-----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, LH7Zzf01J2EuPXmOmP+EHYFFCLJTIn8K8B6WpmUEsjXszTSyu+S9a4VagIF8Ywf4 k0rIMpJqB/AV5WFwWOSBNg== 0000042293-98-000002.txt : 19980331 0000042293-98-000002.hdr.sgml : 19980331 ACCESSION NUMBER: 0000042293-98-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOLDEN WEST FINANCIAL CORP /DE/ CENTRAL INDEX KEY: 0000042293 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 952080059 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-04629 FILM NUMBER: 98577375 BUSINESS ADDRESS: STREET 1: 1901 HARRISON STREET CITY: OAKLAND STATE: CA ZIP: 94612 BUSINESS PHONE: 5104663420 MAIL ADDRESS: STREET 2: 1901 HARRISON STREET CITY: OAKLAND STATE: CA ZIP: 94612 FORMER COMPANY: FORMER CONFORMED NAME: TRANS WORLD FINANCIAL CORP DATE OF NAME CHANGE: 19760806 FORMER COMPANY: FORMER CONFORMED NAME: TRANS WORLD FINANCIAL CO DATE OF NAME CHANGE: 19751124 10-K405 1 GOLDEN WEST 10-K, LIVE FILING SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 for the fiscal year ended December 31, 1997 Commission File No. 1-4629 GOLDEN WEST FINANCIAL CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-2080059 - ----------------------------------------------- ------------------------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 1901 Harrison Street, Oakland, California 94612 - ----------------------------------------------- -------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (510) 446-3420 -------------------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - -------------------------------------------- ------------------------------ Common Stock, $.10 par value New York Stock Exchange, Inc., Pacific Stock Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The approximate aggregate market value of the Registrant's common stock held by nonaffiliates of the Registrant on February 28, 1998, was $5,100,106,820. The number of shares outstanding of the Registrant's common stock on February 28, 1998, was 57,144,054 shares. DOCUMENTS INCORPORATED BY REFERENCE Documents Incorporated by Reference Applicable Part of Form 10-K Proxy Statement Dated March 16, 1998, Part III Furnished to Stockholders in Connection with Registrant's Annual Meeting of Stockholders. PART I ITEM 1. BUSINESS REGISTRANT Golden West Financial Corporation (Golden West or Company) is a savings and loan holding company, the principal business of which is the operation of a savings bank business through its wholly-owned savings bank subsidiaries, World Savings Bank, FSB (WFSB), and World Savings Bank, SSB, (WSSB) and a savings and loan business through its wholly-owned subsidiary, World Savings and Loan Association, a Federal Savings and Loan Association (WSL). WFSB, WSL and WSSB are referred to collectively as the "Insured Institutions" or "Insured Subsidiaries." Golden West also has two other subsidiaries, Atlas Advisers, Inc., and Atlas Securities, Inc. These two companies were formed to provide services to Atlas Assets, Inc., a series open-end registered investment company sponsored by the Company. Atlas Advisers, Inc., is a registered investment adviser and the investment manager of Atlas Assets, Inc.'s fourteen portfolios (the Atlas Funds). Atlas Securities, Inc., is a registered broker-dealer and the sole distributor of Atlas Fund shares. The Company was incorporated in 1959 and has its headquarters in Oakland, California. References herein to the Company or Golden West mean Golden West and its subsidiaries on a consolidated basis, unless the context requires otherwise. During 1995, Golden West acquired Watchung Hills Bank for Savings of New Jersey and renamed it World Savings Bank, FSB. WFSB is a federally chartered savings bank, with deposits insured by the Federal Deposit Insurance Corporation (FDIC) Bank Insurance Fund (BIF) and its home office is in Oakland, California. As of December 31, 1997 and 1996, WFSB had assets of $24.6 billion and $16.9 billion, respectively. For the years ended December 31, 1997 and 1996, WFSB had net income of $185 million and $69 million, respectively, and incurred a net loss of $3 million for the year ended December 31, 1995. WSL, whose deposits are insured by the FDIC Savings Association Insurance Fund (SAIF), was incorporated in 1912 as a capital stock savings and loan association and has its home office in Oakland, California. WSL became a federally chartered savings and loan association in September 1981. For the years ended December 31, 1997, 1996 and 1995, WSL's net income were $161 million, $108 million and $272 million, respectively. WSL's assets totaled $15.4 billion and $21.0 billion at yearends 1997 and 1996, respectively. WSSB had assets of $123 million and $86 million for the years ended December 31, 1997 and 1996, respectively. For the years ended December 31, 1997, 1996 and 1995, WSSB had net income of $901 thousand, $511 thousand and $241 thousand, respectively. ITEM 1. BUSINESS (Continued) REGISTRANT (continued) Golden West is operating its insured subsidiaries in a manner that enhances customer service. In this regard, all of WFSB's and WSL's products are made available in the Company's savings branches. In addition, customers of each of Golden West's insured subsidiaries can transact most business on their accounts at any of the Company's branch offices. Each insured subsidiary reimburses the other for services provided in these arrangements. Interest rates set on deposit accounts offered by the Company's Insured Subsidiaries are based on market conditions, cost and funding needs. REGULATORY FRAMEWORK The Company is a savings and loan holding company within the meaning of the Home Owners Loan Act (HOLA), and is subject to the regulation, examination, supervision, and reporting requirements of HOLA. WFSB is a member of the Federal Home Loan Bank (FHLB) system and owns stock in the FHLB of San Francisco. WFSB's savings accounts are insured by the FDIC BIF, up to the maximum amounts provided by law. WSL is a member of the FHLB system and owns stock in the FHLB of San Francisco. WSL's savings accounts are insured by the FDIC SAIF, also up to the maximum amounts provided by law. The Company, WFSB, and WSL are subject to extensive examination, supervision, and regulation by the Office of Thrift Supervision (OTS) and the FDIC. Applicable regulations govern, among other things, lending and investment powers, the types of savings accounts that can be offered, the types of businesses that can be engaged in, and capital requirements. WFSB and WSL are also subject to regulations of the Board of Governors of the Federal Reserve System (Federal Reserve Board) with respect to reserve requirements and certain other matters (see Regulation). OFFICE STRUCTURE As of December 31, 1997, the Company operated 123 savings branch offices in California, 47 in Colorado, 27 in Florida, 19 in Texas, 13 in Arizona, 11 in New Jersey, and ten in Kansas. The Company also operates 227 loan origination offices of which 189 are located in the states listed above. The remaining 38 loan origination offices are located in Connecticut, Delaware, Idaho, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Mexico, North Carolina, Oregon, Pennsylvania, South Dakota, Utah, Virginia, Washington, and Wisconsin. Of the 227 loan offices, 18 are fully-staffed offices that are located in the same premises as savings branch offices and 91 others are savings branch offices that have a single loan officer on site. The remaining loan origination offices are located in facilities that are separate from savings branch offices. ITEM 1. BUSINESS (Continued) ACQUISITIONS/DIVESTITURES On January 20, 1995, the Company acquired Watchung Hills Bank for Savings of New Jersey with $48 million in deposits and three branches in New Jersey and renamed it World Savings Bank, FSB. That same month, the Company sold seven Colorado branches with $153 million in deposits to First Security Bank of Fort Lupton. The foregoing acquisition and divestiture are not material to the financial position or net earnings of Golden West and pro forma information is not deemed necessary. OPERATIONS The principal business of the Company, through the Insured Subsidiaries, is attracting funds, primarily in the form of savings deposits acquired from the general public, and investing those funds principally in loans secured by deeds of trust or mortgages on residential and other real estate, and mortgage-backed securities (MBS) -- securities backed by pools of residential loans that have many of the characteristics of mortgages including the monthly payment of principal and interest. Funds for the Insured Subsidiaries' operations are also provided through earnings, loan repayments, borrowings from the Federal Home Loan Bank, debt collateralized by mortgages, MBS, or other securities, and the issuance of medium-term notes. In addition, the Insured Subsidiaries had a number of other alternatives available to provide liquidity or finance operations. These include public offerings of debt or equity, sales of loans, issuance of negotiable certificates of deposit, issuance of commercial paper, and borrowings from commercial banks. Furthermore, under certain limited conditions, WFSB and WSL may borrow from the Federal Reserve Bank of San Francisco to meet short-term cash needs. The availability of these funds will vary depending on policies of the FHLB of San Francisco, the Federal Reserve Bank of San Francisco, and the Federal Reserve Board. The principal sources of funds for the holding company, Golden West, are dividends from its Insured Subsidiaries, the proceeds from the issuance of debt and equity securities, and interest on investments. Various statutory and regulatory restrictions and tax considerations limit the amount of dividends WFSB and WSL can pay. The principal liquidity needs of Golden West are for payment of interest and principal on subordinated debt securities, capital contributions to its Insured Subsidiaries, dividends to stockholders, the purchase of Company stock, and general and administrative expenses. ITEM 1. BUSINESS (Continued) DEPOSIT ACTIVITIES Deposit flows are affected by changes in general economic conditions, changes in prevailing interest rates, and competition among depository institutions and other investment alternatives. The Company currently offers a number of alternatives for depositors, including passbook, checking, and money market deposit accounts from which funds may be withdrawn at any time without penalty, and certificate accounts with varying maturities ranging up to seven years. All types of accounts presently offered by the Company have rates that are set by the Company, consistent with prevailing interest rates. The Company's certificate accounts are issued in non-negotiable form through its branch offices. In addition, beginning in January 1997, the Company began a program to use broker/dealers to sell certificates of deposit (CDs) to institutional investors. These are referred to as wholesale CDs. Retail deposits increased $1.5 billion during 1997, including interest credited of $960 million, compared to an increase of $1.3 billion during 1996, including interest credited of $869 million, and an increase of $1.6 billion, including interest credited of $847 million and including $153 million from a divestiture and $48 million from an acquisition during 1995. Total deposits increased during 1997, 1996 and 1995 primarily due to ongoing marketing efforts and competitive rates offered by the Company on its insured accounts. In addition, during 1997, the Company actively promoted money market deposit accounts and a new high-yield checking account. The increase in deposits in 1997, 1996 and 1995 reflected primarily growth in deposits at WFSB. The Company's deposit balance at December 31, 1997, includes $525 million of wholesale CDs. The mix of deposits changed during 1997 and 1996 as compared to 1995. During 1997, the Company actively promoted money market deposit accounts which accounted for part of the change in mix in 1997. In addition, the change was also due in part to a new program begun in the fourth quarter of 1996. Specifically, the 1997 and 1996 reported balances of interest-bearing checking accounts decreased as compared to 1995 and the 1997 and 1996 reported balances of money market accounts increased compared to balances reported in 1995 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. The table on the following page summarizes the Company's deposits by original term to maturity at December 31. ITEM 1. BUSINESS (Continued) DEPOSIT ACTIVITIES (continued)
TABLE 1 Deposits by Original Term to Maturity (Dollars in thousands) 1997 1996 1995 1994 1993 ----------- ------------ ------------ ------------ ------------ Interest-bearing checking . . $ 85,343 $ 318,422 $ 750,160 $ 730,290 $ 736,767 Passbook. . . . . . . . . . . 528,727 550,075 567,890 638,905 611,606 Money market deposit accounts. 4,160,734 1,565,682 1,291,501 1,818,426 2,378,087 Term certificate accounts with original maturities of: 4 weeks to 1 year . . . . 8,996,965 10,144,102 9,358,705 5,159,037 4,334,208 1 to 2 years. . . . . . . 5,750,387 5,012,735 3,599,540 5,636,301 4,614,059 2 to 3 years. . . . . . . 1,478,756 1,587,068 2,128,392 1,997,826 1,448,779 3 to 4 years. . . . . . . 431,400 565,997 651,787 817,631 1,149,108 4 years and over . . . . 1,440,434 1,993,983 2,065,785 2,098,984 2,021,350 Retail jumbo CDs . . . . . . 711,010 360,441 430,647 312,413 109,250 Wholesale CDs . . . . . . . . 525,305 -0- -0- -0- -0- All other . . . . . . . . . . 656 1,429 3,503 9,576 19,270 ---------- ------------ ------------ ------------ ------------ Total deposits . . . . . . . . $24,109,717 $22,099,934 $20,847,910 $19,219,389 $17,422,484 =========== ============ ============ ============ ============
The table below sets forth the Company's deposits by interest rate at December 31.
