accrual of interest on forward starting swaps begins at a predetermined future date. The Company has $125 million and $10 million of forward starting swaps, which are contractually delayed until 1995 and 1997, respectively. The following table illustrates the maturities and weighted average rates of 1994 derivative financial instruments held by the Company by product type.
MATURITIES OF 1994 DERIVATIVE FINANCIAL INSTRUMENTS Maturity -------------------------------------------------------- Balance at 1995 1996 1997 1998 1999+ December 31, 1994 ---------- ---------- -------- ---------- ---------- ----------------- Receive fixed generic swaps: Notional value $2,114,000 $1,545,000 $252,180 $ 827,983 $ 251,837 $4,991,000 Weighted average receive rate 5.07% 5.19% 6.68% 5.72% 6.70% 5.38% Weighted average pay rate 5.98% 4.81% 6.18% 5.27% 5.99% 5.51% Pay fixed generic swaps: Notional value $ 450,000 $ 435,000 $232,000 $ 209,000 $ 899,095 $2,225,095 Weighted average receive rate 5.78% 5.77% 5.57% 6.16% 5.97% 5.87% Weighted average pay rate 6.00% 8.05% 6.86% 7.66% 7.32% 7.18% Basis swaps: Notional value $ 200,000 $ -0- $ -0- $ -0- $ -0- $ 200,000 Weighted average receive rate 5.84% 0.00% 0.00% 0.00% 0.00% 5.84% Weighted average pay rate 6.46% 0.00% 0.00% 0.00% 0.00% 6.46% Forward starting swaps: Notional value $ -0- $ -0- $ -0- $ 125,000 $ 10,000 $ 135,000 Weighted average receive rate 0.00% 0.00% 0.00% 8.35% 8.68% 8.37% Weighted average pay rate 0.00% 0.00% 0.00% 6.80% 7.00% 6.81% Interest rate caps: Notional value $ 75,000 $ 225,000 $ -0- $ -0- $ -0- $ 300,000 ---------- ---------- -------- ---------- ---------- ---------- Total notional value $2,839,000 $2,205,000 $484,180 $1,161,983 $1,160,932 $7,851,095 ========== ========== ======== ========== ========== ========== Total weighted average rate on swaps: Receive rate 5.24% 5.32% 6.15% 6.08% 6.15% 5.59% ========== ========== ======== ========== ========== ========== Pay rate 6.02% 5.52% 6.51% 5.86% 7.03% 6.05% ========== ========== ======== ========== ========== ==========
PAGE F-26 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993, and 1992 (Dollars in thousands except per share figures) Activity in derivative financial instruments in summarized as follows:
DERIVATIVE ACTIVITY For the Years Ended December 31, 1994, 1993, and 1992 (Notional amounts in millions) Treasury Bill Receive Pay Forward Interest and Eurodollar Fixed Fixed Basis Starting Rate Futures Swaps Swaps Swaps Swaps Caps Contracts ------- ------ ----- -------- -------- -------------- Balance, January 1, 1992 $ 406 $1,983 $ -0- $-0- $ 504 $ 4,700 Additions 677 1,175 200 210 87 17,714 Maturities (155) (527) -0- -0- (139) -0- Terminations -0- -0- -0- -0- -0- (18,314) Forward starting becoming effective -0- -0- -0- -0- -0- -0- ------ ------ ----- ---- ----- -------- Balance, December 31, 1992 928 2,631 200 210 452 4,100 Additions 1,807 332 400 -0- 15 9,455 Maturities (29) (381) -0- -0- (30) -0- Terminations -0- -0- -0- -0- -0- (13,555) Forward starting becoming effective -0- -0- -0- -0- -0- -0- ------ ------ ----- ---- ----- -------- Balance, December 31, 1993 2,706 2,582 600 210 437 -0- Additions 2,575 124 200 -0- -0- -0- Maturities (365) (481) -0- -0- (137) -0- Terminations -0- -0- (600) -0- -0- -0- Forward starting becoming effective 75 -0- -0- (75) -0- -0- ------ ------ ----- ---- ----- -------- Balance, December 31, 1994 $4,991 $2,225 $ 200 $135 $ 300 $ -0- ====== ====== ===== ==== ===== ========
Derivatives decreased net interest income by $23 million, $71 million, and $93 million for the years ended December 31, 1994, 1993, and 1992, respectively. NOTE U - Disclosure About Fair Value of Financial Instruments The Financial Accounting Standards Board Statement of Financial Accounting Standards No. 107 (FAS 107) requires disclosure of the fair value of financial instruments for which it is practicable to estimate that value. The statement provides for a variety of different valuation methods, levels of aggregation, and assessments of practicability of estimating fair value. PAGE F-27 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993, and 1992 (Dollars in thousands except per share figures) Fair value estimates are not necessarily more relevant than historical cost values. Fair values may have limited usefulness in evaluating portfolios of long-term financial instrument assets and liabilities held by going concerns. Moreover, there are significant inherent weaknesses in any estimating techniques employed. Differences in the alternative methods and assumptions selected