-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C0rZmonmQ6xAUd/rUl+N8Y6bpTntVz+az1SHtxeQ7V1HgMQ6iWEJfn1ivbC/+D7t ErKHSAx2iyG3hY2nyqnpPQ== 0000042293-96-000002.txt : 19960329 0000042293-96-000002.hdr.sgml : 19960329 ACCESSION NUMBER: 0000042293-96-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-04629 FILM NUMBER: 96539452 BUSINESS ADDRESS: STREET 1: 1901 HARRISON STREET CITY: OAKLAND STATE: CA ZIP: 94612 BUSINESS PHONE: 5104663420 MAIL ADDRESS: STREET 2: 1901 HARRISON STREET CITY: OAKLAND STATE: CA ZIP: 94612 FORMER COMPANY: FORMER CONFORMED NAME: TRANS WORLD FINANCIAL CORP DATE OF NAME CHANGE: 19760806 FORMER COMPANY: FORMER CONFORMED NAME: TRANS WORLD FINANCIAL CO DATE OF NAME CHANGE: 19751124 10-K405 1 GOLDEN WEST 10-K, LIVE FILING SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 for the fiscal year ended December 31, 1995 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 (I.R.S. Employer Identification No.) incorporation or organization) 1901 Harrison Street, Oakland, California 94612 - ------------------------------------------------- ---------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (510) 446-3420 ---------------------- 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 St ock 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. X YES 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. [X] The approximate aggregate market value of the Registrant's common stock held by nonaffiliates of the Registrant on February 29, 1996, was $2,973,968,612. The number of shares outstanding of the Registrant's common stock on February 29, 1996, was 58,745,059 shares. DOCUMENTS INCORPORATED BY REFERENCE Documents Incorporated by Reference Applicable Part of Form 10-K - ----------------------------------- ---------------------------- Proxy Statement Dated March 15, 1996, Part III Furnished to Stockholders in Connection with Registrant's Annual Meeting of Stockholders. PART I ITEM 1. BUSINESS REGISTRANT Golden West Financial Corporation (Golden West or Company) is a savings and loan holding company, the principal business of which is the operation of a savings and loan business through its wholly owned subsidiary, World Savings and Loan Association, a Federal Savings and Loan Association (World or Association), and a savings bank business through its savings bank subsidiaries, World Savings Bank, a Federal Savings Bank (WFSB), and World Savings Bank, a State Savings Bank, (WSSB). The Association, WFSB and WSSB are referred to collectively as the "Insured Institutions" or "Insured Subsidiaries". Golden West also has two other subsidiaries, Atlas Advisers, Inc., and Atlas Securities, Inc. These two companies were formed to provide services to Atlas Assets, Inc., a series open-end registered investment company sponsored by the Company. Atlas Advisers, Inc., is a registered investment adviser and the investment manager of Atlas Assets, Inc.'s 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. References herein to the Company or Golden West mean Golden West and its subsidiaries on a consolidated basis, unless the context requires otherwise. World, whose deposits are insured by the Federal Deposit Insurance Corporation (FDIC) Savings Association Insurance Fund (SAIF), was incorporated in 1912 as a capital stock savings and loan association and has its home office in Oakland, California. World became a federally chartered savings and loan association in September 1981. For the years ended December 31, 1995, 1994 and 1993, World's net earnings were $272 million, $257 million and $286 million, respectively. World's assets totaled $30.4 billion and $31.0 billion at yearends 1995 and 1994, respectively. During 1995, Golden West acquired Watchung Hills Bank for Savings of New Jersey and renamed it World Savings Bank, a Federal Savings Bank. WFSB is a federally chartered savings bank, with deposits insured by the FDIC Bank Insurance Fund (BIF) and its home office is in Warren, New Jersey. As of December 31, 1995, WFSB had assets of $4.0 billion. For the year ended December 31, 1995, WFSB incurred a $3.5 million loss. As a BIF-insured institution, WFSB's FDIC insurance premiums currently are assessed at a lower rate than FDIC insurance premiums of SAIF-insured institutions such as the Association. Golden West is operating its insured subsidiaries in a manner that enhances customer service, including, for example, permitting customers to earn higher yields that reflect the benefits of lower FDIC insurance premiums and allowing customers to maximize FDIC insurance coverage by placing deposits at more than one insured institution. In this regard, products of WFSB are made available through WFSB's own offices, through offices of the Association in an arrangement where the Association acts as agent for WFSB, and through offices shared by the Association and WFSB. As of November 30, 1995, WFSB deposit accounts were available through all Association branches. In addition, customers of each of Golden West's insured subsidiaries can ITEM 1. BUSINESS (Continued) REGISTRANT (continued) transact most business on their accounts at any insured subsidiary's branch offices. Interest rates set on deposit accounts offered by the Association and WFSB are based on market conditions and funding needs. Each insured subsidiary reimburses the other for services provided in these arrangements. REGULATORY FRAMEWORK The Company is a savings and loan holding company within the meaning of the Homeowners Loan Act (HOLA), and is subject to the regulation, examination, supervision, and reporting requirements of HOLA. 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 FDIC SAIF, up to the maximum amounts provided by law. WFSB is a member of the FHLB system and owns stock in the FHLB of New York. WFSB's savings accounts are insured by the FDIC BIF, also up to the maximum amounts provided by law. The Company, the Association, and WFSB are subject to extensive examination, supervision, and regulation by the Office of Thrift Supervision (OTS) and the FDIC. Applicable regulations govern, among other things, lending and investment powers, the types of savings accounts that can be offered, the types of business that can be engaged in, and capital requirements. The Association and WFSB are also subject to regulations of the Board of Governors of the Federal Reserve System (Federal Reserve Board) with respect to reserve requirements and certain other matters (see Regulation). OFFICE STRUCTURE As of December 31, 1995, the Company operated 118 savings branch offices in California, 48 in Colorado, 23 in Florida, 16 in Texas, ten in Kansas, nine in Arizona, and nine in New Jersey. The Company also operates 221 loan origination offices of which 190 are located in the states listed above. The remaining 31 loan origination offices are located in Connecticut, Delaware, Idaho, Illinois, Maryland, Massachusetts, Minnesota, Missouri, Nevada, New Mexico, Oregon, Pennsylvania, South Dakota, Utah, Virginia, Washington, and Wisconsin. Of the 221 loan offices, 18 are fully-staffed offices that are located in the same premises as savings branch offices and 105 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 January 20, 1995, the Company acquired Watchung Hills Bank for Savings of New Jersey with $48 million in deposits and three branches in New Jersey and renamed it World Savings Bank, a Federal Savings Bank. That same month, the Company sold seven Colorado branches with $153 million in deposits to First Security Bank of Fort Lupton. ITEM 1. BUSINESS (Continued) ACQUISITIONS/DIVESTITURES (continued) 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. 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 Insured Subsidiaries, is attracting funds, primarily in the form of savings deposits acquired from the general public, and investing those funds principally in loans secured by deeds of trust or mortgages on residential and other real estate, and mortgage-backed securities (MBS) -- 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 Insured Subsidiaries 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 Insured Subsidiaries had 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, 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 of San Francisco, the Federal Reserve Bank of San Francisco, and the Federal Reserve Board. The principal sources of funds for the holding company, Golden West, are interest on investments, 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 and principal on subordinated debt securities, capital contributions to its Insured Subsidiaries, dividends to stockholders, the purchase of Company stock, and general and administrative expenses. ITEM 1. BUSINESS (Continued) 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. Customer deposits increased $1.6 billion during 1995, including interest credited of $847 million and including $153 million from a divestiture, and $48 million from an acquisition, compared to an increase of $1.8 billion, including interest credited of $585 million and including $78 million from acquisitions during 1994. Customer deposits increased $936 million in 1993, including $567 million of interest credited, $320 million from acquisitions, and $264 million of divestitures. The increase in deposits in 1995 reflected growth in deposits at WFSB which more than offset a decline in deposits at the Association. The increase in customer deposits during 1995 resulted from ongoing marketing efforts and competitive rates offered by the Company on its insured accounts in 1995. Customer funds were attracted during 1994 as a result of aggressive promotions by the Company and by an improvement in the savings market as interest rates rose throughout most of that year. Consumer funds were attracted in 1993 as a result of special promotions in the Company's savings market. 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) 1995 1994 1993 1992 1991 ----------- ----------- ---------- ---------- ----------- Interest-bearing checking $ 750,160 $ 730,290 $ 736,767 $ 710,851 $ 574,068 Passbook. . . . . . . . . 567,890 638,905 611,606 541,701 391,205 Money market deposit accounts. . . . 1,291,501 1,818,426 2,378,087 2,731,338 2,310,518 Term certificate accounts with original maturities of: 4 weeks to 1 year. . . 9,358,705 5,159,037 4,334,208 4,762,359 6,148,044 1 to 2 years . . . . . 3,599,540 5,636,301 4,614,059 3,494,606 4,415,462 2 to 3 years . . . . . 2,128,392 1,997,826 1,448,779 1,246,978 907,858 3 to 4 years . . . . . 651,787 817,631 1,149,108 1,267,707 1,232,213 4 years and over . . . 2,065,785 2,098,984 2,021,350 1,612,784 730,057 Retail jumbo CDs . . . 430,647 312,413 109,250 94,651 82,331 All other . . . . . . . . 3,503 9,576 19,270 23,271 26,754 ----------- ----------- ---------- ---------- ----------- Total customer deposits. . $20,847,910 $19,219,389 $17,422,484 $16,486,246 $16,818,510 ============ =========== =========== =========== ===========
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) 1995 1994 ------------ ----------- 0.00 % -- 4.00% . . . . . . . . . $ 3,059,070 $ 6,040,355 4.01 % -- 6.00% . . . . . . . . . 13,333,303 10,309,411 6.01 % -- 8.00% . . . . . . . . . 4,434,384 2,789,033 8.01 % -- 10.00% . . . . . . . . . 6,239 62,805 10.01 % -- 12.00% . . . . . . . . . 14,814 17,685 12.01 % -- 14.00% . . . . . . . . . 100 100 ------------ ----------- $ 20,847,910 $19,219,389 ============ ===========
The table below shows the maturities of customer deposits at December 31, 1995, by interest rate.
TABLE 3 Customer Deposit Maturities by Interest Rate ($000s Omitted) 2000 and 1996(a) 1997 1998 1999 thereafter Total ------------- ---------- -------- -------- ---------- ----------- 0.00 % -- 4.00 % $ 3,041,492 $ 15,733 $ -0- $ 1,845 $ -0- $ 3,059,070 4.01 % -- 6.00 % 11,730,834 1,085,251 312,236 106,502 98,480 13,333,303 6.01 % -- 8.00 % 2,321,711 1,156,331 299,084 528,965 128,293 4,434,384 8.01 % -- 10.00 % 2,083 1,829 1,738 560 29 6,239 10.01 % -- 12.00 % 92 84 5,184 354 9,100 14,814 12.01 % -- 14.00 % -0- 100 -0- -0- -0- 100 ----------- ---------- -------- -------- -------- ----------- $17,096,212 $2,259,328 $618,242 $638,226 $235,902 $20,847,910 =========== ========== ======== ======== ======== =========== (a) Includes passbook, checking, and money market deposit accounts, which have no stated maturity.
ITEM 1. BUSINESS (Continued) CUSTOMER DEPOSIT ACTIVITIES (continued) As of December 31, 1995, the aggregate amount outstanding of time certificates of deposits in amounts of $100,000 or more was $2.2 billion, of which, $431 million were jumbo CDs. The Company does not use brokers to acquire certificates of deposit. The following table presents the maturity of these time certificates of deposit at December 31, 1995.
TABLE 4 Maturities of Time Certificate of Deposit Equal to or Greater than $100,000 ($000s Omitted) 3 months or less $ 800,868 Over 3 months through 6 months 510,789 Over 6 months through 12 months 430,121 Over 12 months 450,716 --------- $2,192,494 ==========
More information regarding customer deposits is included in Note J to the Financial Statements included in Item 14. BORROWINGS The Company generally may borrow from the FHLBs of San Francisco and New York upon the security of a) the capital stock of the FHLBs 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 FHLBs. At December 31, 1995, the Company had $6.4 billion in FHLB advances outstanding, compared to $6.5 billion at yearend 1994. From time to time, the Company enters into reverse repurchase agreements with selected major government securities dealers, selected large banks, or the FHLB of San Francisco. A reverse repurchase agreement involves the sale and delivery of U.S. Government securities or mortgage-backed securities by the Company to a broker or dealer coupled with an agreement to buy the securities back at a later date. Under generally accepted accounting principles, these transactions are properly accounted for as borrowings secured by securities. The Company pays the counterparty a variable or fixed rate of interest for the use of the funds for the period involved, 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. 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. 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, banks, and the FHLB of San Francisco amounted to $1.8 billion at December 31, 1995, compared to $602 million at yearend 1994. The $1.8 billion balance at December 31, 1995 includes $1.5 billion in FHLB of San Francisco MBS Reverse Repos with maturities ranging from 1996 to 1998. In 1995, the Company issued $100 million of subordinated debt. The debt will mature July 1, 2002 and has a note rate of 6.70%. At December 31, 1995, Golden West, at the parent level, had principal amounts outstanding of $1.1 billion of subordinated debt. As of December 31, 1995, 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. On July 26, 1995, the Company filed a new shelf registration with the Securities and Exchange Commission for the sale of up to $300 million of subordinated debt securities. World currently has on file a shelf registration with the OTS for the issuance of $2.0 billion of unsecured medium-term notes, all of which was available for issuance as of December 31, 1995. The Association had $1.6 billion of medium-term notes outstanding at December 31, 1995, under prior registrations compared to $1.2 billion at yearend 1994. As of December 31, 1995, 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 $300 million of subordinated notes, all of which, as of December 31, 1995, was available for issuance. As of December 31, 1995, the Association had outstanding a total of $200 million of subordinated notes. As of December 31, 1995, 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. ITEM 1. BUSINESS (Continued) BORROWINGS (continued) The table below sets forth the composition of the Company's borrowings at December 31.
TABLE 5 Composition of Borrowings ($000s Omitted) 1995 1994 1993 1992 1991 ----------- ---------- ---------- ---------- ---------- FHLB advances. . . . . . . . . $ 6,447,201 $6,488,418 $6,281,691 $5,499,363 $4,159,796 Reverse repurchase agreements 1,752,171 316,865 205,821 372,409 302,400 Dollar reverse repurchase agreements. . . . . . . . 65,772 284,956 237,053 184,301 349,813 Medium-term notes . . . . . . 1,597,507 1,164,079 676,540 81,267 166,750 Federal funds purchased. . .. -0- 250,000 -0- -0- -0- Other borrowings. . . . . . . -0- -0- -0- -0- 21,395 Subordinated debt. . . . . . . 1,322,392 1,221,559 1,220,061 921,701 625,105 ----------- ---------- ---------- ---------- ---------- Total borrowings. . . . . $11,185,043 $9,725,877 $8,621,166 $7,059,041 $5,625,259 =========== ========== ========== ========== ========== Weighed average interest rate of total borrowings. . . . 6.15% 5.85% 4.69% 5.58% 7.48% =========== ========= ========= ========== ==========
More information concerning the borrowings of the Company is included in Notes K, L, M, N, and O to the Financial Statements which are included 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 in Arizona, California, Colorado, Connecticut, Delaware, Florida, Idaho, Illinois, Kansas, Maryland, Massachusetts, Minnesota, Missouri, Nevada, New Mexico, New Jersey, Oregon, Pennsylvania, South Dakota, 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, 1995, and 1994. The tables on the following two pages set forth the Company's loan portfolio by state as of December 31, 1995, and 1994. ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued)
TABLE 6 Loan Portfolio by State December 31, 1995 ($000s Omitted) Residential Real Estate Commercial Loans ---------------------------- Real Total as a % of State 1 - 4 5+ Land Estate Construction Loans(a) Portfolio - ------------------- ----------- ----------- -------- ------------ ------------ ------------- --------- California $19,000,477 $3,342,510 $ 273 $ 72,321 $ -0- $22,415,581 73.22% Colorado 836,664 210,219 -0- 7,573 -0- 1,054,456 3.44 Illinois 841,771 181,265 -0- 2,445 -0- 1,025,481 3.35 Texas 826,476 75,965 590 1,678 -0- 904,709 2.96 New Jersey 865,935 413 -0- 7,577 1,471 875,396 2.86 Florida 705,373 57 221 1,185 -0- 706,836 2.31 Washington 356,723 310,095 -0- 788 -0- 667,606 2.18 Arizona 428,584 52,695 -0- 1,723 -0- 483,002 1.58 Virginia 423,737 -0- -0- 1,592 -0- 425,329 1.39 Pennsylvania 390,564 -0- -0- 4,160 -0- 394,724 1.29 Connecticut 314,352 -0- -0- -0- -0- 314,352 1.03 Maryland 274,410 -0- -0- 598 -0- 275,008 0.90 Oregon 177,785 10,598 -0- 2,901 -0- 191,284 0.62 Nevada 158,059 1,225 -0- -0- -0- 159,284 0.52 Kansas 130,168 5,172 -0- 211 -0- 135,551 0.44 Utah 95,500 65 -0- 1,988 -0- 97,553 0.32 Minnesota 80,432 -0- -0- -0- -0- 80,432 0.26 Missouri 65,763 7,077 -0- -0- -0- 72,840 0.24 Wisconsin 59,289 4,213 -0- -0- -0- 63,502 0.21 New York 53,245 -0- -0- 23 -0- 53,268 0.17 Georgia 42,858 -0- -0- 2,090 -0- 44,948 0.15 Washington DC 35,785 -0- -0- -0- -0- 35,785 0.12 Ohio 23,932 2,601 427 5,210 -0- 32,170 0.11 New Mexico 25,398 -0- -0- -0- -0- 25,398 0.08 Delaware 19,041 -0- -0- -0- -0- 19,041 0.06 Idaho 15,034 -0- -0- -0- -0- 15,034 0.05 North Carolina 8,992 327 -0- 2,951 -0- 12,270 0.04 Other 28,726 31 -0- 4,913 -0- 33,670 0.10 ----------- ---------- ------ -------- ------- ---------- ------ Totals $26,285,073 $4,204,528 $1,511 $121,927 $1,471 30,614,510 100.00% =========== ========== ====== ======== ======= ====== SFAS 91 deferred loan fees (77,283) Loan discount on purchased loans (6,262) Undisbursed loan funds (3,568) Allowance for loan losses (141,988) Loans to facilitate (LTF) interest reserve (482) Troubled debt restructured (TDR) interest reserve (4,167) Loans on customer deposits 33,279 ----------- Total loan portfolio and loans securitized with FNMA with recourse 30,414,039 Loans securitized with FNMA with recourse (2,232,686)(b) ----------- Total loan portfolio $28,181,353 =========== (a) The Company has no commercial loans. (b) During 1995, loans amounting to $2.3 billion were securitized with full recourse into Federal National Mortgage Association (FNMA) mortgage-backed securities. The December 31, 1995 balances of these FNMA mortgage-backed securities are reflected in the amounts above.
ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued)
TABLE 7 Loan Portfolio by State December 31, 1994 ($000s Omitted) Residential Real Estate Commercial Loans as ------------------------- 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% =========== ========== ====== ======== ======= SFAS 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.
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 collateral at December 31.