TABLE 2 Deposits by Interest Rate (Dollars in thousands) 1997 1996 -------------- -------------- 0.00 % -- 4.00 % . . . . . . . . $ 3,109,497 $ 2,779,651 4.01 % -- 6.00 % . . . . . . . . 19,813,017 17,133,132 6.01 % -- 8.00 % . . . . . . . . 1,170,164 2,168,111 8.01 % -- 10.00 % . . . . . . . . 2,395 4,224 10.01 % -- 12.00 % . . . . . . . . 14,644 14,716 12.01 % -- 14.00 % . . . . . . . . -0- 100 -------------- -------------- $24,109,717 $22,099,934 ============== ==============
ITEM 1. BUSINESS (Continued) DEPOSIT ACTIVITIES (continued) The table below shows the maturities of deposits at December 31, 1997 by interest rate.
TABLE 3 Deposit Maturities by Interest Rate (Dollars in thousands) 2002 and 1998(a) 1999 2000 2001 thereafter Total -------------- ------------ ------------- ------------ ------------ -------------- 0.00 % -- 4.00 % $ 3,092,792 $ 16,692 $ 13 $ -0- $ -0- $ 3,109,497 4.01 % -- 6.00 % 17,900,282 1,465,233 254,334 91,099 102,069 19,813,017 6.01 % -- 8.00 % 344,554 664,994 90,559 38,604 31,453 1,170,164 8.01 % -- 10.00 % 1,754 641 -0- -0- -0- 2,395 10.01 % -- 12.00 % 5,202 84 84 84 9,190 14,644 -------------- ------------ ------------- ------------ ------------- -------------- $21,344,584 $2,147,644 $ 344,990 $ 129,787 $ 142,712 $24,109,717 ============== ============ ============= ============ ============= ==============
(a) Includes passbook, checking, and money market deposit accounts, which have no stated maturity. As of December 31, 1997 the aggregate amount outstanding of time certificates of deposit in amounts of $100,000 or more was $3.0 billion, of which, $711 million were retail jumbo CDs and $525 million were wholesale CDs. The following table presents the maturity of these time certificates of deposit at December 31, 1997.
TABLE 4 Maturities of Time Certificates of Deposit Equal to or Greater than $100,000 (Dollars in thousands) 3 months or less $ 1,323,805 Over 3 months through 6 months 534,715 Over 6 months through 12 months 809,389 Over 12 months 368,603 -------------- $ 3,036,512 ==============
During 1996 and years prior, the Company did not use brokers to acquire certificates of deposit. Beginning in January 1997, the Company began a program to use broker/dealers to acquire certificates of deposit. More information regarding deposits is included in Note J to the Financial Statements included in Item 14. ITEM 1. BUSINESS (Continued) BORROWINGS The Company generally may borrow from the FHLB of San Francisco upon the security of a) the capital stock of the FHLB owned by the Company, b) certain of its residential mortgage loans or c) certain other assets (principally obligations of, or guaranteed by, the United States Government or a federal agency). The Company uses FHLB borrowings, also known as "advances" to supplement cash flow and to provide funds for loan origination activities. Advances offer strategic advantages for asset-liability management, including long-term maturities and, in certain cases, prepayment at the Company's option. Each advance has a specified maturity and interest rate, which may be fixed or variable, as negotiated with the FHLB. At December 31, 1997, the Company had $8.5 billion in FHLB advances outstanding, compared to $8.8 billion at yearend 1996. The Company has given notice to the FHLB that they are going to prepay $2.9 billion in FHLB advances during 1998 and as a result will incur a prepayment penalty of $13 million. From time to time, the Company enters into reverse repurchase agreements with selected major government securities dealers, selected large banks, or the FHLB of San Francisco. A reverse repurchase agreement involves the sale and delivery of U.S. Government securities or mortgage-backed securities by the Company to a broker or dealer coupled with an agreement to buy the securities back at a later date. Under generally accepted accounting principles, these transactions are properly accounted for as borrowings secured by securities. The Company pays the counterparty a variable or fixed rate of interest for the use of the funds for the period involved. At maturity, the borrowings are repaid (by repurchase of the same securities) and the same securities are returned to the Company. The Company also enters into dollar reverse repurchase agreements (dollar reverses) with selected major government securities dealers, as well as large banks. A dollar reverse involves the sale and delivery of mortgage-backed securities by the Company to a broker or dealer, coupled with an agreement to purchase securities of the same type and interest coupon at a fixed price for settlement at a later date. Under generally accepted accounting principles, these transactions are properly accounted for as borrowings secured by mortgage-backed securities. The Company pays the brokers and dealers a fixed rate of interest for the use of the funds for the period involved, which is generally short-term. At maturity, the secured borrowings are repaid (by purchase of similar securities) and similar securities are delivered to the Company. The Company monitors the level of activity with any one party in connection with reverse repurchase agreements and dollar reverses in order to minimize its risk exposure in these transactions. Reverse repurchase agreements and dollar reverses with dealers, banks, and the FHLB of San Francisco amounted to $2.3 billion at December 31, 1997, compared to $1.9 billion at yearend 1996. The $2.3 billion balance at December 31, 1997 includes $250 million in FHLB of San Francisco MBS Reverse Repos which all mature in 1998. ITEM 1. BUSINESS (Continued) BORROWINGS (continued) 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. 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 until January 1, 1998. The impact of SFAS 127 on the Company's financial condition and results of operations is not material. At December 31, 1997, Golden West, at the parent level, had principal amounts outstanding of $1.0 billion of subordinated debt, of which $200 million matures in 1998. As of December 31, 1997, Golden West's subordinated debt securities were rated A3 and A- by Moody's Investors Service (Moody's) and Standard & Poor's Corporation (S&P), respectively. At December 31, 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, all of which was available for issuance at year end 1997. WSL also has on file a registration statement with the OTS for the sale of up to $300 million of subordinated notes, and at yearend 1997, the full amount was available for issuance. As of December 31, 1997, WSL had outstanding a total of $100 million of subordinated notes issued and outstanding which were rated A2 and A from Moody's and S&P, respectively. The subordinated notes are included in WSL's risk-based regulatory capital as Supplementary Capital. WSL currently has on file a shelf registration with the OTS for the issuance of $2.0 billion of unsecured medium-term notes, all of which was available for issuance as of December 31, 1997. WSL had medium-term notes outstanding under prior registrations with principal amounts of $110 million at December 31, 1997, compared to $590 million at yearend 1996. WSL paid off the remaining balance of medium-term notes early in 1998. As of December 31, 1997, WSL's medium-term notes were rated A1 and A+ from Moody's and S&P, respectively. ITEM 1. BUSINESS (Continued) BORROWINGS (continued) 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 December 31, 1997, WFSB's medium-term notes were rated A1 and A+ from Moody's and S&P, respectively. The table below sets forth the composition of the Company's borrowings at December 31.
