-----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, DH5VpKEhdLyIXFUTIKyvdO5OkZnOtrJO6osdaD3R1+qJv272fmzDopK6R8D/QeZf C2XvyG/v4gC0ctfdVT+38g== 0000042293-97-000003.txt : 19971113 0000042293-97-000003.hdr.sgml : 19971113 ACCESSION NUMBER: 0000042293-97-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 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: SEC FILE NUMBER: 001-04629 FILM NUMBER: 97716994 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, 1997 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, 1997, was 56,803,844 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, 1997 and 1996 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, 1997, 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 --------------------------- December 31 1997 1996 1996 ------------- ------------ ------------- Assets: Cash $ 140,898 $ 130,467 $ 218,719 Securities available for sale at fair value 586,401 650,927 781,325 Other investments at cost 436,404 1,350,002 1,078,832 Mortgage-backed securities available for sale without recourse at 197,121 237,176 227,466 fair value Mortgage-backed securities available for sale with recourse at fair value -0- 220,612 -0- Mortgage-backed securities held to maturity without recourse at cost 749,913 814,619 800,692 Mortgage-backed securities held to maturity with recourse at cost 2,974,764 2,039,227 3,265,424 Loans receivable 32,723,212 30,278,267 30,113,421 Interest earned but uncollected 211,653 218,366 221,604 Investment in capital stock of Federal Home Loan Bank--at cost which approximates fair value 580,861 480,468 500,105 Real estate held for sale or investment 67,074 83,074 83,052 Prepaid expenses and other assets 329,545 297,917 226,054 Premises and equipment--at cost less accumulated depreciation 230,513 210,301 213,904 ------------- ------------ ------------- $ 39,228,359 $37,011,423 $37,730,598 ============= ============ ============= Liabilities and Stockholders' Equity: Deposits $ 24,234,947 $21,584,365 $22,099,934 Advances from Federal Home Loan Bank 7,228,765 8,159,240 8,798,433 Securities sold under agreements to repurchase 2,890,918 2,227,481 1,908,126 Medium-term notes 309,969 689,755 589,845 Accounts payable and accrued expenses 527,992 593,594 452,182 Taxes on income 250,407 163,252 207,605 Subordinated notes--net of discount 1,210,141 1,323,592 1,323,996 Stockholders' equity 2,575,220 2,270,144 2,350,477 ------------- ------------ ------------- $ 39,228,359 $37,011,423 $37,730,598 ============= ============ =============
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 ------------------------------ ------------------------------ 1997 1996 1997 1996 ------------ ------------- ------------ ------------- Interest Income: Interest on loans $ 610,177 $ 554,245 $ 1,758,899 $ 1,637,733 Interest on mortgage-backed securities 70,611 59,882 217,913 181,416 Interest and dividends on investments 37,414 32,460 105,908 96,723 ------------ ------------- ------------ ------------- 718,202 646,587 2,082,720 1,915,872 Interest Expense: Interest on deposits 314,895 264,445 889,337 787,727 Interest on advances 103,005 107,803 323,394 289,476 Interest on repurchase agreements 43,371 31,054 111,739 93,408 Interest on other borrowings 34,786 38,338 100,833 124,152 ------------ ------------- ------------ ------------- 496,057 441,640 1,425,303 1,294,763 ------------ ------------- ------------ ------------- Net Interest Income 222,145 204,947 657,417 621,109 Provision for loan losses 9,980 23,498 43,786 59,256 ------------ ------------- ------------ ------------- Net Interest Income after Provision for Loan Losses 212,165 181,449 613,631 561,853 Non-Interest Income: Fees 11,574 9,504 33,609 27,872 Gain on the sale of securities, MBS, and loans 1,884 1,952 6,168 9,783 Other 6,962 6,220 19,685 18,371 ------------ ------------- ------------ ------------- 20,420 17,676 59,462 56,026 Non-Interest Expense: General and administrative: Personnel 45,198 40,146 133,190 119,273 Occupancy 14,008 12,702 40,804 37,267 Deposit insurance (a) 1,786 140,949 5,769 162,298 Advertising 3,445 1,954 8,205 6,711 Other 18,797 15,531 53,063 46,993 ------------ ------------- ------------ ------------- 83,234 211,282 241,031 372,542 Earnings (Loss) Before Taxes on Income and Cumulative Effect of Change in Accounting 149,351 (12,157) 432,062 245,337 Taxes on Income (b) 59,344 (147,942) 171,404 (48,626) ------------ ------------- ------------ ------------- Earnings Before Cumulative Effect of Change in Accounting for Goodwill 90,007 135,785 260,658 293,963 Cumulative Effect of Change in Accounting for Goodwill (c) -0- -0- -0- (205,242) ------------ ------------- ----------- ------------- Net Earnings $ 90,007 $ 135,785 $ 260,658 $ 88,721 ============ ============= =========== ============= Earnings Per Share: Earnings Per Share Before Cumulative Effect of Change in Accounting for Goodwill $ 1.58 $ 2.32 $ 4.57 $ 5.01 Cumulative Effect of Change in Accounting for Goodwill (c) 0.00 0.00 0.00 (3.49) ------------ ------------- ----------- ------------ Net Earnings Per Share $ 1.58 $ 2.32 $ 4.57 $ 1.52 ============ ============= ============ =============
(a) The amounts for 1996 reflect the one-time SAIF assessment of $133 million. (b) The amounts for 1996 reflect a tax benefit of $139 million arising from a prior year acquisition. (c) In September 1996, the Company adopted SFAS 72 effective January 1, 1996 for acquisitions prior to September 30, 1982. As a result, the Company wrote off $205 million as the cumulative effect of the change in accounting for goodwill.