by various companies as well as differences in the methodology utilized between years may, and probably will, significantly limit comparability and usefulness of the data displayed. For these reasons, as well as others, management believes that the disclosure presented herein has limited relevance to the Company and its operations. The values presented are based upon information as of December 31, 1994, and 1993, and do not reflect any subsequent changes in fair value. Fair values may have changed significantly following the balance sheet dates. The estimates presented herein are not necessarily indicative of amounts that could be realized in a current transaction. The following methods and assumptions were used to estimate the fair value of each class of financial instruments: The historical cost amounts approximate the fair value of the following financial instruments: cash, interest earned but uncollected, investment in capital stock of Federal Home Loan Bank, other investments, customer demand deposits, securities sold under agreements to repurchase with brokers/dealers due within 90 days, and federal funds purchased. Fair values are based on quoted market prices for securities available for sale, mortgage-backed securities available for sale, mortgage-backed securities held to maturity, medium-term notes, and subordinated notes. Fair values are estimated using projected cash flows present valued at replacement rates currently offered for instruments of similar remaining maturities for: customer term deposits, advances from Federal Home Loan Bank, and consumer repurchase agreements. For loans receivable and loan commitments, the fair value is estimated by present valuing projected future cash flows, using current rates at which similar loans would be made to borrowers and with assumed rates of prepayment. Adjustment for credit risk is estimated based upon the classification status of the loans. The fair value of interest rate caps is derived from current market prices of similar interest rate cap instruments. The fair value of interest rate swap agreements is the estimated amount the Company would receive or pay to terminate the swap agreements on the reporting date, considering current interest rates. PAGE F-28 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993, and 1992 (Dollars in thousands except per share figures)
December 31 ---------------------------------------------------------- 1994 1993 --------------------------- --------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ----------- ----------- ----------- ----------- Financial Assets: Cash $ 242,441 $ 242,441 $ 243,185 $ 243,185 Securities available for sale 1,488,845 1,488,845 1,636,586 1,636,586 Other investments 534,600 534,600 538,100 538,100 Mortgage-backed securities available for sale 323,339 323,339 1,114,069 1,114 069 Mortgage-backed securities held to maturity 871,039 831,436 408,467 412,243 Loans receivable 27,071,266 26,914,642 23,912,571 24,166,244 Interest earned but uncollected 202,456 202,456 175,080 175,080 Investment in capital stock of Federal Home Loan Bank 332,940 332,940 325,737 325,737 Financial Liabilities: Customer deposits 19,219,389 19,138,503 17,422,484 17,564,644 Advances from Federal Home Loan Bank 6,488,418 6,300,271 6,281,691 6,035,503 Securities sold under agreements to repurchase 601,821 602,117 442,874 447,163 Medium-term notes 1,164,079 864,210 676,540 686,581 Federal funds purchased 250,000 250,000 -0- -0- Subordinated notes 1,221,559 1,053,758 1,220,061 1,349,037
Off-Balance Sheet Instruments (Unrealized Gains (Losses)): December 31 ------------------------------------------------------------------------------ 1994 1993 ------------------------------------- ------------------------------------- Net Net Unrealized Unrealized Unrealized Unrealized Unrealized Unrealized Gains Losses Gain (Loss) Gains Losses Gain (Loss) ---------- ---------- ----------- ---------- ---------- ----------- Interest rate swaps: Receive fixed $ 3,765 $104,098 $(100,333) $64,561 $ 566 $ 63,995 Pay fixed 64,874 8,959 55,915 -0- 159,571 (159,571) Basis -0- 77 (77) 6,634 -0- 6,634 Forward starting 348 -0- 348 -0- -0- -0- Interest rate caps 589 -0- 589 -0- 1,422 (1,422) Loan commitments 1,698 -0- 1,698 -0- 68 (68) ------- -------- --------- ------- -------- --------- Total $71,274 $113,134 $ (41,860) $71,195 $161,627 $ (90,432) ======= ======== ========= ======= ======== =========
PAGE F-29 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993, and 1992 (Dollars in thousands except per share figures) NOTE V - Parent Company Financial Information
