-----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, N1Ra8pW2srZN3mkkVKvduW4K3Z/gecqktW6K1HxlpCUDscU+SZDn50GqTsLSvpPa ztyk/4aWpHemTexO3g24Fg== 0000042293-96-000007.txt : 19961115 0000042293-96-000007.hdr.sgml : 19961115 ACCESSION NUMBER: 0000042293-96-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04629 FILM NUMBER: 96662530 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-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q For Quarter Ended September 30, 1996 Commission File Number 1-4629 GOLDEN WEST FINANCIAL CORPORATION - ------------------------------------------------------------------------------- Delaware 95-2080059 - ----------------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1901 Harrison Street, Oakland, California 94612 - ------------------------------------------ ----------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (510) 446-3420 ----------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---------- ----------- The number of shares outstanding of the registrant's common stock on October 31, 1996, was 57,337,009 shares. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The consolidated financial statements of Golden West Financial Corporation and subsidiaries (the Company) for the three and nine months ended September 30, 1996 and 1995 are unaudited. In the opinion of the Company, all adjustments (consisting only of normal recurring accruals) that are necessary for a fair statement of the results for such three and nine month periods have been included. The operating results for the three and nine months ended September 30, 1996, are not necessarily indicative of the results for the full year.
Golden West Financial Corporation Consolidated Statement of Financial Condition (Unaudited) (Dollars in thousands) September 30 September 30 December 31 1996 1995 1995 ------------- ------------ ------------- Assets: Cash $ 130,467 $ 173,994 $ 218,695 Securities available for sale at fair value 650,927 1,249,736 901,856 Other investments at cost 1,350,002 818,730 1,190,160 Mortgage-backed securities available for sale without recourse at fair value 237,176 298,221 282,881 Mortgage-backed securities available for sale with recourse at fair value 220,612 -0- -0- Mortgage-backed securities held to maturity without recourse at cost 814,619 917,005 893,774 Mortgage-backed securities held to maturity with recourse at cost 2,039,227 1,969,697 2,232,686 Loans receivable 30,278,267 27,951,161 28,181,353 Interest earned but uncollected 218,366 234,442 225,395 Investment in capital stock of Federal Home Loan Banks--at cost which approximates fair value 480,468 346,356 350,955 Real estate held for sale or investment 83,074 71,426 76,187 Prepaid expenses and other assets 297,917 225,899 222,015 Premises and equipment--at cost less accumulated depreciation 210,301 202,674 203,637 Goodwill arising from acquisitions -0- 138,931 138,562 ------------ ----------- ----------- $ 37,011,423 $34,598,272 $35,118,156 ============ =========== =========== Liabilities and Stockholders' Equity: Customer deposits $ 21,584,365 $20,559,933 $20,847,910 Advances from Federal Home Loan Banks 8,159,240 5,976,515 6,447,201 Securities sold under agreements to repurchase 2,227,481 1,865,172 1,817,943 Medium-term notes 689,755 1,864,229 1,597,507 Accounts payable and accrued expenses 593,594 462,041 450,814 Taxes on income 163,252 352,232 356,036 Subordinated notes--net of discount 1,323,592 1,321,989 1,322,392 Stockholders' equity 2,270,144 2,196,161 2,278,353 ------------ ----------- ----------- $ 37,011,423 $34,598,272 $35,118,156 ============ =========== ===========
Golden West Financial Corporation Consolidated Statement of Net Earnings (Unaudited) (Dollars in thousands except per share figures) Three Months Ended Nine Months Ended September 30 September 30 ------------------------------ ----------------------------- 1996 1995 1996 1995 ----------- ------------ ------------ ------------ Interest Income: Interest on loans $ 554,245 $ 540,154 $ 1,637,733 $ 1,557,366 Interest on mortgage-backed securities 59,882 54,007 181,416 117,511 Interest and dividends on investments 32,460 37,611 96,723 112,935 ----------- ------------ ----------- ------------ 646,587 631,772 1,915,872 1,787,812 Interest Expense: Interest on customer deposits 264,445 274,000 787,727 779,795 Interest on advances 107,803 87,681 289,476 280,087 Interest on repurchase agreements 31,054 25,565 93,408 41,169 Interest on other borrowings 38,338 57,093 124,152 160,596 ----------- ------------ ----------- ------------ 441,640 444,339 1,294,763 1,261,647 ----------- ------------ ----------- ------------- Net Interest Income 204,947 187,433 621,109 526,165 Provision for loan losses 23,498 14,622 59,256 44,052 ----------- ------------ ----------- ------------ Net Interest Income after Provision for Loan Losses 181,449 172,811 561,853 482,113 Non-Interest Income: Fees 9,504 7,690 27,872 20,399 Gain (loss) on the sale of securities, MBS and loans 1,952 (366) 9,783 (344) Other 6,220 3,152 18,371 10,660 ----------- ------------ ----------- ------------ 17,676 10,476 56,026 30,715 Non-Interest Expense: General and administrative: Personnel 40,146 37,692 119,273 111,909 Occupancy 12,702 12,431 37,267 36,406 Deposit insurance 140,949 11,602 162,298 33,162 Advertising 1,954 2,166 6,711 7,620 Other 15,531 14,596 46,993 45,918 ----------- ------------ ----------- ------------ 211,282 78,487 372,542 235,015 Amortization of goodwill arising from acquisitions -0- 527 -0- 2,393 ----------- ------------ ----------- ------------ 211,282 79,014 372,542 237,408 ----------- ------------ ----------- ------------ Earnings (Loss) Before Taxes on Income and Cumulative Effect of Change in Accounting (12,157) 104,273 245,337 275,420 Taxes on Income (147,942) 40,892 (48,626) 107,545 ----------- ------------ ----------- ------------ Income Before Cumulative Effect of Change in Accounting for Goodwill 135,785 63,381 293,963 167,875 Cumulative Effect of Change in Accounting for Goodwill -0- -0- (205,242) -0- ----------- ------------ ----------- ------------ Net Earnings $ 135,785 $ 63,381 $ 88,721 $ 167,875 =========== ============ =========== ============ Earnings Per Share: Earnings Per Share Before Cumulative Effect of Change in Accounting for Goodwill $ 2.32 $ 1.08 $ 5.01 $ 2.86 Cumulative Effect of Change in Accounting for Goodwill 0.00 0.00 (3.49) 0.00 ------------ ------------ ----------- ------------ Net Earnings Per Share $ 2.32 $ 1.08 $ 1.52 $ 2.86 ============ ============ =========== ============
Golden West Financial Corporation Consolidated Statement of Cash Flows (Unaudited) (Dollars in thousands) Three Months Ended Nine Months Ended September 30 September 30 --------------------------- ---------------------------- 1996 1995 1996 1995 ------------ ------------ ------------ ------------- Cash Flows From Operating Activities: Net earnings $ 135,785 $ 63,381 $ 88,721 $ 167,875 Adjustments to reconcile net earnings to net cash provided by operating activities: Provision for loan losses 23,498 14,622 59,256 44,052 Cumulative effect of the change in accounting for goodwill -0- -0- 205,242 -0- Amortization of loan fees and discounts (5,412) (5,493) (18,093) (15,052) Depreciation and amortization 4,884 5,214 14,512 16,402 Loans originated for sale (72,354) (33,002) (407,606) (43,488) Sales of loans originated for sale 73,715 14,435 408,594 23,982 Decrease (increase) in interest earned but uncollected 6,198 13,894 7,029 (31,986) Federal Home Loan Bank stock dividends (6,217) (4,659) (20,701) (16,779) Decrease (increase) in prepaid expenses and other assets 7,684 13,174 (136,688) (15,222) Increase in accounts payable and accrued expenses 80,576 26,653 142,780 18,348 Increase (decrease) in taxes on income (197,773) (4,203) (198,759) 27,772 Other, net (4,672) (8,405) (11,987) (24,852) ----------- ----------- ----------- ------------ Net cash provided by operating activities 45,912 95,611 132,300 151,052 Cash Flows From Investing Activities: New loan activity: New real estate loans originated for portfolio (2,034,022) (1,342,404) (4,791,836) (4,535,012) Real estate loans purchased (1,934) (478) (4,009) (29,923) Other, net (9,559) (4,117) (15,074) (60,925) ----------- ----------- ---------- ------------ (2,045,515) (1,346,999) (4,810,919) (4,625,860) Real estate loan principal payments: Monthly payments 161,679 121,752 451,541 384,311 Payoffs, net of foreclosures 528,889 491,202 1,651,319 1,085,577 Refinances 62,114 50,693 202,411 126,532 ----------- ----------- ----------- ------------ 752,682 663,647 2,305,271 1,596,420 Purchases of mortgage-backed securities available for sale -0- -0- -0- (6,254) Purchases of mortgage-backed securities held to maturity (4) (97,840) (1,522) (99,020) Sales of mortgage-backed securities available for sale -0- -0- -0- 6,396 Repayments of mortgage-backed securities 100,527 63,708 320,465 121,298 Proceeds from sales of real estate 50,371 49,743 148,349 151,002 Purchases of securities available for sale (344,476) (1,155,102) (674,721) (2,627,287) Sales of securities available for sale -0- 80,015 81,133 190,625 Maturities of securities available for sale 207,393 1,271,065 862,264 2,750,529 Decrease (increase) in other investments (139,862) 166,440 (159,842) (284,130) Purchases of Federal Home Loan Bank stock (115,256) -0- (152,355) (13,486) Redemptions of Federal Home Loan Bank stock 37,649 -0- 37,649 12,650 Additions to premises and equipment (7,216) (6,358) (21,722) (18,232) ----------- ----------- ----------- ------------ Net cash used in investing activities (1,503,707) (311,681) (2,065,950) (2,845,349)
Golden West Financial Corporation Consolidated Statement of Cash Flows (Continued) (Unaudited) (Dollars in thousands)