Golden West Financial Corporation Consolidated Statement of Cash Flows (Unaudited) (Dollars in thousands) Three Months Ended Nine Months Ended September 30 September 30 --------------------------- ---------------------------- 1997 1996 1997 1996 ------------ ------------ ------------ ------------- Cash Flows From Operating Activities: Net earnings $ 90,007 $ 135,785 $ 260,658 $ 88,721 Adjustments to reconcile net earnings to net cash provided by operatingctivities: Provision for loan losses 9,980 23,498 43,786 59,256 Cumulative effect of the change in accounting for goodwill -0- -0- -0- 205,242 Amortization of loan fees and discounts (4,282) (5,412) (13,533) (18,093) Depreciation and amortization 5,263 4,884 15,570 14,512 Loans originated for sale (47,591) (72,354) (146,342) (407,606) Sales of loans originated for sale 44,482 73,715 142,786 408,594 Decrease in interest earned but uncollected 5,656 6,198 9,951 7,029 Federal Home Loan Bank stock dividends (9,145) (6,217) (33,463) (20,701) Decrease (increase) in prepaid expenses and other assets 26,917 7,684 (94,545) (136,688) Increase in accounts payable and accrued expenses 42,187 80,576 75,810 142,780 Increase (decrease) in taxes on income 138 (197,773) 25,007 (198,759) Other, net (874) (4,672) (8,744) (11,987) ------------ ------------ ------------ ------------- Net cash provided by operating activities 162,738 45,912 276,941 132,300 Cash Flows From Investing Activities: New loan activity: New real estate loans originated for portfolio (1,932,509) (2,034,022) (5,383,485) (4,791,836) Real estate loans purchased (670) (1,934) (1,930) (4,009) Other, net (13,172) (9,559) (36,291) (15,074) ------------ ------------ ------------ ------------- (1,946,351) (2,045,515) (5,421,706) (4,810,919) Real estate loan principal payments: Monthly payments 174,060 161,679 508,619 451,541 Payoffs, net of foreclosures 744,387 528,889 1,932,070 1,651,319 Refinances 76,929 62,114 204,535 202,411 ------------ ------------ ------------ ------------- 995,376 752,682 2,645,224 2,305,271 Purchases of mortgage-backed securities held to maturity -0- (4) -0- (1,522) Repayments of mortgage-backed securities 131,174 100,527 369,760 320,465 Proceeds from sales of real estate 58,487 50,371 171,803 148,349 Purchases of securities available for sale (110) (344,476) (1,297) (674,721) Sales of securities available for sale 4,381 -0- 5,342 81,133 Matured securities available for sale 13,994 207,393 238,047 862,264 Decrease (increase) in other investments 608,352 (139,862) 642,428 (159,842) Purchases of Federal Home Loan Bank stock -0- (115,256) (56,239) (152,355) Redemptions of Federal Home Loan Bank stock -0- 37,649 -0- 37,649 Additions to premises and equipment (14,612) (7,216) (37,744) (21,722) ------------ ------------ ------------ ------------- Net cash used in investing activities (149,309) (1,503,707) (1,444,382) (2,065,950)
Golden West Financial Corporation Consolidated Statement of Cash Flows (Continued) (Unaudited) (Dollars in thousands) Three Months Ended Nine Months Ended September 30 September 30 --------------------------- --------------------------- 1997 1996 1997 1996 ------------ ------------ ------------ ------------- Cash Flows From Financing Activities: Deposit activity: Increase (decrease) in deposits, net $ (46,244) $ 324,260 $1,426,904 $ 92,604 Interest credited 244,531 219,507 708,109 643,851 ------------ ------------ ------------ ------------- 198,287 543,767 2,135,013 736,455 Additions to Federal Home Loan Bank advances 511,750 1,117,600 555,950 1,881,050 Repayments of Federal Home Loan Bank advances (642,070) (134,025) (2,125,759) (169,302) Proceeds from agreements to repurchase securities 2,553,903 1,974,262 4,990,396 3,989,933 Repayments of agreements to repurchase securities (2,617,206) (2,064,039) (4,007,604) (3,580,395) Repayments of medium-term notes -0- -0- (280,000) (908,135) Proceeds from federal funds purchased 7,808,000 -0- 7,808,000 1,250,000 Repayments of federal funds purchased (7,808,000) -0- (7,808,000) (1,250,000) Repayment of subordinated debt -0- -0- (115,000) -0- Dividends on common stock (6,241) (5,496) (18,795) (16,591) Sale of stock 1,441 1,665 3,770 6,110 Purchase and retirement of Company stock (3,062) (35,196) (48,351) (93,703) ------------ ------------- ------------ ------------ Net cash provided by (used in) financing activities (3,198) 1,398,538 1,089,620 1,845,422 ------------ ------------ ------------ ------------- Net Increase (Decrease) in Cash 10,231 (59,257) (77,821) (88,228) Cash at beginning of period 130,667 189,724 218,719 218,695 ------------ ------------ ------------ ------------- Cash at end of period $ 140,898 $ 130,467 $ 140,898 $ 130,467 ============ ============ ============ ============= Supplemental cash flow information: Cash paid for: Interest $ 492,562 $ 476,400 $1,421,204 $ 1,342,224 Income taxes 59,206 49,832 147,720 155,410 Cash received for interest and dividends 723,858 652,785 2,092,671 1,922,901 Noncash investing activities: Loans transferred to foreclosed real estate 51,472 64,061 156,198 163,050 Loans securitized into MBS with recourse -0- -0- -0- 226,210
Golden West Financial Corporation Consolidated Statement of Stockholders' Equity (Unaudited) (Dollars in thousands) Nine Months Ended September 30 --------------------------- 1997 1996 ------------ ------------ Common Stock: Balance at January 1 $ 5,734 $ 5,887 Common stock issued upon exercise of stock options 16 25 Common stock retired upon purchase of stock (73) (174) ------------ ------------ Balance at September 30 5,677 5,738 ------------ ------------ Paid-in Capital: Balance at January 1 67,953 55,353 Common stock issued upon exercise of stock options 3,754 6,085 ------------ ------------ Balance at September 30 71,707 61,438 ------------ ------------ Retained Earnings: Balance at January 1 2,177,098 2,140,883 Net earnings 260,658 88,721 Cash dividends on common stock (18,795) (16,591) Retirement of stock (48,278) (93,529) ------------ ------------ Balance at September 30 2,370,683 2,119,484 ------------ ------------ Unrealized Gains on Securities Available for Sale: Balance at January 1 99,692 76,230 Change during period 27,461 7,254 ------------ ------------ Balance at September 30 127,153 83,484 ------------ ------------ Total Stockholders' Equity at September 30 $ 2,575,220 $ 2,270,144 ============ ============
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, 1996, as well as certain material changes in results of operations during the three and nine month periods ended September 30, 1997, and 1996, respectively. The following narrative is written with the presumption that the users have read or have access to the Company's 1996 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, 1996, and for the year then ended. Therefore, only material changes in financial condition and results of operations are discussed herein. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130), which requires that an enterprise report, by major components and as a single total, the change in its net assets during the period from nonowner sources; and No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131), which establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas, and major customers. Adoption of these statements will not impact the Company's consolidated financial position, results of operations or cash flows, and any effect will be limited to the form and content of its disclosures. The Company operates as a single segment and, therefore, SFAS 131 is expected to have no effect on the Company's financial statements. Both statements are effective for fiscal years beginning after December 15, 1997, with earlier application permitted. CHANGE IN ACCOUNTING FOR GOODWILL 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. Up until 1996, the Company had applied SFAS 72 only to acquisitions made after September 30, 1982. 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. SFAS 72 requires, among other things, that goodwill be amortized over a period no longer than the estimated remaining life of the acquired long-term interest-earning assets. As a result, the Company wrote off goodwill totaling $205 million during 1996 as the cumulative effect of the change in accounting for goodwill. 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. The minor amount of continuing goodwill amortization no longer warrants a separate line item on the Company's Consolidated Statement of Net Earnings and, therefore, for 1997 and 1996, has been included in other income. The adoption of SFAS 72 previously noted resulted in the restatement of earnings previously reported for the first and second quarters of 1996. The restatement included a first quarter charge of $3.49 per share for the cumulative effect of change in accounting for goodwill and a credit of $.05 per share and $.14 per share of goodwill amortization for the third quarter and first nine months of 1996, respectively. For the three and nine months ended September 30, 1996, earnings before the cumulative effect of the change in accounting for goodwill were $2.32 per share and $5.01 per share, respectively.