TABLE 5 Composition of Borrowings (Dollars in thousands) 1997 1996 1995 1994 1993 ------------- ------------- ------------- ------------- -------------- FHLB advances. . . . . . . . . $ 8,516,605 $ 8,798,433 $ 6,447,201 $ 6,488,418 $ 6,281,691 Reverse repurchase agreements. 2,334,048 1,614,763 1,752,171 316,865 205,821 Dollar reverse repurchase agreements. . . . . . . . -0- 293,363 65,772 284,956 237,053 Medium-term notes . . . . . . 109,992 589,845 1,597,507 1,164,079 676,540 Federal funds purchased . . . -0- -0- -0- 250,000 -0- Subordinated debt. . . . . . . 1,110,488 1,323,996 1,322,392 1,221,559 1,220,061 ------------- ------------- ------------- ------------- -------------- Total borrowings. . . . . $ 12,071,133 $ 12,620,400 $ 11,185,043 $ 9,725,877 $ 8,621,166 ============= ============= ============= ============= ============== Weighed average interest rate of total borrowings . . . 5.99% 5.80% 6.15% 5.85% 4.69% ============= ============= ============= ============= ==============
More information concerning the borrowings of the Company is included in Notes K, L, M, and N to the Financial Statements which are included in Item 14. LENDING ACTIVITIES Income from real estate loans provides the principal source of revenue to the Company in the form of interest, loan origination fees, and other fees. Loans made by the Company are generally secured by first liens primarily on residential properties. Although the Company has from time to time made commercial real estate and construction loans, the Company is not currently active in these segments of the lending market. The Company has the power to originate loans in any part of the United States. The Company is currently originating loans in Arizona, California, Colorado, Connecticut, Delaware, Florida, Idaho, Illinois, Kansas, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Mexico, New Jersey, North Carolina, Oregon, Pennsylvania, South Dakota, Texas, Utah, Virginia, Washington, and Wisconsin. The Company also makes loans to customers on the security of their deposit accounts. Deposit loans constituted less than one percent of the Company's total loans outstanding as of December 31, 1997, and 1996. The tables on the following two pages set forth the Company's loan portfolio by state as of December 31, 1997, and 1996. ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued)
TABLE 6 Loan Portfolio by State December 31, 1997 (Dollars in thousands) Residential Commercial Loans Real Estate Real Total as a % of ---------------------------- State 1 - 4 5+ Land Estate Loans (a) Portfolio - ------------------- -------------- ----------- -------- ------------ -------------- ------------ California $ 20,722,679 $3,448,720 $ 234 $ 48,800 $ 24,220,433 $ 66.27 Texas 1,390,668 93,860 559 1,464 1,486,551 4.06 Illinois 1,224,009 170,971 -0- 1,623 1,396,603 3.82 Florida 1,344,412 20,051 9 835 1,365,307 3.73 Colorado 1,098,665 230,203 -0- 7,039 1,335,907 3.65 New Jersey 1,241,358 401 -0- 5,356 1,247,115 3.41 Washington 530,281 408,258 -0- 721 939,260 2.57 Arizona 765,941 37,323 -0- 550 803,814 2.20 Pennsylvania 617,348 4,217 -0- 3,184 624,749 1.71 Virginia 535,615 8,505 -0- 1,325 545,445 1.49 Connecticut 491,275 -0- -0- 19 491,294 1.34 Maryland 369,326 2,158 -0- 493 371,977 1.02 Oregon 256,178 12,803 -0- 245 269,226 0.74 Minnesota 202,274 8,122 -0- -0- 210,396 0.58 Utah 200,516 54 -0- 1,575 202,145 0.55 Nevada 188,756 1,006 -0- -0- 189,762 0.52 Kansas 166,476 4,769 -0- 172 171,417 0.47 Wisconsin 153,005 3,853 -0- -0- 156,858 0.43 Massachusetts 126,343 -0- -0- 20 126,363 0.35 Missouri 84,247 5,833 -0- -0- 90,080 0.25 Washington DC 52,178 -0- -0- -0- 52,178 0.14 New Mexico 49,341 -0- -0- -0- 49,341 0.14 New York 43,499 -0- -0- -0- 43,499 0.12 Delaware 32,950 -0- -0- -0- 32,950 0.09 Georgia 30,633 -0- -0- 1,411 32,044 0.09 Idaho 31,340 -0- -0- -0- 31,340 0.09 Ohio 11,768 1,748 175 3,337 17,028 0.05 North Carolina 12,420 -0- -0- 452 12,872 0.04 South Dakota 10,397 -0- -0- -0- 10,397 0.03 Other 15,109 1 -0- 4,010 19,120 0.05 -------------- ----------- -------- ------------ -------------- ---------- Totals $ 31,999,007 $4,462,856 $ 977 $ 82,631 $ 36,545,471 100.00% ============== =========== ======== ============ ========== SFAS 91 deferred loan fees (37,632) Loan discount on purchased loans (3,838) Undisbursed loan funds (3,306) Allowance for loan losses (233,280) Loans to facilitate (LTF) interest reserve (589) Troubled debt restructured (TDR)interest reserve (3,894) Loans on deposits 28,167 -------------- Total loan portfolio and loans securitized with FNMA with recourse 36,291,099 Loans securitized with FNMA with recourse (3,030,390)(b) -------------- Total loan portfolio $ 33,260,709 ==============
(a) The Company has no commercial loans. (b) The above schedule includes the December 31, 1997 balances of adjustable rate loans that were securitized with full credit recourse into Federal National Mortgage Association (FNMA)mortgage-backed securities. ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued)
TABLE 7 Loan Portfolio by State December 31, 1996 (Dollars in thousands) Residential Commercial Loans Real Estate Real Total as a % of ---------------------------- State 1 - 4 5+ Land Estate Loans (a) Portfolio - ------------------- -------------- ----------- -------- ------------ -------------- ------------ California $ 19,852,265 $3,379,929 $ 253 $ 56,344 $ 23,288,791 69.28% Illinois 1,047,867 186,720 -0- 1,799 1,236,386 3.68 Texas 1,122,383 111,652 575 1,576 1,236,186 3.68 Colorado 969,197 242,594 -0- 7,149 1,218,940 3.63 New Jersey 1,051,639 408 -0- 6,653 1,058,700 3.15 Florida 1,015,879 20,583 116 951 1,037,529 3.09 Washington 414,052 356,721 -0- 757 771,530 2.30 Arizona 618,116 50,949 -0- 585 669,650 1.99 Virginia 491,967 8,600 -0- 1,465 502,032 1.49 Pennsylvania 481,823 4,263 -0- 3,661 489,747 1.46 Connecticut 407,189 -0- -0- 23 407,212 1.21 Maryland 327,128 2,198 -0- 548 329,874 0.98 Oregon 213,484 11,117 -0- 2,735 227,336 0.68 Nevada 181,105 1,121 -0- -0- 182,226 0.54 Utah 150,048 60 -0- 1,790 151,898 0.45 Kansas 144,576 4,926 -0- 193 149,695 0.45 Minnesota 136,221 8,385 -0- -0- 144,606 0.43 Wisconsin 97,589 3,905 -0- -0- 101,494 0.30 Missouri 70,411 6,557 -0- -0- 76,968 0.23 Massachusetts 68,660 -0- -0- 20 68,680 0.20 New York 48,519 -0- -0- -0- 48,519 0.14 Washington DC 42,466 -0- -0- -0- 42,466 0.13 Georgia 35,703 -0- -0- 1,786 37,489 0.11 New Mexico 34,390 -0- -0- -0- 34,390 0.10 Idaho 25,727 -0- -0- -0- 25,727 0.08 Ohio 17,385 2,267 203 4,360 24,215 0.07 Delaware 22,683 -0- -0- -0- 22,683 0.07 North Carolina 7,812 228 -0- 500 8,540 0.03 South Dakota 6,309 -0- -0- -0- 6,309 0.02 Other 12,011 11 -0- 4,629 16,651 0.03 -------------- ----------- -------- ------------ -------------- --------- Totals $ 29,114,604 $4,403,194 $ 1,147 $ 97,524 33,616,469 100.00% ============== =========== ======== ============ ========= SFAS 91 deferred loan fees (58,431) Loan discount on purchased loans (4,331) Undisbursed loan funds (3,920) Allowance for loan losses (195,702) Loans to facilitate (LTF) interest reserve (536) Troubled debt restructured (TDR) interest reserve (6,640) Loans on deposits 31,936 Total loan portfolio and loans securitized with FNMA with recourse 33,378,845 Loans securitized with FNMA with recourse (3,265,424)(b) -------------- Total loan portfolio $ 30,113,421 ==============
(a) The Company has no commercial loans. (b) During 1995 and 1996, loans amounting to $3.6 billion were securitized with full recourse into FNMA mortgage-backed securities. The December 31, 1996 balances of these FNMA mortgage-backed securities are reflected in the amounts above. ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued) The table below sets forth the composition of the Company's loan portfolio (excluding mortgage-backed securities) by type of collateral at December 31.
TABLE 8 Loan Portfolio by Type of Security (Dollars in thousands) 1997 1996 1995 1994 1993 ------------ ------------ ------------ ------------- ------------- Loans collateralized primarily by first deeds of trust: One-to four-family units . $ 28,978,476 $25,862,898 $24,071,421 $ 23,217,564 $ 20,197,613 Over four-family units. . . 4,462,990 4,403,389 4,205,050 3,946,446 3,785,673 Commercial real estate. . . 82,888 97,852 122,396 134,189 153,396 Construction loans. . . . . -0- -0- 1,471 -0- 580 Land. . . . . . . . . . . . 977 1,147 1,511 1,851 2,407 Loans on deposits . . . . 28,167 31,936 33,279 30,460 32,012 Less: Undisbursed loan funds. . . 3,306 3,920 3,568 2,781 1,882 Unearned fees and discounts. 45,953 69,938 88,194 105,314 112,751 Unamortized discount arising from acquisitions . . . 10,250 14,241 20,025 27,146 37,779 . . . . . Allowance for loan losses. . 233,280 195,702 141,988 124,003 106,698 . . ------------ ------------ ------------ ------------- ------------- $33,260,709 $30,113,421 $28,181,353 $ 27,071,266 $ 23,912,571 ============ ============ ============ ============= =============
At December 31, 1997, 99% of the loans in the portfolio had remaining terms to maturity in excess of 10 years. The table below sets forth the amount of loans due after one year that have predetermined interest rates and the amount that have floating interest rates at December 31, 1997. TABLE 9 Loans Due After One Year (Dollars in thousands) Adjustable Rate $30,523,034 Fixed Rate 2,687,318 -------------- $33,210,352 ============== The table on the following page sets forth information concerning new loans made by the Company during 1997, 1996, and 1995 by type and purpose of loan. ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued)
TABLE 10 New Loan Originations By Type and Purpose (Dollars in thousands) 1997 1996 1995 ------------------------------ ----------------------------- ------------------------------ No.of % of No.of % of No.of % of Type Loans Amount Total Loans Amount Total Loans Amount Total ------ ----------- ------- ------ ---------- ------- ------ ----------- -------- Residential (one unit) 47,508 $ 6,847,344 91.5% 46,225 $6,268,160 89.4% 38,742 $5,274,785 88.7% Residential (2 to 4 units) 1,625 231,682 3.1 1,821 236,304 3.4 1,679 223,177 3.7 Residential (5 or more units) 726 403,947 5.4 978 507,977 7.2 898 451,102 7.6 Commercial -0- -0- 0.0 1 121 0.0 -0- -0- 0.0 ======= =========== ====== ======= ========== ====== ======= =========== ====== Totals 49,859 $7,482,973 100.0% 49,025 $7,012,562 100.0% 41,319 $5,949,064 100.0% ======= =========== ====== ======= ========== ====== ======= =========== ======
1997 1996 1995 ------------------------------ ----------------------------- ------- ----------- ------ No.of % of No.of % of No.of % of Purpose Loans Amount Total Loans Amount Total Loans Amount Total ---------------- ------- ----------- ------ ------- ---------- ------ ------- ----------- ------ Purchase 33,663 $ 5,018,687 67.1% 32,553 $4,607,852 65.7% 28,343 $ 4,046,605 68.0% Refinance 16,196 2,464,286 32.9 16,472 2,404,710 34.3 12,976 1,902,459 32.0 ------- ----------- ------ ------- ---------- ------ -------- ----------- ------ Totals 49,859 $ 7,482,973 100.0% 49,025 $7,012,562 100.0% 41,319 $ 5,949,064 100.0% ======= =========== ====== ======= ========== ====== ======= =========== ======
Note:During 1997, 1996, and 1995, the Company also purchased $2 million, $5 million, and $31 million, respectively, of residential loans (not included above) of which $0 million, $3 million, and $26 million, respectively, were on one-unit residential properties. New loan originations in 1997, 1996, and 1995 amounted to $7.5 billion, $7.0 billion, and $5.9 billion, respectively. The increase in loan volume in 1997 occurred because of a continued strong housing market, primarily in California, and solid demand for ARMs, the Company's principal product. The increase in loan volume in 1996 occurred because rates on new fixed-rate mortgages generally remained around the 8% level during 1996, while the starting rates on ARMs, the Company's principal product, remained low and more affordable. Refinanced loans constituted 33% of new loan originations in 1997 compared to 34% in 1996 and 32% in 1995. The total growth in the portfolio for the year ended December 31, 1997, was $3.1 billion or 10% compared to $1.9 billion or 7% for the year ended December 31, 1996. Had there not been $3.6 billion of loans securitized into MBS during 1996 and 1995, loan portfolio growth for 1996 would have been $3.0 billion or 10%. ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued) The primary source of mortgage originations is loans secured by residential properties in California. Loans originated in California were $4.0 billion in 1997 compared to $3.5 billion in 1996 and $3.1 billion in 1995. In 1997, 54% of total originations were on California residential property compared to 50% in 1996 and 53% in 1995. The five largest states, other than California, for originations for the year ended December 31, 1997 were Florida, Texas, Illinois, New Jersey, and Colorado with a combined total of 25% of total originations. The percentage of loans originated in California increased in 1997 as compared to 1996 due to the improvement in the California real estate market. Although California originations were a large portion of total 1996 originations, the California share of total originations decreased in 1996 as compared to 1995 due to increased loan volume in markets outside of California. Federal regulations permit federally chartered savings and loan associations to make or purchase both fixed-rate loans and loans with periodic adjustments to the interest rate. These latter types of loans are subject to the following primary limitations: (i) the adjustments must be based on changes in a specified interest rate index, which may be selected by the association but which must be readily available to, and readily verifiable by, the borrower; and (ii) adjustments to the interest rate may be implemented through changes in the monthly payment amount and/or adjustment to the outstanding principal balance or terms, except that the original loan term may not be increased to more than 40 years. Pursuant to the aforementioned powers, the Company offers adjustable rate mortgages and this type of mortgage is the Company's primary real estate loan. The portion of the mortgage portfolio (excluding mortgage-backed securities) composed of rate-sensitive loans was 93% at yearend 1997 compared to 91% at yearend 1996 and 90% at yearend 1995. Golden West's ARM originations constituted over 95% of new mortgage loans made by the Company in 1997, compared with 90% in 1996 and 93% in 1995. Most of the Company's ARMs carry an interest rate that changes monthly based on movements in certain interest rate or cost of funds indices. During the life of the loan, the interest rate may not be raised above a lifetime cap, set at the time of origination or assumption. Lifetime caps on the Company's ARMs are typically between 350 and 625 basis points (a basis point is one one-hundredth of one percent) higher than the loan's initial fully-indexed contract rate. On most of the Company's ARMs, monthly payments of principal and interest are adjusted annually with a maximum increase or decrease of 7-1/2% of the prior year's payment. At five year intervals, the payment may be adjusted without limit, to amortize the loan fully within the then remaining term. Within these five year periods, negative amortization (deferred interest) may occur to the extent that the loan balance remains below 125% of the original mortgage amount, unless the original loan to value ratio exceeded 85%, in which case the loan balance cannot exceed 110% of the original mortgage amount. ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued) On certain other ARMs, the payment and interest rate change every six months, with the maximum rate per change capped at one percent. These ARMs do not allow negative amortization and, consequently, do not have the 7-1/2% payment change limitation. The Company also offers a "modified" ARM, a loan that usually offers a low fixed rate from 1% to 3% below the initial fully indexed contract rate for an initial period, normally one to 36 months. (However, the borrower must qualify at the initial fully-indexed contract rate.) The weighted average maximum lifetime cap rate on the Company's ARM loan portfolio was 12.74%, or 5.34% above the actual weighted average rate at December 31, 1997, versus 12.90%, or 5.64% above the weighted average rate at yearend 1996. Approximately $5.5 billion of the Company's ARMs have terms that state that the interest rate may not fall below a lifetime floor, set at the time of origination or assumption. As of December 31, 1997, $558 million ARM loans had reached their rate floors. The weighted average floor rate on the loans that had reached their floor was 7.76% at yearend 1997 compared to 7.75% at yearend 1996. Without the floor, the average yield on these loans would have been 7.21% at December 31, 1997 and 7.10% at December 31, 1996. Interest rates charged by the Company on real estate loans are affected principally by competition, and also by the supply of money available for lending, loan demand, and factors that are, in turn, affected by general economic conditions, regulatory and monetary policies of the federal government, the OTS and the Federal Reserve Board, and legislation and other governmental action dealing with budgetary and tax matters. The Company originates loans through offices that are staffed by employees who primarily contact local real estate brokers regarding possible lending opportunities. All loan applications are completed, reviewed, and approved in the loan field offices and forwarded to the Company's central offices in San Antonio, Texas, for processing. The Company also utilizes the services of selected mortgage brokers to obtain completed loan applications. In such cases, the Company, in addition to the review by the mortgage broker, performs its own quality review, including a physical inspection of the property, before processing the application and funding the loan. The Company's loan approval process is intended to assess both the borrower's ability to repay the loan and the adequacy of the proposed security. Documentation for all loans is maintained in the Company's loan servicing offices in San Antonio, Texas. The Company generally lends up to 80% of the appraised value of residential real property and, under certain circumstances, up to 95% of the appraised value of ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued) single-family residences. During 1997, 1996 and 1995, the great majority of all loans originated in excess of 80% of the appraised value of the property carried mortgage insurance except loans to facilitate the sale of REO. During 1997, 5% of loans originated were in excess of 80% of the appraised value of the residence compared to 6% in 1996 and 1995. The Company requires title insurance for all mortgage loans and requires that fire and casualty insurance be maintained on all improved properties that are securities for its loans. The original contractual loan payment period for residential loans normally ranges from 15 to 40 years with most having original terms of 30 years. However, the majority of such loans remain outstanding for a shorter period of time. To generate income and to provide additional funds for lending and liquidity, the Company has from time to time sold, without recourse, whole loans and participations in pools of loans to the Federal Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage Association, and to institutional investors. Beginning in 1995, the Company began sales to FNMA of whole loans with recourse, for which a reserve has been provided. The Company continues to collect payments on the loans as they become due, and otherwise to service the loans. The Company pays an agreed-upon yield on the participant's portion of the loans. This yield is usually less than the interest agreed to be paid by the borrower, with the difference being retained by the Company as servicing fee income. The Company continues to sell most of its fixed-rate originations. Loans originated for sale were $217 million, $477 million, and $169 million for the years ended December 31, 1997, 1996, and 1995, respectively. The Company sold $209 million, $485 million, and $142 million of these loans during 1997, 1996, and 1995, respectively. The Company recognized pre-tax gains of $5.2 million in 1997 compared to $11.1 million in 1996 and $443 thousand in 1995. Included in the $5.2 million gain in 1997 is $4.9 million due to the capitalization of mortgage servicing rights (see page 19 for further information). The loans held for sale portfolio had a balance of $23 million at December 31, 1997, and is carried at the lower of cost or market. At December 31, 1997, the balance of loans sold with recourse was $653 million and the reserve for the recourse liability had a balance of $886 thousand. At December 31, 1997, the Company was engaged in servicing approximately $4.4 billion of loan participations and whole loans for others including $3.6 billion of loans serviced for FNMA with recourse. For the year ended December 31, 1997, fees received for such servicing activities totaled $16 million, or approximately three-fifths of one percent of total revenues compared to $13 million or approximately one-half of one percent of total revenues for the year ended December 31, 1996. ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued) The Company also purchases, on a selective basis and only after strict underwriting review, residential mortgage whole loans in the secondary market. Loan purchases in 1997, 1996, and 1995 amounted to $2 million, $5 million, and $31 million, respectively. Loan repayments consist of monthly loan amortization, loan payoffs, and loan refinances. During 1997, 1996, and 1995, repayments amounted to $3.8 billion, $3.1 billion, and $2.3 billion, respectively. The increase in repayments in 1997 as compared to 1996 was due to an increase in the portfolio balance as well as increased prepayment rates. The increase in repayments in 1996 compared to 1995 was due to higher mortgage payoffs and higher refinances within the Company's loan portfolio as well as an increase in the portfolio balance. The 1996 increase would have been even higher if the Company had not securitized $1.3 billion of loans into MBS during 1996. In addition to interest earned on loans, the Company receives fees for originating loans and for making loan commitments. The income represented by such fees varies with the volume and types of loans made. In 1997 and 1996, the Company responded to increased competition from fixed-rate lenders by offering more low and zero point adjustable rate mortgage options to its customers. The Company also charges fees for loan prepayments, loan assumptions and modifications, late payments and other miscellaneous services. The table below sets forth information relating to interest rates and loan fees charged for the years indicated.
TABLE 11 Weighted Average Interest Rates and Fees on New Loan Originations 1997 1996 1995 1994 1993 ---------- -------- --------- --------- -------- Weighted average interest rate on new real estate loans originated (a) 7.59% 7.59% 7.56% 6.44% 6.86% Weighted average loan fees received on new real estate loans originated (a) .18% .25% .25% .29% .59%
(a) excludes loans purchased ITEM 1. BUSINESS (Continued) LENDING ACTIVITIES (continued) On January 1, 1996, the Company adopted Statement of Financial Accounting Standard No. 122, "Accounting for Mortgage Servicing Rights" (SFAS 122). SFAS 122 amended Statement of Financial Accounting Standard No. 65, "Accounting for Certain Mortgage Banking Activities," to require that any financial institution participating in the secondary 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 required 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 December 31, 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) which superseded SFAS 122. The Accounting for mortgage servicing assets under SFAS 125 is substantially the same as the accounting for mortgage servicing assets under SFAS 122. For the years ended December 31, 1997 and 1996, Golden West recognized gains of $5 million and $11 million, respectively, on the sale of loans due to the capitalization of servicing rights. After amortization, the balance at December 31, 1997 and 1996 of the capitalized servicing rights was $11 million and $9 million, respectively. If a borrower fails to make required payments on a loan, the Company usually takes steps required under applicable law to foreclose upon the security for the loan. If a delinquency is not cured, the property is generally acquired by the Company in a foreclosure sale or by taking a deed in lieu of foreclosure. If the applicable period of redemption by the borrower (which varies from state to state and by method of foreclosure pursued) has expired, the Company is free to sell the property. The property may then be sold generally with a loan conforming to normal loan requirements, or with a "loan to facilitate sale" which is so designated if the loan involves terms more favorable to the borrower than those normally permitted. Various antideficiency and homeowner protective provisions of state law may limit the remedies available to lenders when a residential mortgage borrower is in default. The effect of these provisions, in most cases, is to limit the Company to foreclosing upon, or otherwise obtaining ownership of, the property securing the loan after default and to prevent the Company from recovering from the borrower any deficiency between the amount realized from the sale of such property and the amount owed by the borrower. ITEM 1. BUSINESS (Continued) ASSET QUALITY One measure of the soundness of the Company's portfolio is its ratio of nonperforming assets (NPAs) to total assets. Nonperforming assets include nonaccrual loans (loans, including loans swapped into MBS with recourse, that are 90 days or more past due) and real estate acquired through foreclosure. No interest is recognized on nonaccrual loans. The Company's troubled debt restructured (TDRs) are made up of loans on which delinquent payments have been capitalized or on which temporary interest rate reductions have been made, primarily to customers negatively impacted by adverse economic conditions. The table below sets forth the components of the Company's nonperforming assets and troubled debt restructured and the various ratios to total assets at December 31.