TABLE 8 Loan Portfolio by Type of Security ($000s Omitted) 1995 1994 1993 1992 1991 ----------- ----------- ----------- ------------ ----------- Loans collateralized primarily by first deeds of trusts: One-to four-family units .. $24,071,421 $23,217,564 $20,197,613 $18,487,247 $17,065,371 Over four-family units. . . 4,205,050 3,946,446 3,785,673 3,509,105 2,989,908 Commercial real estate. . . 122,396 134,189 153,396 176,900 214,706 Construction loans. . . . . 1,471 -0- 580 580 580 Land. . . . . . . . . . . . 1,511 1,851 2,407 1,763 1,989 Loans on customer deposits . . 33,279 30,460 32,012 33,230 36,607 Less: Undisbursed loan funds. . . 3,568 2,781 1,882 2,687 1,924 Unearned fees and discounts 88,194 105,314 112,751 109,446 92,472 Unamortized discount arising from acquisitions . . . 20,025 27,146 37,779 57,092 79,297 Allowance for loan losses. . 141,988 124,003 106,698 70,924 48,036 ----------- ----------- ----------- ----------- ----------- $28,181,353 $27,071,266 $23,912,571 $21,968,676 $20,087,432 =========== =========== =========== =========== ===========
At December 31, 1995, 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, 1995.
TABLE 9 Loans Due After One Year ($000s Omitted) Adjustable Rate $24,988,306 Fixed Rate 3,124,336 ----------- $28,112,642 ===========
The table on the following page sets forth information concerning new loans made by the Company during 1995, 1994, and 1993 by type and purpose of loan. ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued)
TABLE 10 New Loan Originations By Type and Purpose ($000s Omitted) 1995 1994 1993 ----------------------------- ------------------------------ ------------------------------- No. of % of No. of % of No. of % of Type Loans Amount Total Loans Amount Total Loans Amount Total - -------- ------- ---------- ------- ------ ------------ ----- ------ ---------- ------- Residential 38,742 $5,274,785 88.7% 42,543 $5,769,339 86.9% 41,999 $5,459,456 85.2% (one unit) Residential (2 to 4 units) 1,679 223,177 3.7 2,194 307,480 4.6 2,380 351,349 5.5 Residential (5or more units) 898 451,102 7.6 1,073 560,834 8.5 1,209 598,972 9.3 Commercial real estate -0- -0- 0.0 -0- -0- 0.0 1 2,100 0.0 ----- ---------- ------ ------- ---------- ------ ------- ---------- ----- Totals 41,319 $5,949,064 100.0% 45,810 $6,637,653 100.0% 45,589 $6,411,877 100.0% ====== ========== ====== ======= ========== ======= ======= ========== ======
1995 1994 1993 -------------------------------- --------------------------------- -------------------------------- No. of % of No. of % of No. of % of Purpose Loans Amount Total Loans Amount Total Loans Amount Total - -------- ------- ---------- ------- ------- ------------ ------- --------- ----------- ------ Purchase 28,343 $4,046,605 68.0% 26,973 $3,941,719 59.4% 18,236 $2,654,769 41.4% Refinance 12,976 1,902,459 32.0 18,837 2,695,934 40.6 27,353 3,757,108 58.6 ------- ---------- ----- ------ ---------- ----- ------ ---------- ------ Totals 41,319 $5,949,064 100.0% 45,810 $6,637,653 100.0% 45,589 $6,411,877 100.0% ======= ========== ===== ====== ========== ====== ======= ========== ====== Note: During 1995, 1994, and 1993, the Company also purchased $31 million, $69 million, and $14 million, respectively, of residential loans (not included above) of which $26 million, $60 million, and $304 thousand, respectively, were on one-unit residential properties.
New loan originations in 1995, 1994, and 1993 amounted to $5.9 billion, $6.6 billion, and $6.4 billion, respectively. Refinanced loans constituted 32% of new loan originations in 1995 compared to 41% in 1994 and 59% in 1993. The decline in loan volume in 1995 was due to interest rate decreases during 1995 which brought down the price of new fixed-rate mortgage loans (FRMs), making competition from fixed-rate lenders more intense for adjustable rate lenders, such as the Company. However, in 1994, as interest rates rose over the levels seen in the prior year, adjustable rate loans (ARMs) proved to be a more affordable alternative to FRMs and the Company was able to increase market share. The strong origination results in 1993 were due to the refinancing boom of the early 1990s, which peaked in 1993, as many homeowners took advantage of historically low interest rates and traded in older, higher-rate loans for less expensive ones. The total portfolio growth for the years ended December 31, 1995, and 1994, were $1.1 billion or 4% and $3.2 billion or 13%, respectively. Had there not been $2.3 billion of loans securitized into MBS during 1995, the loan portfolio growth in 1995 would have been $3.3 billion or 12%, similar to the 1994 growth. ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued) The primary source of mortgage origination is loans secured by residential properties in California. The loans originated in California decreased to $3.1 billion in 1995 from $4.1 billion in 1994 and $4.7 billion in 1993. Residential loans originated in California as a percentage of total originations were 53% in 1995, 62% in 1994 and 73% in 1993. The five largest states, other than California, for originations for the year ended December 31, 1995 were Texas, Illinois, Colorado, Florida and New Jersey with a combined total of 28% of total originations. Although California originations continue to be a large portion of total originations, the California share of total originations decreased in 1995 as compared to 1994, primarily due to both decreased loan volume in California and increased loan volume in markets outside of California. The increase in total originations in 1994 as compared to 1993 was due to the increased penetration by the Company in markets outside of California. 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 90% at yearend 1995 compared to 89% at yearend 1994 and 87% at yearend 1993. Despite the resurgence of fixed-rate mortgages, Golden West's ARM originations constituted approximately 93% of new mortgage loans made by the Company in 1995 and 1994, compared with 75% in 1993. 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 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. ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued) 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 13.11%, or 5.62% above the actual weighted average rate at December 31, 1995, versus 13.36%, or 6.83% above the weighted average rate at yearend 1994. Approximately $5.2 billion of the Company's ARMs 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, 1995, $545 million of these ARM loans had reached their rate floors. The weighted average floor rate on these loans was 7.85% at yearend 1995 compared to 7.56% at yearend 1994. Without the floor, the average yield on these loans would have been 7.35% at December 31, 1995 and 6.47% at December 31, 1994. Interest rates charged by the Company on real estate loans are affected principally by competition, and also by the supply of money available for lending, loan demand, and factors that are, in turn, affected by general economic conditions, regulatory and monetary policies of the federal government, the OTS and the Federal Reserve Board, and legislation and other governmental action dealing with budgetary and tax matters. The Company originates loans through offices that are staffed by employees who primarily contact local real estate brokers regarding 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 San Antonio, Texas, for processing. 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. ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued) 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. During 1995, 1994 and 1993, the great majority of all loans originated in excess of 80% of the appraised value of the property carried mortgage insurance except loans to facilitate the sale of REO. During 1995, 6% of loans originated were in excess of 80% of the appraised value of the residence. Approximately 8% and 3% of loans originated in 1994 and 1993, respectively, 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 securities 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 Mortgage Corporation (FHLMC), the Federal National Mortgage Association (FNMA), and to institutional investors. Beginning in 1995, the Company began sales to FNMA of whole loans with recourse. The Company continues to collect payments on the loans as they become due, and otherwise to service the loans. The Company pays an agreed-upon yield on the participant's portion of the loans. This yield is usually less than the interest agreed to be paid by the borrower, with the difference being retained by the Company as servicing fee income. The Company sold $142 million of loans during 1995 compared to $146 million and $432 million in 1994 and 1993, respectively. The Company recognized pre-tax gains of $443 thousand in 1995 compared to $1.7 million in 1994 and $5.7 million in 1993. The Company originated $169 million of loans held for sale during 1995 compared to $94 million in 1994 and $443 million in 1993. The loans held for sale portfolio had a balance of $32 million at December 31, 1995, and is carried at the lower of cost or market. At December 31, 1995, the Company was engaged in servicing approximately $3.1 billion of loan participations and whole loans for others including $2.3 billion of loans serviced for FNMA with recourse. For the year ended December 31, 1995, fees received for such servicing activities totaled $7 million, or approximately three-tenths of one percent of total revenues compared to $3 million or approximately one-tenth of one percent of total revenues for the year ended December 31, 1994. The Company also purchases, on a selective basis and only after strict underwriting review, residential mortgage whole loans in the secondary market. Loan purchases in 1995, 1994, and 1993 amounted to $31 million, $69 million, and $14 million, respectively. ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued) Loan repayments consist of monthly loan amortization, loan payoffs, and loan refinances. During 1995, 1994, and 1993, repayments amounted to $2.3 billion, $3.2 billion, and $3.8 billion, respectively. The decrease in repayments in 1995 compared to 1994 and 1994 as compared with 1993 was due to lower mortgage payoffs and lower refinances within the Company's loan portfolio. 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. In 1995 and 1994, the Company responded to increased competition from fixed-rate lenders by offering more low and zero point adjustable rate mortgage options to its customers. The Company also charges fees for loan prepayments, loan assumptions and modifications, late payments and other miscellaneous services. The table below sets forth information relating to interest rates and loan fees charged for the years indicated.
TABLE 11 Weighted Average Interest Rates and Fees on New Loan Originations 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Weighted average interest rate on new real estate loans originated (a). . . . 7.56% 6.44% 6.86% 8.06% 9.83% Weighted average loan fees received on new real estate loans originated (a). . . . .25% .29% .59% .81% .85% (a) excludes loans purchased
In May 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" (SFAS 122). SFAS 122 amends Statement of Financial Accounting Standards No. 65, "Accounting for Certain Mortgage Banking Activities," to require that mortgage banking enterprises recognize, as separate assets, rights to service mortgage loans for others when those rights are acquired through either the purchase or origination of mortgage loans which are subsequently sold or securitized. SFAS 122 also requires that mortgage banking enterprises assess capitalized mortgage servicing rights based on the fair value of those rights on a disaggregated basis. SFAS 122 applies to fiscal years beginning after December 15, 1995. However, if it were applied to the Company's 1995 financial statements, the impact would not be material. ITEM 1. BUSINESS (Continued) ASSET QUALITY If a borrower fails to make required payments on a loan, the Company usually takes steps required under applicable law to foreclose upon the security for the loan. If a delinquency is not cured, the property is generally acquired by the Company in a foreclosure sale or by taking a deed in lieu of foreclosure. If the applicable period of redemption by the borrower (which varies from state to state and by method of foreclosure pursued) has expired, the Company is free to sell the property. The property may then be sold generally with a loan conforming to normal loan requirements, or with a "loan to facilitate sale" which is so designated if the loan involves terms more favorable to the borrower than those normally permitted. Various antideficiency and homeowner protective provisions of state law may limit the remedies available to lenders when a residential mortgage borrower is in default. The effect of these provisions, in most cases, is to limit the Company to foreclosing upon, or otherwise obtaining ownership of, the property securing the loan after default and to prevent the Company from recovering from the borrower any deficiency between the amount realized from the sale of such property and the amount owed by the borrower. 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" (SFAS 114), as of January 1, 1993. At December 31, 1995, 1994, and 1993, loans in-substance foreclosed were included in the Company's total loan portfolio. The Company had previously measured loan impairment in accordance with the methods prescribed in SFAS 114; thus; the amounts for all years shown in Table 12 on the following page are comparable. No interest is recognized on nonaccrual loans. ITEM 1. BUSINESS (Continued) ASSET QUALITY (continued) 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) 1995 1994 1993 1992 1991 -------- -------- --------- -------- -------- Non-accrual loans $314,086 $284,103 $330,062 $263,065 $232,803 Real estate acquired through foreclosure 75,158 70,981 62,724 56,642 38,163 Loans in-substance foreclosed -0- -0- -0- 9,351 6,908 Real estate in judgment 443 390 1,366 1,030 4,049 -------- -------- -------- -------- -------- Total nonperforming assets $389,687 $355,474 $394,152 $330,088 $281,923 ======== ======== ======== ======== ======== TDRs $ 45,222 $ 72,827 $ 37,190 $ 13,038 $ 18,360 ======== ======== ======== ======== ======== Ratio of nonperforming assets to total assets 1.11% 1.12% 1.37% 1.27% 1.16% ======== ======== ========= ======= ======== Ratio of TDRs to total assets .13% .23% .13% .06% .08% ======== ======== ========= ======= ======== Ratio of NPAs and TDRs to total assets 1.24% 1.35% 1.50% 1.33% 1.24% ======= ======== ======== ======= ========
The level of NPAs during the past three years has remained relatively flat even though the loan portfolio has continued to grow. The Company continues to closely monitor all delinquencies and takes appropriate steps to protect its interests. Interest foregone on non-accrual loans (loans greater than 90 days past due) is fully-reserved and amounted to $18 million in 1995, $17 million in 1994, and $20 million in 1993. The Company's troubled debt restructured (TDRs) were $45 million, or 0.13% of assets, at December 31, 1995, compared to $73 million, or 0.23% of assets, at yearend 1994 and $37 million, or 0.13% of assets, at yearend 1993. 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 $1.8 million in 1995 compared to $811 thousand in 1994 and $275 thousand in 1993. The tables on the following two pages show the Company's nonperforming assets by state at December 31, 1995, and 1994. ITEM 1. BUSINESS (Continued) ASSET QUALITY (continued)
TABLE 13 Nonperforming Assets by State December 31, 1995 ($000s Omitted) Non-Accrual Loans (a) ------------------------------------ Real Estate Owned Residential ------------------------------------ NPAs as Real Estate Commercial Residential Commercial Total a % of State 1 - 4 5+ Real Estate 1 - 4 5+ Real Estate NPAs(b) Loans - -------------- -------- ------- ---------- ---------- --------- ----------- ---------- -------- California $265,179 $8,075 $ 808 $53,231 $16,969 $3,574 $347,836 1.55% Colorado 1,308 64 3,069 -0- -0- -0- 4,441 0.42 Illinois 3,098 472 -0- 599 342 -0- 4,511 0.44 Texas 2,004 -0- -0- -0- -0- -0- 2,004 0.22 New Jersey 10,541 -0- 603 355 -0- -0- 11,499 1.31 Florida 2,956 -0- 149 398 -0- -0- 3,503 0.50 Washington 520 -0- -0- 319 -0- -0- 839 0.13 Arizona 1,052 -0- -0- 51 -0- -0- 1,103 0.23 Virginia 1,231 -0- -0- 604 -0- -0- 1,835 0.43 Pennsylvania 2,209 -0- -0- -0- -0- -0- 2,209 0.56 Connecticut 3,130 -0- -0- 384 -0- -0- 3,514 1.12 Maryland 796 -0- -0- -0- -0- -0- 796 0.29 Oregon 538 -0- -0- -0- -0- -0- 538 0.28 Nevada 793 -0- -0- 114 -0- -0- 907 0.57 Kansas 719 40 -0- -0- -0- -0- 759 0.56 Utah 122 -0- -0- -0- -0- -0- 122 0.13 Minnesota -0- -0- -0- -0- -0- -0- -0- 0.00 Missouri 402 171 -0- -0- -0- -0- 573 0.79 Wisconsin -0- -0- -0- -0- -0- -0- -0- 0.00 New York 2,664 -0- -0- 683 -0- -0- 3,347 6.28 Georgia 917 -0- -0- 50 -0- -0- 967 2.15 Washington DC 7 -0- -0- -0- -0- -0- 7 0.02 Ohio 71 -0- 58 1 -0- 154 284 0.88 New Mexico 1 -0- -0- -0- -0- -0- 1 0.00 Delaware -0- -0- -0- -0- -0- -0- -0- 0.00 Idaho -0- -0- -0- -0- -0- -0- -0- 0.00 North Carolina 41 -0- -0- -0- -0- -0- 41 0.33 Other 278 -0- -0- -0- -0- -0- 278 0.83 -------- ------ ------ ------- ------- ------- -------- ---- Totals $300,577 $8,822 $4,687 $56,789 $17,311 $3,728 391,914 1.28 ======== ====== ====== ======= ======= ======= REO general valuation allowance (2,227) (0.01) -------- ----- $389,687 1.27% ======== ===== (a) Non-accruals loans are 90 days or more past due and have no unpaid interest accrued. (b) During 1995, loans amounting to $2.3 billion were securitized with full recourse into FNMA mortgage-backed securities. The December 31, 1995 balance of the related nonperforming assets are reflected in the amounts above.
ITEM 1. BUSINESS (Continued) ASSET QUALITY (continued)
TABLE 14 Nonperforming Assets by State December 31, 1994 ($000s Omitted) Non-Accrual Loans (a) -------------------------------- Real Estate Owned Residential ------------------------------- NPAs as Real Estate Commercial Residential Commerical Total a % of State 1 - 4 5+ Real Estate 1 - 4 5+ Real Etsate 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) Non-accruals loans are 90 days or more past due and have no unpaid interest accrued.
ITEM 1. BUSINESS (Continued) ASSET QUALITY (continued) At December 31, 1995, approximately $328 million of the Company's loans were 30 to 89 days past due and an additional $111 million of loans were performing under bankruptcy protection. Management has included its estimate of potential losses on these loans in the allowance for loan losses. The Company provides specific valuation allowances for losses on loans when impaired, including loans securitized into MBS with recourse, and on real estate owned when any significant and permanent decline in value is identified. The Company also utilizes a methodology, based on trends in the basic portfolio, for monitoring and estimating loan losses that is based on both historical experience in the loan portfolio and factors reflecting current economic conditions. This approach uses a data base that identifies losses on loans and foreclosed real estate from past years to the present, broken down by year of origination, type of loan, and geographical area. Management is then able to estimate a range of general loss allowances to cover losses in the portfolio. In addition, periodic reviews are made of major loans and real estate owned, and major lending areas are regularly reviewed to determine potential problems. Where indicated, valuation allowances are established or adjusted. In estimating possible losses, consideration is given to the estimated sale price, cost of refurbishing, 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 Allowance for Loan Losses ($000s Omitted) 1995 1994 1993 1992 1991 -------- -------- ------- -------- -------- Beginning allowance for loan losses $124,003 $106,698 $70,924 $48,036 $ 26,799 Provision charged to expense 61,190 62,966 65,837 43,218 34,984 Less loans charged off (44,656) (46,556) (38,475) (21,227) (15,274) Add recoveries 1,451 895 1,145 897 1,527 Reclassification of in-substance foreclosure allowances -0- -0- 7,267 -0- -0- -------- -------- -------- ------- -------- Ending allowance for loan losses $141,988 $124,003 $106,698 $70,924 $ 48,036 ======== ======== ======== ======= ========= Ratio of net chargeoffs to average loans outstanding (including MBS with recourse) .15% .18% .16% .10% .07% ======== ======== ======== ======= ======== Ratio of allowance for loan losses to nonperforming assets 36.4% 34.9% 27.1% 21.5% 17.0% ======== ======== ======== ======= =========
Chargeoffs decreased in 1995, as compared to 1994, as a result of the gradually improving economy in California. ITEM 1. BUSINESS (Continued) 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. 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 accounts for its investment portfolio under Statement of Financial Standards No 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities." Accordingly, the Company has identified its investment securities as either held to maturity or available for sale. The Company has no trading securities. Held to maturity securities are recorded at cost with any discount or premium amortized using a method that is not materially different from the interest method, which is also known as the level yield method. Securities held to maturity are recorded at cost because the Company has the ability to hold these securities to maturity and because it is management's intention to hold them to maturity. At December 31, 1995, 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 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. Transfers of securities, if any, between available for sale and held to maturity portfolios are handled in accordance with SFAS 115. 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, 1995, the great majority of the Company's CMOs had remaining terms to maturity of five years or less and qualified for inclusion in the 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. ITEM 1. BUSINESS (Continued) INVESTMENT ACTIVITIES (continued) At December 31, 1995, 1994, and 1993, the Company had securities available for sale in the amount of $902 million, $1.5 billion, and $1.6 billion, respectively, including net unrealized gains on investment securities available for sale of $117 million, $23 million, and $70 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 different from the interest method. 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) 1995 1994 1993 --------- ---------- ---------- Certificates of deposit and short-term bank notes $ 50,000 $ 29,969 $ 482,100 U.S Treasury and Government agency obligations 174,819 637,069 419,815 Collateralized mortgage obligations 407,947 668,128 275,408 Commercial paper 50,974 1,269 230,389 Bankers acceptances -0- -0- 58,395 Equity securities 218,116 152,410 170,479 -------- ---------- ---------- $901,856 $1,488,845 $1,636,586 ======== ========== ==========
The weighted average yields on the securities available for sale portfolio were 5.89%, 5.24%, and 3.93% at December 31, 1995, 1994, and 1993, respectively. ITEM 1. BUSINESS (Continued) INVESTMENT ACTIVITIES (continued) The table below sets forth the composition of the Company's other investments at December 31.