Golden West Financial Corporation Financial Highlights (Unaudited) (Dollars in thousands except per share figures) September 30 September 30 December 31 1997 1996 1996 ------------- ------------ ------------- Assets $ 39,228,359 $37,011,423 $ 37,730,598 Loans receivable 32,723,212 30,278,267 30,113,421 Mortgage-backed securities 3,921,798 3,311,634 4,293,582 Deposits 24,234,947 21,584,365 22,099,934 Stockholders' equity 2,575,220 2,270,144 2,350,477 Stockholders' equity/total assets 6.56% 6.13% 6.23% Book value per common share $ 45.36 $ 39.57 $ 40.99 Common shares outstanding 56,770,444 57,375,909 57,342,389 Yield on loan portfolio 7.47% 7.42% 7.43% Yield on mortgage-backed securities 7.15% 7.18% 7.13% Yield on investments 6.61% 6.06% 6.88% Yield on earning assets 7.42% 7.32% 7.37% Cost of deposits 5.08% 4.95% 4.98% Cost of borrowings 5.98% 5.85% 5.80% Cost of funds 5.37% 5.28% 5.28% Yield on earning assets less cost of funds 2.05% 2.04% 2.09% Ratio of nonperforming assets to total assets 1.05% 1.20% 1.21% Ratio of troubled debt restructured to total assets .13% .16% .22% World Savings and Loan Association: Total assets $ 17,116,425 $23,883,202 $21,040,890 Net worth 1,196,534 1,623,564 1,427,914 Net worth/total assets 6.99% 6.80% 6.79% Regulatory capital ratios: Tangible capital 6.34% 6.47% 6.37% Core capital 6.34% 6.47% 6.37% Risk-based capital 13.83% 14.19% 13.91% World Savings Bank, a Federal Savings Bank: Total assets $ 21,734,516 $12,830,891 $16,929,859 Net worth 1,489,373 880,253 1,136,717 Net worth/total assets 6.85% 6.86% 6.71% Regulatory capital ratios: Tangible capital 6.83% 6.83% 6.69% Core capital 6.83% 6.83% 6.69% Risk-based capital 13.30% 12.68% 13.14%
Golden West Financial Corporation Financial Highlights (Unaudited) (Dollars in thousands except per share figures) Three Months Ended Nine Months Ended September 30 September 30 -------------------------- -------------------------- 1997 1996 1997 1996 ------------ ----------- ------------ ----------- New real estate loans originated $ 1,980,100 $2,106,376 $5,529,827 $5,199,442 Average yield on new real estate loans 7.63% 7.54% 7.56% 7.61% Increase in deposits (a) $ 198,287 $ 543,767 $2,135,013 $ 736,455 Earnings excluding 1996 nonrecurring items (b) 90,007 74,208 260,658 232,386 Earnings before cumulative effect of change in accounting for goodwill 90,007 135,785 260,658 293,963 Net earnings 90,007 135,785 260,658 88,721 Earnings per share excluding 1996 nonrecurring items (b) 1.58 1.29 4.57 3.99 Earnings per share before cumulative effect of change in accounting for goodwill 1.58 2.32 4.57 5.01 Net earnings per share 1.58 2.32 4.57 1.52 Cash dividends on common stock .11 .095 .33 .285 Average common shares outstanding 56,740,342 57,584,306 56,980,399 58,216,474 Ratios:(c) Net earnings/average net worth (ROE) (d) 14.23% 24.71% 14.14% 5.45% Net earnings/average assets (ROA) (d) .92% 1.50% .90% .33% Net interest income/average assets 2.26% 2.27% 2.27% 2.34% General and administrative expense/average assets (G&A to Average Assets) (d) .85% 2.34% .83% 1.40%
(a) Includes a decrease of $208 million of wholesale deposits for the quarter ended September 30, 1997 and an increase of $864 million of wholesale deposits for the nine months ended September 30, 1997. (b) Excludes the third quarter 1996 SAIF assessment of $133 million (pre-tax), or $1.34 per share, and the special tax credit of $139 million, or $2.40 per share. Also excluded is the $205 million, or $3.49 per share, cumulative effect of the change in accounting for goodwill, which was effective January 1, 1996. (c) Ratios are annualized by multiplying the quarterly computation by four and the nine month computation by one and one-third. Averages are computed by adding the beginning balance and each monthend balance during the quarter and nine-month period and dividing by four and ten, respectively. (d) The ratios for the quarter and nine months ended September 30, 1996 include the three 1996 nonrecurring items in footnote (b) above. The ratios for the quarter ended September 30, 1996, excluding the two nonrecurring items are: ROE 13.50%; ROA .82%; and G&A to Average Assets .87%. The year-to-date ratios as of September 30, 1996, excluding the three nonrecurring items are: ROE 14.27%; ROA .87%; 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, 1997 and 1996, and December 31, 1996. The reader is referred to page 51 of the Company's 1996 Form 10-K for similar information for the years 1993 through 1996 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 1997 1996 1996 ------- ------- ------------- Assets: Cash and investments 3.0% 5.8% 5.5% Mortgage-backed securities 10.0 8.9 11.4 Loans receivable 83.4 81.8 79.8 Other assets 3.6 3.5 3.3 ------- ------- ------- 100.0% 100.0% 100.0% ======= ======= ======= Liabilities and Stockholders' Equity: Deposits 61.8% 58.3% 58.6% Federal Home Loan Bank advances 18.4 22.0 23.3 Securities sold under agreements to repurchase 7.4 6.0 5.1 Medium-term notes 0.8 1.9 1.6 Other liabilities 1.9 2.1 1.7 Subordinated debt 3.1 3.6 3.5 Stockholders' equity 6.6 6.1 6.2 ------- ------- ------- 100.0% 100.0% 100.0% ======= ======= =======
As the above table shows, 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 following gap table shows that, as of September 30, 1997, 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 lags 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. In addition, because COFI is based on a portfolio of accounts, not all of which mature or reprice immediately, COFI does not initially reflect a change in market interest rates. Consequently, when the interest rate environment changes, the COFI lags cause 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 lags, other elements of ARM loans also have an impact on earnings. These elements are introductory rates on new ARM loans, the interest rate adjustment frequency of ARM loans, interest rate limits on individual rate changes, and interest rate floors.
TABLE 2 Repricing of Interest-Earning Assets and Interest-Bearing Liabilities, Repricing Gaps, and Gap Ratio As of September 30, 1997 (Dollars in millions) Projected Repricing(a) ---------------------------------------------------------------- 0 - 3 4 - 12 1 - 5 Over 5 Months Months Years Years Total ---------- ----------- ---------- ----------- ---------- Interest-Earning Assets: Investments $ 719 $ 257 $ 45 $ 2 $ 1,023 Mortgage-backed securities 3,066 86 339 431 3,922 Loans receivable: (b) Rate-sensitive 28,262 1,568 125 -0- 29,955 Fixed-rate 89 253 1,027 1,154 2,523 Other(c) 684 -0- -0- -0- 684 Impact of interest rate swaps 597 190 (356) (431) -0- ---------- ----------- ---------- ----------- ---------- Total $ 33,417 $ 2,354 $ 1,180 $ 1,156 $ 38,107 ========== =========== ========== =========== ========== Interest-Bearing Liabilities(d): Deposits $ 13,569 $ 8,025 $ 2,620 $ 21 $ 24,235 FHLB advances 5,923 900 25 381 7,229 Other borrowings 3,294 200 718 199 4,411 Impact of interest rate swaps 1,362 (903) (368) (91) -0- ---------- ----------- ---------- ----------- ----------- Total $ 24,148 $ 8,222 $ 2,995 $ 510 $ 35,875 ========== =========== ========== ========== =========== Repricing gap $ 9,269 $ (5,868) $ (1,815) $ 646 ========== =========== ========== ========== Cumulative gap $ 9,269 $ 3,401 $ 1,586 $ 2,232 ========== =========== ========== =========== Cumulative gap as a percentage of total assets 23.6% 8.7% 4.0% ========== =========== ==========