Three Months Ended Nine Months Ended September 30 September 30 --------------------------- --------------------------- 1996 1995 1996 1995 ------------ ------------ ------------ ------------ Cash Flows From Financing Activities: Customer deposit activity: Increase (decrease) in deposits, net $ 324,260 $ (399,563) $ 92,604 $ 713,689 Interest credited 219,507 221,341 643,851 626,855 ----------- ----------- ----------- ------------ 543,767 (178,222) 736,455 1,340,544 Additions to Federal Home Loan Bank advances 1,117,600 25,800 1,881,050 575,890 Repayments of Federal Home Loan Bank advances (134,025) (307,551) (169,302) (1,088,118) Proceeds from agreements to repurchase securities 1,974,262 1,429,200 3,989,933 2,894,195 Repayments of agreements to repurchase securities (2,064,039) (735,714) (3,580,395) (1,630,844) Proceeds from medium-term notes -0- -0- -0- 699,360 Repayments of medium-term notes -0- -0- (908,135) -0- Proceeds from federal funds purchased -0- -0- 1,250,000 -0- Repayments of federal funds purchased -0- -0- (1,250,000) (250,000) Proceeds from subordinated debt -0- -0- -0- 99,283 Dividends on common stock (5,496) (4,990) (16,591) (14,955) Sale of stock 1,665 382 6,110 3,365 Purchase and retirement of Company stock (35,196) (2,224) (93,703) (2,870) ----------- ----------- ------------ ------------ Net cash provided by financing activities 1,398,538 226,681 1,845,422 2,625,850 ----------- ----------- ------------ ------------ Net Increase (Decrease) in Cash (59,257) 10,611 (88,228) (68,447) Cash at beginning of period 189,724 163,383 218,695 242,441 ----------- ------------ ----------- - ------------ Cash at end of period $ 130,467 $ 173,994 $ 130,467 $ 173,994 =========== ============ ============ ============ Supplemental cash flow information: Cash paid for: Interest $ 476,400 $ 431,106 $ 1,342,224 $ 1,234,984 Income taxes 49,832 45,716 155,410 81,768 Cash received for interest and dividends 652,785 645,666 1,922,901 1,755,826 Noncash investing activities: Loans transferred to foreclosed real estate 64,061 56,287 163,050 162,507 Loans securitized into MBS with recourse -0- 637,122 226,210 2,010,272
Golden West Financial Corporation Consolidated Statement of Stockholders' Equity (Unaudited) (Dollars in thousands) Nine Months Ended September 30 -------------------------- 1996 1995 ----------- ----------- Common Stock: Balance at January 1 $ 5,887 $ 5,859 Common stock issued upon exercise of stock options 25 14 Common stock retired upon purchase of stock (174) (7) ----------- ---------- Balance at September 30 5,738 5,866 ----------- ---------- Paid-in Capital: Balance at January 1 55,353 45,689 Common stock issued upon exercise of stock options 6,085 3,351 ------------ ---------- Balance at September 30 61,438 49,040 ------------ ---------- Retained Earnings: Balance at January 1 2,140,883 1,929,740 Net earnings 88,721 167,875 Cash dividends on common stock (16,591) (14,955) Retirement of stock (93,529) (2,863) ----------- ---------- Balance at September 30 2,119,484 2,079,797 ----------- ---------- Unrealized Gains on Securities Available for Sale: Balance at January 1 76,230 18,986 Change during period 7,254 42,472 ----------- ---------- Balance at September 30 83,484 61,458 ----------- ---------- Total Stockholders' Equity at September 30 $2,270,144 $2,196,161 =========== ==========
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion and analysis included herein covers those material changes in liquidity and capital resources that have occurred since December 31, 1995, as well as certain material changes in results of operations during the three and nine month periods ended September 30, 1996, and 1995, respectively. The following narrative is written with the presumption that the users have read or have access to the Company's 1995 Form 10-K, which contains the latest audited financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 1995, and for the year then ended. Therefore, only material changes in financial condition and results of operations are discussed herein. ACCOUNTING CHANGE In the third quarter and effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions," (SFAS 72) for goodwill related to acquisitions made prior to September 30, 1982. SFAS 72 requires, among other things, that goodwill resulting from the acquisition of banking or thrift institutions initiated after September 30, 1982, be amortized over a period no longer than the estimated remaining life of the acquired long-term interest-earning assets. The adoption of SFAS 72 for goodwill relating to acquisitions of banking or thrift institutions prior to September 30, 1982, is permitted but not required. As a result, the Company wrote-off goodwill totaling $205.2 million as the cumulative effect of the change in accounting for goodwill. The adoption resulted in the restatement of earnings previously reported of $75.5 million, or $1.28 per share, in the first quarter of 1996 to a loss of $126.6 million, or $2.15 per share. Earnings for the second quarter of 1996 have been restated from $76.5 million, or $1.32 per share to $79.6 million, or $1.35 per share. The Company has been accounting for acquisitions initiated subsequent to September 30, 1982, in accordance with SFAS 72. Prior to the adoption of SFAS 72, the goodwill amortization expense for goodwill relating to acquisitions prior to September 30, 1982 was $3.1 million per quarter. Golden West Financial Corporation Financial Highlights (Unaudited) (Dollars in thousands except per share figures)
September 30 September 30 December 31 1996 1995 1995 ------------- ------------ ------------- Assets $ 37,011,423 $ 34,598,272 $ 35,118,156 Loans receivable 30,278,267 27,951,161 28,181,353 Mortgage-backed securities 3,311,634 3,184,923 3,409,341 Customer deposits 21,584,365 20,559,933 20,847,910 Stockholders' equity 2,270,144 2,196,161 2,278,353 Stockholders' equity/total assets 6.13% 6.35% 6.49% Book value per common share $ 39.57 $ 37.44 $ 38.70 Common shares outstanding 57,375,909 58,663,619 58,871,409 Yield on loan portfolio 7.42% 7.70% 7.69% Yield on mortgage-backed securities 7.18% 7.49% 7.41% Yield on investments 6.06% 6.05% 5.96% Yield on earning assets 7.32% 7.58% 7.56% Cost of deposits 4.95% 5.22% 5.15% Cost of borrowings 5.85% 6.22% 6.15% Cost of funds 5.28% 5.57% 5.50% Yield on earning assets less cost of funds 2.04% 2.01% 2.06% Ratio of nonperforming assets to total assets 1.20% 1.08% 1.11% Ratio of troubled debt restructured to total assets .16% .16% .13% World Savings and Loan Association: Total assets $ 23,883,202 $32,668,619 $ 30,354,740 Net worth 1,623,564 2,314,532 2,128,329 Net worth/total assets 6.80% 7.08% 7.01% Regulatory capital ratios: Tangible capital 6.47% 6.54% 6.38% Core capital 6.47% 6.54% 6.38% Risk-based capital 14.19% 13.61% 13.40% World Savings Bank, a Federal Savings Bank: Total assets $ 12,830,891 $ 1,090,619 $ 4,017,491 Net worth 880,253 215,614 566,851 Net worth/total assets 6.86% 19.77% 14.11% Regulatory capital ratios: Tangible capital 6.83% 19.44% 14.01% Core capital 6.83% 19.44% 14.01% Risk-based capital 12.68% 35.14% 26.55%
Golden West Financial Corporation Financial Highlights (Unaudited) (Dollars in thousands except per share figures)
Three Months Ended Nine Months Ended September 30 September 30 -------------------------- --------------------------- 1996 1995 1996 1995 ----------- ------------ ------------ ------------ New real estate loans originated $2,106,376 $ 1,375,406 $ 5,199,442 $4,578,500 Average yield on new real estate loans 7.54% 7.84% 7.61% 7.49% Increase (decrease) in customer deposits $ 543,767 $ (178,222) $ 736,455 $1,340,544 Earnings excluding 1996 nonrecurring items (a) 71,125 63,381 223,141 167,875 Earnings before cumulative effect of change in accounting for goodwill 135,785 63,381 293,963 167,875 Net earnings 135,785 63,381 88,721 167,875 Earnings per share excluding 1996 nonrecurring items (a) 1.23 1.08 3.83 2.86 Earnings per share before cumulative effect of change in accounting for goodwill 2.32 1.08 5.01 2.86 Net earnings per share 2.32 1.08 1.52 2.86 Cash dividends on common stock .095 .085 .285 .255 Average common shares outstanding 57,584,306 58,681,021 58,216,474 58,637,427 Ratios:(b) Net earnings/average net worth (ROE)(c) 24.71% 11.71% 5.45% 10.65% Net earnings/average assets (ROA)(c) 1.50% .74% .33% .67% Net interest income/average assets 2.27% 2.18% 2.34% 2.09% General and administrative expense/average assets (G&A to Average Assets)(c) 2.34% .91% 1.40% .93%
(a) Excludes the third quarter 1996 SAIF assessment of $132.6 million (pre-tax) and the special tax credit of $139.5 million. Also excluded is the $205.2 million cumulative effect of the change in accounting for goodwill, which was effective January 1, 1996. (b) Ratios are annualized by multiplying the quarterly computation by four and the nine-month computation by one and one-third. Averages are computed by adding the beginning balance and each monthend balance during the quarter and the nine month period and dividing by four and ten, respectively. (c) The ratios for the quarter ended September 30, 1996, excluding the three 1996 nonrecurring items in footnote (a) above are: ROE 11.95%, ROA .78% and G&A to Average Assets .87%. The same ratios for the nine months ended September 30, 1996, are: ROE 12.69%, ROA .84% and G&A to Average Assets .90%. FINANCIAL CONDITION The consolidated condensed balance sheet shown in the table below presents the Company's assets and liabilities in percentage terms at September 30, 1996 and 1995, and December 31, 1995. The reader is referred to page 48 of the Company's 1995 Form 10-K for similar information for the years 1992 through 1995 and a discussion of the changes in the composition of the Company's assets and liabilities in those years.