TABLE 12 Nonperforming Assets and Troubled Debt Restructured (Dollars in thousands) 1997 1996 1995 1994 1993 ----------- ---------- ---------- ---------- ----------- Non-accrual loans $ 317,550 $ 373,157 $ 314,086 $ 284,103 $ 330,062 Real estate acquired through foreclosure 61,517 82,075 75,158 70,981 62,724 Real estate in judgment 67 416 443 390 1,366 ----------- ---------- ---------- ---------- ----------- Total nonperforming assets $ 379,134 $ 455,648 $ 389,687 $ 355,474 $ 394,152 =========== ========== ========== ========== =========== TDRs $ 43,795 $ 84,082 $ 45,222 $ 72,827 $ 37,190 =========== ========== ========== ========== =========== Ratio of nonperforming assets to total assets .96% 1.21% 1.11% 1.12% 1.37% =========== ========== ========== ========== =========== Ratio of TDRs to total assets .11% .22% .13% .23% .13% =========== ========== ========== ========== =========== Ratio of NPAs and TDRs to total assets 1.07% 1.43% 1.24% 1.35% 1.50% =========== ========== ========== ========== ===========
The decrease in NPAs during 1997 reflected the improving California economy. The increase in NPAs during 1996 reflected the continued weakness in the California housing market and increased bankruptcies nationwide. The level of NPAs during 1993 through 1995 remained relatively flat even though the loan portfolio continued to grow. The Company continues to closely monitor all delinquencies and takes appropriate steps to protect its interests. Interest foregone on non-accrual loans (loans greater than 90 days past due) is fully-reserved and amounted to $14 million in 1997, $20 million in 1996, and $18 million in 1995. The Company's troubled debt restructured was $44 million, or .11% of assets, at December 31, 1997, compared to $84 million, or .22% of assets, at yearend 1996 and $45 million, or 0.13% of assets, at yearend 1995. Interest foregone on TDRs amounted to $1.9 million in 1997 compared to $1.7 million in 1996 and $1.8 million in 1995. The tables on the following two pages show the Company's nonperforming assets by state at December 31, 1997, and 1996. ITEM 1. BUSINESS (Continued) ASSET QUALITY (continued)
TABLE 13 Nonperforming Assets by State December 31, 1997 (Dollars in thousands) Non-Accrual Loans (a) ------------------------------------- Real Estate Owned Residential --------------------------------------------- NPAs as Commercial Residential Commercial Total a % of State 1 - 4 5+ Real Estate 1 - 4 5+ Land Real Estate NPAs(b) Loans - ----------------- ----------- ----------- ----------- ---------- --------- --------- ------------ ---------- ----------- California $ 228,859 $ 8,528 $ 1,579 $ 53,834 $ 1,913 $ -0- $ 2,167 $ 296,880 1.23% Texas 8,142 -0- -0- 994 -0- -0- -0- 9,136 0.61 Illinois 9,656 221 -0- 818 -0- -0- -0- 10,695 0.77 Florida 11,211 -0- 191 567 -0- -0- -0- 11,969 0.88 Colorado 1,317 -0- 16 75 -0- -0- -0- 1,408 0.11 New Jersey 17,299 -0- 769 530 -0- -0- -0- 18,598 1.49 Washington 1,930 -0- -0- 110 -0- -0- -0- 2,040 0.22 Arizona 1,412 -0- -0- -0- -0- -0- -0- 1,412 0.18 Pennsylvania 6,412 -0- -0- 246 -0- -0- -0- 6,658 1.07 Virginia 1,726 -0- -0- 528 -0- -0- -0- 2,254 0.41 Connecticut 3,345 -0- -0- 274 -0- -0- -0- 3,619 0.74 Maryland 1,900 -0- -0- 106 -0- -0- -0- 2,006 0.54 Oregon 1,000 -0- -0- -0- -0- -0- -0- 1,000 0.37 Minnesota 798 -0- -0- -0- -0- -0- -0- 798 0.38 Utah 1,503 -0- -0- -0- -0- -0- -0- 1,503 0.74 Nevada 2,129 -0- -0- 133 -0- -0- -0- 2,262 1.19 Kansas 657 40 -0- -0- -0- -0- -0- 697 0.41 Wisconsin 807 -0- -0- -0- -0- -0- -0- 807 0.51 Massachusetts 96 -0- 20 -0- -0- -0- -0- 116 0.09 Missouri 469 39 -0- 126 163 -0- -0- 797 0.88 Washington DC 97 -0- -0- -0- -0- -0- -0- 97 0.19 New Mexico 217 -0- -0- -0- -0- -0- -0- 217 0.44 New York 2,976 -0- -0- 183 -0- -0- 30 3,189 7.33 Delaware 269 -0- -0- -0- -0- -0- -0- 269 0.82 Georgia 1,635 -0- -0- 181 -0- -0- -0- 1,816 5.67 Idaho 235 -0- -0- -0- -0- -0- -0- 235 0.75 Ohio -0- -0- 2 -0- -0- -0- -0- 2 0.01 North Carolina 5 -0- -0- -0- -0- -0- -0- 5 0.04 South Dakota -0- -0- -0- -0- -0- -0- -0- 0 0.00 Other 43 -0- -0- -0- -0- -0- -0- 43 0.22 ----------- ----------- ----------- ----------- --------- --------- ------------ ---------- -------- Totals $ 306,145 $ 8,828 $ 2,577 $ 58,705 $ 2,076 $ 0 $ 2,197 380,528 1.04 =========== =========== =========== ========== ========= ========= ============ REO general valuation allowance (1,394) (0.00) ---------- -------- $ 379,134 1.04% ========== ========
(a) Non-accrual loans are 90 days or more past due and have no unpaid interest accrued. (b) The above schedule includes the December 31, 1997 balances of adjustable rate loans that were securitized with full credit recourse into FNMA mortgage-backed securities. ITEM 1. BUSINESS (Continued) ASSET QUALITY (continued)
TABLE 14 Nonperforming Assets by State December 31, 1996 (Dollars in thousands) Non-Accrual Loans (a) ------------------------------------- Real Estate Owned Residential --------------------------------------------- NPAs as Real Estate Commercial Residential Commercial Total a % of State 1 - 4 5+ Real Estate 1 - 4 5+ Land Real Estate NPAs(b) Loans - ----------------- ----------- ----------- ----------- ---------- --------- ----- ---------- ---------- -------- California $ 287,869 $ 21,560 $ 2,385 $ 69,006 $ 9,156 $475 $ 2,175 $ 392,626 1.69% Illinois 5,487 223 -0- 247 472 -0- -0- 6,429 0.52 Texas 5,258 -0- -0- 429 -0- -0- -0- 5,687 0.46 Colorado 1,881 -0- 3,090 -0- -0- -0- -0- 4,971 0.41 New Jersey 12,593 -0- 1,876 1,194 -0- -0- -0- 15,663 1.48 Florida 6,263 -0- 267 411 -0- -0- -0- 6,941 0.67 Washington 1,903 -0- -0- -0- -0- -0- -0- 1,903 0.25 Arizona 1,280 -0- -0- -0- -0- -0- -0- 1,280 0.19 Virginia 1,464 -0- -0- 368 -0- -0- -0- 1,832 0.36 Pennsylvania 4,606 -0- 6 203 -0- -0- -0- 4,815 0.98 Connecticut 2,864 -0- -0- 94 -0- -0- -0- 2,958 0.73 Maryland 1,956 -0- -0- 98 -0- -0- -0- 2,054 0.62 Oregon 555 -0- -0- -0- -0- -0- -0- 555 0.24 Nevada 1,348 -0- -0- -0- -0- -0- -0- 1,348 0.74 Utah 561 -0- -0- -0- -0- -0- -0- 561 0.37 Kansas 950 40 -0- -0- -0- -0- -0- 990 0.66 Minnesota 586 -0- -0- -0- -0- -0- -0- 586 0.41 Wisconsin 226 -0- -0- -0- -0- -0- -0- 226 0.22 Missouri 504 231 -0- 147 -0- -0- -0- 882 1.15 Massachusetts -0- -0- 20 -0- -0- -0- -0- 20 0.03 New York 4,057 -0- -0- 113 -0- -0- -0- 4,170 8.59 Washington DC -0- -0- -0- -0- -0- -0- -0- -0- 0.00 Georgia 995 -0- -0- -0- -0- -0- -0- 995 2.65 New Mexico -0- -0- -0- -0- -0- -0- -0- -0- 0.00 Idaho -0- -0- -0- -0- -0- -0- -0- -0- 0.00 Ohio 61 -0- 58 -0- -0- -0- -0- 119 0.49 Delaware 59 -0- -0- -0- -0- -0- -0- 59 0.26 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 75 -0- -0- -0- -0- -0- -0- 75 0.45 ----------- ----------- ----------- ---------- --------- ------ ----------- ----------- ------ $ 343,401 $ 22,054 $ 7,702 $ 72,310 $ 9,628 $ 475 $ 2,175 $ 457,745 1.36 =========== =========== =========== ========== ========= ====== =========== (2,097) (0.00) REO general valuation allowance ----------- ------ $ 455,648 1.36% =========== ======
(a) Non-accrual loans are 90 days or more past due and have no unpaid interest accrued. (b) During 1995 and 1996, loans amounting to $3.6 billion were securitized with full recourse into FNMA mortgage-backed securities. The December 31, 1996 balance of the related nonperforming assets are reflected in the amounts above. ITEM 1. BUSINESS (Continued) ASSET QUALITY (continued) At December 31, 1997, approximately $323 million of the Company's loans were 30 to 89 days past due and an additional $165 million of loans were performing under bankruptcy protection. Management has included its estimate of potential losses on these loans in the allowance for loan losses. The Company provides specific valuation allowances for losses on loans when impaired, including loans securitized into MBS with recourse 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 data base that identifies losses on loans and foreclosed real estate from past years to the present, broken down by year of origination, type of loan, and geographical area. Management is then able to estimate a range of general loss allowances to cover losses in the portfolio. In addition, periodic reviews are made of major loans and real estate owned, and major lending areas are regularly reviewed to determine potential problems. Where indicated, valuation allowances are established or adjusted. In estimating possible losses, consideration is given to the estimated sale price, cost of refurbishing, payment of delinquent taxes, cost of disposal, and cost of holding the property. Additions to, and reductions from the allowances are reflected in current earnings. The table below shows the changes in the allowance for loan losses for the years indicated:
TABLE 15 Changes in Allowance for Loan Losses (Dollars in thousands) 1997 1996 1995 1994 1993 ----------- ------------ ----------- ----------- ------------ Beginning allowance for loan losses $ 195,702 $ 141,988 $ 124,003 $ 106,698 $ 70,924 Provision charged to expense 57,609 84,256 61,190 62,966 65,837 Less loans charged off (20,818) (31,239) (44,656) (46,556) (38,475) Add recoveries 787 697 1,451 895 1,145 Reclassification of in-substance foreclosure -0- -0- -0- -0- 7,267 allowances ----------- ------------ ----------- ----------- ------------ Ending allowance for loan losses $ 233,280 $ 195,702 $ 141,988 $ 124,003 $ 106,698 =========== ============ =========== =========== ============ Ratio of net chargeoffs to average loans outstanding (including MBS withrecourse) .06% .10% .15% .18% .16% =========== ============ =========== =========== ============ Ratio of allowance for loan losses to nonperforming assets 61.5% 43.0% 36.4% 34.9% 27.1% =========== ============ =========== =========== ============