TABLE 17 Composition of Other Investments ($000s Omitted) 1995 1994 1993 ------------ --------- -------- Federal funds $ 490,960 $152,000 $ 25,000 Short-term repurchase agreements collateralized by mortgage-back securities 699,200 382,600 513,100 ---------- -------- ------- $1,190,160 $534,600 $538,100 =========== ========= ========
The weighted average yield on the other investments portfolio was 6.00%, 5.92%, and 3.42% at December 31, 1995, 1994, and 1993, respectively. As of December 31, 1995, the entire other investments portfolio matures in 1996. MORTGAGE-BACKED SECURITIES In accordance with SFAS 115, the Company identifies its mortgage-backed securities 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 over the estimated life of the security. At December 31, 1995, 1994, and 1993, the Company had mortgage-backed securities held to maturity in the amount of $3.1 billion, $871 million, and $408 million, respectively, including $2.2 billion of FNMA MBS subject to full credit recourse at December 31, 1995. 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, 1995, 1994, and 1993, the Company had mortgage-backed securities available for sale in the amount of $283 million, $323 million, and $1.1 billion, respectively, including net unrealized gains on mortgage-backed securities available for sale of $14 million, $6 million, and $74 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. ITEM 1. BUSINESS (Continued) MORTGAGE -BACKED SECURITIES (continued) 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 SFAS 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. During 1995, the Company securitized $2.3 billion of adjustable rate mortgages into Federal National Mortgage Association COFI-indexed mortgage-backed securities to be used as collateral for borrowings. These securities are subject to full credit recourse to the Company. The Company has the ability and intent to hold these MBS until maturity. Accordingly, these MBS are classified as held to maturity. Repayments of MBS during the years 1995, 1994, and 1993 amounted to $210 million, $311 million, and $646 million, respectively. The decreases in repayments on MBS in 1995 over 1994 and in 1994 over 1993 were primarily due to decreased prepayments on the underlying mortgages. For information on MBS see Notes D and E to the Financial Statements included in Item 14. GOODWILL ARISING FROM ACQUISITIONS Positive goodwill, or the excess of the cost over the fair value of net assets acquired resulting from acquisitions, of $212 million (1995) and $223 million (1994) is stated net of accumulated amortization of $215 million (1995) and $200 million (1994). Negative goodwill, or the excess of the fair value of net assets acquired over the cost resulting from acquisitions, of $73 million (1995) and $86 million (1994) is shown net of accumulated amortization of $73 million (1995) and $60 million (1994). 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 $2.8 million for 1995, an expense of $2.6 million for 1994, and income of $1.6 million for 1993. The increase in goodwill amortization expense in 1995 as compared to 1994 was due to the addition of positive goodwill amortization resulting from the January 1995 Watchung Hills Bank for Savings of New Jersey acquisition. The increase in goodwill amortization expense in 1994 as compared to 1993 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 a prior acquisition. ITEM 1. BUSINESS (Continued) LONG-LIVED ASSETS AND OTHER INTANGIBLES The Company has adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS 121) in 1995. SFAS 121 establishes accounting and disclosure requirements using a fair value based method of accounting for long-lived assets and certain identifiable intangibles whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. The adoption of SFAS 121 had no effect on the Company's 1995 consolidated financial statements. STOCKHOLDERS' EQUITY The Company's stockholders' equity increased during 1995 as a result of retained earnings and the increase in market values of investment and mortgage-backed securities available for sale since December 31, 1994. The Company's stockholders' equity decreased by $65 million 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 compared to a year earlier, and $19 million of common stock dividends. These decreases in stockholders' equity were substantially offset by 1994's net earnings. The Company increased its total stockholders' equity in 1993 through retained earnings and the adoption of SFAS 115 which added $85 million to stockholders' equity at December 31, 1993. During periods of low asset growth, the Company's capital ratios may build to levels well in excess of the amounts necessary to meet regulatory capital requirements. Golden West's' Board of Directors regularly reviews alternative uses of excess capital, including faster growth and acquisitions. At times, the Board has determined that repurchase of common stock is a wise use of excess capital. In 1993 and 1994, through two separate actions, the Company's Board of Directors' authorized the purchase by the Company of up to 6.3 million shares of Golden West's common stock. On August 1, 1995, the Company's Board of Directors authorized the purchase by the Company of an additional 5.9 million shares of Golden West's outstanding common stock. For the period from October 28, 1993 through December 31, 1995, 5.8 million shares had been repurchased and retired at a cost of $226 million. During 1995, 68 thousand were purchased and retired at a cost of $3 million. The remaining number of shares authorized for repurchase is 6.3 million at December 31, 1995. 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 registration. The Company's preferred stock has been preliminarily rated a2 by Moody's. ITEM 1. BUSINESS (Continued) 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, 1995, 1994, and 1993 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, 1995, and is incorporated herein by reference. The dollar amounts of the Company's income and interest expense fluctuate depending both on changes in the respective interest rates and on changes in the respective amounts (volume) of interest-earning assets and interest-bearing liabilities. The following table sets forth certain information with respect to the yields earned and rates paid on the Company's interest-earning assets and interest-bearing liabilities.
TABLE 18 Average Interest-Earning Assets and Interest-Bearing Liabilities At or for the Years Ended December 31 ($000s Omitted) 1995 1994 1993 ------------------------------ ----------------------------- ---------------------------- 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 $ 2,188,929 5.97% 5.96% $ 2,149,385 4.98% 5.42% $ 2,178,164 3.67% 3.80% Mortgage-backed 2,294,360 7.90% 7.41% 1,276,615 8.14% 8.37% 1,595,255 8.71% 8.67% securities Loans receivable (a) 27,948,917 7.51% 7.69% 24,963,935 6.61% 6.85% 23,101,066 7.09% 6.73% Invest. in capital stock of FHLB 345,837 5.15% 4.92% 328,998 4.89% 4.81% 342,586 3.99% 3.49% ----------- ----- ----------- ----- ----------- ---- Interest-earning assets $32,778,043 7.41% $28,718,933 6.53% $27,217,071 6.87% =========== ==== =========== ==== =========== ==== LIABILITIES Customer Deposits: Checking accounts $ 711,460 1.30% 1.25% $ 730,956 1.30% 1.28% $ 706,245 1.62% 1.35% Savings accounts 2,073,226 2.32% 2.90% 2,835,339 2.05% 2.92% 3,069,143 2.23% 3.11% Term accounts 17,526,056 5.66% 5.54% 14,496,937 4.46% 4.98% 13,239,960 4.73% 4.24% ----------- ---- ---- ----------- ----- ------- ----------- ------- ------- Total customer deposits $20,310,742 5.16% 5.15% $18,063,232 3.96% 4.57% $17,015,348 4.15% 3.92% Advances from FHLB 6,438,791 5.74% 5.70% 6,251,431 4.30% 5.21% 6,416,250 4.27% 3.87% Reverse repurchases 1,120,860 6.31% 6.15% 574,487 6.55% 6.67% 464,091 7.76% 6.06% Other borrowings 3,030,067 7.14% 7.15% 1,961,828 6.84% 7.25% 1,611,046 7.56% 7.07% ----------- ---- ---------- -------- ---------- ----- Interest-bearing liabilities $30,900,460 5.52% $26,850,978 4.30% $25,506,735 4.46% =========== ==== =========== ==== =========== ==== Net interest margin 1.89% 2.23 % 2.41% ==== ===== ==== Net interest income $ 722,836 $ 721,730 $ 732,758 =========== =========== =========== Net yield on average interest-earning assets 2.21% 2.51% 2.69% ==== ==== ==== (a) Includes nonaccrual loans (90 days or more past due).
ITEM 1. BUSINESS (Continued) YIELD ON INTEREST-EARNING ASSETS/COST OF FUNDS (continued) The table below presents the changes for 1995 and 1994 from the respective preceding year of the interest income and expense associated with each category of interest-bearing asset and liability as allocated to changes in volume and changes in rates.
TABLE 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) ----------------------------------------------------------------- 1995 1994 1993 1995 versus 1994 1994 versus 1993 ---------- ----------- ------------ -------------------------------- -------------------------------- Income/ Income/ Income/ Expense(b) Expense(b) Expense(b) Volume Rate Total Volume Rate Total ---------- ----------- ------------ --------- -------- --------- --------- --------- --------- Interest Income Investments $ 130,595 $ 107,059 $ 79,874 $ 2,003 $21,533 $ 23,536 $(1,041) $28,226 $ 27,185 Mortgage-backed securities 181,355 103,927 138,874 80,356 (2,928) 77,428 (26,381) (8,566) (34,947) Loans receivable 2,097,664 1,649,413 1,637,764 209,769 238,482 448,251 74,556 (62,907) 11,649 Invest. in capital stock of Federal Home Loan Banks 17,827 16,078 13,660 845 904 1,749 (516 ) 2,934 2,418 ---------- ----------- ------------ Total interest income $2,427,441 $1,876,477 $1,870,172 Interest Expense Customer deposits Checking accounts 9,258 9,463 11,426 (253 48 (205 417 (2,380 (1,963) Savings accounts 48,033 58,163 68,382 (19,535) 9,405 (10,130) (5,007) (5,212) (10,219) Term accounts 991,099 646,727 625,892 150,989 193,383 344,372 51,199 (30,364) 20,835 ---------- ----------- ------------ --------- -------- --------- --------- --------- --------- Total cusomter deposits 1,048,390 714,353 705,700 131,201 202,836 334,037 46,609 (37,956) 8,653 Advances from Federal Home Loan Banks 369,239 268,952 273,816 8,283 92,004 100,287 (7,117) 2,253 (4,864) Securities sold under agreements to repurchase 70,709 37,620 36,023 34,415 (1,326) 33,089 4,659 (3,062) 1,597 Other borrowings 216,267 134,182 121,875 76,009 6,076 82,085 21,990 (9,683) 12,307 --------- --------- --------- ------ ----- ------- ------- ------ ------ Total interest 1,704,605 1,155,107 1,137,414 expense --------- --------- --------- Net interest income $ 722,836 $ 721,370 $ 732,758 $43,065 $(41,599) $1,466 $(19,523) $8,135 (11,388) ========== ========== =========== ======== ======== ====== ======== ====== ======= Net interest income increase (decrease) as a percentage of average earning assets (c) 0.13% (0.12)% 0.01% (0.07)% 0.03% (0.04)% ======= ======= ======== ====== ======= ======= (a) The change in volume is calculated by multiplying the difference between the average balance of the current year and the prior year by the prior year's average yield. The change in rate is calculated by multiplying the difference between the average yield of the current year and the prior year by the prior year's average balance. The mixed changes in rate/volume is calculated by multiplying the difference between the average balance of the current year and the prior year by the difference between the average yield of the current year and the prior year. This amount is then allocated proportionately to the volume and rate changes calculated previously. (b) The effects of interest rate swap and cap activity have been included in income and expense of the related assets and liabilities. (c) Includes nonaccrual loans (90 days or more past due).
ITEM 1. BUSINESS (Continued) COMPETITION AND OTHER MATTERS The Company experiences strong competition in both attracting customer deposits and making real estate loans. Competition for savings deposits has historically come from money market mutual funds, other savings associations, 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 headquartered or have a significant number of branch offices in the areas in which the Company competes. Changes in the government's monetary, tax, or housing financing policies can also affect the ability of lenders to compete profitably. The primary factors in competing for real estate loans are interest rates, loan fee charges, underwriting standards, and the quality of service to borrowers and their 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 members, the Insured Institutions are required to own capital stock of an FHLB in an amount that depends generally upon their outstanding home mortgage loans or advances from such FHLB, and are authorized to borrow funds from such FHLB (see Borrowings). ITEM 1. BUSINESS (Continued) REGULATION (continued) LIQUIDITY. The OTS requires the institutions it regulates, including World and WFSB, 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, 1995, 1994, and 1993, World's regulatory average liquidity ratio was 8%, 7%, and 8%, respectively, consistently exceeding the requirement. WFSB's regulatory average liquidity ratio was 6% for the month ended December 31, 1995. FEDERAL DEPOSIT INSURANCE CORPORATION. The customer deposit accounts of World are insured by the FDIC as part of the SAIF up to the maximum amount permitted by law, currently $100,000 per insured depositor. The customer deposits accounts of WFSB are insured by the FDIC as part of the BIF, also up to the same, maximum amount permitted by law. As a result, World and WFSB are subject to supervision, regulation and examination by the FDIC. FDIC insurance is required for all federally chartered financial institutions such as World and WFSB. Such insurance may be terminated by the FDIC under certain circumstances involving violations of regulations or unsound practices. The annual premium charged for SAIF and BIF insurance is determined by the FDIC using a risk-based system. Under the system, SAIF-insured associations are charged a variable rate ranging from a low of $.23 to a high of $.31 per $100 of deposits. BIF-insured institutions are charged a variable rate ranging from a low of $.00 to a high of $.27 per $100 of deposits. The amount of capital an institution maintains and its examination scores are the most important factors determining the assessment. As of February 29, 1996, World and WFSB qualify for the lowest premium assessments of $.23 and $.00 per $100 of deposits under the system, respectively. Legislation is currently pending in Congress which would recapitalize the SAIF in order to bring it into parity with the FDIC's other insurance fund, the BIF. The legislation would require an assessment of all SAIF-insured institutions of approximately 80 basis points on their March 31, 1995, customer deposit balances. If such legislation had been passed by December 31, 1995, World would have been assessed approximately $95 million, on an after-tax basis. After paying the one-time assessment, it is expected that World would pay significantly reduced insurance premiums on its customer deposits. There is no certainty that such legislation will become law. ITEM 1. BUSINESS (Continued) REGULATION (continued) Current law generally imposes a moratorium on conversions from SAIF membership to 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 (OTS). Because they are federally chartered savings institutions, the principal regulator of both World and WFSB is the OTS. Under various regulations of the OTS, savings associations are required, among other things, to pay assessments to the OTS, maintain required regulatory capital, maintain liquid assets 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. 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 and WFSB are currently in compliance with all applicable Federal Reserve Board reserve requirements. Savings associations have authority to borrow from the Federal Reserve Bank but the Federal Reserve Board requires savings associations to exhaust all FHLB sources before borrowing from the Federal Reserve Bank. REGULATORY CAPITAL. The OTS requires federally insured institutions such as World and WFSB to meet certain minimum capital requirements. The table on the following page summarizes World's regulatory capital ratio and compares them to the OTS requirements at December 31. ITEM 1. BUSINESS (Continued) REGULATION (continued)
TABLE 20 World Savings and Loan Association Regulatory Capital Ratios ($000s Omitted) 1995 1994 ------------------------------------------ ---------------------------------------- ACTUAL REQUIRED ACTUAL REQUIRED -------------------- ------------------- -------------------- ----------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ----------- ------- ---------- ------- ---------- ------- ---------- ------ Tangible $1,924,910 6.38% $ 452,761 1.50% $1,931,375 6.26% $ 462,564 1.50% Core 1,924,910 6.38 905,521 3.00 2,047,016 6.64 925,129 3.00 Risk-based 2,243,519 13.40 1,339,177 8.00 2,353,781 13.54 1,390,391 8.00
At December 31, 1995, WFSB had tangible, core and risk-based capital of $562,788, $562,788, and $568,451, respectively. WFSB's respective capital ratios at the same date were 14.01%, 14.01%, and 26.55%. 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 tables on the following page summarizes the capital ratios for each of the five classifications and shows that World Savings and WFSB met the "well capitalized" standard as of December 31, 1995. ITEM 1. BUSINESS (Continued) REGULATION (continued) The table below shows a reconciliation of World's equity capital to regulatory capital at December 31, 1995.
TABLE 21 World Savings and Loan Association 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 surplus 233,441 Retained earnings 1,822,852 Unrealized gains on securities available for sale 71,886 ----------- Equity capital $ 2,128,329 $ 2,128,329 $ 2,128,329 $ 2,128,329 $ 2,128,329 $ 2,128,329 =========== Positive goodwill (1) (204,992) (204,992) (204,992) (204,992) (204,992) Negative goodwill (1) 73,459 73,459 73,459 73,459 73,459 Unrealized gains on securities available for sale (71,886) (71,886) (71,886) (71,886) (71,886) Equity/other investments (450) Subordinated debt 199,299 General valuation allowance 119,760 ------------ ----------- ----------- ---------- ----------- Regulatory capital $ 1,924,910 $ 1,924,910 $ 1,924,910 $ 1,924,910 $ 2,243,519 =========== =========== =========== =========== ============ Total assets $30,354,740 =========== Adjusted total assets $30,184,046 $30,184,046 $30,184,046 =========== =========== =========== Risk-weighted assets $16,739,718 $16,739,718 =========== =========== CAPITAL RATIO - ACTUAL 7.01% 6.38% 6.38% 6.38% 11.50% 13.40% =========== =========== =========== =========== =========== ============ 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 undercapitalized, 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.
ITEM 1. BUSINESS (Continued) REGULATION (continued) The table below shows a reconciliation of World's equity capital to regulatory capital at December 31, 1994.
TABLE 22 World Savings and Loan Association 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 surplus 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 (25,966) (25,966) (25,966) (25,966) (25,966) available for sale Equity/other investments (2) (709) Subordinated debt 199,089 General valuation allowance 108,385 ----------- ----------- ----------- ------------ ------------ Regulatory capital $ 1,193,375 $ 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 undercapitalized, 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.
ITEM 1. BUSINESS (Continued) REGULATION (continued) The table below shows a reconciliation of WFSB's equity capital to regulatory capital at December 31, 1995.
TABLE 23 World Savings Bank, a Federal Savings Bank 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 surplus 570,182 Retained deficit (3,481) ---------- Equity capital $ 566,851 $ 566,851 $ 566,851 $ 566,851 $ 566,851 $ 566,851 ========== Positive goodwill (1) (4,063) (4,063) (4,063) (4,063) (4,063) General valuation allowance 5,663 --------- ---------- ---------- ---------- ---------- Regulatory capital $ 562,788 $ 562,788 562,788 $ 562,788 $ 568,451 ========== ========== ========== ========== ========== Total assets $4,017,491 ========== Adjusted total assets $4,016,477 $4,016,477 $4,016,477 ========== ========== ========== Risk-weighted assets $2,141,316 $2,141,316 ========== ========== CAPITAL RATIO - ACTUAL 14.11% 14.01% 14.01% 14.01% 26.28% 26.55% ========== ========== ========== ========== ========== ========== 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 undercapitalized, less than 3.00% 3.00% 6.00% =========== =========== ============ Critically undercapitalized, equal to or less than 2.00% ============ (1) As of January 1, 1995, 100% of goodwill was required to be deducted for all three capital calculations.