TABLE 1 Consolidated Condensed Balance Sheet In Percentage Terms September 30 ------------------ December 31 1996 1995 1995 ------- ------ ------------- Assets: Cash and investments 5.8% 6.5% 6.6% Mortgage-backed securities 8.9 9.2 9.7 Loans receivable 81.8 80.8 80.2 Other assets 3.5 3.5 3.5 ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== ===== Liabilities and Stockholders' Equity: Customer deposits 58.3% 59.4% 59.4% Federal Home Loan Bank advances 22.0 17.3 18.4 Securities sold under agreements to repurchase 6.0 5.4 5.2 Medium-term notes 1.9 5.4 4.5 Other liabilities 2.1 2.4 2.2 Subordinated debt 3.6 3.8 3.8 Stockholders' equity 6.1 6.3 6.5 ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== =====
As the above 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. 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 characteristics of assets and liabilities is commonly referred to as the gap. The gap table on the following page shows that, as of September 30, 1996, the Company's assets mature or reprice sooner than its liabilities. Consequently, one would expect falling interest rates to lower the Company's earnings and rising interest rates to increase the Company's earnings. However, the Company's earnings are also affected by the built-in lag inherent in the Eleventh District Cost of Funds Index (COFI), which is the benchmark the Company uses to determine the rate on the great majority of its adjustable rate mortgages. Specifically, there is a two-month delay in reporting the COFI because of the time required to gather the data needed to compute the index. As a result, the current COFI actually reflects the Eleventh District's cost of funds at the level it was two months prior. Consequently, when the interest rate environment changes, the COFI reporting lag causes assets to initially reprice more slowly than liabilities, enhancing earnings when rates are falling and holding down income when rates rise. In addition to the COFI reporting lag, other elements of ARM loans also have an impact on earnings. These elements are the interest rate adjustment frequency of ARM loans, interest rate limits on individual rate changes, interest rate floors, and introductory rates on new ARM loans.
TABLE 2 Repricing of Interest-Earning Assets and Interest-Bearing Liabilities, Repricing Gaps, and Gap Ratio As of September 30, 1996 (Dollars in millions) Projected Repricing(a) ------------------------------------------------------------------- 0 - 3 4 - 12 1 - 5 Over 5 Months Months Years Years Total ----------- ------------ ----------- ----------- ---------- Interest-Earning Assets: Investments $ 1,656 $ 10 $ 333 $ 2 $ 2,001 Mortgage-backed securities 2,354 93 358 507 3,312 Loans receivable: Rate-sensitive 25,280 1,815 113 -0- 27,208 Fixed-rate 75 236 985 1,499 2,795 Other(b) 573 -0- -0- -0- 573 Impact of interest rate swaps 629 8 24 (661) -0- --------- -------- ------- -------- -------- Total $ 30,567 $ 2,162 $ 1,813 $ 1,347 $ 35,889 ========= ======== ======= ======== ======== Interest-Bearing Liabilities(c): Customer deposits $ 8,095 $ 10,552 $ 2,880 $ 57 $ 21,584 FHLB advances 7,158 440 340 221 8,159 Other borrowings 2,711 315 619 596 4,241 Impact of interest rate swaps 2,219 (1,065) (1,141) (13) -0- --------- -------- ------- -------- -------- Total $ 20,183 $ 10,242 $ 2,698 $ 861 $ 33,984 ========= ======== ======= ======== ======== Repricing gap $ 10,384 $ (8,080) $ (885) $ 486 ========= ======== ======= ======== Cumulative gap $ 10,384 $ 2,304 $ 1,419 1,905 ========= ======== ======= ========= Cumulative gap as a percentage of total assets 28.1% 6.2% 3.8% ========= ======== =======
(a) Based on scheduled maturity or scheduled repricing; loans reflect scheduled repayments and projected prepayments of principal. (b) Includes cash in banks and Federal Home Loan Bank (FHLB) stock. (c) Liabilities with no maturity date, such as passbook and money market deposit accounts, are assigned zero months. CASH AND INVESTMENTS The Office of Thrift Supervision (OTS) requires insured institutions, such as World Savings and Loan Association (World or Association) and World Savings Bank, a Federal Savings Bank (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 September 30, 1996 and 1995, and December 31, 1995, World's average regulatory liquidity ratios were 7%, 6%, and 8%, respectively, consistently exceeding the requirement. For the months ended September 30, 1996, and December 31, 1995, WFSB's average regulatory liquidity ratios were 6% and 6%, 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. At September 30, 1996 and 1995, and December 31, 1995, the Company had securities available for sale in the amount of $651 million, $1.2 billion, and $902 million, respectively, including net unrealized gains on securities available for sale of $132 million, $89 million, and $117 million, respectively. At September 30, 1996 and 1995, and December 31, 1995, the Company had no securities held to maturity or for trading. Included in the securities available for sale at September 30, 1996 and 1995, and December 31, 1995, were collateralized mortgage obligations (CMOs) in the amount of $216 million, $484 million, and $408 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 September 30, 1996, the majority of the Company's CMOs were fixed-rate instruments with remaining terms to maturity of five years or less, and qualified for inclusion in the regulatory liquidity measurement. MORTGAGE-BACKED SECURITIES At September 30, 1996 and 1995, and December 31, 1995, the Company had mortgage-backed securities (MBS) held to maturity in the amount of $2.9 billion, $2.9 billion, and $3.1 billion, respectively, including $2.0 billion of Federal National Mortgage Association (FNMA) MBS subject to full credit recourse at September 30, 1996. At September 30, 1996 and 1995, and December 31, 1995, the Company had mortgage-backed securities available for sale in the amount of $458 million, $298 million, and $283 million, respectively, including net unrealized gains on MBS available for sale of $11 million, $16 million, and $14 million, respectively, and including $221 million of FNMA MBS subject to full credit recourse at September 30, 1996. At September 30, 1996 and 1995, and December 31, 1995, the Company had no trading MBS. In June 1996, the Company securitized $226 million of adjustable rate mortgages (ARMs) into FNMA COFI-indexed MBS. These MBS are classified as available for sale. During 1995, the Company securitized $2.3 billion of ARMs into FNMA COFI-indexed MBS. The Company has the ability and intent to hold these MBS until maturity. Accordingly, these MBS are classified as held to maturity. Both the FNMA COFI-indexed MBS available for sale and the FNMA COFI-indexed MBS held to maturity are available to be used as collateral for borrowings and are subject to full credit recourse to the Company. Repayments of MBS during the third quarter and first nine months of 1996 were $101 million and $320 million, respectively, compared to $64 million and $121 million in the same periods of 1995. The increase in repayments on MBS during the first nine months of 1996 as compared to the first nine months of 1995 was primarily due to the increase in MBS that resulted from the securitization of ARM loans into FNMA MBS and an increase in prepayments on the underlying mortgages. LOAN PORTFOLIO LOAN VOLUME New loan originations for the three months ended September 30, 1996, amounted to $2.1 billion, the largest single quarter in the Company's history, compared to $1.4 billion for the same period in 1995. New loan originations for the nine months ended September 30, 1996, amounted to $5.2 billion, compared to $4.6 billion for the same period in 1995. The increase in loan volume in 1996 occurred because rates on new fixed-rate mortgages have generally remained above the 8% level during 1996, while the starting rates on ARMs, the Company's principal product, remained low and more affordable. The Company continues to sell most of its fixed-rate originations. Loans originated for sale for the three and nine months ended September 30, 1996 were $72 million and $408 million, respectively, compared to $33 million and $43 million for the same periods in 1995. Although interest rates increased during the second quarter of 1996, interest rates on fixed-rate loans in the first nine months of 1996 have generally been at levels below the same periods of 1995, helping to cause an increase in activity in fixed-rate loans during 1996. Refinanced loans constituted 29% and 35% of new loan originations for the three and nine months ended September 30, 1996, compared to 31% and 30% for the three and nine months ended September 30, 1995. The Company has lending operations in 24 states. The primary source of mortgage origination is loans secured by residential properties in California. For the three and nine months ended September 30, 1996, 49% and 51%, respectively, of total loan originations were on residential properties in California compared to 53% for the same periods in 1995. The five largest states, other than California, for originations for the three and nine months ended September 30, 1996, were Texas, Florida, Illinois, Colorado, and New Jersey with a combined total of 29% and 28%, respectively, of total originations. The percentage of the total loan portfolio (including mortgage-backed securities with recourse) that is comprised of residential loans in California was 70% at September 30, 1996 compared to 74% at September 30, 1995, and 73% at December 31, 1995. The tables on the following two pages show the Company's loan portfolio by state at September 30, 1996 and 1995.