Statement of Net Earnings Year Ended December 31 -------------------------------- 1994 1993 1992 -------- -------- -------- Revenues: Investment income $ 40,821 $ 28,047 $ 22,542 Insurance commissions and trustee fees 1,190 1,357 2,978 Other 20 20 25 -------- -------- -------- 42,031 29,424 25,545 Expenses: Interest 85,906 75,601 58,313 General and administrative 2,648 2,188 2,088 -------- -------- -------- 88,554 77,789 60,401 -------- -------- -------- Loss before earnings of subsidiaries and income tax credit (46,523) (48,365) (34,856) Income tax credit 20,779 21,585 15,279 Earnings of subsidiaries 256,193 300,634 303,115 -------- -------- -------- Net Earnings $230,449 $273,854 $283,538 ======== ======== ========
Statement of Financial Condition Assets December 31 ------------------------- 1994 1993 ---------- ---------- Cash $ 1,708 $ 9,658 Securities available for sale 299,454 681,935 Other investments 386,707 114,714 Notes receivable from subsidiary 250,000 150,000 Prepaid expenses and other assets 9,273 7,008 Investment in subsidiaries 2,094,784 2,169,364 ---------- ---------- $3,041,926 $3,132,679 ========== ==========
Liabilities and Stockholders' Equity Securities sold under agreements to repurchase $ -0- $ 24,875 Accounts payable and accrued expenses 19,182 21,018 Subordinated notes, net 1,022,470 1,021,182 Stockholders' equity 2,000,274 2,065,604 ---------- ---------- $3,041,926 $3,132,679 ========== ==========
PAGE F-30 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993, and 1992 (Dollars in thousands except per share figures) NOTE V - Parent Company Financial Information (Continued)
Statement of Cash Flows Year Ended December 31 ------------------------------------- 1994 1993 1992 ----------- --------- --------- Cash flows from operating activities: Net earnings $ 230,449 $ 273,854 $ 283,538 Adjustments to reconcile net earnings to net cash used in operating activities: Equity in earnings of subsidiaries (256,193) (300,634) (303,115) Amortization of intangibles and discount on subordinated debt 1,353 1,209 837 Other, net (5,086) 15,509 (2,897) ----------- --------- --------- Net cash used in operating activities (29,477) (10,062) (21,637) Cash flows from investing activities: Capital contributed to subsidiaries (625) -0- -0- Dividends received from subsidiary 275,000 34,000 40,000 Purchases of securities held for sale (1,305,371) (1,920,007) (434,738) Sales and maturities of securities available for sale 1,681,257 1,440,605 432,685 Decrease (increase) in other investments (271,993) (169,355) 175,703 Notes receivable from subsidiary (650,000) (150,000) (695,000) Repayments of notes receivable from subsidiary 550,000 475,000 220,000 ----------- --------- --------- Net cash provided (used) in investing activities 278,268 (289,757) (261,350) Cash flows from financing activities: Increase (decrease) in securities sold under agreements to repurchase (24,875) 24,875 -0- Proceeds from subordinated debt -0- 297,008 295,616 Dividends on common stock (19,220) (17,280) (14,624) Sale of stock 2,992 2,818 5,153 Purchase and retirement of Company stock (215,638) (7,821) -0- ----------- --------- --------- Net cash provided (used) by financing activities (256,741) 299,600 286,145 Net increase (decrease) in cash (7,950) (219) 3,158 Cash at beginning of period 9,658 9,877 6,719 ----------- --------- --------- Cash at end of period $ 1,708 $ 9,658 $ 9,877 =========== ========= =========
PAGE F-31 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993, and 1992 (Dollars in thousands except per share figures) NOTE W - Selected Quarterly Financial Data (Unaudited)
1994 ------------------------------------------------------------ Quarter Ended ------------------------------------------------------------ March 31 June 30 September 30 December 31 -------- -------- ------------ ----------- Interest income $451,695 $457,461 $468,161 $499,160 Interest expense 262,801 271,633 290,975 329,698 Net interest income 188,894 185,828 177,186 169,462 Provision for loan losses 16,492 17,946 15,996 12,532 Non-interest income 11,424 11,435 9,786 4,841 Non-interest expense 73,415 74,347 75,817 81,929 -------- -------- -------- -------- Earnings before taxes on income 110,411 104,970 95,159 79,842 Taxes on income 45,115 43,027 39,034 32,757 -------- -------- -------- -------- Net earnings $ 65,296 $ 61,943 $ 56,125 $ 47,085 ======== ======== ======== ======== Net earnings per share $ 1.02 $ .98 $ .91 $ .79 ======== ======== ======== ======== Cash dividends per share $ .075 $ .075 $ .075 $ .085 ======== ======== ======== ========