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) 1995 1994 --------------------------------------------- ------------------------------------------------- ACTUAL WELL CAPITALIZED ACTUAL WELL CAPITALIZED -------------------- --------------------- ---------------------- ---------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ----------- ------ --------- --------- ---------- ------- ---------- ----- Leverage $1,924,910 6.38% 1,509,202 5.00% 2,047,016 6.64% $1,541,881 5.00% Tier 1 risk based 1,924,910 11.50 1,004,383 6.00 2,047,016 11.78 1,042,793 6.00 Total risk-based 2,243,519 13.40 1,673,972 10.00 2,353,781 13.54 1,737,989 10.00
WFSB also meets the OTS criteria of a well-capitalized institution with leverage, Tier 1 risk-based, and total risk-based capital of $562,788, $562,788, and $568,451, respectively as of December 31, 1995. The respective capital ratios at yearend for WFSB were, 14.01%, 26.28%, and 26.55%. CAPITAL DISTRIBUTIONS BY SAVINGS ASSOCIATIONS. The OTS limits capital distributions, including cash dividends, payments to shareholders of another institution in a cash out merger and other distributions charged against capital, by savings associations such as World and WFSB. Under these regulations, a savings association is classified as either Tier 1, if it meets each of its capital requirements before and after a capital distribution; Tier 2, if it currently meets each of its capital requirements but does not meet one or more of its capital requirements immediately prior to or after giving effect to the proposed capital distribution; or Tier 3, if it does not meet its 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 the 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 beginning of the calendar year. A Tier 2 association may make capital distributions up 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 given to the OTS, which may disapprove the distribution. However, current law prohibits capital distributions by an institution that does not meet its capital requirements. Savings associations are required to give the OTS 30-day advance written notice of all ITEM 1. BUSINESS (Continued) REGULATION (continued) proposed capital distributions. For purposes of capital distributions, the OTS has classified World and WFSB as Tier 1 institutions. World paid a total of $280 million in upstream dividends to Golden West during 1995. 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, 1995, the maximum amount that World could have loaned to one borrower (and related entities) was $337 million. At such date, the largest amount of loans that World had outstanding to any one borrower was $38 million. At December 31, 1995 the maximum that WFSB could have loaned to one borrower was $85 million while the largest amount of loans it had to one borrower was $14 million. DEPOSITOR PRIORITIES. In the event of the appointment of a receiver of a federally chartered savings association, such as the Association or WFSB, based upon the failure of the savings associations to meet certain minimum capital requirements or the existence of certain other conditions, the Federal Deposit Insurance Act recognizes a priority in favor of holders of withdrawable deposits (including the FDIC subrogee or transferee) over general creditors (including holders of debt of the 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, 1995, the Insured Institutions had approximately $20.8 billion of deposits outstanding. 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 or WFSB, 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 date of the appointment of the conservator or receiver. Alternatively, at least one court has held that the claim would be in the amount of the fair market value of the debt as of the date of the repudiation, which amount could be more or less than accrued principal and interest. The amount paid on the claims of the holders of the debt would depend, among other factors, upon the amount of ITEM 1. BUSINESS (Continued) REGULATION (continued) 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 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. SAVINGS AND LOAN HOLDING COMPANY LAW. The Company is a "savings and loan holding company" under the HomeOwners Loan Act (HOLA). As such, it has registered with the OTS and is subject to OTS regulation and OTS and FDIC examination, supervision, and reporting requirements. Among other things, the OTS has authority to determine that an activity of a savings and loan holding company constitutes a serious risk to the financial safety, soundness, or stability of its subsidiary savings institutions and thereupon may impose, among other things, restrictions on the payment of dividends by the subsidiary institutions and on transactions between the subsidiary institutions, the holding company and subsidiaries or affiliates of either. As World's and WFSB's parent company, Golden West is considered an "affiliate" of the Association and WFSB for regulatory purposes. In addition, the Association and WFSB are considered to be affiliates of each other. 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. ITEM 1. BUSINESS (Continued) REGULATION (continued) 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 or transactions with affiliates. QTL TEST. The HOLA requires savings institutions to meet a qualified thrift lender (QTL) test. Under the QTL test, a savings institution is required to maintain at least 65% of its "portfolio assets" in certain "qualified thrift investments" (primarily residential mortgages and related investments, including certain mortgage-backed and related securities) in at least nine months out of each 12 month period. A savings institution that fails the QTL test must either convert to a bank charter or operate under certain restrictions. At December 31, 1995, World and WFSB were in compliance with the QTL test. 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, 1995, the 6% and 12% limitations did not restrict the bad debt reserve deduction of World. However, World's bad debt reserve deduction could be impacted or even eliminated in 1996 or later years by significant decreases in the balances of outstanding deposits at any yearend as compared to one year earlier. 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. Legislation was passed by the United States Congress in 1995, which would eliminate the percentage of taxable income deduction method. However, such legislation was not signed by the President and did not become law. It is possible that similar legislation could become law in the future. ITEM 1. BUSINESS (Continued) REGULATION (continued) 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. Such accumulated reserves are also subject to taxation if a savings and loan association converts to a commercial bank charter. The 1995 legislation would have exempted from taxation a portion of the accumulated bad debt reserves that would otherwise be subject to taxation merely because of a charter change. 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. EMPLOYEE RELATIONS The Company had a total of 3,790 full-time and 671 permanent part-time employees at December 31, 1995. 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 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. The Company owns 183 of its branches, some of which are located on leased land. For further information regarding the Company's investment in premises and equipment and expiration dates of long-term leases, see Note I to the Financial Statements included in Item 14. ITEM 2. PROPERTIES (Continued) The Company continuously evaluates the suitability and adequacy of the offices of the Company and has a program of relocating or remodeling them as necessary to maintain efficient and attractive facilities. ITEM 3. LEGAL PROCEEDINGS 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 was certified and, after a two week trial, a judgment was entered in favor of World. 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 one of the actions, Federal law has been amended in a manner that precludes certification of a plaintiffs' class. 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 subsidiaries 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 1995 and 1994 were as follows:
TABLE 25 Common Stock Price Range 1995 1994 ------------------ ------------------- First Quarter 34 3/4 - 39 3/4 37 1/2 - 46 Second Quarter 38 - 50 1/4 37 3/8 - 41 1/8 Third Quarter 43 3/4 - 52 1/2 38 5/8 - 44 1/4 Fourth Quarter 49 3/8 - 57 1/2 34 1/4 - 40 1/4
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 1995 and 1994 were as follows:
TABLE 26 Cash Dividends Per Share 1995 1994 --------- --------- First Quarter $ .085 $ .075 Second Quarter $ .085 $ .075 Third Quarter $ .085 $ .075 Fourth Quarter $ .095 $ .085
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 or WFSB of any proposed dividend to be paid to the parent. Under OTS regulations, World Savings and WFSB are classified as Tier 1 associations and are, therefore, allowed to distribute dividends up to 100% of their net income in any year plus one-half of capital in excess of the OTS fully phased-in capital requirement as of the end of the prior year. At December 31, 1995, $306 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 22, 1996, 58,739,159 shares of Golden West's Common Stock were outstanding and were held by 1,702 stockholders of record. At the close of business on March 22, 1996, the Company's common stock price was $51.875. 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 documents incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA (Continued)
TABLE 27 Five Year Consolidated Summary of Operations ($000s Omitted, Except Per Share Figures) Year Ended December 31 ---------------------------------------------------------------------- 1995 1994 1993 1992 1991 ----------- ------------ ------------ ----------- ----------- Interest Income: Interest on loans $2,097,664 $ 1,649,413 $1,637,764 $1,740,845 $1,877,955 Interest on mortgage-backed 181,355 103,927 138,874 178,010 210,834 securities Interest on dividends and investments 148,422 123,137 93,534 65,655 125,801 ---------- ----------- ------------ ---------- ---------- 2,427,441 1,876,477 1,870,172 1,984,510 2,214,590 Interest Expense: Interest on customer deposits 1,048,390 714,353 705,700 844,710 1,094,383 Interest on advances and other 656,215 440,754 431,714 422,470 488,431 borrowings ----------- ----------- ------------ ----------- ----------- 1,704,605 1,155,107 1,137,414 1,267,180 1,582,814 ----------- ----------- ----------- ---------- ----------- Net interest income 722,836 721,370 732,758 717,330 631,776 Provision for loan losses 61,190 62,966 65,837 43,218 34,984 ----------- ------------ ------------ ----------- ----------- Net interest income after provision for loan losses 661,646 658,404 666,921 674,112 596,792 Non-Interest Income: Fees 29,200 28,816 31,061 24,458 20,889 Gain (loss) on the sale of securities and mortgage-backed securities (493) (120) 22,541 4,058 (1,021) Other 13,833 8,790 8,440 12,601 7,008 ----------- ------------ ------------ ----------- ----------- 42,540 37,486 62,042 41,117 26,876 Non-interest Expense General and administrative expenses Personnel 151,352 150,220 132,472 118,553 107,759 Occupancy 48,737 44,472 40,443 38,521 35,619 Deposit insurance 44,993 40,220 35,706 37,621 34,245 Advertising 9,850 10,761 10,782 8,968 10,486 Other 61,260 57,246 53,764 47,212 47,312 ----------- ------------ ------------ ----------- ----------- 316,192 302,919 273,167 250,875 235,421 Amortization of goodwill arising from acquisitions 2,762 2,589 (1,586) 661 1,532 ----------- ----------- ------------ ----------- ----------- 318,954 305,508 271,581 251,536 236,953 ----------- ------------ ------------ ----------- ----------- Earnings before taxes on income 385,232 390,382 457,382 463,693 386,715 Taxes on income 150,693 159,933 183,528 180,155 148,116 ----------- ------------ ------------ ----------- ----------- Net earnings $ 234,539 $230,449 $273,854 $283,538 $238,599 =========== ============ ============ =========== =========== Net earnings per share $ 4.00 $ 3.71 $ 4.28 $ 4.46 $ 3.76 =========== ============ ============ =========== ===========
ITEM 6. SELECTED FINANCIAL DATA (Continued)
TABLE 28 Five Year Summary of Financial Condition ($000s Omitted) At December 31 ------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 ----------------- ---------------- ---------------- ---------------- --------------- Assets $ 35,118,156 $ 31,683,741 $ 28,829,288 $ 25,890,921 $ 24,297,784 Cash, securities available for sale, and other investments 2,310,711 2,265,886 2,417,871 1,179,868 1,289,327 Mortgage-backed securities 3,409,341 1,194,378 1,522,536 1,791,615 2,000,167 Loans receivable 28,181,353 27,071,266 23,912,571 21,968,676 20,087,432 Goodwill arising from acquisitions 138,562 136,245 136,754 155,873 181,733 Customer Deposits 20,847,910 19,219,389 17,422,484 16,486,246 16,818,510 Advances from FHLBs 6,447,201 6,488,418 6,281,691 5,499,363 4,159,796 Securities sold under agreements to repurchase and other 1,817,943 601,821 1,119,414 637,977 840,358 borrowings Medium-term notes 1,597,507 1,164,079 676,540 81,267 166,750 Subordinated debt 1,322,392 1,221,559 1,220,061 921,701 625,105 Stockholders' equity 2,278,353 2,000,274 2,065,604 1,727,398 1,449,135
ITEM 6. SELECTED FINANCIAL DATA (Continued)
TABLE 29 Five Year Selected Other Data ($000s Omitted) Year Ended December 31 ------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 --------------- -------------- -------------- -------------- -------------- New real estate loans originated $ 5,949,064 $ 6,637,653 $ 6,411,877 $ 6,455,090 $ 4,877,157 Average yield on new real estate loans 7.56% 6.44% 6.86% 8.06% 9.83% Customer deposits increase decrease ($) $ 1,628,521 $ 1,796,905 $ 936,238 $ (332,264) $ 2,446,026 Customer deposits increase (decrease) 8.5% 10.3% 5.7% (2.0)% 17.0% (%) Net earnings/average net worth 10.98% 11.11% 14.68% 17.86% 17.92% Net earnings/average assets .69% .78% .98% 1.12% 1.00% General and administrative expense to: Total revenues 12.80% 15.83% 14.14% 12.39% 10.50% Average assets .93% 1.02% .97% .99% .99% Ratio of earnings to fixed charges:(a) Including interest on customer deposits 1.23x 1.34x 1.40x 1.36x 1.24x Excluding interest on customer deposits 1.58x 1.87x 2.05x 2.08x 1.78x Yield on loan portfolio 7.69% 6.85% 6.73% 7.52% 9.30% Yield on MBS 7.41% 8.37% 8.67% 9.30% 9.74% Yield on investments 5.96% 5.42% 3.80% 4.17% 5.41% Yield on earning assets 7.56% 6.81% 6.61% 7.52% 9.16% Cost of deposits 5.15% 4.57% 3.92% 4.40% 6.09% Cost of borrowings 6.15% 5.85% 4.69% 5.58% 7.48% Cost of funds 5.50% 5.00% 4.18% 4.75% 6.44% Spread 2.06% 1.81% 2.43% 2.77% 2.72% Nonperforming asset/total assets (b) 1.11% 1.12% 1.37% 1.27% 1.16% Stockholders' equity/total assets 6.49% 6.31% 7.16% 6.67% 5.96% Average stockholders' equity/average 6.30% 6.98% 6.65% 6.27% 5.60% assets World Savings and Loan Association (World) regulatory capital ratios: (c) Tangible capital 6.38% 6.26% 7.27% 6.54% 5.79% Core capital 6.38% 6.64% 8.02% 7.54% 6.96% Risk-based capital 13.40% 13.54% 17.42% 16.28% 14.98% World Savings Bank, FSB (WFSB) regulatory capital ratios: (c) Tangible capital 14.01% --- --- --- --- Core capital 14.01% --- --- --- --- Risk-based capital 26.55% --- --- --- --- Number of savings branch offices 233 237 227 227 231 Cash dividends per share $ .35 $ .31 $ .27 $ .23 $ .19 Dividend payout ratio 8.75% 8.34% 6.31% 5.16% 5.05% (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 state 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, 1995, 1994 and 1993. World and WFSB currently meet their fully phased-in capital requirement.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the year ended December 31, 1995, Golden West Financial Corporation (Golden West or Company) reported net earnings of $235 million, or $4.00 per share, compared with $230 million, or $3.71 per share, in 1994 and $274 million, or $4.28 per share, in 1993. Golden West's principal subsidiary, World Savings and Loan Association (World Savings or Association) is headquartered in Oakland, California and, with $30 billion in assets at December 31, 1995, was the third largest thrift in the country. Golden West also conducts deposit gathering activities through World Savings Bank, a Federal Savings Bank (WFSB), a $4.0 billion institution, headquartered in Warren, New Jersey. At December 31, 1995, Golden West had a savings network of 118 branches in California, 48 in Colorado, 23 in Florida, 16 in Texas, ten in Kansas, nine in Arizona, and nine in New Jersey. By virtue of being federally chartered thrifts, World Savings and WFSB can originate mortgages anywhere in the nation, even though they may not be authorized to conduct deposit gathering business in those jurisdictions. In addition to the states with savings operations referenced above, the Company has lending operations in Connecticut, Delaware, Idaho, Illinois, Maryland, Massachusetts, Minnesota, Missouri, Nevada, New Mexico, Oregon, Pennsylvania, South Dakota, 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 and, where appropriate, World Savings' 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 1995, 1994, 1993, and 1992. As the table shows, customer deposits represent the majority of the Company's liabilities. The largest asset component is the loan portfolio, which consists primarily of long-term mortgages. 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 -------------------------------------------------------- 1995 1994 1993 1992 ------------ ----------- ------------ ----------- Assets: Cash and investments 6.6% 7.2% 8.4% 4.6% Mortgage-backed securities 9.7 3.8 5.3 6.9 Loans receivable 80.2 85.4 82.9 84.9 Other assets 3.5 3.6 3.4 3.6 ------------ ----------- ------------ ----------- 100.0% 100.0% 100.0% 100.0% ============ =========== ============ =========== Liabilities and Stockholders' Equity: Customer deposits 59.4% 60.7% 60.4% 63.7% FHLB advances 18.4 20.5 21.8 21.2 Securities sold under agreements to repurchase 5.2 1.9 1.5 2.2 Medium-term notes 4.5 3.7 2.4 0.3 Federal funds purchased 0.0 0.8 0.0 0.0 Other liabilities 2.2 2.3 2.5 2.3 Subordinated debt 3.8 3.8 4.2 3.6 Stockholders' equity 6.5 6.3 7.2 6.7 ------------ ----------- ------------ ----------- 100.0% 100.0% 100.0% 100.0% ============ =========== ============ ===========
The disparity between the repricing (maturity or interest rate change) of deposits and borrowings and the repricing of mortgage loans and investments can have a material impact on the Company's results of operations. The difference between the repricing of assets and liabilities is commonly referred to as "the gap." The gap table on the following page shows that, as of December 31, 1995, the Company's assets mature or 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 month 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 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 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued FINANCIAL CONDITION (continued) 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, 1995 (Dollars in Millions) Projected Repricing(a) ----------------------------------------------------------------------------- 0 - 3 4 - 12 1 - 5 Over 5 Months Months Years Years Total ------------- ------------- ------------- ------------- ------------- Interest-Earning Assets: Investments $ 1,612 $ 163 $ 271 $ 46 $ 2,092 Mortgage-backed securities 2,344 108 415 542 3,409 Loans receivable: Rate-sensitive 23,459 1,395 129 -0- 24,983 Fixed-rate 88 274 1,214 1,392 2,968 Other(b) 487 -0- -0- -0- 487 Impact of interest rate swaps and caps 576 263 (164) (675) -0- ------------- ------------- ------------- ------------- ------------- Total $ 28,566 $ 2,203 $ 1,865 $ 1,305 $ 33,939 ============= ============= ============= ============= ============= Interest-Bearing Liabilities(c): Customer deposits $ 8,624 $ 8,472 $ 3,659 $ 93 $ 20,848 FHLB advances 4,494 1,392 408 153 6.447 Other borrowings 2,059 1,150 934 595 4,738 Impact of interest rate swaps 1,751 (576) (1,217) 42 -0- ------------- ------------- ------------- ------------- ------------ Total $ 16,928 $ 10,438 $ 3,784 $ 883 $ 32,033 ============= ============= ============= ============= ============= Repricing gap $ 11,638 $ (8,235) $ (1,919) $ 422 ============= ============= ============= ============= Cumulative gap $ 11,638 $ 3,403 $ 1,484 $ 1,906 ============= ============= ============= ============= Cumulative gap as a percentage of total assets 33.1% 9.7% 4.2% ============ ============ ============ (a) Based on scheduled maturity or scheduled repricing; loans reflect scheduled repayments and projected prepayments of principal. (b) Includes cash in banks and FHLB stock. (c) Liabilities with no maturity date, such as passbook and money market deposit accounts, are assigned zero months.