(a) Based on scheduled maturity or scheduled repricing; loans reflect scheduled repayments and projected prepayments of principal. (b) Excludes nonaccrual loans (90 days or more past due). (c) Includes cash in banks and Federal Home Loan Bank (FHLB) stock. (d) 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, FSB (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 daily balances of 5% of deposits and short-term borrowings. Even though the ratio of cash and investments to total assets was 3.0% at September 30, 1997 as shown on page 10, the average for the month was in excess of the 5% requirement. For the months ended September 30, 1997 and 1996, and December 31, 1996, World's average regulatory liquidity ratios were 10%, 7%, and 8%, respectively. For the months ended September 30, 1997 and 1996, and December 31, 1996, WFSB's average regulatory liquidity ratios were 8%, 6%, and 6%, respectively. World and WFSB exceeded the monthly 5% requirements for each of the nine months ended September 30, 1997 and all months during 1996. 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 September 30, 1997 and 1996, and December 31, 1996, the Company had securities available for sale in the amount of $586 million, $651 million, and $781 million, respectively, including unrealized gains on securities available for sale of $206 million, $132 million, and $159 million, respectively. At September 30, 1997 and 1996, and December 31, 1996, the Company had no securities held to maturity or for trading. Included in the securities available for sale at September 30, 1997 and 1996, and December 31, 1996, were collateralized mortgage obligations (CMOs) in the amount of $82 million, $216 million, and $170 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, 1997, the 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. MORTGAGE-BACKED SECURITIES At September 30, 1997 and 1996, and December 31, 1996, the Company had mortgage-backed securities (MBS) held to maturity in the amount of $3.7 billion, $2.9 billion, and $4.1 billion, respectively, including Federal National Mortgage Association (FNMA) MBS subject to full credit recourse to the Company of $3.0 billion at September 30, 1997, $2.0 billion at September 30, 1996, and $3.3 billion at December 31, 1996. At September 30, 1997 and 1996, and December 31, 1996, the Company had mortgage-backed securities available for sale in the amount of $197 million, $458 million, and $227 million, respectively, including unrealized gains on MBS available for sale of $8 million, $11 million, and $11 million, respectively, and including $221 million of FNMA MBS subject to full credit recourse at September 30, 1996. At September 30, 1997 and 1996 and December 31, 1996, the Company had no trading MBS. During 1995 and 1996, the Company securitized $2.3 billion and $1.3 billion, respectively, of adjustable rate mortgages (ARMs) into FNMA COFI-indexed MBS, to be used as collateral for borrowings. Included in the $1.3 billion securitized during 1996, was $226 million of loans securitized into MBS available for sale with recourse, which were subsequently transferred from the MBS available for sale portfolio to the MBS held to maturity portfolio during the fourth quarter of 1996. 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 third quarter and first nine months of 1997 were $131 million and $370 million, respectively, compared to $101 million and $320 million in the same periods of 1996. The increase in repayments on MBS during the first nine months of 1997 as compared to the first nine months of 1996 was primarily due to the increase in prepayments on the underlying loans during the third quarter of 1997 as compared to the third quarter of 1996 and the increase in MBS that resulted from the securitization of ARM loans into FNMA MBS. LOAN PORTFOLIO LOAN VOLUME New loan originations for the three and nine months ended September 30, 1997, amounted to $2.0 billion and $5.5 billion, respectively, compared to $2.1 billion and $5.2 billion for the same periods in 1996. The increase in loan volume in 1997 occurred because of a continuing strong home sales market and solid demand for ARMs, our primary product. Despite the fact that the cost of fixed-rate mortgages fell below 8% during the third quarter of 1997, ARMs, the Company's principal product, remained an attractive option for many customers. The Company continues to sell most of its fixed-rate originations. Loans originated for sale for the three and nine months ended September 30, 1997 were $48 million and $146 million, respectively, compared to $72 million and $408 million for the same periods in 1996. Refinanced loans constituted 30% and 32% of new loan originations for the three and nine months ended September 30, 1997, compared to 29% and 35% for the three and nine months ended September 30, 1996. The Company has lending operations in 25 states. The primary source of mortgage origination is loans secured by residential properties in California. For the three and nine months ended September 30, 1997, 53% of total loan originations were on residential properties in California compared to 49% and 51% for the same periods in 1996. The five largest states, other than California, for originations for the three and nine months ended September 30, 1997, were Florida, Texas, Illinois, New Jersey, and Colorado with a combined total of 25% of total originations for both periods. The percentage of the total loan portfolio (excluding mortgage-backed securities with recourse) that is comprised of residential loans in California was 67% at September 30, 1997 compared to 70% at September 30, 1996, and 69% at December 31, 1996. The tables on the following two pages show the Company's loan portfolio by state at September 30, 1997 and 1996.
TABLE 3 Loan Portfolio by State September 30, 1997 (Dollars in thousands) Residential Real Estate Commercial Loans as -------------------------- Real Total a % of State 1 - 4 5+ Land Estate Loans (a) Portfolio - ----------------- ------------ ----------- ---------- -------------- ------------ ------------ California $20,573,055 $3,418,748 $ 240 $ 51,498 $24,043,541 66.89% Texas 1,335,730 100,082 563 1,493 1,437,868 4.00 Illinois 1,189,536 175,226 -0- 1,668 1,366,430 3.80 Colorado 1,075,954 231,209 -0- 7,014 1,314,177 3.66 Florida 1,260,196 20,120 30 923 1,281,269 3.56 New Jersey 1,196,308 403 -0- 5,551 1,202,262 3.34 Washington 507,543 398,141 -0- 732 906,416 2.52 Arizona 737,858 40,000 -0- 559 778,417 2.17 Pennsylvania 583,660 4,228 -0- 3,282 591,170 1.64 Virginia 524,069 8,527 -0- 1,361 533,957 1.49 Connecticut 477,893 -0- -0- 20 477,913 1.33 Maryland 364,166 2,168 -0- 507 366,841 1.02 Oregon 247,806 12,844 -0- 245 260,895 0.73 Utah 194,538 56 -0- 1,630 196,224 0.55 Nevada 190,787 1,035 -0- -0- 191,822 0.53 Minnesota 182,700 8,146 -0- -0- 190,846 0.53 Kansas 162,572 4,797 -0- 178 167,547 0.47 Wisconsin 139,254 3,866 -0- -0- 143,120 0.40 Massachusetts 118,187 -0- -0- 20 118,207 0.33 Missouri 80,941 6,153 -0- -0- 87,094 0.24 Washington DC 49,706 -0- -0- -0- 49,706 0.14 New Mexico 47,573 -0- -0- -0- 47,573 0.13 New York 44,610 -0- -0- -0- 44,610 0.12 Georgia 31,578 -0- -0- 1,443 33,021 0.09 Delaware 30,631 -0- -0- -0- 30,631 0.09 Idaho 30,227 -0- -0- -0- 30,227 0.08 Ohio 13,256 1,788 181 3,477 18,702 0.05 South Dakota 9,452 -0- -0- -0- 9,452 0.03 North Carolina 7,486 -0- -0- 464 7,950 0.02 Other 10,315 4 -0- 4,419 14,738 0.05 ------------ ----------- ---------- ------------ ------------- --------- Totals $31,417,587 $4,437,541 $ 1,014 $ 86,484 35,942,626 100.00% ============ =========== ========== ============ ========= SFAS 91 deferred loan fees (42,573) Loan discount on purchased loans (3,654) Undisbursed loan funds (3,511) Allowance for loan losses (222,020) Loans to facilitate (LTF) interest reserve (587) Troubled debt restructured (TDR) interest reserve (3,965) Loans on deposits 31,660 ------------ Total loan portfolio and loans securitized into FNMA MBS with recourse 35,697,976 Loans securitized into FNMA MBS with recourse (2,974,764)(b) ------------ Total loan portfolio $32,723,212 ============
(a) The Company has no commercial loans. (b) During 1995 and 1996, loans amounting to $2.3 billion and $1.3 billion, respectively, were securitized with full recourse into Federal National Mortgage Association mortgage-backed securities. The September 30, 1997 balances of these FNMA mortgage-backed securities are reflected in the amounts above.