TABLE 3 Loan Portfolio by State September 30, 1996 (Dollars in thousands) Residential Real Estate Commercial Loans as ------------------------- Real Total a % of State 1 - 4 5+ Land Estate Loans (a) Portfolio - --------------- ------------ ----------- ---------- --------------- ------------ ----------- California $19,615,787 $3,369,019 $ 259 $ 65,584 $23,050,649 $ 70.35% Colorado 931,879 233,318 -0- 7,404 1,172,601 3.58 Illinois 985,939 182,522 -0- 1,857 1,170,318 3.57 Texas 1,052,319 106,486 579 1,602 1,160,986 3.54 New Jersey 992,647 409 -0- 7,155 1,000,211 3.05 Florida 917,033 17,829 143 976 935,981 2.86 Washington 397,289 341,335 -0- 765 739,389 2.26 Arizona 569,451 51,943 -0- 1,689 623,083 1.90 Virginia 474,620 7,884 -0- 1,498 484,002 1.48 Pennsylvania 452,421 4,273 -0- 3,780 460,474 1.41 Connecticut 379,277 -0- -0- 24 379,301 1.16 Maryland 310,800 1,396 -0- 561 312,757 0.95 Oregon 199,410 11,031 -0- 2,778 213,219 0.65 Nevada 173,693 1,148 -0- -0- 174,841 0.53 Kansas 140,487 4,951 -0- 198 145,636 0.44 Utah 134,296 61 -0- 1,841 136,198 0.42 Minnesota 118,120 5,135 -0- -0- 123,255 0.38 Wisconsin 87,158 4,183 -0- -0- 91,341 0.28 Missouri 68,924 6,697 -0- -0- 75,621 0.23 Massachusetts 52,479 -0- -0- 20 52,499 0.16 New York 50,257 -0- -0- 18 50,275 0.15 Washington, DC 39,633 -0- -0- -0- 39,633 0.12 Georgia 37,223 -0- -0- 1,864 39,087 0.12 New Mexico 31,705 -0- -0- -0- 31,705 0.10 Ohio 18,743 2,322 283 4,477 25,825 0.08 Idaho 23,298 -0- -0- -0- 23,298 0.07 Delaware 20,944 -0- -0- -0- 20,944 0.06 North Carolina 8,067 254 -0- 511 8,832 0.03 South Dakota 4,838 -0- -0- -0- 4,838 0.01 Other 12,874 18 -0- 4,698 17,590 0.06 ----------- ---------- --------- ----------- ----------- -------- Totals $28,301,611 $4,352,214 $ 1,264 $ 109,300 32,764,389 100.00% =========== ========== ========= =========== ======== SFAS 91 deferred loan fees (63,634) Loan discount on purchased loans (5,436) Undisbursed loan funds (4,913) Allowance for loan losses (178,354) Loans to facilitate (LTF) interest reserve (532) Troubled debt restructured (TDR) interest reserve (5,237) Loans on customer deposits 31,823 ----------- Total loan portfolio and loans securitized into FNMA MBS with recourse 32,538,106 Loans securitized into FNMA MBS with recourse (2,259,839)(b) ----------- Total loan portfolio $30,278,267 ===========
(a) The Company has no commercial loans. (b) Loans amounting to $2.6 billion were securitized with full recourse into Federal National Mortgage Association mortgage-backed securities during 1995 and 1996. The September 30, 1996 balances of these FNMA mortgage-backed securities are reflected in the amounts above.
TABLE 4 Loan Portfolio by State September 30, 1995 (Dollars in thousands) Residential Real Estate Commercial Loans as -------------------------- Real Total a % of State 1 - 4 5+ Land Estate Construction Loans (a) Portfolio - --------------- ------------ ----------- ------- ------------- ------------- ------------ ------------- California $18,869,206 $3,337,180 $ 277 $ 74,020 $ -0- $22,280,683 73.98% Colorado 818,258 207,409 -0- 7,841 -0- 1,033,508 3.43 Illinois 800,456 177,024 -0- 2,586 -0- 980,066 3.25 Texas 780,265 68,344 593 1,702 -0- 850,904 2.83 New Jersey 836,725 -0- -0- 8,440 2,214 847,379 2.81 Florida 654,941 -0- 247 1,424 -0- 656,612 2.18 Washington 347,367 299,209 -0- 796 -0- 647,372 2.15 Virginia 406,260 604 -0- 1,623 -0- 408,487 1.36 Arizona 353,127 40,271 -0- 1,745 -0- 395,143 1.31 Pennsylvania 369,861 -0- -0- 4,347 -0- 374,208 1.24 Connecticut 302,964 -0- -0- -0- -0- 302,964 1.01 Maryland 267,044 -0- -0- 610 -0- 267,654 0.89 Oregon 173,120 10,618 -0- 3,789 -0- 187,527 0.62 Nevada 155,791 1,250 -0- -0- -0- 157,041 0.52 Kansas 128,558 5,193 -0- 215 -0- 133,966 0.44 Utah 86,049 66 -0- 2,035 -0- 88,150 0.29 Missouri 65,305 7,138 -0- 77 -0- 72,520 0.24 Minnesota 70,001 -0- -0- -0- -0- 70,001 0.23 Wisconsin 50,876 4,218 -0- -0- -0- 55,094 0.18 New York 54,494 -0- -0- -0- -0- 54,494 0.18 Georgia 44,914 -0- -0- 1,974 -0- 46,888 0.16 Washington, DC 34,591 -0- -0- -0- -0- 34,591 0.11 Ohio 25,677 2,839 438 5,383 -0- 34,337 0.11 New Mexico 23,325 -0- -0- -0- -0- 23,325 0.08 Delaware 17,862 -0- -0- -0- -0- 17,862 0.06 Idaho 13,626 -0- -0- -0- -0- 13,626 0.05 North Carolina 9,060 351 -0- 3,026 -0- 12,437 0.04 Other 57,270 10,893 -0- 4,974 -0- 73,137 0.25 ----------- ---------- ------ -------- ------- ---------- ------ Totals $25,816,993 $4,172,607 $1,555 $126,607 $ 2,214 30,119,976 100.00% =========== ========== ====== ======== ======= ====== SFAS 91 deferred loan fees (80,366) Loan discount on purchased loans (6,770) Undisbursed loan funds (3,623) Allowance for loan losses (137,377) LTF interest reserve (512) TDR interest reserve (5,244) Loans on customer deposits 34,774 ------------ Total loan portfolio and loans securitized into FNMA MBS with recourse 29,920,858 Loans securitized into FNMA MBS with recourse (1,969,697)(b) ----------- Total loan portfolio $27,951,161 ===========
(a) The Company has no commercial loans. (b) Loans amounting to $2.0 billion were securitized with full recourse into FNMA mortgage-backed securities during the first nine months of 1995. The September 30, 1995 balances of these mortgage-backed securities are reflected in the amounts above. The Company continues to emphasize ARM 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 91% at September 30, 1996 compared to 90% at September 30, 1995, and December 31, 1995. The Company's ARM originations for the third quarter and first nine months of 1996 constituted approximately 95% and 89%, respectively, of new mortgage loans made in 1996 compared to 88% and 94% in the same periods of 1995. The weighted average maximum lifetime cap rate on the Company's ARM loan portfolio (including MBS with recourse) was 12.95%, or 5.72% above the actual weighted average rate at September 30, 1996, versus 13.16%, or 5.67% above the weighted average rate at September 30, 1995. Approximately $5.4 billion of the Company's loans (including MBS with recourse) have terms that state that the interest rate may not fall below a lifetime floor set at the time of origination. As of September 30, 1996, $665 million of these ARM loans had reached their rate floors. The weighted average floor rate on these loans was 7.75% at September 30, 1996 and 7.85% at September 30, 1995. Without the floor, the average yield on these loans would have been 7.08% at September 30, 1996 and 7.54% at September 30, 1995. Loan repayments consist of monthly loan amortization, loan payoffs, and refinances. For the three and nine months ended September 30, 1996, loan repayments were $753 million and $2.3 billion, respectively, compared to $664 million and $1.6 billion in the same periods of 1995. The increase in loan repayments was primarily due to higher mortgage payoffs and higher refinances within the portfolio as well as an increase in the portfolio balance. MORTGAGE SERVICING RIGHTS On January 1, 1996, the Company adopted 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 any financial institution participating in the secondary mortgage market 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 financial institutions participating in the secondary mortgage market should evaluate and measure impairment of capitalized mortgage servicing rights based on the fair value of those rights on a disaggregated basis. For the third quarter and first nine months of 1996, the Company recognized gains of $1.8 million and $8.8 million, respectively, on the sale of loans due to the capitalization of servicing rights under SFAS 122. After amortization, the balance at September 30, 1996 of the capitalized servicing rights was $7.9 million. ASSET QUALITY One measure of the soundness of the Company's portfolio is its ratio of nonperforming assets (NPAs) to total assets. Nonperforming assets includes non-accrual loans (loans that are 90 days or more past due) and real estate acquired through foreclosure. No interest is recognized on non-accrual loans. The Company's troubled debt restructured (TDRs) is made up of loans on which delinquent loan payments have been capitalized or on which temporary interest rate reductions have been made, primarily to customers negatively impacted by adverse economic conditions. The following table shows the components of the Company's nonperforming assets and TDRs, and the ratios to total assets.