CASH AND INVESTMENTS 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 obligations. In determining the amounts of assets to invest in each class of investments, the Company considers relative rates, liquidity, and credit quality. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) 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 1995, 1994, and 1993, World's regulatory average liquidity ratio was 8%, 7%, and 8%, respectively, consistently exceeding the requirement. 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. At December 31, 1995, and 1994, the Company had securities available for sale in the amount of $902 million and $1.5 billion, respectively, including unrealized gains on securities available for sale of $117 million and $23 million, respectively. At December 31, 1995, and 1994, the Company had no securities held to maturity or for trading. Included in the securities available for sale at December 31, 1995, and 1994, were collateralized mortgage obligations (CMOs) in the amount of $408 million and $668 million, respectively. The Company holds CMOs on which both principal and interest are received. It does not hold any interest-only or principal-only CMOs. At December 31, 1995, the majority of the Company's CMOs were fixed-rate with remaining terms to maturity of five years or less and qualified for inclusion in the regulatory liquidity measurement. MORTGAGE-BACKED SECURITIES At December 31, 1995, and 1994, the Company had mortgage-backed securities held to maturity in the amount of $3.1 billion and $871 million, respectively, including $2.2 billion of Federal National Mortgage Association (FNMA) mortgage-backed securities (MBS) subject to full credit recourse at December 31, 1995. At yearends 1995 and 1994, the Company had mortgage-backed securities available for sale in the amount of $283 million and $323 million, respectively, including unrealized gains on mortgage-backed securities available for sale of $14 million and $6 million at December 31, 1995, and 1994, respectively. At December 31, 1995, and 1994, the Company had no trading MBS. During 1995, the Company securitized $2.3 billion of adjustable rate mortgages (ARMs) into FNMA COFI-indexed MBS, to be used as collateral for borrowings. These securities are subject to full credit recourse to the Company. The Company has the ability and intent to hold these MBS until maturity. Accordingly, these MBS are classified as held to maturity. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) Repayments of MBS during the years 1995, 1994, and 1993 amounted to $210 million, $311 million, and $646 million, respectively. The decrease in repayments on MBS in 1995 over 1994 and in 1994 over 1993 was primarily due to decreased prepayments on the underlying mortgages. At December 31, 1995 and 1994, $1.1 billion of the Company's total MBS portfolio were fixed-rate mortgage-backed securities and were subject to prepayment and interest rate risk similar to fixed-rate loans. In rising interest rate environments, the rate of repayment on fixed-rate, pass-through mortgage-backed securities tends to decrease because of lower repayments on underlying mortgages, and, conversely, as interest rates fall, repayments on such securities tend to rise. LOAN PORTFOLIO New loan originations in 1995, 1994, and 1993 amounted to $5.9 billion, $6.6 billion, and $6.4 billion, respectively. Refinanced loans constituted 32% of new loan originations in 1995 compared to 41% in 1994 and 59% in 1993. The 1995 origination volume declined due to interest rate decreases which brought down the price of new fixed-rate mortgage loans, making competition from fixed-rate lenders more intense for adjustable rate mortgage lenders. Golden West continues to emphasize adjustable rate mortgages--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 90% at yearend 1995 compared to 89% at yearend 1994 and 87% at yearend 1993. Despite the resurgence of fixed-rate mortgages, Golden West's ARM originations constituted approximately 93% of new mortgage loans made by the Company in 1995, compared with 93% in 1994 and 75% in 1993. Approximately $5.2 billion of the Company'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, 1995, $545 million of these ARMs were at their rate floors. The weighted average floor rate on these loans was 7.85% at December 31, 1995 compared to 7.56% at December 31, 1994. Without the floor, the average yield on these loans would have been 7.35% at December 31, 1995 and 6.47% at December 31, 1994. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) The Company has lending operations in 24 states. The primary source of mortgage origination is loans secured by residential properties in California. In 1995, 53% of total loan originations were on residential properties in California, compared to 62% and 73% in 1994 and 1993, respectively. The five largest states, other than California, for originations for the year ended December 31, 1995, were Texas, Illinois, Colorado, Florida and New Jersey with a combined total of 28% of total originations. Although California originations continue to be a large portion of total originations, the California share of total originations decreased in 1995 as compared to 1994, primarily due to both decreased loan volume in California and increased loan volume in markets outside of California. The increase in total originations in 1994 as compared to 1993 was due to increased penetration 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 73% at December 31, 1995, 77% at December 31, 1994, and 81% at December 31, 1993. The total growth in the portfolio for the year ended December 31, 1995, was $1.1 billion or 4% compared to $3.2 billion or 13% for the year ended December 31, 1994. Had there not been $2.3 billion of loans securitized into MBS during 1995, the loan portfolio growth in 1995 would have been $3.3 billion or 12%, similar to the 1994 growth. Loan repayments consisting of monthly loan amortization, payoffs, and refinances during the years 1995, 1994, and 1993 amounted to $2.3 billion, $3.2 billion, and $3.8 billion, respectively. The decrease in repayments in 1995 as compared to 1994 and 1994 as compared with 1993 was due to lower mortgage payoffs and lower refinances within the Company's loan portfolio. ASSET QUALITY 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, including loans swapped into MBS with recourse, that are 90 days or more past due) and real estate acquired through foreclosure. No interest is recognized on nonaccrual loans. NPAs amounted to $390 million, $355 million, and $394 million at yearends 1995, 1994, and 1993, respectively. The level of NPAs during the past three years has remained relatively flat even though the loan portfolio has continued to grow. The Company continues to closely monitor all delinquencies and takes appropriate steps to protect its interests. The Company's troubled debt restructured (TDRs) were $45 million, or .13% of assets, at December 31, 1995, compared to $73 million, or .23% of assets, at December 31, 1994, and $37 million, or .13% of assets, at December 31, 1993. 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. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) The Company's ratio of NPAs and TDRs to total assets decreased to 1.24% at December 31, 1995, from 1.35% and 1.50% at yearends 1994 and 1993, respectively. The Company had other impaired loans on which specific loss reserves were provided and that were not otherwise included in nonperforming loans or troubled debt restructured because the loans were performing in full accordance with the loan terms. Other impaired loans amounted to $60 million, $41 million and $26 million at yearends 1995, 1994 and 1993, respectively. ALLOWANCE FOR LOAN LOSSES The Company's allowance for loan losses was $142 million at December 31, 1995, compared to $124 million and $107 million at yearends 1994 and 1993, respectively. The provision for loan losses was $61 million, $63 million, and $66 million in 1995, 1994, and 1993, respectively. While there has been little change in the dollar amount, the provision for loan losses as a percentage of the loan portfolio (including MBS with recourse) has decreased from .28% in 1993 to .20% in 1995. The ratio of net chargeoffs to average loans outstanding (including MBS with recourse) was .15% for the year ended December 31, 1995, as compared to .18% and .16% for the years ended 1994 and 1993, 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. 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 loan losses, consideration is given to the estimated sales price, cost of refurbishing, payment of delinquent taxes, cost of disposal and cost of holding property. Additions to, and reductions from, the allowance are reflected in current earnings. REAL ESTATE HELD FOR SALE At December 31, 1995, the Company had real estate held for sale in the amount of $76 million compared to $71 million a year earlier. The largest balance of real estate held for sale continues to be one- to four family properties in California. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) LONG-LIVED ASSETS AND OTHER INTANGIBLES The Company has adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS 121) in 1995. SFAS 121 establishes accounting and disclosure requirements using a fair value based method of accounting for long-lived assets and certain identifiable intangibles whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. The adoption of SFAS 121 had no effect on the Company's 1995 consolidated financial statements. MORTGAGE SERVICING RIGHTS In May 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" (SFAS 122). SFAS 122 amends Statement of Financial Accounting Standard No. 65, "Accounting for Certain Mortgage Banking Activities," to require that mortgage banking enterprises recognize, as separate assets, rights to service mortgage loans for others when those rights are acquired through either the purchase or origination of mortgage loans which are subsequently sold or securitized. SFAS 122 also requires that mortgage banking enterprises assess capitalized mortgage servicing rights based on the fair value of those rights on a disaggregated basis. SFAS 122 applies to fiscal years beginning after December 15, 1995. Golden West adopted SFAS 122 as of January 1, 1996. The impact on the Company's financial condition and results of operations is not expected to be material. CUSTOMER DEPOSITS Customer deposits increased by $1.6 billion in 1995 compared to increases of $1.8 billion and $936 million in 1994 and 1993, respectively. Customer deposits increased during 1995 primarily due to ongoing marketing efforts and competitive rates offered by the Company on its insured accounts. The increase in customer deposits during 1994 resulted from an improvement in the savings market due to the rising interest rate environment as well as from aggressive promotions. Consumer funds were attracted during 1993 as a result of special promotions in the Company's savings markets. In 1995, the Company acquired one branch in New Jersey with $48 million in deposits and sold seven branches in Colorado with $153 million in deposits. 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. . 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. FHLB advances amounted to $6.4 billion at December 31, 1995, compared to $6.5 billion and $6.3 billion at December 31, 1994, and 1993, respectively. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE The Company borrows funds through transactions in which securities are sold under agreements to repurchase (Reverse Repos). Reverse Repos are entered into with selected major government securities dealers, as well as large banks and the Federal Home Loan Bank of San Francisco, typically using MBS from the Company's portfolio. Reverse Repos with dealers, banks and the Federal Home Loan Bank of San Francisco amounted to $1.8 billion, $602 million, and $443 million at yearends 1995, 1994, and 1993, respectively. The $1.8 billion balance at December 31, 1995, includes $1.5 billion in Federal Home Loan Bank of San Francisco MBS Reverse Repos with maturities ranging from 1996 to 1998. OTHER BORROWINGS As of December 31, 1995, Golden West, at the holding company level, had a total of $1.1 billion of subordinated debt issued and outstanding. At yearend 1995, 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. At December 31, 1995, Golden West had on file a registration statement with the Securities and Exchange Commission for the sale of up to $300 million of subordinated notes. World Savings currently has on file a shelf registration with the OTS for the issuance of $2.0 billion of unsecured medium-term notes, all of which was available for issuance at yearend 1995. The Association has medium-term notes outstanding under prior registrations with principal amounts of $1.6 billion at December 31, 1995, compared to $1.2 billion at December 31, 1994, and $677 million at December 31, 1993. As of December 31, 1995, the Association's medium-term notes were rated Al and A+ by Moody's and S&P, respectively. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) World Savings also has on file a registration statement with the OTS for the sale of up to $300 million of subordinated notes and at yearend 1995, the full amount was available for issuance. As of December 31, 1995, World Savings had issued a total of $200 million of subordinated notes which 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. STOCKHOLDERS' EQUITY The Company's stockholders' equity increased during 1995 as a result of retained earnings and the increase in market values of securities available for sale since December 31, 1994. The Company's stockholders' equity decreased by $65 million 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 substantially offset by 1994's net earnings. The Company increased its total stockholders' equity in 1993 through retained earnings and the adoption of Statement of Financial Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" which added $85 million to stockholders' equity at December 31, 1993. The Company is required to adopt Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) in 1996. SFAS 123 establishes accounting and disclosure requirements using a fair value based method of accounting for stock based employee compensation plans. Under SFAS 123, the Company may either adopt the new fair value based accounting method or continue the intrinsic value based method and provide pro forma disclosures of net income and earnings per share as if the accounting provisions of SFAS 123 had been adopted. The Company plans to adopt only the disclosure requirements of SFAS 123; therefore such adoption will have no effect on the Company's consolidated financial statements. In 1993 and 1994, through two separate actions, Golden West's Board of Directors authorized the purchase by the Company of up to 6.3 million shares of Golden West's common stock. On August 1, 1995, the Company's Board of Directors authorized the purchase by the Company of an additional 5.9 million shares of Golden West's common stock. As of December 31, 1995, 5.8 million shares had been repurchased and retired at a cost of $226 million since October 28, 1993, of which 68 thousand shares were purchased and retired at a cost of $3 million during 1995. 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. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) The OTS requires federally insured institutions, such as World Savings, 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, 1995, World Savings had tangible capital of $1.9 billion, or 6.38% 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. At December 31, 1995, World Savings had core capital of $1.9 billion, or 6.38% of adjusted total assets, $1.0 billion in excess of the regulatory requirement. The third capital requirement is to have risk-based capital equal to 8.0% of risk-weighted assets. At December 31, 1995, World Savings had risk-based capital in the amount of $2.2 billion, or 13.40% of risk-weighted assets, exceeding the current requirement by $904 million. At December 31, 1995, WFSB had capital in excess of all its regulatory capital requirements. Under OTS regulations which implement the prompt corrective action system mandated by the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), an institution is "well capitalized" if its ratio of core capital to total assets is 5% or more, its ratio of core capital to risk-weighted assets is 6% or more, and its ratio of total capital to risk-weighted assets is 10% or more and it is not subject to any written agreement, order or directive to meet a specified capital level. The Company's insured subsidiaries qualify as well capitalized institution under the rules applicable to them. The OTS limits capital distributions by savings associations. For purposes of capital distributions, the OTS has classified World Savings as a Tier 1 associations; thus, World Savings 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 $280 million in upstream dividends to Golden West during 1995. 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. 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 1993 through 1995.
TABLE 32 Yield on Earning Assets, Cost of Funds, And Primary Spread Including the Effect of Purchase Accounting December 31 ------------------------------------------- 1995 1994 1993 ------------ ------------ ------------- Yield on loan portfolio 7.66% 6.91% 6.84% Yield on investments 5.96 5.42 3.80 ------------ ------------ ------------- Yield on earning assets 7.56 6.81 6.61 ------------ ------------ ------------- Cost of customer deposits 5.15 4.57 3.92 Cost of borrowings 6.15 5.85 4.69 ------------ ------------ ------------- Cost of funds 5.50 5.00 4.18 ------------ ------------ ------------- Primary spread 2.06% 1.81% 2.43% =========== =========== ============
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 in accordance with an index based on the cost of deposits and borrowings of savings institutions that are members of the FHLB of San Francisco (the COFI). Nevertheless, the Company's ARM portfolio tends to lag changes in market interest rates because of certain loan features which restrain monthly adjustments and because the COFI tends to trail changes in interest rates due to the existence of a two-month reporting lag. Therefore, although interest rates began to increase during 1994, the yield on earning assets responded slowly to the upward trend as the COFI lags and other ARM features slowed the upward repricing of our loan portfolio. The yield on the Company's loan portfolio began to increase in mid-1994 and continued upward until mid-1995, in response to the rising rates. As interest rates began to stabilize during 1995, so did the Company's yield on the loan portfolio, which ended the year at 7.66%. COST OF FUNDS Approximately 85% 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, higher rates led to an increase in the Company's cost of funds during 1994 and 1995. Falling rates led to a decrease in the Company's cost of funds during 1993. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued) INTEREST RATE SWAPS AND CAPS The Company enters into interest rate swaps and caps as part of its interest rate risk management strategy. Such instruments are entered into solely to alter the repricing characteristics of designated assets and liabilities. The Company does not hold any derivative financial instruments for trading purposes. Interest rate swap and cap activity decreased net interest income by $29 million, $23 million, and $71 million, for the years ended December 31, 1995, 1994, and 1993, respectively. The table below summarizes the unrealized gains and losses for interest rate swaps and caps at December 31, 1995, and 1994.
TABLE 33 Unrealized Gains and Losses on Interest Rate Swaps and Caps (Dollars in Thousands) December 31, 1995 --------------------------------------------------- Net Unrealized Unrealized Unrealized Gains Losses Gain (Loss) -------------- -------------- --------------- Interest rate swaps $ 46,374 $ 87,403 $ (41,029) Interest rate caps 36 -0- 36 -------------- -------------- --------------- Total $ 46,410 $ 87,403 $ (40,993) ============== ============== ===============
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) ============== ============== ===============
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued)
TABLE 34 Interest Rate Swap and Cap Activity (Dollars in Millions) Receive Pay Forward Interest Fixed Fixed Swaps Basis Starting Rate Swaps Swaps(a) Swaps Caps ------------- ------------ -------------- -------------- ------------- Balance at January 1, 1994 $ 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 Additions 219 -0- 43 -0- -0- Maturities (2,114 ) (450 ) (200 ) -0- (75 ) Forward starting becoming effective 125 -0- -0- (125 ) -0- ------------- ------------ -------------- -------------- ------------- Balance at December 31, 1995 $ 3,221 $ 1,775 $ 43 $ 10 $ 225 ============= ============ ============== ============== ============= (a) Receives floating, pays floating.