TABLE 4 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 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) During 1995 and 1996, loans amounting to $2.3 billion and $226 million, respectively, were securitized with full recourse into Federal National Mortgage Association (FNMA) mortgage-backed securities. The September 30, 1996 balances of these FNMA 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 93% at September 30, 1997 compared to 91% at September 30, 1996 and December 31, 1996. The Company's ARM originations for the third quarter and first nine months of 1997 constituted approximately 96% of new mortgage loans made in 1997 compared to 95% and 89% in the same periods of 1996. The weighted average maximum lifetime cap rate on the Company's ARM loan portfolio (including MBS with recourse) was 12.76%, or 5.43% above the actual weighted average rate at September 30, 1997, versus 12.95%, or 5.72% above the weighted average rate at September 30, 1996. Approximately $5.5 billion of the Company's ARM 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 or assumption. As of September 30, 1997, $567 million of ARM loans had reached their rate floors. The weighted average floor rate on the loans that had reached their floor was 7.76% at September 30, 1997 compared to 7.75% at September 30, 1996. Without the floor, the average yield on these loans would have been 7.14% at September 30, 1997 and 7.08% at September 30, 1996. Loan repayments consist of monthly loan amortization, loan payoffs, and refinances. For the three and nine months ended September 30, 1997, loan repayments were $995 million and $2.6 billion, respectively, compared to $753 million and $2.3 billion in the same periods of 1996. Loan repayments were higher during the first nine months of 1997 as compared to the first nine months of 1996 primarily due to an increase in the loan portfolio balance as well as increased prepayment rates. 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 for impairment of capitalized mortgage servicing rights based on the fair value of those rights on a disaggregated basis. If the book value exceeds the fair value of the capitalized mortgage servicing rights, financial institutions are required to write-down the servicing rights to their fair value. The book value of Golden West's servicing rights did not exceed the fair value at September 30, 1997 or 1996 and, therefore, no adjustment was necessary. On January 1, 1997, the Company adopted Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 125). The accounting for mortgage servicing assets under SFAS 125 is substantially the same as the accounting for mortgage servicing assets under SFAS 122. See page 24 for further discussion on SFAS 125. For the third quarter and first nine months of 1997, the Company recognized gains of $1.1 million and $3.2 million, respectively, on the sale of loans due to the capitalization of servicing rights. For the same periods in 1996, the Company recognized gains of $1.8 million and $8.8 million, respectively. After amortization, the balance at September 30, 1997 and 1996 of the capitalized servicing rights was $10.3 million and $7.9 million, respectively. 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 non-accrual 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 non-accrual loans. The Company's troubled debt restructured (TDRs) is made up of loans on which delinquent payments have been capitalized or on which temporary interest rate reductions have been made, primarily to customers adversely impacted by economic conditions. The following table shows the components of the Company's nonperforming assets and troubled debt restructured and the various ratios to total assets.
TABLE 5 Nonperforming Assets and Troubled Debt Restructured (Dollars in thousands) September 30 -------------------------- December 31 1997 1996 1996 ----------- ------------ -------------- Non-accrual loans $ 344,655 $ 362,817 $ 373,157 Real estate acquired through foreclosure 66,652 81,563 82,075 Real estate in judgment -0- 944 416 ----------- ------------ ------------ Total nonperforming assets $ 411,307 $ 445,324 $ 455,648 =========== ============ ============ TDRs $ 51,785 $ 60,732 $ 84,082 =========== ============ ============ Ratio of NPAs to total assets 1.05% 1.20% 1.21% =========== ============ ============ Ratio of TDRs to total assets .13% .16% .22% =========== ============ ============ Ratio of NPAs and TDRs to total assets 1.18% 1.36% 1.43% =========== ============ ============
The decrease in NPAs during 1997 reflects the improving California economy. 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 $3 million and $12 million in the third quarter and first nine months of 1997 compared to $5 million and $15 million for the same periods of 1996. Interest foregone on TDRs amounted to $381 thousand and $1.5 million for the three and nine months ended September 30, 1997, compared to $432 thousand and $1.2 million for the three and nine months ended September 30, 1996. The tables on the following two pages show the Company's nonperforming assets by state at September 30, 1997 and 1996.
TABLE 6 Nonperforming Assets by State September 30, 1997 (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 $252,838 $ 12,737 $ 1,071 $55,089 $ 6,112 $ 2,279 $330,126 1.37% Texas 7,986 -0- -0- 1,059 -0- -0- 9,045 0.63 Illinois 10,400 223 -0- 384 -0- -0- 11,007 0.81 Colorado 1,890 -0- 3,086 -0- -0- -0- 4,976 0.38 Florida 10,265 -0- 257 546 -0- -0- 11,068 0.86 New Jersey 16,076 -0- 823 494 -0- -0- 17,393 1.45 Washington 2,014 -0- -0- -0- -0- -0- 2,014 0.22 Arizona 1,989 -0- -0- 52 -0- -0- 2,041 0.26 Pennsylvania 5,289 -0- -0- 295 -0- -0- 5,584 0.94 Virginia 1,469 -0- -0- 530 -0- -0- 1,999 0.37 Connecticut 2,430 -0- -0- 354 -0- -0- 2,784 0.58 Maryland 2,545 -0- -0- 106 -0- -0- 2,651 0.72 Oregon 1,008 -0- -0- -0- -0- -0- 1,008 0.39 Utah 982 -0- -0- -0- -0- -0- 982 0.50 Nevada 1,964 -0- -0- 133 -0- -0- 2,097 1.09 Minnesota 492 -0- -0- -0- -0- -0- 492 0.26 Kansas 293 40 -0- -0- -0- -0- 333 0.20 Wisconsin 612 -0- -0- -0- -0- -0- 612 0.43 Massachusetts 96 -0- 20 -0- -0- -0- 116 0.10 Missouri 488 40 -0- -0- -0- -0- 528 0.61 Washington, DC 43 -0- -0- -0- -0- -0- 43 0.09 New Mexico 109 -0- -0- -0- -0- -0- 109 0.23 New York 3,049 -0- -0- 420 -0- 243 3,712 8.32 Georgia 1,533 -0- -0- 181 -0- -0- 1,714 5.19 Delaware 198 -0- -0- -0- -0- -0- 198 0.65 Idaho 235 -0- -0- -0- -0- -0- 235 0.78 Ohio 6 -0- 3 -0- -0- -0- 9 0.05 South Dakota -0- -0- -0- -0- -0- -0- -0- 0.00 North Carolina -0- -0- -0- -0- -0- -0- -0- 0.00 Other 56 -0- -0- -0- -0- -0- 56 0.38 --------- ---------- --------- -------- --------- --------- --------- ----- Totals $326,355 $ 13,040 $ 5,260 $59,643 $ 6,112 $ 2,522 412,932 1.15% ========= ========== ========= ======== ========= ========= REO general valuation allowance (1,625) (0.01) --------- ----- Total nonperforming assets $411,307 1.14% ========= =====
(a) Non-accruals loans are 90 days or more past due and have no unpaid interest accrued. (b) During 1995 and 1996, loans amounting to $2.3 billion and $1.3 billion, respectively, were securitized with full recourse into FNMA mortgage- backed securities. The September 30, 1997 balances of the related nonperforming assets are reflected in the amounts above.
TABLE 7 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) During 1995 and 1996, loans amounting to $2.3 billion and $226 million, respectively, were securitized with full recourse into FNMA mortgage- backed securities. The September 30, 1996 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. Loans securitized into FNMA MBS with full credit recourse are included with the Company's loan portfolio when determining the allowance for loan losses. For loans sold to FNMA with full credit recourse, the Company records a separate recourse liability for any potential losses. The table below shows the changes in the allowance for loan losses for the three and nine months ended September 30, 1997 and 1996.