TABLE 5 Nonperforming Assets and Troubled Debt Restructured (Dollars in thousands) September 30 -------------------------- December 31 1996 1995 1995 ----------- ------------ ------------ Non-accrual loans $ 362,817 $ 301,586 $ 314,086 Real estate acquired through foreclosure 81,563 70,727 75,158 Real estate in judgment 944 107 443 ---------- ----------- ----------- Total nonperforming assets $ 445,324 $ 372,420 $ 389,687 ========== =========== =========== TDRs $ 60,732 $ 56,493 $ 45,222 ========== =========== =========== Ratio of NPAs to total assets 1.20% 1.08% 1.11% ========== =========== =========== Ratio of TDRs to total assets .16% .16% .13% ========== =========== =========== Ratio of NPAs and TDRs to total assets 1.36% 1.24% 1.24% ========== =========== ===========
The increase in NPAs during 1996 reflects the continued weakness in the California housing market and increased bankruptcies nationwide. The Company continues to closely monitor all delinquencies and takes appropriate steps to protect its interests. Interest foregone on non-accrual loans is fully-reserved and amounted to $5 million and $15 million in the third quarter and first nine months of 1996 compared to $5 million and $14 million for the same periods of 1995. Interest foregone on TDRs amounted to $432 thousand and $1.2 million for the three and nine months ended September 30, 1996, compared to $482 thousand and $1.5 million for the three and nine months ended September 30, 1995. The tables on the following two pages show the Company's nonperforming assets by state at September 30, 1996 and 1995.
TABLE 6 Nonperforming Assets by State September 30, 1996 (Dollars in thousands) Non-Accrual Loans (a) Real Estate Owned ----------------------------------- -------------------------------------------- Residential Commercial Commercial NPAs as Real Estate Real Residential Real Total a % of State 1 -4 5+ Estate 1 - 4 5+ Land Estate NPAs(b) Loans - ----------- --------- ---------- --------- -------- -------- --------- --------- --------- -------- California $291,880 $ 18,711 $ 530 $63,792 $ 14,649 $ 475 $ 2,167 $392,204 1.70% Colorado 1,220 119 3,092 165 -0- -0- -0- 4,596 0.39 Illinois 4,726 191 -0- 227 281 -0- -0- 5,425 0.46 Texas 3,881 -0- -0- 102 -0- -0- -0- 3,983 0.34 New Jersey 11,955 -0- 791 1,393 -0- -0- -0- 14,139 1.41 Florida 3,903 -0- 269 430 -0- -0- -0- 4,602 0.49 Washington 1,470 -0- -0- -0- -0- -0- -0- 1,470 0.20 Arizona 776 -0- 1,096 -0- -0- -0- -0- 1,872 0.30 Virginia 1,224 -0- -0- 733 -0- -0- -0- 1,957 0.40 Pennsylvania 2,696 -0- -0- 48 -0- -0- -0- 2,744 0.60 Connecticut 2,936 -0- -0- 279 -0- -0- -0- 3,215 0.85 Maryland 1,596 -0- -0- -0- -0- -0- -0- 1,596 0.51 Oregon 850 -0- -0- -0- -0- -0- -0- 850 0.40 Nevada 1,000 -0- -0- -0- -0- -0- -0- 1,000 0.57 Kansas 720 40 -0- -0- -0- -0- -0- 760 0.52 Utah 294 -0- -0- -0- -0- -0- -0- 294 0.22 Minnesota 323 -0- -0- -0- -0- -0- -0- 323 0.26 Wisconsin -0- -0- -0- -0- -0- -0- -0- -0- 0.00 Missouri 849 106 -0- -0- -0- -0- -0- 955 1.26 Massachusetts -0- -0- -0- -0- -0- -0- -0- -0- 0.00 New York 3,926 -0- -0- -0- -0- -0- -0- 3,926 7.81 Washington, DC -0- -0- -0- -0- -0- -0- -0- -0- 0.00 Georgia 1,443 -0- -0- 73 -0- -0- -0- 1,516 3.88 New Mexico -0- -0- -0- -0- -0- -0- -0- -0- 0.00 Ohio 70 -0- 58 -0- -0- -0- -0- 128 0.50 Idaho -0- -0- -0- -0- -0- -0- -0- -0- 0.00 Delaware -0- -0- -0- -0- -0- -0- -0- -0- 0.00 North Carolina -0- -0- -0- -0- -0- -0- -0- -0- 0.00 South Dakota -0- -0- -0- -0- -0- -0- -0- -0- 0.00 Other 76 -0- -0- -0- -0- -0- -0- 76 0.43 --------- ---------- --------- -------- --------- --------- --------- --------- ----- Totals $337,814 $ 19,167 $ 5,836 $67,242 $14,930 $ 475 $2,167 447,631 1.37 ========= ========== ========= ======== ========= ========= ========= REO general valuation allowance (2,307) (0.01) -------- ----- Total nonperforming assets $445,324 1.36% ========= =====
(a) Non-accruals loans are 90 days or more past due and have no unpaid interest accrued. (b) Loans amounting to $2.6 billion were securitized with full recourse into FNMA mortgage-backed securities during 1995 and 1996. The September 30, 1996 balances of the related nonperforming assets are reflected in the amounts above.
TABLE 7 Nonperforming Assets by State September 30, 1995 (Dollars in thousands) Non-Accrual Loans (a) Real Estate Owned ----------------------------------- ----------------------------------- Residential Commercial Commercial NPAs as Real Estate Real Residential Real Total a % of State 1 -4 5+ Estate 1 - 4 5+ Estate NPAs(b) Loans - ----------- --------- ---------- --------- -------- -------- --------- --------- -------- California $251,455 $ 12,691 $ 413 $52,335 $12,650 $3,716 $333,260 1.50% Colorado 1,658 64 -0- 49 -0- -0- 1,771 0.17 Illinois 2,531 1,078 -0- 859 400 -0- 4,868 0.50 Texas 2,301 -0- -0- 307 -0- -0- 2,608 0.31 New Jersey 10,218 -0- 2 412 -0- -0- 10,632 1.25 Florida 2,678 -0- 84 234 -0- -0- 2,996 0.46 Washington 783 -0- -0- 335 -0- -0- 1,118 0.17 Virginia 2,044 -0- -0- 326 -0- -0- 2,370 0.58 Arizona 1,138 -0- -0- -0- -0- -0- 1,138 0.29 Pennsylvania 2,222 -0- -0- -0- -0- -0- 2,222 0.59 Connecticut 3,307 -0- -0- (90) -0- -0- 3,217 1.06 Maryland 405 -0- -0- 213 -0- -0- 618 0.23 Oregon 608 -0- -0- -0- -0- -0- 608 0.32 Nevada 557 -0- -0- 113 -0- -0- 670 0.43 Kansas 561 40 -0- 21 -0- -0- 622 0.46 Utah 122 -0- -0- -0- -0- -0- 122 0.14 Missouri 407 -0- -0- 32 -0- -0- 439 0.61 Minnesota -0- -0- -0- -0- -0- -0- -0- 0.00 Wisconsin -0- -0- -0- -0- -0- -0- -0- 0.00 New York 2,929 -0- -0- 724 -0- -0- 3,653 6.70 Georgia 1,046 -0- -0- -0- -0- -0- 1,046 2.23 Washington, DC -0- -0- -0- -0- -0- -0- -0- 0.00 Ohio -0- -0- 58 17 154 -0- 229 0.67 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 80 -0- -0- -0- -0- -0- 80 0.64 Other 105 -0- -0- -0- -0- -0- 105 0.14 -------- --------- -------- ------- -------- -------- -------- ---- Totals $287,156 $ 13,873 $ 557 $55,887 $ 13,204 $ 3,716 374,393 1.24 ======== ========= ======== ======= ======== ======== REO general valuation allowance (1,973) (0.00) -------- ----- Total nonperforming assets $372,420 1.24% ======== =====
(a) Non-accruals loans are 90 days or more past due and have no unpaid interest accrued. (b) Loans amounting to $2.0 billion were securitized with full recourse into FNMA mortgage-backed securities during the first nine months of 1995. The September 30, 1995 balance of the related nonperforming assets are reflected in the amounts above. The Company provides specific valuation allowances for losses on loans when impaired, including loans securitized into MBS with recourse or loans sold 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 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 three and nine months ended September 30, 1996 and 1995.