INTEREST ON LOANS In 1995, interest on loans increased due to an increase in the average portfolio balance and an increase in the average portfolio yield. 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. INTEREST ON MBS In 1995, interest on MBS increased due to an increase in the average portfolio balance which was partially offset by a decrease in the average portfolio yield. In 1994, 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 1995 than in 1994 and in 1994 than in 1993 due to increases in the average portfolio balance and increases in the average portfolio yield in 1994 and again in 1995. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued) 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 in 1995 was due to the increase in the average cost of customer deposits and an increase in the average balance of customer deposits. 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 customer deposits. INTEREST ON ADVANCES Interest paid on FHLB advances was higher in 1995 as compared to 1994 due to an increase in the average outstanding balance and an increase in the average cost of these borrowings. 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 ON OTHER BORROWINGS Interest expense on other borrowings, including interest on reverse repurchase agreements, amounted to $287 million, $172 million, and $158 million for the years ended 1995, 1994, and 1993, respectively. The increase in the expense in 1995 over 1994 was due to an increase in the average balance of these liabilities, mainly due to the increase in the average balance of reverse repurchases, which was partially offset by a decrease in the average cost of other borrowings. The increase in the expense in 1994 over 1993 was due to an increase in the average balance of these liabilities partially offset by a decrease in the average cost. PROVISION FOR LOAN LOSSES The provision for loan losses was $61 million, $63 million, and $66 million for the years ended 1995, 1994 and 1993, respectively. The lower provision in 1995 reflects lower chargeoffs. The decrease in the provision in 1994 over 1993 reflected the decrease in nonperforming assets due to the beginning of a recovery in the California economy. The 1994 provision included $3.7 million in specific earthquake loss reserves. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued) 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 $493 thousand for the year ended 1995, a loss of $120 thousand for the year ended 1994 and a gain of $23 million for the year ended 1993. The 1993 gain included a $24 million reduction of a valuation allowance on investments charged to income in previous years. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses increased during the three years under discussion. The primary reasons for the increase in 1995 were the growth in savings deposits and general inflation. 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. Nevertheless, economies of scale were realized in 1995 as general and administrative expenses as a percentage of average assets dropped to .93% at yearend December 31, 1995 compared with 1.02%, and .97% for the years ended December 31, 1994, and 1993, respectively. DEPOSIT INSURANCE Legislation is currently pending in Congress which would recapitalize the Savings Association Insurance Fund (SAIF) in order to bring it into parity with the FDIC's other insurance fund, the Bank Insurance Fund (BIF). The legislation would require an assessment of all SAIF-insured institutions of approximately 80 basis points on their March 31, 1995, customer deposit balances. If such legislation had been passed by December 31, 1995, World Savings would have been assessed approximately $95 million, on an after tax basis. After paying the one-time assessment, it is expected that World Savings would pay significantly reduced insurance premiums on its customer deposits. There is no certainty that such legislation will become law. TAXES ON INCOME Golden West utilizes the accrual method of accounting for income tax purposes and for preparing its published financial statements. For financial reporting purposes only, the Company uses "purchase accounting" in connection with certain assets acquired through mergers. The purchase accounting portion of income is not subject to tax. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued) Taxes as a percentage of earnings decreased in 1995 over 1994 as a result of tax benefits from past acquisitions and the final settlement of prior year tax audits. LIQUIDITY AND CAPITAL RESOURCES World Savings' 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, World Savings has a number of other alternatives available to provide liquidity or finance operations. These include borrowings from public offerings of debt, sales of loans, negotiable certificates of deposit, issuances of commercial paper, and borrowings from commercial banks. Furthermore, under certain conditions, 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. The principal sources of funds for the Association's parent, Golden West, are interest on investments, 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 that World Savings can pay. The principal liquidity needs of Golden West are for payment of interest on subordinated debt securities, capital contributions to its insured subsidiaries, dividends to stockholders, the purchase of Golden West stock and general and administrative expenses. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index included on page 71 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, 64 Chairman of the Board and Chief Executive Officer Marion O. Sandler, 65 Chairman of the Board and Chief Executive Officer (a) James T. Judd, 57 Senior Executive Vice President Russell W. Kettell, 52 President and Treasurer(b) J. L. Helvey, 64 Group Senior Vice President Dirk S. Adams, 44 Group Senior Vice President Robert C. Rowe, 40 Vice President and Secretary (c) Louis J. Galen, 70 Director Antonia Hernandez, 47 Director Patricia A. King, 53 Director William D. McKee, 69 Director Bernard A. Osher, 68 Director Kenneth T. Rosen, 47 Director Paul Sack, 68 Director 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. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (Continued) (b) Russell W. Kettell was elected Treasurer of the Company in January 1995 and has held the position of President of the Company since February 1993. Prior thereto, Mr. Kettell served as Senior Executive Vice President since 1989, Executive Vice President since 1984, Senior Vice President since 1980, and Treasurer from 1976 until 1984. (c) Robert C. Rowe was elected Senior Vice President in 1995. Prior thereto, he served as Vice President and Secretary of the Company since 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 5 of the Registrant's Proxy Statement dated March 15, 1996, which are incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 is set forth in Registrant's Proxy Statement dated March 15, 1996, on pages 3 through 5 and 7 through 10 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, 6 and 7 of Registrant's Proxy Statement dated March 15, 1996, 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 15, 1996, 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 71 and the financial statements, which begin on page F-1. (2) Index to Financial Statement Schedules Financial statement schedules are omitted because they are not required or because the required information is included in the financial statements or the notes thereto. (3) Index To Exhibits Exhibit No. Description ----------- ----------- 3 (a) Certificate of Incorporation, as amended, and amendments thereto, are incorporated by reference 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. 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 incorporated 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 certain 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 ITEM 14. 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. 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 Herbert M. Sandler, Chairman of the Board and Chief Executive Officer By: /s/ Marion O. Sandler Marion O. Sandler, Chairman of the Board and Chief Executive Officer By: /s/ J. L.Helvey J. L. Helvey, Group Senior Vice President and Chief Financial and Accounting Officer Dated: March 27, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated: /s/ Louis J. Galen 3/27/96 Louis J. Galen, Kenneth T. Rosen, Director Director /s/ Antonia Hernandez 3/27/96 /s/ Paul Sack 3/27/96 Antonia Hernandez Paul Sack, Director Director /s/ Patricia A. King, 3/27/96 /s/ Herbert M. Sandler 3/27/96 Patricia A. King Herbert M. Sandler Director Director /s/ William D. McKee, 3/27/96 /s/ Marion O. Sandler, 3/27/96 William D. McKee Marion O.Sandler Director Director /s/ Bernard A. Osher 3/27/96 Bernard A. Osher, Director
INDEX TO FINANCIAL STATEMENTS Page ---- Independent Auditors' Report F-1 Golden West Financial Corporation and Subsidiaries: Consolidated Statement of Financial Condition as of December 31, 1995, and 1994 F-2 Consolidated Statement of Net Earnings for the years ended December 31, 1995, 1994, and 1993 F-3 Consolidated Statement of Stockholders' Equity for the years ended December 31, 1995, 1994, and 1993 F-4 Consolidated Statement of Cash Flows for the years ended December 31, 1995, 1994, and 1993 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. Independent Auditors' Report Board of Directors and Stockholders Golden West Financial Corporation Oakland, California We have audited the accompanying consolidated statement of financial condition of Golden West Financial Corporation and subsidiaries (the "Company") as of December 31, 1995 and 1994, 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, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Golden West Financial Corporation and subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Oakland, California January 22, 1996 F-1 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Dollars in thousands except per share figures) ASSETS ------
December 31 ---------------------------------- 1995 1994 --------------- ---------------- Cash $ 218,695 $ 242,441 Securities available for sale at fair value (Notes B and L) 901,856 1,488,845 Other investments at cost (fair value of $1,190,160 and $534,600) (Note C) 1,190,160 534,600 Mortgage-backed securities available for sale at fair value (Notes D and L) 282,881 323,339 Mortgage-backed securities held to maturity without recourse at cost (fair value of $922,032 and $831,436) (Notes E and L) 893,774 871,039 Mortgage-backed securities held to maturity with recourse at cost (fair value of $2,295,203 and $-0-) (Notes E and L) 2,232,686 -0- Loans receivable less allowance for loan losses of $141,988 and $124,003 (Notes F and K) 28,181,353 27,071,266 Interest earned but uncollected (Note G) 225,395 202,456 Investment in capital stock of Federal Home Loan Banks, at cost which approximates fair value (Note K) 350,955 332,940 Real estate held for sale or investment (Note H) 76,187 72,217 Prepaid expenses and other assets 222,015 206,478 Premises and equipment, net (Note I) 203,637 201,875 Goodwill arising from acquisitions (Note A) 138,562 136,245 =============== ================ $ 35,118,156 $ 31,683,741 =============== ================
See notes to consolidated financial statements. F-2 LIABILITIES AND STOCKHOLDERS' EQUITY
December 31 --------------------------------------- 1995 1994 ----------------- ------------------ Customer deposits (Note J) $20,847,910 $19,219,389 Advances from Federal Home Loan Banks (Note K) 6,447,201 6,488,418 Securities sold under agreements to repurchase (Note L) 1,817,943 601,821 Medium-term notes (Note M) 1,597,507 1,164,079 Federal funds purchased (Note N) -0- 250,000 Accounts payable and accrued expenses 450,814 443,693 Taxes on income (Note P) 356,036 294,508 ----------------- ------------------ 31,517,411 28,461,908 Subordinated notes (Note O) 1,322,392 1,221,559 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, 58,871,409 and 58,589,955 shares 5,887 5,859 Paid-in capital 55,353 45,689 Retained earnings - substantially restricted 2,140,883 1,929,740 ----------------- ------------------ 2,202,123 1,981,288 Unrealized gains on securities available for sale 76,230 18,986 ----------------- ------------------ Total Stockholders' Equity 2,278,353 2,000,274 ----------------- ------------------ $35,118,156 $31,683,741 ================= ==================
F-3 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF NET EARNINGS (Dollars in thousands except per share figures)
Year Ended December 31 ------------------------------------------------------- 1995 1994 1993 ----------------- ----------------- ----------------- Interest Income: Interest on loans $ 2,097,664 $ 1,649,413 $ 1,637,764 Interest on mortgage-backed securities 181,355 103,927 138,874 Interest and dividends on investments 148,422 123,137 93,534 ----------------- ----------------- ----------------- 2,427,441 1,876,477 1,870,172 Interest Expense: Interest on customer deposits (Note J) 1,048,390 714,353 705,700 Interest on advances 369,239 268,952 273,816 Interest on repurchase agreements 70,709 37,620 36,023 Interest on other borrowings 216,267 134,182 121,875 ----------------- ----------------- ----------------- 1,704,605 1,155,107 1,137,414 ----------------- ----------------- ----------------- Net Interest Income 722,836 721,370 732,758 Provision for loan losses 61,190 62,966 65,837 ----------------- ----------------- ----------------- Net Interest Income after Provision for Loan Losses 661,646 658,404 666,921 Non-Interest Income: Fees 29,200 28,816 31,061 Gain (loss) on the sale of securities and mortgage-backed securities (493) (120) 22,541 Other 13,833 8,790 8,440 ----------------- ----------------- ----------------- 42,540 37,486 62,042 Non-Interest Expense: General and administrative: Personnel 151,352 150,220 132,472 Occupancy 48,737 44,472 40,443 Deposit insurance 44,993 40,220 35,706 Advertising 9,850 10,761 10,782 Other 61,260 57,246 53,764 ----------------- ----------------- ----------------- 316,192 302,919 273,167 Amortization of goodwill arising from acquisitions 2,762 2,589 (1,586) ----------------- ----------------- ----------------- 318,954 305,508 271,581 ----------------- ----------------- ----------------- Earnings Before Taxes on Income 385,232 390,382 457,382 Taxes on income (Note P) 150,693 159,933 183,528 ----------------- ----------------- ----------------- Net Earnings $ 234,539 $ 230,449 $ 273,854 ================= ================= ================= Net earnings per share $4.00 $3.71 $4.28 ================= ================= =================
See notes to consolidated financial statements. F-4 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Dollars in thousands except per share figures)
Unrealized Gains on Securities Total Common Paid-in Retained Available Stockholders' Stock Capital Earnings for Sale Equity ----------- ----------- ------------- -------------- --------------- Balance at January 1, 1993 $ 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 ($.31 per share) -0- -0- (19,220) (19,220) Purchase and retirement of 5,561,180 shares of Company stock (Note Q) (556 ) -0- (215,082) (215,638) Change in unrealized gains on securities available for sale -0- -0- -0- (65,733) (65,733) ----------- ----------- ------------- -------------- --------------- Balance at December 31, 1994 5,859 45,689 1,929,740 18,986 2,000,274 Common stock issued upon exercise of stock options, including tax benefits - 349,290 shares 35 9,664 -0- 9,699 Net earnings -0- -0- 234,539 234,539 Cash dividends on common stock ($.35 per share) -0- -0- (20,533) (20,533) Purchase and retirement of 67,836 shares of Company stock (Note Q) (7) -0- (2,863) (2,870) Change in unrealized gains on securities available for sale -0- -0- -0- 57,244 57,244 ----------- ----------- ------------- -------------- --------------- Balance at December 31, 1995 $ 5,887 $ 55,353 $ 2,140,883 $ 76,230 $ 2,278,353 =========== =========== ============= ============== ===============
See notes to consolidated financial statements. F-5 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in thousands)
Year Ended December 31 -------------------------------------------------------- 1995 1994 1993 ---------------- ---------------- ----------------- Cash Flows From Operating Activities: Net earnings $ 234,539 $ 230,449 $ 273,854 Adjustments to reconcile net earnings to net cash provided by operating activities: Provision for loan losses 61,190 62,966 65,837 Amortization of loan fees and discounts (20,746) (28,832) (45,666) Depreciation and amortization 21,568 19,454 13,978 Reduction of a valuation allowance on investments -0- -0- (24,000) Loans originated for sale (169,020) (93,951) (442,880) Sales of loans originated for sale 141,648 146,115 432,362 (Increase) in interest earned but uncollected (22,939) (27,376) (17,357) Federal Home Loan Bank stock dividends (21,511) (19,007) (12,744) Decrease (increase) in prepaid expenses and other assets (11,205) (91,751) 26,020 Increase (decrease) in accounts payable and accrued expenses 7,121 87,894 (5,327) Increase (decrease) in taxes on income 21,210 (23,448) 72,828 Other, net (27,426) (23,011) (15,624) ---------------- ---------------- ---------------- Net cash provided by operating activities 214,429 239,502 321,281 Cash Flows From Investing Activities: New loan activity: Real estate loans originated for portfolio (5,780,044) (6,543,702) (5,968,997) Real estate loans purchased (30,837) (68,926) (13,567) Other, net (64,754) 3,816 25,836 ---------------- ---------------- ---------------- (5,875,635) (6,608,812) (5,956,728) Real estate loan principal payments: Monthly payments 511,710 600,879 574,459 Payoffs, net of foreclosures 1,560,485 2,232,214 2,852,722 Refinances 182,323 326,447 388,171 ---------------- ---------------- ---------------- 2,254,518 3,159,540 3,815,352 Purchases of mortgage-backed securities available for sale (6,254) (1,656) -0- Purchases of mortgage-backed securities held to maturity (99,032) (47,086) (302,313) Sales of mortgage-backed securities available for sale 6,396 121 -0- Sales of mortgage-backed securities held to maturity -0- -0- 138 Repayments of mortgage-backed securities 210,388 310,704 645,647 Proceeds from sales of real estate 193,389 217,965 206,009 Purchases of securities available for sale (2,992,018) (2,623,315) (4,326,544) Sales of securities available for sale 290,624 931,508 1,151,375 Matured securities available for sale 3,392,495 1,801,054 2,620,242 Decrease (increase) in other investments (655,560) 3,500 (569,697) Purchases of Federal Home Loan Bank stock (13,486) -0- (79,713) Redemptions of Federal Home Loan Bank stock 12,650 7,775 52,969 Additions to premises and equipment (24,099) (58,827) (37,496) ---------------- ---------------- ---------------- Net cash used in investing activities (3,305,624) (2,907,529) (2,780,759)
See notes to consolidated financial statements. F-6
Year Ended December 31 ----------------------------------------------------- 1995 1994 1993 --------------- --------------- --------------- Cash Flows From Financing Activities: Customer deposit activity: Increase in deposits, net $ 781,850 $ 1,211,544 $ 368,749 Interest credited 846,671 585,361 567,489 --------------- --------------- --------------- 1,628,521 1,796,905 936,238 Additions to Federal Home Loan Bank advances 1,051,490 304,500 1,701,200 Repayments of Federal Home Loan Bank advances (1,093,122) (98,034) (919,195) Proceeds from agreements to repurchase securities 3,424,725 4,599,988 4,035,812 Repayments of agreements to repurchase securities (2,208,603) (4,441,041) (4,149,648) Proceeds from medium-term notes 699,360 499,696 609,235 Repayments of medium-term notes (267,000) (12,865) (14,500) Proceeds from federal funds purchased -0- 250,000 -0- Repayments of federal funds purchased (250,000) -0- -0- Proceeds from subordinated debt 99,283 -0- 297,008 Dividends on common stock (20,533) (19,220) (17,280) Sale of stock 6,198 2,992 2,818 Purchase and retirement of Company stock (2,870) (215,638) (7,821) --------------- --------------- --------------- Net cash provided by financing activities 3,067,449 2,667,283 2,473,867 --------------- --------------- --------------- Net Increase (Decrease) in Cash (23,746) (744) 14,389 Cash at beginning of period 242,441 243,185 228,796 --------------- --------------- --------------- Cash at end of period $ 218,695 $ 242,441 $ 243,185 =============== =============== =============== Supplemental cash flow information: Cash paid for: Interest $ 1,640,261 $ 1,152,572 $ 1,176,338 Income taxes 128,123 182,332 112,970 Cash received for interest and dividends 2,404,502 1,849,101 1,852,815 Noncash investing activities: Loans transferred to foreclosed real estate 216,392 246,612 234,149 Securities transferred to available for sale -0- -0- 845,786 Mortgage-backed securities transferred to available for sale -0- -0- 1,114,069 Mortgage-backed securities transferred from available for sale to held to maturity (at fair value) -0- 453,564 -0- Loans securitized into mortgage-backed securities with recourse 2,325,589 -0- -0-
F-7 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 1995, 1994 and 1993 (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). The Company's principal operating subsidiaries are World Savings and Loan Association, a federally chartered association (the Association or World Savings) and World Savings Bank, a federally chartered savings bank (WFSB), (collectively, the Insured Institutions). At December 31, 1995, the assets of these subsidiaries were $30 billion and $4 billion, respectively. Intercompany accounts and transactions have been eliminated. Nature of Operations - -------------------- Golden West Financial Corporation, through its financial institution subsidiaries, operates 233 savings branches in seven states and 221 loan offices in 24 states. The Company's primary source of revenue is interest from loans on residential real estate. Use of Estimates in the Preparation of Financial Statements - ----------------------------------------------------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Investments - -------------------- The Insured Institutions are 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. The Company has adopted Statement of Financial Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities." Accordingly, the Company has identified its investment securities as either held to maturity or available for sale. The Company has no trading securities. Held to maturity securities are recorded at cost with any discount or premium amortized using a method that is not materially different from the interest method, which is also known as the level yield method. Securities held to maturity are recorded at cost because the Company has the ability to hold these securities to maturity and because it is Management's intention to hold them to maturity. At December 31, 1995, 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. Transfers of securities, if any, between the available for sale and held to maturity portfolios are handled in accordance with FAS 115. 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. F-8 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1995, 1994, and 1993 (Dollars in thousands except per share) Mortgage-backed securities - -------------------------- The Company has no trading mortgage-backed securities (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 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. The Company has securitized certain loans into MBS with recourse to be held to maturity which are available to be used as collateral for borrowings. Loans Receivable - ---------------- The Company's real estate loan portfolio consists primarily of long-term loans collateralized by first trust deeds on single-family residences and multi-family residential property. In addition to real estate loans, the Company makes loans on the security of savings accounts. The adjustable rate mortgage (ARM) is the Company's primary real estate loan. The ARM carries an interest rate that may change as often as monthly, based on movements in certain cost of funds or other indexes. Interest rate changes and monthly payments of principal and interest may be subject to maximum increases or decreases. Negative amortization may occur during periods when payments are limited. The Company also offers "modified" ARMs, loans that offer a low fixed rate generally from 1% to 3% below the contract rate for an initial period, usually three to 36 months. The Company does make a limited number of loans that are held for sale, primarily fixed-rate loans. These loans are usually originated against firm sales contracts. These loans are recorded at the lower of cost or market. Impairment is measured based on the fair value of the collateral. 