TABLE 8 Changes in Allowance for Loan Losses (Dollars in thousands) Three Months Ended Nine Months Ended September 30 September 30 ------------------------ ------------------------ 1997 1996 1997 1996 ----------- ---------- ----------- ---------- Beginning allowance for loan losses $ 216,651 $ 163,846 $ 195,702 $ 141,988 Provision charged to expense 9,980 23,498 43,786 59,256 Less loans charged off (4,810) (9,167) (18,115) (23,398) Add recoveries 199 177 647 508 ----------- ---------- ----------- ---------- Ending allowance for loan losses $ 222,020 $ 178,354 $ 222,020 $ 178,354 =========== ========== =========== ========== Ratio of net charge-offs to average loans outstanding (including MBS with recourse) .05% .11% .07% .10% =========== ========== =========== ========== Ratio of allowance for loan losses to nonperforming assets 54.0% 40.1% =========== ========== Ratio of allowance for loan losses to total loans (including MBS with recourse) .62% .55% =========== ==========
DEPOSITS Retail deposits increased during the third quarter of 1997 by $406 million, including interest credited of $244 million, compared to an increase of $544 million, including interest credited of $220 million, in the third quarter of 1996. Retail deposit balances in the first nine months of 1997 increased by $1.3 billion, including interest credited of $708 million, compared to an increase of $736 million, including interest credited of $644 million, during the first nine months of 1996. Retail deposits increased during 1997 primarily due to ongoing marketing efforts and competitive rates offered by the Company on its insured accounts. Beginning in January 1997, the Company began a program to use government securities dealers to sell wholesale certificates of deposit (CDs) to institutional investors. The Company's deposit balance at September 30, 1997 includes $864 million of these wholesale CDs. During 1997 the Company has been actively promoting money market deposit accounts and starting in September of 1997, the Company began promoting a high-yield checking account. The higher rates offered on these accounts have caused the weighted average interest rate for interest-bearing checking accounts and money market deposit accounts to be higher at September 30, 1997 as compared to the previous year (see Table 9 on page 23). The mix of reported deposits changed during 1997 as compared to 1996, in part due to a new program begun in the fourth quarter of 1996. Specifically, the reported balance of interest-bearing checking accounts has decreased as compared to 1996 and the reported balance of money market accounts has increased compared to balances reported in 1996 as a result of this new program which calculates the minimum amount of funds needed to cover disbursements for each customer's checking account and transfers the remaining funds to a money market account, reducing the Company's required reserves at the Federal Reserve Bank. In addition, during 1997 the Company has been actively promoting money market deposit accounts. The table below shows the Company's deposits by interest rate and by remaining maturity at September 30, 1997 and 1996.
TABLE 9 Deposits (Dollars in millions) September 30 --------------------------------------------------- 1997 1996 ---------------------- ----------------------- Rate* Amount Rate* Amount -------- ---------- --------- ---------- Deposits by interest rate: Interest-bearing checking accounts 1.28% $ 286 1.22% $ 747 Passbook accounts 2.15 530 2.22 549 Money market deposit accounts 3.73 2,883 3.06 1,095 Term certificate accounts with original maturities of: 4 weeks to 1 year 5.28 11,220 5.05 9,104 1 to 2 years 5.44 4,455 5.21 5,259 2 to 3 years 5.44 1,382 5.96 1,750 3 to 4 years 5.77 453 5.58 591 4 years and over 5.79 1,544 5.78 2,034 Retail jumbo CDs 5.58 617 5.31 453 Wholesale CDs 5.69 864 0.00 -0- All other 7.65 1 7.71 2 ----------- ----------- $ 24,235 $ 21,584 =========== =========== Deposits by remaining maturity: No contractual maturity $ 3,699 $ 2,391 Maturity within one year: 4th quarter 9,570 5,704 1st quarter 4,236 6,568 2nd quarter 1,914 2,857 3rd quarter 2,175 1,127 ----------- ----------- 17,895 16,256 1 to 2 years 1,986 1,763 2 to 3 years 389 772 3 to 4 years 121 232 4 years and over 145 170 ----------- ----------- $ 24,235 $ 21,584 =========== ===========
* 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. Advances are secured by pledges of certain loans, capital stock of the FHLB, and MBS. FHLB advances amounted to $7.2 billion at September 30, 1997, compared to $8.2 billion and $8.8 billion at September 30, 1996 and December 31, 1996, 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 $2.9 billion, $2.2 billion, and $1.9 billion at September 30, 1997 and 1996, and December 31, 1996, respectively. The $2.9 billion balance at September 30, 1997, 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 SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. These 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 December 1996, the FASB issued Statement of Financial Accounting Standards No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125" (SFAS 127), which delayed the effective date for portions of SFAS 125 for one year. The impact of the SFAS 125 and SFAS 127 on the Company's financial condition and results of operations has not been nor is it expected to be material. OTHER BORROWINGS At September 30, 1997, Golden West, at the holding company level, had a total of $1.0 billion of subordinated debt issued and outstanding. As of September 30, 1997, 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, 1997, 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, 1997. World had medium-term notes outstanding under prior registrations with principal amounts of $310 million at September 30, 1997, compared to $690 million at September 30, 1996, and $590 million at December 31, 1996. As of September 30, 1997, 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, 1997, the full amount was available for issuance. As of September 30, 1997, World had issued under prior registrations a total of $200 million of subordinated notes (of which $100 million matured in October 1997), 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. During November 1996, WFSB received permission from the OTS to issue non-convertible medium-term notes to institutional investors under rules similar to Office of the Comptroller of the Currency rules applicable to similarly situated national banks. As of September 30, 1997, WFSB had not issued any notes under this authority. STOCKHOLDERS' EQUITY The Company's stockholders' equity increased by $225 million during the first nine months of 1997. The increase in stockholders' equity was primarily a result of net earnings for the first nine months of 1997 and a $27 million increase in market values of securities available for sale since December 31, 1996, which were partially offset by the $48 million cost of the purchase of Company stock and the payment of $19 million in quarterly dividends to stockholders. 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. Unrealized gains net of taxes on securities and MBS available for sale included in stockholders' equity at September 30, 1997 and 1996, and December 31, 1996, were $127 million, $83 million, and $100 million, respectively. 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, 1997, 8.5 million shares had been purchased and retired at a cost of $380 million since October 1993, of which 731,100 were purchased and retired at a cost of $48 million during the first nine months of 1997. 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 $135 million, a $140 million and a $100 million dividend to Golden West in March, June and September 1997, respectively. Golden West purchased from World, and subsequently contributed as capital to WFSB, $30 million in loans during the first quarter of 1997, $18 million in loans during the second quarter, and $17 million in loans during the third quarter of 1997. In addition, Golden West contributed $30 million in the first quarter of 1997, $47 million in the second quarter of 1997, and $82 million in the third quarter of 1997 in capital to WFSB. 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. 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 regulatory capital ratios and compares them to the OTS minimum requirements at September 30, 1997 and 1996.
TABLE 10 World Savings and Loan Association Regulatory Capital Ratios (Dollars in thousands) September 30, 1997 September 30, 1996 ------------------------------------------------ ------------------------------------------------ ACTUAL REQUIRED ACTUAL REQUIRED ----------------------- ----------------------- ---------------------- ----------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ----------- --------- ----------- --------- ----------- -------- ----------- -------- Tangible $ 1,077,399 6.34% $ 254,738 1.50% $ 1,541,519 6.47% $ 357,644 1.50% Core 1,077,399 6.34 509,477 3.00 1,541,519 6.47 715,288 3.00 Risk-based 1,390,093 13.83 804,375 8.00 1,866,220 14.19 1,052,051 8.00
The following table shows WFSB's current regulatory capital ratios and compares them to the current OTS minimum requirements at September 30, 1997 and 1996.
TABLE 11 World Savings Bank, a Federal Savings Bank Regulatory Capital Ratios (Dollars in thousands) September 30, 1997 September 30, 1996 ----------------------------------------------- ---------------------------------------------- ACTUAL REQUIRED ACTUAL REQUIRED ---------------------- ---------------------- ---------------------- ---------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ----------- --------- ----------- --------- ---------- --------- ---------- -------- Tangible $1,487,088 6.83% $ 326,468 1.50% $876,490 6.83% $ 192,563 1.50% Core 1,487,088 6.83 652,936 3.00 876,490 6.83 385,125 3.00 Risk-based 1,562,867 13.30 940,300 8.00 901,307 12.68 568,592 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, 1997.
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 $1,077,399 6.34% $ 849,128 5.00% Tier 1 risk-based 1,077,399 10.72 603,282 6.00 Total risk-based 1,390,093 13.83 1,005,469 10.00
The table below shows that WFSB's regulatory capital exceeds the requirements of the well capitalized classification at September 30, 1997.