Chargeoffs decreased in 1997 as compared to 1996 primarily due to the improving California economy. Chargeoffs decreased in 1996 as compared to 1995 as a result of decreases in losses on REO property. ITEM 1. BUSINESS (Continued) INVESTMENT ACTIVITIES Golden West's investment securities portfolio is composed primarily of federal funds, short-term repurchase agreements collateralized by mortgage-backed securities, short-term money market securities, United States government obligations, and collateralized mortgage obligations. In determining the amounts of assets to invest in each class of investments, the Company considers relative rates, liquidity, and credit quality. The level of the Company's investments position in excess of its liquidity requirements at any time depends on liquidity needs and available arbitrage opportunities. The Company classifies its investment securities as either held to maturity or available for sale. The Company has no trading securities. Held to maturity securities are recorded at cost with any discount or premium amortized using a method that is not materially different from the interest method, which is also known as the level yield method. Securities held to maturity are recorded at cost because the Company has the ability to hold these securities to maturity and because it is Management's intention to hold them to maturity. At December 31, 1997, 1996, and 1995, the Company had no securities held to maturity. Securities available for sale increase the Company's portfolio management flexibility for investments and are reported at fair value. Net unrealized gains and losses are excluded from earnings and reported net of applicable income taxes as a separate component of stockholders' equity until realized. At December 31, 1997, 1996, and 1995, the Company had securities available for sale in the amount of $609 million, $781 million, and $902 million, respectively, including net unrealized gains on investment securities available for sale of $245 million, $159 million, and $117 million, respectively. Gains or losses on sales of investment securities are realized and recorded in earnings at the time of sale and are determined by the difference between the net sales proceeds and the cost of the security, using specific identification, adjusted for any unamortized premium or discount. The Company has other investments, which are recorded at cost with any discount or premium amortized using a method that is not materially different from the interest method. Included in the securities available for sale at December 31, 1997, 1996, and 1995, were collateralized mortgage obligations (CMOs) in the amount of $71 million, $170 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 December 31, 1997, the great majority of the Company's CMOs had remaining terms to maturity of five years or less and all CMOs qualified for inclusion in the regulatory liquidity measurement. ITEM 1. BUSINESS (Continued) INVESTMENT ACTIVITIES (continued) The table below sets forth the composition of the Company's securities available for sale at December 31.
TABLE 16 Composition of Securities Available for Sale (Dollars in thousands) 1997 1996 1995 ------------ ------------ ------------ Certificates of deposit and short-term bank notes $ -0- $ 149,997 $ 50,000 U.S Treasury and Government agency obligations 201,845 200,844 174,819 Collateralized mortgage obligations 71,432 169,812 407,947 Commercial paper -0- -0- 50,974 Equity securities 335,267 260,672 218,116 ------------ ------------ ------------ $ 608,544 $ 781,325 $ 901,856 ============ ============ ============
The weighted average yields on the securities available for sale portfolio were 6.88%, 6.64%, and 5.89% at December 31, 1997, 1996, and 1995, respectively. The table below sets forth the composition of the Company's other investments at December 31.
TABLE 17 Composition of Other Investments (Dollars in thousands) 1997 1996 1995 ------------ ------------ ----------- Eurodollar time deposits, at cost $ 180,000 $ 102,400 $ -0- Federal funds, at cost 72,648 324,432 490,960 Short-term repurchase agreements collateralized by mortgage-back securities, at cost -0- 652,000 699,200 ============ ============ =========== $ 252,648 $ 1,078,832 $1,190,160 ============ ============ ===========
The weighted average yields on the other investments portfolio were 5.91%, 7.01%, and 6.00% at December 31, 1997, 1996, and 1995, respectively. As of December 31, 1997, the entire other investments portfolio matures in 1998. ITEM 1. BUSINESS (Continued) MORTGAGE-BACKED SECURITIES The Company classifies its mortgage-backed securities as either held to maturity or available for sale. The Company has no trading MBS. Mortgage-backed securities held to maturity are recorded at cost because the Company has the ability to hold these MBS to maturity and because Management intends to hold these securities to maturity. Premiums and discounts on MBS are amortized or accreted using the interest method over the estimated life of the security. At December 31, 1997, 1996, and 1995, the Company had mortgage-backed securities held to maturity in the amount of $3.8 billion, $4.1 billion, and $3.1 billion, respectively, including $3.0 billion of FNMA MBS subject to full credit recourse by the Company at December 31, 1997. MBS available for sale are reported at fair value, with unrealized gains and losses excluded from earnings and reported net of applicable income taxes as a separate component of stockholders' equity until realized. At December 31, 1997, 1996, and 1995, the Company had mortgage-backed securities available for sale in the amount of $157 million, $227 million, and $283 million, respectively, including unrealized gains on mortgage-backed securities available for sale of $8 million, $11 million, and $14 million, respectively. Gains or losses on sales of MBS are realized and recorded in earnings at the time of sale and are determined by the difference between the net sales proceeds and the cost of the MBS, using specific identification, adjusted for any unamortized premium or discount. The Company has securitized certain loans from its held to maturity portfolio into MBS with recourse which are available to be used as collateral for borrowings. These MBS are recorded at cost if they are held to maturity and recorded at fair value if they are available for sale. During 1997, the Company desecuritized $856 million of FNMA, Eleventh District Cost of Funds Index (COFI)MBS in November and securitized $1.0 billion of adjustable rate mortgages into FNMA COFI indexed MBS in December. During 1996, the Company securitized $1.3 billion of adjustable rate mortgages into FNMA COFI-indexed mortgage-backed securities. During 1995, the Company securitized $2.3 billion of ARMs into FNMA COFI-indexed MBS. The FNMA MBS held to maturity are available to be used as collateral for borrowings and are subject to full credit recourse to the Company. ITEM 1. BUSINESS (Continued) MORTGAGE-BACKED SECURITIES (continued) Repayments of MBS during the years 1997, 1996, and 1995 amounted to $518 million, $413 million, and $210 million, respectively. MBS repayments were higher in 1997 due to the increase in prepayments on underlying mortgages. MBS repayments were higher in 1996 due to the increase in total MBS outstanding and an increase in prepayments on underlying mortgages. For information on MBS see Notes D and E to the Financial Statements included in Item 14. 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 $205.2 million as the cumulative effect of the change in accounting for goodwill. Financial statements from periods prior to 1996 have not been restated. The Company had been accounting for acquisitions initiated subsequent to September 30, 1982 in accordance with SFAS 72. The remaining goodwill from acquisitions subsequent to 1982 amounting to less than .2% of total assets was not material and was reclassified to other assets. Amortization of goodwill is recorded on the Company's Consolidated Statement of Net Earnings under the section titled "Non-Interest Income - Other". LONG-LIVED ASSETS AND OTHER INTANGIBLES The Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS 121) in 1995. SFAS 121 establishes accounting and disclosure requirements using a fair value based method of accounting for long-lived assets and certain identifiable intangibles whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. The adoption of SFAS 121 had no effect on the Company's 1997, 1996 and 1995 consolidated financial statements. ITEM 1. BUSINESS (Continued) STOCKHOLDERS' EQUITY The Company's stockholders' equity increased during 1997 as a result of earnings and increased market values of securities available for sale. These increases were partially offset by the $48 million cost of the repurchase of Company stock. The Company's stockholders' equity increased during 1996 as a result of earnings and the increase in market values of securities available for sale. These increases were partially offset by the $106 million cost of the repurchase of Company stock. The Company's stockholders' equity increased during 1995 as a result of earnings and increased market values of securities available for sale. Since 1993, through three separate actions, Golden West's Board of Directors' authorized the purchase by the Company of up to 12.2 million shares of Golden West's common stock. As of December 31, 1997, 8.5 million shares had been repurchased and retired at a cost of $380 million since October 28 1993, of which 731,000 shares were purchased and retired at a cost of $48 million during 1997. Dividends from subsidiaries 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. The Company has on file a shelf registration statement with the Securities and Exchange Commission to issue up to two million shares of its preferred stock. The preferred stock may be issued in one or more series, may have varying provisions and designations, and may be represented by depository shares. The preferred stock is not convertible into common stock. No preferred stock has yet been issued under registration. The Company's preferred stock has been preliminarily rated a2 by Moody's. 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 and will be adopted in 1998. ITEM 1. BUSINESS (Continued) EARNINGS PER SHARE In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). SFAS 128 replaced "Primary" and "Fully-Diluted" Earnings Per Share (EPS) with "Basic EPS" and "Diluted EPS" for fiscal years ending after December 15, 1997. Basic EPS is calculated by dividing net earnings for the period by the weighted average common shares outstanding for that period. There is no adjustment to the number of outstanding shares for stock options or other dilutive items as was previously done in the calculation of Primary EPS. Diluted EPS takes into account the effect of dilutive instruments, such as stock options, but uses 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, Fully-Diluted EPS used the period-ending share price, if it exceeded the average price, in the calculation to determine the number of incremental shares that were to be added. The Company's Basic EPS for the years ended December 31, 1997, 1996, and 1995, was $6.22, $5.31 (before the three nonrecurring items), and $4.00, respectively. The Company reported Diluted EPS of $6.13 for the year ended December 31, 1997 as compared to $5.24 (before the three nonrecurring items), and $3.94 for the years ended December 31, 1996 and 1995, respectively. YIELD ON INTEREST-EARNING ASSETS/COST OF FUNDS Information regarding the Company's yield on interest-earning assets and cost of funds at December 31, 1997, 1996, and 1995 is contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and is incorporated herein by reference. The gap table and related discussion included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, gives information on the repricing characteristics of the Company's interest-earning assets and interest-bearing liabilities at December 31, 1997, and is incorporated herein by reference. ITEM 1. BUSINESS (Continued) YIELD ON INTEREST-EARNING ASSETS/COST OF FUNDS (Continued) The dollar amounts of the Company's income and interest expense fluctuate depending both on changes in the respective interest rates and on changes in the respective amounts (volume) of interest-earning assets and interest-bearing liabilities. The following table sets forth certain information with respect to the yields earned and rates paid on the Company's interest-earning assets and interest-bearing liabilities.