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 loans that are collateral dependent. Loan origination fees, net of certain direct loan origination costs, are deferred and amortized as an interest income yield adjustment over the actual life of the related loans using the interest method. "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. Troubled debt restructured consists of loans that have been modified by the lender to grant a concession to the borrower because of a perceived temporary weakness in the collateral and/or borrower. F-9 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1995, 1994, and 1993 (Dollars in thousands except per share figures) Real Estate Held for Sale or Investment - --------------------------------------- Real estate held for sale or investment is comprised primarily of improved property acquired through foreclosure. All real estate owned is recorded at the lower of cost or fair value. Included in the fair value is the estimated selling price in the ordinary course of business less estimated costs to repair, hold, and dispose of the property. Costs relating to holding property, net of rental and option income, are expensed in the current period. Gains on the sale of real estate are recognized at the time of sale. Losses realized and expenses incurred in connection with the disposition of foreclosed real estate are charged to current earnings. Allowance for Loan Losses - ------------------------- The Company provides specific valuation allowances for losses on loans when impaired, including loans securitized into MBS with recourse, and on real estate owned when any significant and permanent decline in value is identified. The Company also utilizes a methodology, based on trends in the basic portfolio, for monitoring and estimating loan losses that is based on both historical experience in the loan portfolio and factors reflecting current economic conditions. This approach uses a database that identifies losses on loans and foreclosed real estate from past years to the present, broken down by year of origination, type of loan, and geographical area. Management is then able to estimate a range of general loss allowances to cover losses in the portfolio. In addition, periodic reviews are made of major loans and real estate owned, and major lending areas are regularly reviewed to determine potential problems. Where indicated, valuation allowances are established or adjusted. In estimating loan losses, consideration is given to the estimated sales price, cost of refurbishing, payment of delinquent taxes, cost of disposal and cost of holding the property. Additions to, and reductions from the allowances are reflected in current earnings. Mortgage Servicing Rights - ------------------------- In May 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" (SFAS 122). SFAS 122 amends Statement of Financial Accounting Standards No. 65, "Accounting for Certain Mortgage Banking Activities," to require that mortgage banking enterprises recognize, as separate assets, rights to service mortgage loans for others when those rights are acquired through either the purchase or origination of mortgage loans which are subsequently sold or securitized. SFAS 122 also requires that mortgage banking enterprises assess capitalized mortgage servicing rights based on the fair value of those rights on a disaggregated basis. SFAS 122 applies to fiscal years beginning after December 15, 1995. However, if it were applied to the Company's 1995 financial statements, the impact would not be material. Goodwill - -------- Positive goodwill, or the excess of the cost over the fair value of net assets acquired resulting from acquisitions, of $212,021 (1995) and $222,524 (1994) is stated net of accumulated amortization of $215,275 (1995) and $199,693 (1994). Negative goodwill, or the excess of the fair value of net assets acquired over the cost resulting from acquisitions, of $73,459 (1995) and $86,279 (1994) is shown net of accumulated amortization of $72,741 (1995) and $59,921 (1994). Positive and negative goodwill are being amortized on the straight-line method over periods ranging from 5 to 40 years. Long-Lived Assets and Other Intangible Assets - --------------------------------------------- The Company has adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS 121) in 1995. SFAS 121 establishes accounting and disclosure requirements using a fair value based method of accounting for long-lived assets and certain identifiable intangibles whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. The adoption of SFAS 121 had no effect on the Company's 1995 consolidated financial statements. F-10 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1995, 1994, and 1993 (Dollars in thousands except per share figures) Securities Sold Under Agreements to Repurchase - ---------------------------------------------- The Company enters into sales of securities under agreements to repurchase (reverse repurchase agreements) only with selected dealers and banks. Reverse repurchase agreements are treated as financings and the obligations to repurchase securities sold are reflected as a liability in the Consolidated Statement of Financial Condition. The securities underlying the agreements remain in the asset accounts. Interest Rate Swaps and Caps - ---------------------------- The Company utilizes certain derivative financial instruments, primarily various types of interest rate swaps and caps, as a part of its interest rate risk management strategy. Such instruments are entered into solely to alter the repricing characteristics of designated assets and liabilities. The Company does not hold any derivative financial instruments for trading purposes. An interest rate swap is an agreement between two parties in which one party exchanges cash payments based on a fixed or floating rate of interest for a counterparty's cash payment based on a floating rate of interest. The amounts to be paid are defined by agreement and determined by applying the specified interest rates to a notional principal amount. Interest rate swap agreements are entered into to limit the impact of changes in interest rates on mortgage loans, or other designated assets, customer deposits or borrowings. The interest rate differential paid or received on interest rate swap agreements is recognized over the life of the agreements, with income and expense recorded in the same category as the designated balance sheet item. The designated balance sheet item is generally a pool of assets or liabilities with similar interest rate characteristics. Some interest rate swaps are entered into with starting dates in the future in anticipation of future prepayments on fixed-rate assets. 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 on mortgage loans or other designated assets. 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 designated balance sheet item. 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. Regulatory Capital Requirements - ------------------------------- The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) established capital standards. Under FIRREA, thrifts and savings banks must have tangible capital equal to 1.5% of adjusted total assets, have core capital equal to 3% of adjusted total assets, and have risk-based capital equal to 8% of risk-weighted assets. F-11 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1995, 1994, and 1993 (Dollars in thousands except per share figures) At December 31, World Savings had the following regulatory capital calculated in accordance with FIRREA's capital standards:
1995 1994 --------------------------------------------------- --------------------------------------------------- ACTUAL REQUIRED ACTUAL REQUIRED ------------------------- ------------------------- ------------------------- ------------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ------------- -------- -------------- -------- ------------- -------- ------------- -------- Tangible $1,924,910 6.38% $ 452,761 1.50% 1,931,375 6.26% 462,564 1.50% Core 1,924,910 6.38 905,521 3.00 2,047,016 6.64 925,129 3.00 Risk-based 2,243,519 13.40 1,339,177 8.00 2,353,781 13.54 1,390,391 8.00
At December 31, 1995, WFSB had the following regulatory capital calculated in accordance with FIRREA's capital standards: Tangible, $562,788 or 14.01%; Core, $562,788 or 14.01%; and Risk-based $568,451 or 26.55%. The Office of Thrift Supervision (OTS) has adopted rules based upon five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The rules provide that a savings association is "well capitalized" if its total risk-based capital ratio is 10% or greater, its Tier 1 risk-based capital ratio is 6% or greater, its leverage ratio is 5% or greater, and the institution is not subject to a capital directive. As used herein, the total risk-based capital ratio is the ratio of total capital to risk-weighted assets, Tier 1 risk-based capital ratio means the ratio of core capital to risk-weighted assets, and the leverage ratio is the ratio of core capital to adjusted total assets, in each case as calculated in accordance with current OTS capital regulations. Under these regulations, World Savings and World Savings Bank, FSB, both of which are regulated by the OTS, are deemed to be "well capitalized." At December 31, World Savings had the following regulatory capital calculated in accordance with FDICIA's capital standards:
1995 1994 ------------------------------------------------- ------------------------------------------------- ACTUAL WELL CAPITALIZED ACTUAL WELL CAPITALIZED ----------------------- ----------------------- ----------------------- ----------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ------------ -------- ------------ --------- ------------ --------- ------------ -------- Leverage $1,924,910 6.38% $1,509,202 5.00% $2,047,016 6.64% $1,541,881 5.00% Tier 1 ris based 1,924,910 11.50 1,004,383 6.00 2,047,016 11.78 1,042,793 6.00 Total risk-based 2,243,519 13.40 1,673,972 10.00 2,353,781 13.54 1,737,989 10.00
At December 31, 1995, WFSB had the following regulatory capital, calculated in accordance with FDICIA's capital standards: Leverage, $562,788 or 14.01%; Tier 1 risk-based, $562,788 or 26.28%; and Total risk-based, $568,451 or 26.55%. Legislation is currently pending in Congress which would recapitalize the Savings Association Insurance Fund (SAIF) in order to bring it into parity with the FDIC's other insurance fund, the Bank Insurance Fund (BIF). The legislation would require an assessment of all SAIF-insured institutions of approximately 0.80% on their March 31, 1995, customer balances. If such legislation had been passed by December 31, 1995, World Savings would have been assessed approximately $95 million, on an after tax basis. After paying the one time assessment, it is expected that World Savings would pay significantly reduced insurance premiums on its customer deposits. There is no certainty that such legislation will become law. F-12 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1995, 1994, and 1993 (Dollars in thousands except per share figures) Retained Earnings - ----------------- Under OTS regulations, the OTS must be given at least 30 days' advance notice by the Association or WFSB of any proposed dividend to be paid to the Company. Under OTS regulations, World Savings and WFSB are classified as Tier 1 institutions and are, therefore, allowed to distribute dividends up to 100% of their net income in any year plus one-half of their capital in excess of the OTS fully phased-in capital requirement as of the end of the prior year. At December 31, 1995, $306 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, 58,657,422 (1995), 62,128,719 (1994), and 63,977,876 (1993). NOTE B - Securities Available for Sale The following is a summary of securities available for sale:
December 31, 1995 -------------------------------------------------------------------- Unrealized Unrealized Fair Cost Gains Losses Value ---------------- --------------- --------------- ---------------- Certificates of deposit $ 49,999 $ 1 $ -0- $ 50,000 U.S. Treasury and Government agency obligations 174,783 36 -0- 174,819 Collateralized mortgage obligations 410,953 216 3,222 407,947 Commercial paper 50,932 42 -0- 50,974 Equity securities 98,545 119,597 26 218,116 ---------------- --------------- --------------- ---------------- $ 785,212 $ 119,892 $ 3,248 $ 901,856 ================ =============== =============== ================
December 31, 1994 --------------------------------------------------------------------- Unrealized Unrealized Fair Cost Gains Losses Value --------------- --------------- --------------- --------------- Certificates of deposit $ 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 =============== =============== =============== ===============
F-13 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1995, 1994, and 1993 (Dollars in thousands except per share figures) The weighted average portfolio yields on securities available for sale were 5.89% and 5.24% at December 31, 1995, and 1994, respectively. Sales of securities available for sale resulted in realized gains of $10 (1995), $83 (1994) and $22 (1993) and realized losses of $515 (1995), $226 (1994) and $13 (1993). At December 31, 1995, the securities available for sale had maturities as follows:
Amortized Fair Maturity Cost Value -------------------------------------- ---------------- ---------------- No maturity $ 98,545 $ 218,116 1996 281,024 280,933 1997 through 2000 333,437 330,851 2001 through 2005 42,952 42,720 2006 and thereafter 29,254 29,236 ---------------- --------------- $ 785,212 $ 901,856 ================ ===============
NOTE C - Other Investments The following is a summary of other investments not subject to Financial Accounting Standards Board pronouncement No. 115:
December 31 --------------------------------- 1995 1994 ---------------- -------------- Federal funds, at cost $ 490,960 $ 152,000 Short-term repurchase agreements collateralized by mortgage-backed securities, at cost 699,200 382,600 ================ ============== $ 1,190,160 $ 534,600 ================ ==============
At December 31, 1995, and 1994, cost approximated fair market value and there were no unrealized gains or losses. The weighted average portfolio yields on other investments were 6.00% and 5.92% at December 31, 1995, and 1994, respectively. Sales of other investments resulted in gains of $-0- (1995), $-0- (1994), and $24,000 (1993), and losses of $-0- (1995), $-0- (1994), and $1,473 (1993). As of December 31, 1995, the entire other investments portfolio matures in 1996. F-14 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1995, 1994, and 1993 (Dollars in thousands except per share figures) NOTE D - Mortgage-Backed Securities Available for Sale Mortgage-backed securities available for sale are summarized as follows:
December 31, 1995 ---------------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------------- -------------- --------------- -------------- FNMA $ 114,204 $ 4,661 $ 280 $ 118,585 FHLMC 91,032 4,771 88 95,715 GNMA 62,327 5,098 59 67,366 Other 1,215 -0- -0- 1,215 =============== ============== =============== ============== $ 268,778 $ 14,530 $ 427 $ 282,881 =============== ============== =============== ==============
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 =============== ============== =============== ==============
The weighted average portfolio yields on mortgage-backed securities available for sale were 8.85% and 9.57% at December 31, 1995, and 1994, respectively. Principal proceeds from the sales of securities from the mortgage-backed securities available for sale portfolio were $6,409 (1995), $120 (1994) and $-0- (1993) and resulted in realized gains of $13 (1995), $-0- (1994), and $-0- (1993) and realized losses of $-0- (1995), $1 (1994), and $-0- (1993). At December 31, 1995, mortgage-backed securities available for sale had contractual maturities as follows:
Amortized Fair Maturity Cost Value ----------------------------- ---------------- ---------------- 1996 through 2000 $ 1,459 $ 1,488 2001 through 2005 2,974 3,121 2006 and thereafter 264,345 278,272 ================ ================ $ 268,778 $ 282,881 ================ ================
F-15 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1995, 1994, and 1993 (Dollars in thousands except per share figures) NOTE E - Mortgage-Backed Securities Held to Maturity Mortgage-backed securities held to maturity are summarized as follows:
December 31, 1995 ----------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------------- -------------- -------------- -------------- Mortgage-backed securities without recourse: FNMA $ 718,136 $ 19,276 $ 2,930 $ 734,482 FHLMC 91,224 6,628 -0- 97,852 GNMA 84,414 5,284 -0- 89,698 -------------- -------------- -------------- -------------- $ 893,774 $ 31,188 $ 2,930 $ 922,032 Mortgage-backed securities with recourse: FNMA 2,232,686 62,517 -0- 2,295,203 -------------- -------------- -------------- -------------- $ 3,126,460 $ 93,705 $ 2,930 $ 3,217,235 ============== ============== ============== ==============
December 31, 1994 ------------------------------------------------------------------ Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------------- -------------- -------------- -------------- Mortgage-backed securities without recourse: 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 =============== ============== ============== ==============
The weighted average portfolio yields of mortgage-backed securities held to maturity were 7.28% and 7.99% at December 31, 1995, and 1994, respectively. Principal proceeds from the sales of securities from the mortgage-backed securities held to maturity portfolio amounted to $-0- (1995), $-0- (1994), and $144 (1993) and resulted in realized gains of $-0- (1995), $-0- (1994), and $7 (1993) and realized losses of $-0- (1995), $-0- (1994), and $-0- (1993). At December 31, 1995, mortgage-backed securities held to maturity had contractual maturities as follows:
Amortized Fair Maturity Cost Value ------------------------------ -------------- -------------- 1996 through 2000 $ 120 $ 123 2001 through 2005 105 111 2006 and thereafter 3,126,235 3,217,001 -------------- -------------- $ 3,126,460 $ 3,217,235 ============== ==============
F-16 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1995, 1994, and 1993 (Dollars in thousands except per share figures) NOTE F - Loans Receivable
December 31 -------------------------------------- 1995 1994 ---------------- ---------------- Loans collateralized primarily by first deeds of trust: One-to four-family dwelling units $ 24,071,421 $ 23,217,564 Over four-family dwelling units 4,205,050 3,946,446 Commercial property 122,396 134,189 Construction loans 1,471 -0- Land 1,511 1,851 ---------------- ---------------- 28,401,849 27,300,050 Loans on savings accounts 33,279 30,460 ---------------- ---------------- 28,435,128 27,330,510 Less: Undisbursed loan funds 3,568 2,781 Unearned fees and discounts 88,194 105,314 Unamortized discount arising from acquisitions 20,025 27,146 Allowance for loan losses 141,988 124,003 ---------------- ---------------- $ 28,181,353 $ 27,071,266 ================ ================
In addition to loans receivable, the Association services loans for others. At December 31, 1995, and 1994, the amount of loans serviced for others (non-affiliated) was $3,135,125 and $843,963, respectively, including $2.2 billion of loans that were securitized into FNMA MBS with recourse during 1995. At December 31, 1995, and 1994, the Company had $32 million and $4 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 --------------------------------------------- 1995 1994 1993 ------------- ------------- ------------ Balance at January 1 $ 124,003 $ 106,698 $ 70,924 Provision for loan losses charged to expense 61,190 62,966 65,837 Less loans charged off (44,656) (46,556) (38,475) Recoveries 1,451 895 1,145 Reclassification of in-substance foreclosure allowances -0- -0- 7,267 ------------- -------------- ------------- Balance at December 31 $ 141,988 $ 124,003 $ 106,698 ============= ============== =============
The following is a summary of impaired loans: December 31 -------------------------------- 1995 1994 --------------- ---------------- Nonperforming loans $ 314,086 $ 284,103 Troubled debt restructured 45,222 72,827 Other impaired loans 60,483 40,504 -------------- -------------- $ 419,791 $ 397,434 ============== ==============
The portion of the allowance for loan losses that was specifically provided for impaired loans was $16,516 and $15,618 at December 31, 1995, and 1994, respectively. The average recorded investment in total impaired loans was $487,989 and $395,228 during 1995 and 1994, respectively. All amounts involving impaired loans have been measured based upon the fair value of the related collateral. The amount of interest income recognized on the total of impaired loans at December 31, 1995 and 1994 was $19,141 and $16,449, respectively. F-17 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1995, 1994, and 1993 (Dollars in thousands except per share figures) NOTE G - Interest Earned But Uncollected
December 31 --------------------------------- 1995 1994 -------------- ------------- Loans receivable $ 132,849 $ 108,130 Mortgage-backed securities 23,975 7,135 Interest rate swaps 60,415 81,684 Other 8,156 5,507 -------------- ------------- $ 225,395 $ 202,456 ============== =============
NOTE H - Real Estate Held for Sale or Investment
December 31 --------------------------------- 1995 1994 -------------- -------------- Real estate acquired through foreclosure of loans, net of allowance for losses $ 75,158 $ 70,981 Real estate in judgement, net of allowance for losses 443 390 Real estate held for investment, net of allowance for losses 586 846 -------------- -------------- $ 76,187 $ 72,217 ============== ==============
NOTE I - Premises and Equipment
December 31 ------------------------------ 1995 1994 ------------- -------------- Land $ 51,002 $ 47,509 Building and leasehold improvements 149,872 143,065 Furniture, fixtures, and equipment 127,759 123,688 ------------- -------------- 328,633 314,262 Accumulated depreciation and amortization 124,996 112,387 ------------- -------------- $ 203,637 $ 201,875 ============= ==============
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, 1995, and which expire between 1996 and 2064, amounted to approximately $152,710. The approximate minimum payments during the five years ending 2000 are $14,490 (1996), $13,657 (1997), $12,234 (1998), $10,254 (1999), and $8,987 (2000). 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 $17,540 (1995), $16,979 (1994), and $15,579 (1993). F-18 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1995, 1994, and 1993 (Dollars in thousands except per share figures) NOTE J - Customer Deposits
December 31 ----------------------------------------------------------- 1995 1994 ---------------------------- ----------------------------- Rate* Amount Rate* Amount ---------- --------------- ------------ -------------- Customer deposits by rate: Interest-bearing checking accounts 1.25% $ 750,160 1.28% $ 730,290 Passbook accounts 2.23 567,890 2.23 638,905 Money market deposit accounts 3.20 1,291,501 3.13 1,818,426 Term certificate accounts with original maturities of: 4 weeks to 1 year 5.32 9,358,705 4.56 5,159,037 1 to 2 years 5.65 3,599,540 4.59 5,636,301 2 to 3 years 5.63 2,128,392 4.85 1,997,826 3 to 4 years 5.36 651,787 5.22 817,631 4 years and over 6.32 2,065,785 6.99 2,098,984 Retail jumbo CDs 5.57 430,647 5.44 312,413 All other 7.71 3,503 7.78 9,576 --------------- --------------- $ 20,847,910 $ 19,219,389 =============== ===============
*Weighted average interest rate including the impact of interest rate. swaps.
December 31 ----------------------------------------------- 1995 1994 ----------------- ------------------ Customer deposits by remaining maturity at yearend: No contractual maturity $ 2,609,551 $ 3,187,621 Maturity within one year: 1st quarter 6,014,410 3,598,746 2nd quarter 4,953,641 3,319,067 3rd quarter 2,096,226 2,377,766 4th quarter 1,422,384 1,765,131 ----------------- ----------------- 14,486,661 11,060,710 1 to 2 years 2,259,328 2,799,980 2 to 3 years 618,242 983,797 3 to 4 years 638,226 420,778 Over 4 years 235,902 766,503 ----------------- ----------------- $ 20,847,910 $ 19,219,389 ================= =================
At December 31, the weighted average cost of deposits was 5.15% (1995) and 4.57% (1994). Interest expense on customer deposits is summarized as follows:
Year Ended December 31 --------------------------------------------------- 1995 1994 1993 --------------- --------------- --------------- Interest-bearing checking accounts $ 9,258 $ 9,463 $ 11,426 Passbook accounts 17,771 19,733 21,043 Money market deposit accounts 30,262 38,430 47,339 Term certificate accounts 991,099 646,727 625,892 =============== =============== =============== $ 1,048,390 $ 714,353 $ 705,700 =============== =============== ===============
F-19 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1995, 1994, and 1993 (Dollars in thousands except per share figures) NOTE K - Advances from Federal Home Loan Banks Advances are secured by pledges of $10,833,942 of certain loans and capital stock of the Federal Home Loan Bank, and these borrowings have maturities and interest rates as follows:
December 31, 1995 ------------------------------------------------------------------------------------ Receive Stated Fixed Adjusted Maturity Amount Rate Swaps Rate* -------------- ---------- ------------ ----------- 1996 $ 634,416 6.29% (0.75)% 5.54% 1997 165,479 6.55 (0.56) 5.99 1998 1,058,806 6.16 6.16 1999 558,918 5.08 5.08 2000 672,737 6.05 (0.01) 6.04 2001 and thereafter 3,356,845 5.61 (0.01) 5.60 -------------- $ 6,447,201 ==============
December 31, 1994 ------------------------------------------------------------------------------------ Receive Stated Fixed Adjusted Maturity Amount Rate Swaps Rate* ----------------------- -------------- ---------- ------------ ----------- 1995 $ 325,469 $ 5.8% (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 ==============
*Weighted average interest rate adjusted for impact of interest rate swaps. At December 31, the weighted average cost of advances was 5.70% (1995) and 5.21% (1994). F-20 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1995, 1994, and 1993 (Dollars in thousands except per share figures) NOTE L - Securities Sold Under Agreements to Repurchase Securities sold under agreements to repurchase are collateralized by mortgage-backed securities and collateralized mortgage obligations with a market value of $1,859,652 and $657,325 at December 31, 1995, and 1994, respectively.
December 31, 1995 ------------------------------------------------------------------------------------------------ Pay Receive Stated Fixed Fixed Adjusted Maturity Amount Rate Swaps Swaps Rate* ----------------------- ------------- ---------- ----------- ----------- ----------- 1996 $ 1,061,343 5.64% 0.64% 6.28% 1997 500,000 5.94 5.94 1998 250,000 6.09 6.09 1999 6,600 8.09 (2.68)% 5.41 ------------- $ 1,817,943 =============
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 6,600 8.09 (3.27) 4.82 ------------- $ 601,821 =============
*Weighted average interest rate adjusted for impact of interest rate swaps. At December 31, these liabilities had a weighted average interest rate of 6.15% (1995) and 6.67% (1994). These borrowings averaged $1,120,860 (1995) and $574,487 (1994) and the maximum outstanding at any monthend was $2,018,438 (1995) and $930,072 (1994). At the end of 1995 and 1994, respectively, $1,752,171 and $316,865 of the agreements to repurchase with broker/dealers and the Federal Home Loan Bank of San Francisco were to reacquire the same securities. Agreements with broker/dealers to repurchase substantially the same securities amounted to $65,772 (1995) and $284,956 (1994). NOTE M - Medium-Term Notes Medium-term notes are unsecured obligations of the Association. They have maturities and interest rates as follows:
December 31, 1995 - ----------------------------------------------------------------------------------------------------------- Pay Receive Stated Fixed Fixed Basis Adjusted Maturity Amount Rate Swaps Swaps Swaps Rate* - ---------------- --------------- ------------ ------------ ----------- ------------ ------------ 1996 $ 1,007,988 5.49% (0.03)% 0.50% (0.01)% 5.95% 1997 479,645 6.80 (0.65) 6.15 1998 109,874 6.21 6.21 --------------- $ 1,597,507 ===============
F-21 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1995, 1994, and 1993 (Dollars in thousands except per share figures)
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 =============
*Weighted average interest rate adjusted for impact of interest rate swaps. At December 31, medium-term notes had a weighted average interest rate of 6.04% (1995) and 6.10% (1994). NOTE N - Federal Funds Purchased At December 31, 1994, these liabilities had a weighted average interest rate of 6.55%. These borrowings averaged $38,462 (1995) and $19,231 (1994) and the maximum outstanding at any monthend was $250,000 (1995) and $250,000 (1994). NOTE O - Subordinated Notes
December 31 ------------------------------------ 1995 1994 ---------------- ---------------- Parent: Subordinated notes, unsecured, due from 1997 to 2003 at coupon rates of 6.00% to 10.25%, net of unamortized discount of $6,907 (1995) and $7,530 (1994) $ 1,123,093 $ 1,022,470 Association: Subordinated notes, unsecured, due from 1997 to 2000 at coupon rates of 9.90% to 10.25%, net of unamortized discount of $701 (1995) and $911 (1994) 199,299 199,089 ---------------- ---------------- $ 1,322,392 $ 1,221,559 ================ ================
At December 31, subordinated notes had a weighted average interest rate of 8.49% (1995) and 8.64% (1994). At December 31, 1995, subordinated notes had maturities and interest rates as follows:
Maturity Rate* Amount ---------------------------------- ----------- --------------- 1997 10.37% $ 214,662 1998 9.04 199,388 2000 9.29 313,155 2002 7.75 396,569 2003 6.13 198,618 =============== $ 1,322,392 ===============
*Weighted average interest rate F-22 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1995, 1994, and 1993 (Dollars in thousands except per share figures) NOTE P - Taxes on Income The following is a comparative analysis of the provision for federal and state taxes on income.