TABLE 8 Changes in Allowance for Loan Losses (Dollars in thousands) Three Months Ended Nine Months Ended September 30 September 30 -------------------------- ------------------------- 1996 1995 1996 1995 ----------- ------------ ----------- ----------- Beginning allowance for loan losses $ 163,846 $ 133,682 $ 141,988 $ 124,003 Provision charged to expense 23,498 14,622 59,256 44,052 Less loans charged off (9,167) (11,087) (23,398) (31,997) Add recoveries 177 160 508 1,319 ---------- ----------- ---------- --------- Ending allowance for loan losses $ 178,354 $ 137,377 $ 178,354 $ 137,377 ========== =========== ========== ========= Ratio of net charge-offs to average loans outstanding (including MBS with recourse) .11% .15% .10% .14% ========== =========== ========== ========= Ratio of allowance for loan losses to nonperforming assets 40.1% 36.9% ========== =========
CUSTOMER DEPOSITS Driven by effective, directed marketing efforts, customer deposits increased during the third quarter of 1996 by $544 million, including interest credited of $220 million, compared to a decrease of $178 million, including interest credited of $221 million, in the third quarter of 1995. Customer deposit balances in the first nine months of 1996 increased by $736 million, including interest credited of $644 million, compared to an increase of $1.3 billion, including interest credited of $627 million, during the first nine months of 1995. All of the 1995 growth occurred in the first half of the year and was attributed to increasing interest rates offered on savings accounts during those six months. The table below shows the Company's customer deposits by interest rate and by remaining maturity at September 30, 1996 and 1995.
TABLE 9 Customer Deposits (Dollars in millions) September 30 --------------------------------------------------- 1996 1995 ---------------------- ----------------------- Rate* Amount Rate* Amount -------- ---------- --------- ---------- Customer deposits by interest rate: Interest-bearing checking accounts 1.22 % $ 747 1.25% $ 733 Passbook accounts 2.22 549 2.23 583 Money market deposit accounts 3.06 1,095 3.14 1,379 Term certificate accounts with original maturities of: 4 weeks to 1 year 5.05 9,104 5.52 8,538 1 to 2 years 5.21 5,259 5.59 3,950 2 to 3 years 5.96 1,750 5.48 2,179 3 to 4 years 5.58 591 5.31 698 4 years and over 5.78 2,034 6.43 2,076 Retail jumbo CDs 5.31 453 5.76 420 All other 7.71 2 7.72 4 ---------- ---------- $ 21,584 $ 20,560 ========== ========== Customer deposits by remaining maturity: No contractual maturity $ 2,391 $ 2,695 Maturity within one year: 4th quarter 5,704 4,584 1st quarter 6,568 4,628 2nd quarter 2,857 3,689 3rd quarter 1,127 1,217 ---------- ---------- 16,256 14,118 1 to 2 years 1,763 2,095 2 to 3 years 772 752 3 to 4 years 232 601 4 years and over 170 299 ---------- ---------- $ 21,584 $ 20,560 ========== ==========
* Weighted average interest rate, including the impact of interest rate swaps. ADVANCES FROM FEDERAL HOME LOAN BANKS The Company uses borrowings from the FHLB, also known as "advances," to supplement cash flow and to provide funds for loan origination activities. FHLB advances amounted to $8.2 billion at September 30, 1996, compared to $6.0 billion and $6.4 billion at September 30, 1995, and December 31, 1995, 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, 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 $2.2 billion, $1.9 billion, and $1.8 billion at September 30, 1996 and 1995, and December 31, 1995, respectively. The $2.2 billion balance at September 30, 1996, included $750 million in Federal Home Loan Bank of San Francisco MBS Reverse Repos with maturities ranging from 1997 to 1998. In June 1996, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 125). SFAS 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Those standards are based on consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. In November 1996, the FASB issued an exposure draft which would delay the effective date for portions of SFAS 125 for one year. The impact of the exposure draft and SFAS 125 on the Company's financial condition and results of operations is not expected to be material. OTHER BORROWINGS At September 30, 1996, Golden West, at the holding company level, had a total of $1.1 billion of subordinated debt issued and outstanding. As of September 30, 1996, the Company's subordinated debt securities were rated A3 and A- by Moody's Investors Service (Moody's) and Standard & Poor's Corporation (S&P), respectively. At September 30, 1996, 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 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 September 30, 1996. World had medium-term notes outstanding under prior registrations with principal amounts of $690 million at September 30, 1996, compared to $1.9 billion at September 30, 1995, and $1.6 billion at December 31, 1995. As of September 30, 1996, World's medium-term notes were rated A1 and A+ by Moody's and S&P, respectively. World also has on file a registration statement with the OTS for the sale of up to $300 million of subordinated notes and, at September 30, 1996, the full amount was available for issuance. As of September 30, 1996, World 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's risk-based regulatory capital as Supplementary Capital. STOCKHOLDERS' EQUITY The Company's stockholders' equity decreased during the first nine months of 1996 as a result of the $94 million cost of the purchase of Company stock and the payment of $17 million in quarterly dividends to stockholders. The decrease was offset by net earnings for the first nine months of 1996 and a $7 million increase in market values of securities available for sale since December 31, 1995. The Company's stockholders' equity increased during the first nine months of 1995 as a result of retained earnings. Unrealized gains on securities and MBS available for sale included in stockholders' equity at September 30, 1996 and 1995, and December 31, 1995, were $83 million, $61 million, and $76 million, respectively. The Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) on January 1, 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 can 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 adopted only the disclosure requirements of SFAS 123; therefore such adoption has no effect on the Company's September 30, 1996 consolidated financial statements. 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 periodically reviews alternative uses of excess capital, including faster growth and acquisitions. At times, the Board has determined that the purchase of common stock is a wise use of excess capital. Since October 1993, through three separate actions, Golden West's Board of Directors has authorized the purchase by the Company of up to 12.2 million shares of Golden West's common stock. As of September 30, 1996, 7.6 million shares had been purchased and retired at a cost of $320 million since October 1993, of which 1.7 million were purchased and retired at a cost of $94 million during the first nine months of 1996. Dividends from World Savings are expected to continue to be the major source of funding for the stock repurchase program. The purchase of Golden West stock is not intended to have a material impact on the normal liquidity of the Company. World paid a $165 million dividend to Golden West in March 1996, a $165 million dividend in June 1996 and a $245 million dividend in September 1996 for a total of $575 million for the first nine months of 1996. In addition, World has received approval from the OTS to pay up to $255 million more in upstream dividends to Golden West. Also, during 1996, Golden West invested $175 million and $95 million in WFSB in June and in September, respectively. 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. REGULATORY CAPITAL The OTS requires federally insured institutions, such as World and WFSB, to meet certain minimum capital requirements. The adoption of SFAS 72 had no effect on World's or WFSB's regulatory capital ratios because goodwill is required to be deducted from regulatory capital. Both World's and WFSB's regulatory capital ratios continue to exceed regulatory requirements for well-capitalized institutions, the highest regulatory standard. The following table shows World's current regulatory capital ratios and compares them to the current OTS minimum requirements at September 30, 1996 and 1995.
TABLE 10 World Savings and Loan Association Regulatory Capital Ratios (Dollars in thousands) September 30, 1996 September 30, 1995 ------------------------------------------------ ------------------------------------------------ ACTUAL REQUIRED ACTUAL REQUIRED ----------------------- ----------------------- ---------------------- ----------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ----------- --------- ----------- --------- ----------- -------- ----------- --------- Tangible $1,541,519 6.47% $ 357,644 1.50% $2,123,471 6.54% $ 487,097 1.50% Core 1,541,519 6.47 715,288 3.00 2,123,471 6.54 974,194 3.00 Risk-based 1,866,220 14.19 1,052,051 8.00 2,441,239 13.61 1,434,813 8.00
The following table shows WFSB's current regulatory capital ratios and compares them to the current OTS minimum requirements at September 30, 1996 and 1995.
TABLE 11 World Savings Bank, a Federal Savings Bank Regulatory Capital Ratios (Dollars in thousands) September 30, 1996 September 30, 1995 ----------------------------------------------- ---------------------------------------------- ACTUAL REQUIRED ACTUAL REQUIRED ---------------------- ---------------------- ---------------------- --------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ----------- --------- ----------- --------- ---------- --------- ---------- -------- Tangible $ 876,490 6.83% $ 192,563 1.50% $ 211,297 19.44% $16,301 1.50% Core 876,490 6.83 385,125 3.00 211,297 19.44 32,603 3.00 Risk-based 901,307 12.68 568,592 8.00 212,965 35.14 48,479 8.00
In addition, institutions whose exposure to interest rate risk as determined by the OTS is deemed to be above normal may be required to hold additional risk-based capital. The OTS has determined that neither the Association nor WFSB has above-normal exposure to interest rate risk. The OTS has adopted rules based upon five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The determination of whether an association falls into a certain classification depends primarily on its capital ratios. The table below shows that World's regulatory capital exceeds the requirements of the well capitalized classification at September 30, 1996.
TABLE 12 World Savings and Loan Association Regulatory Capital Compared to Well Capitalized Classification (Dollars in thousands) ACTUAL WELL CAPITALIZED ----------------------- -------------------------- Capital Ratio Capital Ratio ----------- -------- ----------- ----------- Leverage $1,541,519 6.47% $1,192,146 5.00% Tier 1 risk-based 1,541,519 11.72 789,038 6.00 Total risk-based 1,866,220 14.19 1,315,063 10.00
The table below shows that WFSB's regulatory capital exceeds the requirements of the well capitalized classification at September 30, 1996.