TABLE 18 Average Interest-Earning Assets and Interest-Bearing Liabilities At and for the Years Ended December 31 (Dollars in thousands) 1997 1996 1995 ---------------------------- ------------------------------ ---------------------------- End of End of End of Average Average Period Average Average Period Average Average Period Balances Yield Period Balances Yield Yield Balances Yield Yield ----------- ------- ------ ----------- -------- ------- ---------- ------- ------- ASSETS Investment Securities $ 2,025,096 6.06% 6.48% $ 1,690,498 6.18% 6.88% $2,188,929 5.97% 5.96% Mortgage-backed securities 3,985,408 7.09% 7.23% 3,392,220 7.26% 7.13% 2,294,360 7.90% 7.41% Loans receivable (a) 31,811,922 l7.52% 7.53% 29,316,590 7.52% 7.43% 27,948,917 7.51% 7.69% Invest,in capital stock of 566,678 6.19% 5.86% 433,819 6.23% 6.34% 345,837 5.15% 4.92% FHLB ----------- ------- ----------- ------- ----------- ------- Interest-earning assets $38,389,104 7.38% $34,833,127 7.41% $32,778,043 7.41% =========== ======= =========== ======= =========== ======= LIABILITIES Deposits: Checking accounts $ 93,472 1.18% 1.75% $ 622,011 1.21% 1.17% $ 711,460 1.30% 1.25% Savings accounts 3,112,833 2.79% 3.75% 1,880,457 2.30% 2.38% 2,073,226 2.32% 2.90% Term accounts 20,700,959 5,42% 5.37% 18,756,033 5.39% 5.32% 17,526,056 5.66% 5.54% ----------- ------- ------ ------------ -------- ------ ------------ ------- ------- Total deposits 23,907,264 5.06% 5.04% 21,258,501 4.99% 4.98% 20,310,742 5.16% 5.15% Advances from FHLB 7,813,493 5.59% 5.78% 7,343,334 5.57% 5.47% 6,438,791 5.74% 5.70% Reverse repurchases 2,630,958 5.72% 5.73% 2,013,427 5.86% 5.45% 1,120,860 6.31% 6.15% Other borrowings 2,000,791 7.24% 7.94% 2,202,477 7.36% 7.65% 3,030,067 7.14% 7.15% ----------- ------- ------------ -------- ------------ ------- Interest-bearing liabilities $36,352,506 5.34% $32,817,739 5.33% $30,900,460 5.52% =========== ======= ============ ======== ============ ======= Net interst margin 2.04% 2.08% 1.89% ======= ======== ======= Net interest income $ 890,495 $ 830,960 $ 722,836 =========== ============ ============ Net yield on average interest-earning assets 2.32% 2.39% 2.21% ======= ======== =======
(a) Includes nonaccrual loans (90 days or more past due). ITEM 1. BUSINESS (Continued) YIELD ON INTEREST-EARNING ASSETS/COST OF FUNDS (continued) The table below presents the changes for 1997 and 1996 from the respective preceding year of the interest income and expense associated with each category of interest-bearing asset and liability as allocated to changes in volume and changes in rates.
TABLE 19 Volume and Rate Analysis of Interest Income and Interest Expense Years Ended December 31 (Dollars in thousands) Increase/Decrease in Income/Expense Due to Changes in Due to Changes in Volume and Rate (a) ---------------------------------------------------------------- 1997 1996 1995 1997 versus 1996 1996 versus 1995 ---------- ---------- ---------- ------------------------------- ------------------------------ Income/ Income/ Income/ Expense(b) Expense(b) Expense(b) Volume Rate Total Volume Rate Total ---------- ---------- ---------- --------- --------- --------- --------- --------- -------- Interest Income Investments $ 122,765 $ 104,510 $ 130,595 $ 20,240 $ (1,985) $ 18,255 $ (31,018) $ 4,933 $(26,085) Mortgage-backed securities 282,499 246,293 181,355 41,887 (5,681) 36,206 78,260 (13,322) 64,938 Loans receivable 2,392,175 2,203,752 2,097,664 187,642 781 188,423 102,804 3,284 106,088 Invest. in capital stock of Federal Home Loan Banks 35,058 27,006 17,827 8,219 (167) 8,052 5,054 4,125 9,179 ---------- ---------- ---------- Total interest income 2,832,497 2,581,561 2,427,441 Interest Expense Deposits Checking accounts 1,100 7,536 9,258 (6,226) (210) (6,436) (1,112) (610) (1,722) Savings accounts 86,799 43,261 48,033 32,894 10,644 43,538 (4,437) (335) (4,772) Term accounts 1,121,747 1,010,617 991,099 105,361 5,769 111,130 59,545 (40,027) 19,518 ---------- ---------- ---------- --------- --------- --------- --------- --------- -------- Total deposits 1,209,646 1,061,414 1,048,390 132,029 16,203 148,232 53,996 (40,972) 13,024 Advances from Federal Home Loan Banks 437,028 409,040 369,239 26,290 1,698 27,988 50,004 (10,203) 39,801 Securities sold under agreements to repurchase 150,557 117,960 70,709 35,269 (2,672) 32,597 51,897 (4,646) 47,251 Other borrowings 144,771 162,187 216,267 (14,634) (2,782) (17,416) (61,188) 7,108 (54,080) ---------- ---------- ---------- --------- --------- --------- --------- --------- -------- Total interest expense 1,942,002 1,750,601 1,704,605 ---------- ---------- ---------- Net interest expense $ 890,495 $ 830,960 $ 722,836 $ 79,034 $ (19,499) $ 59,535 $ 60,391 $ 47,733 $ 108,124 ========== ========== ========== ========= ========= ========= ========= ========= ======== Net interest income increase (decrease) as a percentage of average earning assets (c) .21% .05% 0.16% 0.17% 0.14% 0.31% ========= ========= ========= ========= ========= ========
(a) The change in volume is calculated by multiplying the difference between the average balance of the current year and the prior year by the prior year's average yield. The change in rate is calculated by multiplying the difference between the average yield of the current year and the prior year by the prior year's average balance. The mixed changes in rate/volume is calculated by multiplying the difference between the average balance of the current year and the prior year by the difference between the average yield of the current year and the prior year. This amount is then allocated proportionately to the volume and rate changes calculated previously. (b) The effects of interest rate swap and cap activity have been included in income and expense of the related assets and liabilities. (c) Includes nonaccrual loans (90 days or more past due). ITEM 1. BUSINESS (Continued) COMPETITION AND OTHER MATTERS The Company experiences strong competition in both attracting deposits and making real estate loans. Competition for savings deposits has historically come from money market mutual funds, other savings associations, commercial banks, credit unions, and government and corporate debt securities. In addition, traditional financial institutions have found themselves in competition with other financial services entities, such as securities dealers, insurance companies, and others. The principal methods used by the Company to attract deposits, in addition to the interest rates and terms offered, include the offering of a variety of services and the convenience of office locations and hours of public operation. Competition in making real estate loans comes principally from other savings associations, mortgage banking companies, and commercial banks. Many of the nation's largest savings associations, mortgage banking companies, and commercial banks are headquartered or have a significant number of branch offices in the areas in which the Company competes. Changes in the government's monetary, tax, or housing financing policies can also affect the ability of lenders to compete profitably. The primary factors in competing for real estate loans are interest rates, loan fee charges, underwriting standards, and the quality of service to borrowers and their real estate brokers. THRIFT INDUSTRY The operations of the thrift industry are significantly influenced by general economic conditions, by the related monetary and fiscal policies of the federal government, and by the policies of financial institution regulatory authorities. Deposit flows and costs of funds are impacted by interest rates on competing investments and general market rates of interest. Lending and other investment activities are affected by the demand for mortgage financing and for consumer and other types of loans, which in turn are affected by the interest rates at which such financing may be offered and other factors affecting the supply of housing and the availability of funds. REGULATION FEDERAL HOME LOAN BANK SYSTEM. The FHLB system functions in a reserve credit capacity for its members, which may include savings associations, savings banks, commercial banks and credit unions. As members, the Insured Institutions are required to own capital stock of a FHLB in an amount that depends generally upon their outstanding home mortgage loans or advances from such FHLB, and are authorized to borrow funds from such FHLB (see Borrowings). ITEM 1. BUSINESS (Continued) REGULATION (continued) LIQUIDITY. The Office of Thrift Supervision (OTS) requires insured institutions, such as WFSB and WSL, to maintain a minimum amount of cash and certain qualifying investments for liquidity purposes. As of December 1, 1997, the current minimum requirement was changed to equal 4% of the quarterly average of daily balances of short-term deposits and borrowings or 4% of the prior quarter's ending balance of short-term deposits and borrowings. For all other months during 1997, the minimum liquidity requirement was equal to 5% of the monthly average of customer deposits and short-term borrowings. For the months ended December 31, 1997, 1996, and 1995, WFSB's average regulatory liquidity ratio was 11%, 6%, and 6%, respectively. WSL's average regulatory liquidity ratio was 12%, 8%, and 8%, for the months ended December 31, 1997, 1996, and 1995. WFSB and WSL exceeded the quarterly 4% requirement for the quarter ended December 31, 1997. WFSB and WSL exceeded the monthly 5% requirement for all months during 1997, 1996, and 1995. During 1997, the Company more effectively managed its liquidity portfolio within each month, resulting in a lower liquidity balance at monthends. FEDERAL DEPOSIT INSURANCE CORPORATION. The deposit accounts of WFSB are insured by the FDIC as part of the BIF, up to the maximum amount permitted by law, currently $100,000 per insured depositor. The deposit accounts of WSL are insured by the FDIC as part of the SAIF, also up to the maximum amount permitted by law. As a result, WFSB and WSL are subject to supervision, regulation and examination by the FDIC. FDIC insurance is required for all federally chartered financial institutions such as WFSB and WSL. Such insurance may be terminated by the FDIC under certain circumstances involving violations of regulations or unsound practices. During 1996, federal legislation was enacted 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. The new banking law required members to pay a levy of $4.7 billion to bring the SAIF up to the required reserve level of 1.25% of insured deposits, but lowered savings and loan deposit insurance premiums starting in 1997. As a result of this legislation, Golden West's subsidiary, WSL, incurred a one-time charge of $133 million during 1996. Beginning on January 1, 1997, the premium paid by WSL to the FDIC was reduced from $2.30 per $1,000 in savings balances to $.648 per $1,000. Included in this reduction, is an adjustment of the assessment for deposit insurance to zero and a reduction in the assessment for the Financing Corporation (FICO) to $.648 per $1,000 of deposits. Also, 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 $.1296 per $1,000. The increased assessment for BIF-assessable deposits is comprised solely of an assessment for FICO. ITEM 1. BUSINESS (Continued) REGULATION (continued) The deposits of savings institutions insured by the SAIF may be converted to BIF insurance. Further, deposits insured by the BIF may be converted to SAIF insurance. Such conversion requires payment of an exit fee to the insurance fund that the institution leaves and an entrance fee to the insurance fund the institution enters. In addition, bank holding companies, which were previously authorized to acquire savings institutions only in connection with supervisory transactions, may now acquire savings institutions generally. In addition, the same 1996 federal legislation which recapitalized the SAIF, also included a provision which directs federal banking regulators to take appropriate actions to prevent insured depositories from encouraging and facilitating the shifting of deposits from SAIF to BIF. The provision was the subject of a notice of proposed rulemaking issued by the FDIC, but the FDIC withdrew the porposed rule. OFFICE OF THRIFT SUPERVISION (OTS). Because they are federally chartered savings institutions, the principal regulator of both WFSB and WSL is the OTS. Under various regulations of the OTS, savings associations are required, among other things, to pay assessments to the OTS, maintain required regulatory capital, maintain liquid assets at levels fixed from time to time, and to comply with various limitations on loans to one borrower and limitations on equity investments, investments in real estate, and investments in corporate debt securities that are not investment grade. FEDERAL RESERVE SYSTEM. Federal Reserve Board regulations require savings institutions to maintain noninterest-earning reserves against their checking accounts. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements. WFSB and WSL are currently in compliance with all applicable Federal Reserve Board reserve requirements. Savings associations have authority to borrow from the Federal Reserve Bank but the Federal Reserve Board requires savings associations to exhaust all FHLB sources before borrowing from the Federal Reserve Bank. REGULATORY CAPITAL. The OTS requires federally insured institutions such as WFSB and WSL to meet certain minimum capital requirements. ITEM 1. BUSINESS (Continued) REGULATION (continued) The following table summarizes WFSB's regulatory capital ratio and compares them to the OTS requirements at December 31.