Year Ended December 31 ------------------------------------------------------- 1995 1994 1993 ---------------- ---------------- ---------------- Federal income tax: Current $ 108,717 $ 121,124 $ 141,016 Deferred 6,287 1,765 3,599 State tax: Current 36,887 39,941 42,014 Deferred (1,198) (2,897) (3,101) ================ ================ ================ $ 150,693 $ 159,933 $ 183,528 ================ ================ ================
The amounts of net deferred liability included in taxes on income in the Consolidated Statement of Financial Condition are:
December 31 ---------------------------------- 1995 1994 ---------------- ---------------- Federal income tax $ 112,031 $ 75,396 State tax 48,065 40,033
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 --------------------------------------- 1995 1994 ----------------- ----------------- Deferred tax liabilities: Loan fees and interest income $ 72,355 $ 64,116 FHLB stock dividends 69,572 62,524 Bad debt reserve 28,355 39,085 Unrealized gains on debt and equity securities 53,500 13,328 Depreciation 14,337 11,282 Other deferred tax liabilities 4,779 751 ----------------- ----------------- Gross deferred tax liabilities 242,898 191,086 Deferred tax assets: Provision for losses on loans 54,577 47,869 State taxes 13,367 14,112 Loan discount primarily related to acquisitions 8,674 11,460 Other deferred tax assets 6,184 2,216 ----------------- ----------------- Gross deferred tax assets 82,802 75,657 ----------------- ----------------- Net deferred tax liability $ 160,096 115,429 ================= =================
F-23 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1995, 1994, and 1993 (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 ---------------------------------------------------------------------------------- 1995 1994 1993 -------------------------- -------------------------- ----------------------------- Percent Percent Percent of of of Pretax Pretax Pretax Amount Income Amount Income Amount Income ----------- ----------- ----------- ----------- ----------- ----------- Computed standard corporate tax expense $ 134,831 35.0% $ 136,634 35.0% $ 160,083 35.0% Increases (reductions) in taxes resulting from: Net financial income, not subject to income tax, primarily related to acquisitions (6,706) (1.7) 393 0.1 (3,293) (0.7) State tax, net of federal income tax benefit 24,046 6.2 24,325 6.2 27,783 6.0 Adjustment of deferred tax liability due to tax rate increase -0- -0- -0- -0- 1,793 0.4 Other (1,478) (0.4) (1,419) (0.3) (2,838) (0.6) ----------- ----------- ----------- ----------- ----------- ----------- $ 150,693 39.1% $ 159,933 41.0% $ 183,528 40.1% =========== =========== =========== =========== =========== ===========
In accordance with Financial Accounting Standards Board pronouncement 109, "Accounting for Income Taxes," a deferred tax liability has not been recognized for the tax bad debt reserve of World Savings and Loan Association that arose in tax years that began prior to December 31, 1987. At December 31, 1995 and 1994, 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, 1995 and 1994, 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. F-24 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1995, 1994, and 1993 (Dollars in thousands except per share figures) 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 and August 1, 1995, the Company's Board of Directors authorized the purchase by the Company of an additional 3.1 million and 5.9 million shares, respectively, of Golden West's common stock. As of December 31, 1995, 5,833,016 of such shares had been repurchased and retired at a cost of $226 million since October 28, 1993. During 1995, 67,836 of the shares were purchased and retired at a cost of $3 million. 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, 1993 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 Granted 278,250 $ 51.21 Exercised (349,290) $ 17.74 Canceled (18,250) $ 35.71 -------------- ------------- Outstanding, December 31, 1995 2,978,295 $ 26.70 ============== =============
At December 31, shares available for option amounted to 2,844,200 (1995), 3,104,200 (1994), and 3,465,400 (1993); and shares exercisable amounted to 2,170,745 (1995), 2,114,335 (1994), and 1,792,235 (1993). Outstanding options at December 31, 1995, were held by 354 employees and had expiration dates ranging from December 1, 1997, to January 12, 2006. F-25 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1995, 1994, and 1993 (Dollars in thousands except per share figures) NOTE S - Financial Instruments with Off-Balance-Sheet Risk and Concentrations of Credit Risk As of December 31, 1995, the Company's loans receivable balance was $28.2 billion. Of that $28.2 billion balance, 37% were Southern California loans, 36% were Northern California loans, 3% were Colorado loans, 3% were Illinois loans, 3% were Texas loans, 3% were New Jersey loans, 2% were Florida 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. In order to reduce its exposure to fluctuations in interest rates, the Company is a party to financial instruments with off-balance-sheet risk entered into in the normal course of business. These financial instruments include commitments to fund loans; commitments to purchase or sell securities, mortgage-backed securities, and loans; and interest rate swaps and caps. 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, 1995, and 1994, was $258 million and $412 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. The Company had no outstanding commitments to purchase or sell mortgage-backed securities as of December 31, 1995, and 1994. 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. F-26 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1995, 1994, and 1993 (Dollars in thousands except per share figures) NOTE T - Interest Rate Swaps and Caps 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 these contracts exposes the Company to credit risk to the extent of the net difference between the calculated pay and receive amounts on each transaction. Net differences of that amount are generally settled quarterly. The Company has not experienced any credit losses from interest rate swaps or caps. The information presented below is based on interest rates at December 31, 1995. 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 one basis swap contract on which it makes payments based on three month LIBOR and receives an amount based on one month LIBOR. The forward starting swap was 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 the forward starting swap begins at a predetermined future date. The Company has a $10 million forward starting swap, which is contractually delayed until 1997. The following table illustrates the maturities and weighted average rates as of December 31, 1995 for interest rate swaps and caps held by the Company by product type. Maturities of December 31, 1995 Interest Rate Swaps and Caps
Maturity Balance at ------------------------------------------------------------------------ December 31, 1996 1997 1998 1999 2000+ 1995 ------------ ----------- ------------ ------------ ----------- ---------------- Receive fixed generic swaps: Notional amount $ 1,545,000 $ 452,180 $ 952,983 $ 244,144 $ 26,667 $ 3,220,974 Weighted average receive rate 5.19% 7.05% 6.07% 6.77% 7.14% 5.85% Weighted average pay rate 5.43% 5.93% 5.71% 5.95% 6.02% 5.63% Pay fixed generic swaps: Notional amount $ 435,000 $ 232,000 $ 209,000 $ 172,000 $ 727,095 $ 1,775,095 Weighted average receive rate 5.96% 6.00% 5.89% 5.99% 5.93% 5.95% Weighted average pay rate 8.05% 6.86% 7.66% 8.26% 7.10% 7.48% Basis swaps: Notional amount $ 43,000 $ -0- $ -0- $ -0- $ -0- $ 43,000 Weighted average receive rate 6.03% 0.00% 0.00% 0.00% 0.00% 6.03% Weighted average pay rate 5.89% 0.00% 0.00% 0.00% 0.00% 5.89% Forward starting swaps: Notional amount $ -0- $ -0- $ -0- $ 10,000 $ -0- $ 10,000 Weighted average receive rate 0.00% 0.00% 0.00% 8.68% 0.00% 8.68% Weighted average pay rate 0.00% 0.00% 0.00% 5.53% 0.00% 5.53% Interest rate caps: Notional amount $ 225,000 $ -0- $ -0- $ -0- $ -0- $ 225,000 Range of cap strike rates 5.00-11.00% 5.00-11.00% 11.00 Total notional value $2,248,000 $ 684,180 $ 1,161,983 $ 426,144 $ 753,762 $ 5,274,069 ============ =========== ============ ============ =========== ============= Total weighted average rate on swaps: Receive rate 5.38% 6.69% 6.04% 6.50% 5.97% 5.89% ============ =========== ============ ============ =========== ============= Pay rate 6.01% 6.24% 6.06% 6.87% 7.06% 6.2% ============ =========== ============ ============ =========== =============
F-27 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1995, 1994, and 1993 (Dollars in thousands except per share figures) During 1995, the range of floating interest rates received on swap contracts was 5.13% to 7.02% and the range of floating interest rates paid on swap contracts was 4.37% to 6.69%. The range of fixed interest rates received on swap contracts was 3.91% to 9.68% and the range of fixed interest rates paid on swap contracts was 4.09% to 9.54%. Activity in interest rate swaps and caps is summarized as follows:
Interest Rate Swap and Cap Activity For the Years Ended December 31, 1995, 1994, and 1993 (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, 1993 $ 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- Additions 219 -0- 43 -0- -0- -0- Maturities (2,114) (450) (200) -0- (75) -0- Terminations -0- -0- -0- -0- -0- -0- Forward starting becoming effective 125 -0- -0- (125) -0- -0- ----------- ----------- ----------- ----------- ---------- ---------------- Balance, December 31, 1995 $ 3,221 $ 1,775 $ 43 $ 10 $ 225 $ -0- =========== =========== =========== =========== ========== ================
Interest rate swaps and caps activity decreased net interest income by $29 million, $23 million, and $71 million for the years ended December 31, 1995, 1994, and 1993, respectively. NOTE U - Disclosure About Fair Value of Financial Instruments The Financial Accounting Standards Board Pronouncement No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of the fair value of financial instruments for which it is practicable to estimate that value. The statement provides for a variety of different valuation methods, levels of aggregation, and assessments of practicability of estimating fair value. F-28 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1995, 1994, and 1993 (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, 1995, and 1994, and do not reflect any subsequent changes in fair value. Fair values may have changed significantly following the balance sheet dates. The estimates presented herein are not necessarily indicative of amounts that could be realized in a current transaction. The following methods and assumptions were used to estimate the fair value of each class of financial instruments: The historical cost amounts approximate the fair value of the following financial instruments: cash, interest earned but uncollected, investment in capital stock of Federal Home Loan Banks, other 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, securitites sold under agreements to repurchase with the Federal Home Loan Bank of San Francisco and broker/dealers with terms greater than 90 days, and subordinated notes. Fair values are estimated using projected cash flows present valued at replacement rates currently offered for instruments of similar remaining maturities for: customer term deposits, advances from Federal Home Loan Banks, consumer repurchase agreements and medium-term notes. 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. F-29 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1995, 1994, and 1993 (Dollars in thousands except per share figures)
December 31 --------------------------------------------------------------------- 1995 1994 -------------------------------- -------------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value --------------- --------------- ---------------- --------------- Financial Assets: Cash $ 218,695 $ 218,695 $ 242,441 $ 242,441 Securities available for sale 901,856 901,856 1,488,845 1,488,845 Other investments 1,190,160 1,190,160 534,600 534,600 Mortgage-backed securities available for sale 282,881 282,881 323,339 323,339 Mortgage-backed securities held to maturity 3,126,460 3,217,235 871,039 831,436 Loans receivable 28,181,353 28,342,204 27,071,266 26,914,642 Interest earned but uncollected 225,395 225,395 202,456 202,456 Investment in capital stock of Federal Home Loan Banks 350,955 350,955 332,940 332,940 Financial Liabilities: Customer deposits 20,847,910 20,957,186 19,219,389 19,138,503 Advances from Federal Home Loan Banks 6,447,201 6,441,338 6,488,418 6,300,271 Securities sold under agreements to repurchase 1,817,943 1,831,403 601,821 602,117 Medium-term notes 1,597,507 1,607,720 1,164,079 864,210 Federal funds purchased -0- -0- 250,000 250,000 Subordinated notes 1,322,392 1,418,775 1,221,559 1,053,758 Off-Balance Sheet Instruments (Unrealized Gains (Losses)):
December 31 ------------------------------------------------------------------------------------------------ 1995 1994 ---------------------------------------------- ------------------------------------------------ Net Net Unrealized Unrealized Unrealized Unrealized Unrealized Unrealized Gains Losses Gain (Loss) Gains Losses Gain (Loss) ------------- -------------- ------------- ------------- ------------- ------------- Interest rate swaps: Receive fixed $ 45,632 $ 1,421 $ 44,211 $ 3,765 $ 104,098 $ (100,333) Pay fixed 327 85,982 (85,655) 64,874 8,959 55,915 Basis -0- -0- -0- -0- 77 (77) Forward starting 415 -0- 415 348 -0- 348 Interest rate caps 36 -0- 36 589 -0- 589 Loan commitments 1,389 -0- 1,389 1,698 -0- 1,698 ------------- -------------- ------------- ------------- ------------- ------------- Total $ 47,799 $ 87,403 $ (39,604) $ 71,274 $ 113,134 $ (41,860) ============= ============== ============= ============= ============= =============
F-30 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1995, 1994, and 1993 (Dollars in thousands except per share figures) NOTE V - Parent Company Financial Information Statement of Net Earnings
Year Ended December 31 ------------------------------------------------- 1995 1994 1993 -------------- -------------- -------------- Revenues: Investment income $ 49,893 $ 40,821 $ 28,047 Insurance commissions and trustee fees 1,403 1,190 1,357 Other 24 20 20 -------------- -------------- -------------- 51,320 42,031 29,424 Expenses: Interest 88,662 85,906 75,601 General and administrative 3,631 2,648 2,188 -------------- -------------- -------------- 92,293 88,554 77,789 -------------- -------------- -------------- Loss before earnings of subsidiaries and income tax credit (40,973) (46,523) (48,365) Income tax credit 18,498 20,779 21,585 Earnings of subsidiaries 257,014 256,193 300,634 -------------- -------------- -------------- Net Earnings $ 234,539 230,449 273,854 ============== ============== ==============
Statement of Financial Condition - -------------------------------- Assets ------
December 31 --------------------------------------- 1995 1994 ------------------ ------------------ Cash $ 2,556 $ 1,708 Securities available for sale 199,523 299,454 Other investments 517,202 386,707 Notes receivable from subsidiary -0- 250,000 Prepaid expenses and other assets 14,380 9,273 Investment in subsidiaries 2,698,237 2,094,784 ------------------ ------------------ $ 3,431,898 $ 3,041,926 ================== ==================
Liabilities and Stockholders' Equity ------------------------------------ Accounts payable and accrued expenses $ 30,452 $ 19,182 Subordinated notes, net 1,123,093 1,022,470 Stockholders' equity 2,278,353 2,000,274 ----------------- ----------------- $ 3,431,898 $ 3,041,926 ================= =================
F-31 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1995, 1994, and 1993 (Dollars in thousands except per share figures) NOTE V- Parent Company Financial Information (Continued) Statement of Cash Flows
Year Ended December 31 ---------------------------------------------------- 1995 1994 1993 --------------- --------------- --------------- Cash flows from operating activities: Net earnings $ 234,539 $ 230,449 $ 273,854 Adjustments to reconcile net earnings to net cash used in operating activities: Equity in earnings of subsidiaries (257,014) (256,193) (300,634) Amortization of intangibles and discount on subordinated debt 1,404 1,353 1,209 Other, net (7,290) (5,086) 15,509 --------------- --------------- --------------- Net cash used in operating activities (28,361) (29,477) (10,062) Cash flows from investing activities: Capital contributed to subsidiaries (580,582) (625) -0- Dividends received from subsidiary 280,000 275,000 34,000 Purchases of securities held for sale (2,638,824) (1,305,371) (1,920,007) Sales of securities available for sale 102,911 620,415 337,593 Matured securities available for sale 2,664,121 1,060,842 1,103,012 (Increase) in other investments (130,495) (271,993) (169,355) Notes receivable from subsidiary (450,000) (650,000) (150,000) Repayments of notes receivable from subsidiary 700,000 550,000 475,000 --------------- --------------- --------------- Net cash provided by (used in) investing activities (52,869) 278,268 (289,757) Cash flows from financing activities: Increase(decrease)in securities sol under agreements to repurchase -0- (24,875) 24,875 Proceeds from subordinated debt 99,283 -0- 297,008 Dividends on common stock (20,533) (19,220) (17,280) Sale of stock 6,198 2,992 2,818 Purchase and retirement of Company stock (2,870) (215,638) (7,821) --------------- --------------- --------------- Net cash provided by (used in) financing activities 82,078 (256,741) 299,600 Net increase (decrease) in cash 848 (7,950) (219) Cash at beginning of period 1,708 9,658 9,877 --------------- --------------- --------------- Cash at end of period $ 2,556 $ 1,708 $ 9,658 =============== =============== ===============
F-32 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1995, 1994, and 1993 (Dollars in thousands except per share figures) NOTE W - Selected Quarterly Financial Data (Unaudited)
1995 ----------------------------------------------------------------- Quarter Ended ----------------------------------------------------------------- March 31 June 30 September 30 December 31 -------------- --------------- -------------- -------------- Interest income $ 551,895 $ 604,145 $ 631,772 $ 639,629 Interest expense 385,464 431,844 444,339 442,958 -------------- --------------- -------------- -------------- Net interest income 166,431 172,301 187,433 196,671 Provision for loan losses 14,779 14,651 14,622 17,138 Non-interest income 11,012 9,227 10,476 11,825 Non-interest expense 79,320 79,074 79,014 81,546 -------------- --------------- -------------- -------------- Earnings before taxes on income 83,344 87,803 104,273 109,812 Taxes on income 32,411 34,242 40,892 43,148 -------------- --------------- -------------- -------------- Net earnings $ 50,933 $ 53,561 $ 63,381 $ 66,664 ============== =============== ============== ============== Net earnings per share $ .87 $ .91 $ 1.08 $ 1.14 ============== =============== ============== ============== Cash dividends per share $ .085 $ .085 $ .085 $ .095 ============== =============== ============== ==============
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 ============== =============== ============== ===============
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. F-33 EX-99 2 EXHIBIT 23(A) INDEPENDENT AUDITORS' CONSENT 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, Registration Statement No. 33-57882 on Form S-3 and Amendment No. 1 to , Registration Statement No. 33-61293 on Form S-3 of our report dated January 22, 1996 appearing in this Annual Report on Form 10-K of Golden West Financial Corporation for the year ended December 31, 1995. /s/Deloitte & Touche LLP San Francisco, California March 25, 1996 EX-27 3 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
9 12-MOS DEC-31-1995 218695 50000 490960 0 1,184,737 3,126,460 3,217,235 28,181,353 141,988 35,118,156 20,847,910 1,817,943 806,850 9,367,100 0 0 5,887 2,272,466 35,118,156 2,097,664 148,422 181,355 2,427,441 1,048,390 1,704,605 722,836 61,190 0 318,954 385,232 385,232 0 0 234,539 4.00 4.00 7.56 314,086 0 45,222 60,483 124,003 44,656 1,451 141,988 141,988 0 0
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