1993 ------------------------------------------------------------ Quarter Ended ------------------------------------------------------------ March 31 June 30 September 30 December 31 -------- -------- ------------ ----------- Interest income $463,027 $472,073 $473,813 $461,259 Interest expense 280,911 291,831 288,550 276,122 -------- -------- -------- -------- Net interest income 182,116 180,242 185,263 185,137 Provision for loan losses 11,459 13,182 16,196 25,000 Non-interest income 11,907 13,428 14,444 22,263 Non-interest expense 64,361 63,870 70,077 73,273 -------- -------- -------- -------- Earnings before taxes on income 118,203 116,618 113,434 109,127 Taxes on income 46,619 46,035 49,666 41,208 -------- -------- -------- -------- Net earnings $ 71,584 $ 70,583 $ 63,768 $ 67,919 ======== ======== ======== ======== Net earnings per share $ 1.12 $ 1.10 $ 1.00 $ 1.06 ======== ======== ======== ======== Cash dividends per share $ .065 $ .065 $ .065 $ .075 ======== ======== ======== ========
Due to the effect of stock repurchases on the fourth quarter earnings per share calculation, the year-to-date earnings per share for 1994 do not equal the sum of the quarterly earnings per share amounts. In addition, non-interest income in the fourth quarter of 1993 includes a $17 million reduction of a valuation allowance on investments charged to income in a previous year. PAGE 73 EXHIBIT 23(a) INDEPENDENT AUDITORS' CONSENT Board of Directors and Stockholders Golden West Financial Corporation Oakland, California We consent to the incorporation by reference in Post-Effective Amendment No. 2 to Registration Statement No. 2-66913 on Form S-8, Registration Statement No. 33-14833 on Form S-8, Registration Statement No. 33-29286 on Form S-3, Registration Statement No. 33-40572 on Form S-8, Registration Statement No. 33-48976 on Form S-3, and Registration Statement No. 33-57882 on Form S-3 of our report dated January 25, 1994 appearing in this Annual Report on Form 10-K of Golden West Financial Corporation for the year ended December 31, 1994. Oakland, California March 22, 1995 PAGE 74
EXHIBIT 27 Golden West Financial Corporation Financial Data Schedule ($000s omitted except per share amounts) For the Year Ended December 31, 1994 ------------------ Cash due from banks $ 242,441 Interest-bearing deposits 29,969 Federal funds sold - purchased securities for resale 152,000 Trading account assets -0- Investments and mortgage-backed securities available for sale 1,812,184 Investments and mortgage-backed securities held to maturity - carrying value 871,039 Investments and mortgage-backed securities held to maturity - market value 831,436 Loans 27,071,266 Allowance for losses 124,003 Total assets 31,683,741 Deposits 19,219,389 Short-term borrowings 851,821 Other liabilities 738,201 Long-term debt 8,874,056 Preferred stock - mandatory redemption -0- Preferred stock - no mandatory redemption -0- Common stocks 5,859 Other stockholders' equity 1,994,415 Total liability and stockholders' equity 31,683,741 Interest and fees on loans 1,649,413 Interest and dividends on investments 123,137 Other interest income 103,927 Total interest income 1,876,477 Interest on deposits 714,353 Total interest expense 1,155,107 Net interest income 721,370 Provision for loan losses 62,966 Investment securities losses (120) Other expenses 305,508 Income before income tax 390,382 Income before extraordinary items 390,382 Extraordinary items, less tax -0- Cumulative change in accounting principles -0- Net income 230,449 Earnings per share - primary 3.71 Earnings per share - fully diluted 3.71 Net yield - interest earning assets - actual 6.81% Loans on nonaccrual 284,103 Accruing loans past due 90 days or more -0- Troubled debt restructuring 72,827 Potential problem loans -0- Allowance for loan loss - beginning of period 106,698 Total chargeoffs 46,556 Total recoveries 895 Allowance for loan loss - end of period 124,003 Loan loss allowance allocated to domestic loans 124,003 Loan loss allowance allocated to foreign loans -0- Loan loss allowance - unallocated -0-
EX-27 2
9 YEAR DEC-31-1994 DEC-31-1994 242,441 29,969 152,000 0 1,812,184 871,039 831,436 27,071,266 124,003 31,683,741 19,219,389 601,821 738,201 9,124,056 0 0 5,859 1,994,415 31,683,741 1,649,413 123,137 103,454 1,876,477 714,353 1,155,107 721,370 62,966 (120) 305,508 390,382 390,382 0 0 230,449 3.71 3.71 6.81 284,103 0 72,827 0 106,698 46,556 895 124,003 124,003 0 0
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