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 $1,487,088 6.83% $ 1,088,227 5.00% Tier 1 risk-based 1,487,088 12.65 705,225 6.00 Total risk-based 1,562,867 13.30 1,175,375 10.00
RESULTS OF OPERATIONS NET EARNINGS Net earnings for the nine months ended September 30, 1997 were $261 million or $4.57 per share compared to $89 million or $1.52 per share for the nine months ended September 30, 1996. Net earnings for the 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 $133 million, or $1.34 per share on an after-tax basis at the end of the third quarter (see Deposit Insurance Section on page 33); the recognition during the third quarter of $139 million, or $2.40 per share of tax benefits arising from a prior year acquisition; and the adoption, as of January 1, 1996, of SFAS 72 which resulted in the write-off of $205 million, or $3.49 per share, of goodwill (see Accounting Change section on page 7). Without the effect of the three nonrecurring items, Golden West's earnings for the first nine months of 1996 would have been $232 million or $3.99 per share. Net earnings from operations increased in 1997 as a result of increased net interest income and a lower provision for loan losses. In addition, the 1996 general and administrative expenses included the one-time SAIF assessment discussed above. SFAS 128 - EARNINGS PER SHARE In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Measurement of Earnings Per Share" (SFAS 128). SFAS 128 replaces Primary and Fully-Diluted Earnings Per Share (EPS) with "Basic EPS" and "Diluted EPS" for fiscal years ending after December 15, 1997. Basic EPS will be calculated by dividing net earnings for the period by the weighted-average common shares outstanding for that period. There will be no adjustment to the number of outstanding shares for stock options or other dilutive items as is currently done in the calculation of Primary EPS. Diluted EPS will take into account the effect of dilutive instruments, such as stock options, but will use the average share price for the period in determining the number of incremental shares that are to be added to the weighted average number of shares outstanding. In contrast, the current, Fully-Diluted EPS uses the period-ending share price, if it exceeds the average price, in the calculation to determine the number of incremental shares that are to be added. If SFAS 128 had been applied for the quarter and the nine months ended September 30, 1997, the Basic EPS reported would have been $1.59 and $4.57, respectively, and the Diluted EPS would have been $1.56 and $4.50, respectively. For the quarter and nine months ended September 30, 1996, before the cumulative effect of the change in accounting for goodwill, Basic EPS would have been $2.36 and $5.05, respectively, and Diluted EPS would have been $2.32 and $4.97, respectively. 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, 1997 and 1996, and December 31, 1996.
TABLE 14 Yield on Earning Assets, Cost of Funds, and Primary Spread September 30 --------------------------- December 31 1997 1996 1996 --------- ----------- ------------- Yield on loan portfolio 7.47% 7.42% 7.43% Yield on MBS 7.15 7.18 7.13 Yield on investments 6.61 6.06 6.88 ---------- -------- ---------- Yield on earning assets 7.42 7.32 7.37 ---------- -------- ---------- Cost of deposits 5.08 4.95 4.98 Cost of borrowings 5.98 5.85 5.80 ---------- -------- ---------- Cost of funds 5.37 5.28 5.28 ---------- -------- ---------- Primary spread 2.05% 2.04% 2.09% ========== ======== ==========
The Company's primary spread is, to some degree, influenced 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 the COFI tends to trail changes in liability costs due to the existence of a two-month reporting lag and because of certain loan features which restrain monthly adjustments. In addition, because COFI is based on a portfolio of accounts, not all of which mature or reprice immediately, COFI does not initially reflect a change in market interest rates. Yields on short term and long-term interest rates fluctuated both modestly upward and downward in 1997. The effects of this interest rate environment led to a nine basis point increase in the Company's cost of funds for the first nine months of 1997. The yield on earning assets increased five basis points during the first nine months of 1997. The yield on earning assets did not respond as much to the changing interest rate environment mainly due to the lags in the COFI index. These changes resulted in a four basis point decrease in the Company's spread since yearend 1996. The following table shows the Company's revenues and expenses as a percentage of total revenues for the three and nine months ended September 30, 1997 and 1996, 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 ---------------------- ---------------------- 1997 1996 1997 1996 --------- -------- --------- --------- Interest on loans 82.6% 83.4% 82.1% 83.1% Interest on mortgage-backed securities 9.6 9.0 10.2 9.2 Interest and dividends on investments 5.0 4.9 4.9 4.9 --------- -------- --------- --------- 97.2 97.3 97.2 97.2 Less: Interest on deposits 42.6 39.8 41.5 40.0 Interest on advances and other borrowings 24.5 26.7 25.0 25.7 --------- -------- --------- --------- 67.1 66.5 66.5 65.7 Net interest income 30.1 30.8 30.7 31.5 Provision for loan losses 1.4 3.5 2.0 3.0 --------- -------- --------- --------- Net interest income after provision for loan losses 28.7 27.3 28.7 28.5 Add: Fees 1.6 1.4 1.6 1.4 Gain on the sale of securities, MBS, and loans 0.3 0.3 0.3 0.5 Other non-interest income 0.9 1.0 0.9 0.9 --------- -------- --------- --------- 2.8 2.7 2.8 2.8 Less: General and administrative expenses 11.3 31.8 (a) 11.3 18.9 (a) Taxes on income 8.0 (22.2) (b) 8.0 (2.5)(b) --------- -------- --------- --------- Earnings before cumulative effect of change in accounting for goodwill 12.2 20.4 12.2 14.9 Cumulative effect of change in accounting for goodwill 0.0 0.0 0.0 (10.4) --------- -------- --------- --------- Net earnings 12.2% 20.4% 12.2% 4.5% ========= ======== ========= =========
(a) Without the effect of the one-time SAIF assessment (see Deposit Insurance section on page 33), 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 34), 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 The Company enters into interest rate swaps 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 activity decreased net interest income by $1.5 million and $3 million for the three and nine months ended September 30, 1997, as compared to a decrease of $2 million and $9 million for the same periods in 1996.
TABLE 16 Schedule of Interest Rate Swaps Activity (Notional amounts in millions) Nine Months Ended September 30, 1997 -------------------------------------------- Receive Pay Forward Fixed Fixed Starting Swaps Swaps Swaps ------------- ------------ ------------ Balance at December 31, 1996 $ 2,581 $ 1,340 $ 10 Additions 90 -0- -0- Maturities (926) (202) -0- Forward starting becoming effective 10 -0- (10) ------------ ------------ ------------ Balance at September 30, 1997 $ 1,755 $ 1,138 $ -0- ============ ============ ============
The following table summarizes the unrealized gains and losses for interest rate swaps at September 30, 1997 and 1996.