TABLE 13 World Savings Bank, a Federal Savings Bank Regulatory Capital Compared to Well Capitalized Classification (Dollars in thousands) ACTUAL WELL CAPITALIZED ----------------------- -- -------------------------- Capital Ratio Capital Ratio ----------- -------- -- ----------- ----------- Leverage $ 876,490 6.83% $ 641,876 5.00% Tier 1 risk-based 876,490 12.33 426,444 6.00 Total risk-based 901,307 12.68 710,740 10.00
RESULTS OF OPERATIONS NET EARNINGS Net earnings for the quarter and nine months ended September 30, 1996, were significantly influenced by three nonrecurring items: the federally mandated recapitalization of the Savings Association Insurance Fund (SAIF) which resulted in a one-time charge of $132.6 million, or $1.34 per share on an after-tax basis at the end of the third quarter (See Deposit Insurance Section on page 31); the recognition during the third quarter of $139.5 million, or $2.40 per share of tax benefits arising from a prior year acquisition (see Taxes on Income section on page 32); and the third quarter adoption, retroactive to January 1, 1996, of SFAS 72 which resulted in the write-off of $205.2 million or $3.49 per share of goodwill during the first quarter of 1996. Reported net earnings for the third quarter and nine months ended September 30, 1996 were $135.8 million or $2.32 per share and $88.7 million or $1.52 per share, respectively. Without the effect of the three items, net earnings for the third quarter and nine months ended September 30, 1996 would have been $71.1 million or $1.23 per share and $223.1 million or $3.83 per share, respectively, compared to $63.4 million or $1.08 per share and $167.9 million or $2.86 per share for same periods in 1995. SPREADS An important determinant of the Company's earnings is its primary spread -- the difference between its yield on earning assets and its cost of funds. The table below shows the components of the Company's spread at September 30, 1996 and 1995, and December 31, 1995.
TABLE 14 Yield on Earning Assets, Cost of Funds, and Primary Spread, Including Effect of Purchase Accounting September 30 --------------------------- December 31 1996 1995 1995 --------- ----------- ----------- Yield on loan portfolio 7.42% 7.70% 7.69% Yield on MBS 7.18 7.49 7.41 Yield on investments 6.06 6.05 5.96 -------- ------ -------- Yield on earning assets 7.32 7.58 7.56 -------- ------ -------- Cost of customer deposits 4.95 5.22 5.15 Cost of borrowings 5.85 6.22 6.15 -------- ------ -------- Cost of funds 5.28 5.57 5.50 --------- ------ -------- Primary spread 2.04% 2.01% 2.06% ========= ====== ========
The Company's primary spread is, to some degree, dependent on changes in interest rates because the Company's liabilities tend to respond somewhat more rapidly to rate movements than its assets, which are primarily adjustable rate mortgages. 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). In general, the repricing of COFI ARM portfolios tends to lag liability interest rate changes because of certain loan features which restrain monthly adjustments and because the COFI tends to trail changes in liability costs due to the existence of a two-month reporting lag. Short term interest rates were generally declining during the second half of 1995 and early 1996 before stabilizing and remaining relatively flat through September. The effects of this interest rate environment led to a 22 basis point reduction in the Company's cost of funds and a 24 basis point reduction in the yield on earning assets during the first nine months of 1996, resulting in a 2 basis point decrease in the Company's spread since yearend 1995. The table below shows the Company's revenues and expenses as a percentage of total revenues for the three and nine months ended September 30, 1996 and 1995, in order to focus on the changes in interest income between years as well as changes in other revenue and expense amounts.
TABLE 15 Selected Revenue and Expense Items as Percentages of Total Revenues Three Months Ended Nine Months Ended September 30 September 30 ---------------------- ---------------------- 1996 1995 1996 1995 --------- --------- -------- --------- Interest on loans 83.4% 84.1 % 83.1 % 85.6% Interest on mortgage-backed securities 9.0 8.4 9.2 6.5 Interest and dividends on investments 4.9 5.9 4.9 6.2 --------- --------- -------- --------- 97.3 98.4 97.2 98.3 Less: Interest on customer deposits 39.8 42.7 40.0 42.9 Interest on advances and other borrowings 26.7 26.5 25.7 26.5 --------- --------- -------- --------- 66.5 69.2 65.7 69.4 Net interest income 30.8 29.2 31.5 28.9 Provision for loan losses 3.5 2.3 3.0 2.4 -------- -------- -------- -------- Net interest income after provision for loan 27.3 26.9 28.5 26.5 losses Add: Fees 1.4 1.2 1.4 1.1 Gain (loss) on the sale of securities, MBS, and loans 0.3 (0.1) 0.5 0.0 Other non-interest income 1.0 0.5 0.9 0.6 -------- -------- -------- -------- 2.7 1.6 2.8 1.7 Less: General and administrative expenses 31.8(a) 12.2 18.9 (a) 13.0 Amortization of goodwill 0.0 0.1 0.0 0.1 Taxes on income (22.2)(b) 6.3 (2.5)(b) 5.9 -------- -------- ------- -------- Earnings before cumulative effect of change in accounting for goodwill 20.4 9.9 14.9 9.2 Cumulative effect of change in accounting for goodwill 0.0 0.0 (10.4) 0.0 -------- -------- ------- -------- Net earnings 20.4% 9.9% 4.5% 9.2% ======== ======== ======= ========
(a) Without the effect of the one-time SAIF assessment (see Deposit Insurance section on page 31), general and administrative expenses as a percentage of total revenues would have been 11.8% and 12.2% for the three and nine months ended September 30, 1996, respectively. (b) Without the effect of the one-time SAIF assessment and the special tax credit (see Taxes on Income section on page 32), taxes on income as a percentage of total revenues would have been 7.0% and 7.4% for the three and nine months ended September 30, 1996, respectively. INTEREST RATE SWAPS AND CAPS The Company enters into interest rate swaps and, from time to time, 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. Interest rate swap and cap activity decreased net interest income by $2 million and $9 million for the three and nine months ended September 30, 1996, as compared to a decrease of $6 million and $24 million for the same periods in 1995. The following table summarizes the unrealized gains and losses for interest rate swaps and caps at September 30, 1996 and 1995.
TABLE 16 Schedule of Unrealized Gains and Losses on Interest Rate Swaps and Caps (Dollars in thousands) September 30, 1996 September 30, 1995 ---------------------------------------- ---------------------------------------- Net Net Unrealized Unrealized Unrealized Unrealized Unrealized Unrealized Gains Losses Gain (Loss) Gains Losses Gain (Loss) ------------ ------------ ------------- ------------ ------------ ------------ Interest rate caps $ -0- $ -0- $ -0- $ 84 $ -0- $ 84 Interest rate swaps 25,763 (42,980) (17,217) 27,998 (62,254) (34,256) ----------- ----------- ------------ ---------- ----------- ---------- Total $ 25,763 $ (42,980) $ (17,217) $ 28,082 $ (62,254) $ (34,172) =========== =========== ============ ========== =========== ==========
TABLE 17 Schedule of Interest Rate Swaps and Caps Activity (Notional amounts in millions) Nine Months Ended September 30, 1996 ----------------------------------------------------------------------- Receive Pay Forward Interest Fixed Fixed Basis Starting Rate Swaps Swaps Swaps(a) Swaps Caps ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1995 $ 3,221 $ 1,775 $ 43 $ 10 $ 225 Additions 905 -0- -0- -0- -0- Maturities (1,545) (270) (43) -0- (225) Terminations -0- -0- -0- -0- -0- Forward starting becoming effective -0- -0- -0- -0- -0- Other -0- -0- -0- -0- -0- ----------- --------- ---------- ---------- --------- Balance at September 30, 1996 $ 2,581 $ 1,505 $ -0- $ 10 $ -0- =========== ========= ========== ========== =========
(a) Receives based upon one index, pays based upon another index. The range of floating interest rates received on swap contracts in the first nine months of 1996 was 5.14% to 6.02%, and the range of floating interest rates paid on swap contracts was 4.81% to 6.06%. The range of fixed interest rates received on swap contracts in the first nine months of 1996 was 4.61% to 9.68% and the range of fixed interest rates paid on swap contracts was 5.38% to 9.14%. INTEREST ON LOANS In the third quarter of 1996, interest on loans was higher than in the comparable 1995 period by $14 million or 2.6%. The increase in the third quarter of 1996 was due to a $1.8 billion increase in the average portfolio balance which was partially offset by a 27 basis point decrease in the average portfolio yield. For the first nine months of 1996, interest on loans was higher than the comparable 1995 period by $80 million or 5.2%. The increase was due to a $1.1 billion increase in the average portfolio balance and a ten basis point increase in the average portfolio yield. INTEREST ON MORTGAGE-BACKED SECURITIES In the third quarter of 1996, interest on mortgage-backed securities was higher than in the comparable 1995 period by $6 million or 10.9%. The third quarter increase was due primarily to a $477 million increase in the average portfolio balance, which was partially offset by a 37 basis point decrease in the average portfolio yield. For the first nine months of 1996, interest on mortgage-backed securities was higher than in the comparable 1995 period by $64 million or 54.4% due to a $1.3 billion increase in the average portfolio which was partially offset by a 41 basis point decrease in the average portfolio yield. The increase in the mortgage-backed securities portfolio, and the lower average portfolio yield were primarily the result of the securitization of adjustable-rate loans with full credit recourse that began in 1995, as discussed on page 12. INTEREST AND DIVIDENDS ON INVESTMENTS The income earned on the investment portfolio fluctuates, depending upon the volume outstanding and the yields available on short-term investments. For the third quarter of 1996, interest and dividends on investments were $5 million or 13.7% lower than for the same period in 1995. The decrease was primarily due to a 15 basis point decrease in the average portfolio yield and a $447 million decrease in the average portfolio balance. For the first nine months of 1996, interest and dividends on investments was $16 million or 14.4% lower than for the same period in 1995. The decrease was primarily due to a $511 million decrease in the average portfolio balance and a 19 basis point decrease in the average portfolio yield. INTEREST ON CUSTOMER DEPOSITS In the third quarter of 1996, interest on customer deposits decreased by $10 million or 3.5% from the comparable period in 1995. In the first nine months of 1996, interest on customer deposits increased by $8 million or 1.0% from the comparable period of 1995. The third quarter decrease was due to a 35 basis point decrease in the average cost of deposits which was offset by a $705 million increase in the average deposit balance. The nine month increase was primarily due to a $765 million increase in the average balance of deposits which was offset by a 16 basis point decrease in the average cost of deposits. INTEREST ON ADVANCES AND OTHER BORROWINGS For the third quarter and first nine months of 1996, interest on advances and other borrowings increased by $7 million or 4.0% and $25 million or 5.2%, respectively, from the comparable periods of 1995. The third quarter increase was primarily due to a $1.1 billion increase in the average balance, which was partially offset by a 36 basis point decrease in the average cost of these borrowings. The nine month increase was primarily due to a $948 million increase in the average balance which was offset by a 28 basis point decrease in the average cost of these borrowings. PROVISION FOR LOAN LOSSES The provision for loan losses was $23 million and $59 million, respectively, for the three and nine months ended September 30, 1996, compared to $14.6 million and $44.1 million for the same periods in 1995. The higher provision in 1996 reflects the increase in non-accrual loans. GENERAL AND ADMINISTRATIVE EXPENSES For the third quarter and first nine months of 1996, general and administrative expenses (G&A) increased by $133 million or 169.2% and $138 million or 58.5%, respectively, from the comparable periods in 1995. The primary reason for the increase in 1996 was the $132.6 million Savings Association Insurance Fund (SAIF) assessment accrued in September 1996 (See Deposit Insurance section below). Without the effect of the one-time SAIF assessment, G&A as a percentage of average assets on an annualized basis was .87% and .90% for the third quarter and first nine months of 1996, respectively, compared to .91% and .93% for the same periods in 1995. Including the effect of the one-time SAIF assessment, G&A as a percentage of average assets on an annualized basis was 2.34% and 1.40% for the third quarter and first nine months of 1996, respectively. DEPOSIT INSURANCE On September 30, 1996, Congress passed and President Clinton signed legislation to capitalize the Savings Association Insurance Fund in order to bring it into parity with the FDIC's other insurance fund, the Bank Insurance Fund (BIF). The new banking law requires members to pay a levy of $4.7 billion to bring SAIF up to the required reserve level of 1.25% of insured deposits, but lowers savings and loan deposit insurance premiums starting in 1997. As a result of this legislation, Golden West's subsidiary, World Savings and Loan Association, incurred a one-time charge of $132.6 million at the end of the third quarter. Beginning on January 1, 1997, the premium paid by the Association to the FDIC will be reduced from $2.30 per $1,000 in savings balances to $.64 per $1,000. Beginning on January 1, 1997, the premiums paid by BIF insured institutions, such as WFSB, will be increased from $0.00 per $1,000 in savings balances to $.13 per $1,000. CHANGE IN ACCOUNTING FOR GOODWILL During the third quarter of 1996, the Company adopted SFAS 72, effective January 1, 1996, for goodwill related to acquisitions made prior to September 30, 1982. SFAS 72 requires, among other things, that to the extent the fair value of liabilities assumed exceeds the fair value of assets resulting from the acquisition of banking or thrift institutions initiated after September 30, 1982, the resulting goodwill recognized shall be amortized over a period no longer than the estimated remaining life of the acquired long-term interest-earning assets. The adoption of SFAS 72 for goodwill related to acquisitions of banking or thrift institutions prior to September 30, 1982, is permitted but not required. As a result, the Company wrote-off goodwill totaling $205.2 million as the cumulative effect of the change in accounting for goodwill and restated its financial statements for the first and second quarters of 1996. Results from periods prior to 1996 have not been restated. The Company has been accounting for acquisitions initiated subsequent to September 30, 1982 in accordance with SFAS 72. With the adoption of SFAS 72 and the resulting reduction in the balance of goodwill, there was no amortization of goodwill for the third quarter and first nine months of 1996. The remaining goodwill from acquisitions subsequent to 1982 amounting to less than .2% of total assets is not material and has been reclassified to other assets. Goodwill amortization for the third quarter and first nine months of 1995 was $527 thousand and $2.4 million, respectively. TAXES ON INCOME The Company utilizes the accrual method of accounting for income tax purposes and for preparing its published financial statements. For financial reporting purposes only, the Company uses purchase accounting in connection with certain assets acquired through mergers. The purchase accounting portion of income is not subject to tax. During the third quarter of 1996, the Company recognized $139.5 million of tax benefits associated with the Company's acquisition of Beach Federal Savings and Loan Association (Beach). Specifically, in December 1988, Golden West entered into a government approved transaction with Beach to provide management services to that institution. As part of the agreement, Golden West obtained an option to take title to the stock of Beach and subsequently exercised this right in July 1991. When Golden West took title to the stock, the Company disclosed that tax benefits were anticipated from operating losses which had been accumulated at Beach's predecessor institution up to the time of the 1988 agreement, although the availability and the amount of these benefits were uncertain. The availability of the $139.5 million of tax benefits was confirmed in the third quarter of 1996. Taxes as a percentage of earnings before the cumulative effect of the change in accounting for goodwill, the one-time SAIF assessment and excluding the aforementioned $139.5 million in tax benefits, were 39.4% and 39.5% for the third quarter and first nine months of 1996, respectively, compared to 39.2% and 39.0% for the same periods a year ago. LIQUIDITY AND CAPITAL RESOURCES World's principal sources of funds are cash flows generated from earnings; customer deposits; loan repayments; borrowings from the FHLB; issuance of medium-term notes; and debt collateralized by mortgages, MBS, or securities. In addition, World has a number of other alternatives available to provide liquidity or finance operations. These include borrowings from its parent, 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 may borrow from the Federal Reserve Bank of San Francisco to meet short-term cash needs. The availability of these funds will vary depending upon policies of the FHLB, the Federal Reserve Bank of San Francisco, and the Federal Reserve Board. For a discussion of World's liquidity positions at September 30, 1996, and 1995, and December 31, 1995, see the cash and investments section on page 12. WFSB's principal sources of funds are cash flows generated from earnings; customer deposits; loan repayments; borrowings from the FHLB; investments and borrowings from its parent; and debt collateralized by mortgages or securities. In addition, WFSB has other alternatives available to provide liquidity or finance operations including sales of loans. For a discussion of WFSB's liquidity positions at September 30, 1996, and 1995, and December 31, 1995, see the cash and investments section on page 12. The principal sources of funds for Golden West (the Parent) 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 World 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 Golden West stock (see stockholders' equity section on page 23), and general and administrative expenses. At September 30, 1996 and 1995, and December 31, 1995, Golden West's total cash and investments amounted to $910 million (including a $600 million short-term loan to World and a $1.5 million short-term loan to World Savings Bank, a State Savings Bank), $802 million, and $719 million, respectively. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 11 - Statement of Computation of Earnings Per Share 27 - Financial Data Schedule SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GOLDEN WEST FINANCIAL CORPORATION Dated: November 13, 1996 /s/ J. L. Helvey ------------------------------------ J. L. Helvey Executive Vice President (duly authorized and principal financial officer) EXHIBIT 11 Golden West Financial Corporation Statement of Computation of Earnings Per Share (Dollars in thousands except per share figures)
Three Months Ended Nine Months Ended September 30 September 30 ----------------------------- ---------------------------- 1996 1995 1996 1995 ------------- ------------- ------------- ------------ Earnings Before Cumulative Effect of Change in Accounting for Goodwill $ 135,785 $ 63,381 $ 293,963 $ 167,875 Cumulative Effect of Change in Accounting for Goodwill -0- -0- (205,242) -0- ----------- ---------- ---------- ----------- Net Earnings $ 135,785 $ 63,381 $ 88,721 $ 167,875 =========== ========== ========== =========== Average Number of Common Shares Outstanding 57,584,306 58,681,021 58,216,474 58,637,427 ============ ========== ========== =========== Earnings Per Share Before Cumulative Effect of Change in Accounting for Goodwill $ 2.32 $ 1.08 $ 5.01 $ 2.86 Cumulative Effect of Change in Accounting for Goodwill 0.00 0.00 (3.49) 0.00 ------------ ------------ ------------ ----------- Earnings Per Common Share $ 2.32 $ 1.08 $ 1.52 $ 2.86 ============ ============ ============ ===========
EX-27 2
9 9-MOS DEC-31-1995 SEP-30-1996 130,467 0 581,002 0 1,108,715 2,853,846 2,850,722 30,278,267 178,354 37,011,423 21,584,365 3,664,269 756,846 8,735,799 0 0 5,738 2,264,406 37,011,423 1,637,733 96,723 181,416 1,915,872 787,727 1,294,763 621,109 59,256 0 372,542 245,337 245,337 0 (205,242) 88,721 1.52 1.52 7.32 362,817 0 60,732 0 141,988 23,398 508 178,354 178,354 0 0
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