TABLE 17 Schedule of Unrealized Gains and Losses on Interest Rate Swaps (Dollars in thousands) September 30, 1997 September 30, 1996 ---------------------------------------- ---------------------------------------- Net Net Unrealized Unrealized Unrealized Unrealized Unrealized Unrealized Gains Losses Gain (Loss) Gains Losses Gain (Loss) ------------ ------------ ------------- ------------ ------------ ------------ Interest rate swaps $ 13,625 $ (34,030) $ (20,405) $ 25,763 $ (42,980) $ (17,217) ============ ============ ============= ============ ============= =============
The range of floating interest rates received on swap contracts in the first nine months of 1997 was 5.47% to 6.08%, and the range of floating interest rates paid on swap contracts was 4.76% to 6.00%. The range of fixed interest rates received on swap contracts in the first nine months of 1997 was 4.62% to 8.68% 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 1997, interest on loans was higher than in the comparable 1996 period by $56 million or 10.1%. The increase in the third quarter of 1997 was due to a $2.6 billion increase in the average portfolio balance and a ten basis point increase in the average portfolio yield. For the first nine months of 1997, interest on loans was higher than the comparable 1996 period by $121 million or 7.4%. The increase was due to a $2.4 billion increase in the average portfolio balance which was partially offset by a six basis point decrease in the average portfolio yield. INTEREST ON MORTGAGE-BACKED SECURITIES In the third quarter of 1997, interest on mortgage-backed securities was higher than in the comparable 1996 period by $11 million or 17.9%. The 1997 increase was due primarily to a $623 million increase in the average portfolio balance which was partially offset by a five basis point decrease in the average portfolio yield. For the first nine months of 1997, interest on mortgage-backed securities was higher than in the comparable 1996 period by $36 million or 20.1% due to a $770 million increase in the average portfolio balance which was partially offset by an 18 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 1997, interest and dividends on investments were higher than in the comparable 1996 period by $5 million or 15.3%. The increase was primarily due to a $177 million increase in the average portfolio balance and a 22 basis point increase in the average portfolio yield. For the first nine months of 1997, interest and dividends on investments were $9 million or 9.5% higher than for the same period in 1996. The increase was primarily due to a $92 million increase in the average portfolio balance and a 25 basis point increase in the average portfolio yield. INTEREST ON DEPOSITS In the third quarter of 1997, interest on deposits increased by $50 million or 19.1% from the comparable period in 1996. In the first nine months of 1997, interest on deposits increased by $102 million or 12.9% from the comparable period in 1996. The third quarter increase was due to a $3.2 billion increase in the average balance of deposits and an 18 basis point increase in the average cost of deposits. The nine month increase was primarily due to a $2.5 billion increase in the average balance of deposits and a seven basis point increase in the average cost of deposits. INTEREST ON ADVANCES AND OTHER BORROWINGS For the third quarter and first nine months of 1997, interest on advances and other borrowings increased by $4 million or 2.2% and $29 million or 5.7%, respectively, from the comparable periods of 1996. The third quarter increase was primarily due to a $139 million increase in the average balance and a six basis point increase in the average cost of these borrowings. The nine month increase was primarily due to a $817 million increase in the average balance which was partially offset by a six basis point decrease in the average cost of these borrowings. PROVISION FOR LOAN LOSSES The provision for loan losses was $10 million and $44 million, respectively, for the three and nine months ended September 30, 1997, compared to $23 million and $59 million for the same periods in 1996. The lower provision in 1997 reflects the decrease in nonperforming assets, a decrease in net chargeoffs in the third quarter of 1997 as compared to the third quarter of 1996, and the improving California economy. GENERAL AND ADMINISTRATIVE EXPENSES For the third quarter and first nine months of 1997, general and administrative expenses (G&A) were $83 million and $241 million, respectively, compared to $211 million and $373 million for the comparable periods in 1996. The 1996 G&A amounts include the one-time 1996 third quarter Savings Association Insurance Fund (SAIF) assessment of $133 million (See Deposit Insurance section below). Thus, the primary reason for the decrease in 1997 was the aforementioned 1996 SAIF assessment as well as the benefit received from reduced deposit insurance premiums paid by the Association in 1997. Excluding the effect of the lower deposit insurance premiums, total G&A increased due to the expansion of savings branches, higher loan volume, and the installation of enhancements to data processing systems. In addition, advertising expense was higher during the third quarter and first nine months of 1997 due to the promotion of the new money market account and the high-yield checking account as discussed on page 22. Without the effect of the one-time SAIF assessment, G&A as a percentage of average assets on an annualized basis was .85% and .83%, respectively, for the third quarter and first nine months of 1997 compared to .87% and .90% for the same periods in 1996. 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 During 1996, legislation was enacted to recapitalize 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 required 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 lowered the premiums paid by SAIF-insured institutions, starting in the fourth quarter of 1996. As a result of this legislation, Golden West's subsidiary, World Savings and Loan Association, incurred a one-time charge of $133 million at the end of the third quarter of 1996. Beginning on January 1, 1997, the premium paid by the Association to the FDIC was reduced from $2.30 per $1,000 in savings balances to $.65 per $1,000. Beginning on January 1, 1997, the premiums paid by BIF insured institutions, such as WFSB, was increased from $0.00 per $1,000 in savings balances to $.13 per $1,000. 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 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 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 were 39.7% for the third quarter and first nine months of 1997. Taxes as a percentage of earnings before the cumulative effect of the change in accounting for goodwill excluding the one time SAIF assessment and the aforementioned $139 million tax benefit, were 38.4% and 38.5% for the third quarter and nine months ended September 30, 1996, respectively. LIQUIDITY AND CAPITAL RESOURCES World's principal sources of funds are cash flows generated from earnings; deposits; loan repayments; borrowings from the FHLB; debt collateralized by mortgages, MBS, or securities, and the issuance of medium-term notes. In addition, World has a number of other alternatives available to provide liquidity or finance operations. These include borrowings from its affiliates, borrowings from public offerings of debt, sales of loans, sales of 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, 1997, and 1996, and December 31, 1996, see the Cash and Investments section on page 12. WFSB's principal sources of funds are cash flows generated from earnings; deposits; loan repayments; negotiable certificates of deposit, borrowings from the FHLB; issuance of medium-term notes; investments and borrowings from its affiliates; and debt collateralized by mortgages, MBS, or securities. In addition, WFSB has other alternatives available to provide liquidity or finance operations including borrowings from public offerings of debt, sales of loans, issuances of commercial paper, and borrowings from commercial banks. Furthermore, under certain conditions, WFSB 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 WFSB's liquidity positions at September 30, 1997, and 1996, and December 31, 1996, see the Cash and Investments section on page 12. The principal sources of funds for Golden West (the Parent) are dividends from World, interest on investments, 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 and WFSB can pay. The principal liquidity needs of Golden West are for payment of interest and principal on subordinated debt securities (of which $200 million matures in 1998), capital contributions to its insured subsidiaries (including $224 million for the nine months ended September 30, 1997 and $500 million for the year ended December 31, 1996 to WFSB), dividends to stockholders, the purchase of Golden West stock (see stockholders' equity section on page 24), and general and administrative expenses. At September 30, 1997 and 1996, and December 31, 1996, Golden West's total cash and investments amounted to $891 million (including a $600 million long-term loan to WFSB), $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), and $913 million (including a $600 million long-term loan to WFSB), 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, 1997 /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 ----------------------------- ------------------------------ 1997 1996 1997 1996 ------------- ------------- ------------- ------------- Earnings Before Cumulative Effect of Change in Accounting for Goodwill $ 90,007 $ 135,785 $ 260,658 $ 293,963 Cumulative Effect of Change in Accounting for Goodwill -0- -0- -0- (205,242) ------------- ------------- ------------- ------------- Net Earnings $ 90,007 $ 135,785 $ 260,658 $ 88,721 ============= ============= ============= ============= Average Number of Common Shares Outstanding 56,740,342 57,584,306 56,980,399 58,216,474 ============= ============= ============= ============= Earnings Per Share Before Cumulative Effect of Change in Accounting for Goodwill $ 1.58 2.32 4.57 5.01 Cumulative Effect of Change in Accounting for Goodwill 0.00 0.00 0.00 (3.49) ------------- ------------- ------------- ------------- Earnings Per Common Share $ 1.58 $ 2.32 $ 4.57 $ 1.52 ============= ============= ============= =============
EX-27 2
9 9-MOS DEC-31-1996 SEP-30-1997 140,898 0 0 0 783,522 3,724,677 3,749,985 32,723,212 222,020 39,228,359 24,234,947 4,542,826 778,399 7,096,967 0 0 5,677 2,569,543 39,228,359 1,758,899 105,908 217,913 2,082,720 889,337 1,425,303 657,417 43,786 2,831 241,031 432,062 432,062 0 0 260,658 4.57 4.57 7.42 344,655 0 51,785 0 195,702 18,115 647 222,020 222,020 0 0
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