TABLE 20 World Savings Bank, a Federal Savings Bank Regulatory Capital Ratios (Dollars in thousands) 1997 1996 -------------------------------------------------- ------------------------------------------------- ACTUAL REQUIRED ACTUAL REQUIRED ----------------------- ---------------------- ----------------------- ----------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ----------- --------- ----------- --------- ----------- -------- ------------ --------- Tangible $1,603,530 6.51% $ 369,694 1.50% $ 1,133,016 6.69% $ 254,140 1.50% Core 1,603,530 6.51 739,388 3.00 1,133,016 6.69 508,279 3.00 Risk-based 1,695,565 12.80 1,060,024 8.00 1,173,583 13.14 714,609 8.00
The following table summarizes WSL's regulatory capital ratio and compares them to the OTS requirements at December 31.
TABLE 21 World Savings and Loan Association Regulatory Capital Ratios (Dollars in thousands) 1997 1996 -------------------------------------------------- -------------------------------------------------- ACTUAL REQUIRED ACTUAL REQUIRED ----------------------- ---------------------- ----------------------- ----------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ----------- --------- ----------- --------- ------------ -------- ------------ --------- Tangible $ 980,483 6.42% $ 228,950 1.50% $ 1,334,813 6.37% $ 314,254 1.50% Core 980,483 6.42 457,901 3.00 1,334,813 6.37 628,507 3.00 Risk-based 1,186,445 13.64 695,611 8.00 1,655,820 13.91 952,631 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 WFSB and WSL do not have 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 tables on the following pages summarize the capital ratios for each of the five classifications and shows that WFSB and WSL met the "well capitalized" standard as of December 31, 1997. ITEM 1. BUSINESS (Continued) REGULATION (continued) The table below shows a reconciliation of WFSB's equity capital to regulatory capital at December 31, 1997.
TABLE 22 World Savings Bank, a Federal Savings Bank Reconciliation of Equity Capital to Regulatory Capital (Dollars in thousands) Core/ Tier 1 Total Equity Tangible Tangible Leverage Risk-Based Risk-Based Capital Capital Equity Capital Capital Capital ------------ ------------ ------------- ------------ ------------ ------------ Common stock $ 150 Paid-in surplus 1,354,612 Retained earnings 250,799 Unrealized gains on securities available for sale -0- ------------ Equity capital $ 1,605,561 $ 1,605,561 $ 1,605,561 $ 1,605,561 $ 1,605,561 $ 1,605,561 ============ Positive goodwill (2,031) (2,031) (2,031) (2,031) (2,031) General valuation allowance 92,035 ============ ============= ============ ============= ============= Regulatory capital $ 1,603,530 $ 1,603,530 $ 1,603,530 $ 1,603,530 $ 1,695,565 ============ ============= ============ ============= ============= Total assets $ 24,608,701 ============ Adjusted total assets $ 24,646,251 $ 24,646,251 $ 24,646,251 ============ ============= ============ Risk-weighted assets $ 13,250,306 $ 13,250,306 ============= ============= CAPITAL RATIO - ACTUAL 6.52% 6.51% 6.51% 6.51% 12.10% 12.80% ============ ============ ============= ============ ============= ============= Regulatory Capital Ratio Requirements: Well capitalized, equal to or greater than 5.00% 6.00% 10.00% ============ ============ ============ Adequately capitalized, equal to or greater than 1.50% 4.00% 4.00% 8.00% ============= ============ ============ ============ Undercapitalized, less than 1.50% 4.00% 4.00% 8.00% ============= ============ ============ ============ Significantly undercapitalized, less than 3.00% 3.00% 6.00% ============ ============ ============ Critically undercapitalized, equal to or less than 2.00% ============
ITEM 1. BUSINESS (Continued) REGULATION (continued) The table below shows a reconciliation of WFSB's equity capital to regulatory capital at December 31, 1996.
TABLE 23 World Savings Bank, a Federal Savings Bank Reconciliation of Equity Capital to Regulatory Capital (Dollars in thousands) Core/ Tier 1 Total Equity Tangible Tangible Leverage Risk-Based Risk-Based Capital Capital Equity Capital Capital Capital ------------ ------------ ------------- ------------ ------------ ------------ Common stock $ 150 Paid-in surplus 1,070,182 Retained earnings 65,731 Unrealized gains on securities available for sale 654 ------------ Equity capital $ 1,136,717 $ 1,136,717 $ 1,136,717 $1,136,717 1,136,717 1,136,717 ============ Positive goodwill (3,047) (3,047) (3,047) (3,047) (3,047) Unrealized gains on securities available for sale (654) (654) (654) (654) (654) General valuation allowance 40,567 ============ ============= ============ ============= ============= Regulatory capital $ 1,133,016 $ 1,133,016 $ 1,133,016 $ 1,133,016 $ 1,173,583 ============ ============= ============ ============= ============= Total assets $ 16,929,859 ============ Adjusted total assets $ 16,942,646 $ 16,942,646 $ 16,942,646 ============ ============= ============ Risk-weighted assets $ 8,932,609 $ 8,932,609 ============= ============= CAPITAL RATIO - ACTUAL 6.71% 6.69% 6.69% 6.69% 12.68% 13.14% ============ ============ ============= ============ ============= ============= Regulatory Capital Ratio Requirements: Well capitalized, equal to or greater than 5.00% 6.00% 10.00% ============ ============ ============ Adequately capitalized, equal to or greater than 1.50% 4.00% 4.00% 8.00% ============= ============ ============ ============ Undercapitalized, lessthan 1.50% 4.00% 4.00% 8.00% ============= ============ ============ ============ Significantly undercapitalized, less than 3.00% 3.00% 6.00% ============ ============ ============ Critically undercapitalized, equal to or less than 2.00% ============
ITEM 1. BUSINESS (Continued) REGULATION (continued) The table below shows a reconciliation of WSL's equity capital to regulatory capital at December 31, 1997.
TABLE 24 World Savings and Loan Association Reconciliation of Equity Capital to Regulatory Capital (Dollars in thousands) Core/ Tier 1 Total Equity Tangible Tangible Leverage Risk-Based Risk-Based Capital Capital Equity Capital Capital Capital ------------ ------------ ------------- ------------ ------------ ------------ Common stock $ 150 Paid-in surplus 233,441 Retained earnings 746,892 Unrealized gains on securities available for sale 141,478 ------------ Equity capital $ 1,121,961 $ 1,121,961 $ 1,121,961 $ 1,121,961 1,121,961 1,121,961 ============ Unrealized gains on securities available for sale (141,478) (141,478) (141,478) (141,478) (141,478) Equity/other investments (2,452) Subordinated debt 99,697 General valuation allowance 108,717 ------------- ------------- ------------ ------------- ------------- Regulatory capital $ 980,483 $ 980,483 $ 980,483 $ 980,483 $ 1,186,445 ============= ============= ============ ============= ============= Total assets $15,446,575 ============ Adjusted total assets $ 15,263,364 $ 15,263,364 $15,263,364 ============= ============= ============ Risk-weighted assets $ 8,695,143 $ 8,695,143 ============= ============= CAPITAL RATIO - ACTUAL 7.26% 6.42% 6.42% 6.42% 11.28% 13.64% ============ ============= ============= ============ ============= ============= Regulatory Capital Ratio Requirements: Well capitalized, equal to or greater than 5.00% 6.00% 10.00% ============ ============= ============ Adequately capitalized, equal to or greater than 1.50% 4.00% 4.00% 8.00% ============ ============ ============= ============ Undercapitalized, less than 1.50% 4.00% 4.00% 8.00% ============ ============ ============= ============ Significantly undercapitalized, less than 3.00% 3.00% 6.00% ============ ============= ============ Critically undercapitalized, equal to or less than 2.00% ============
ITEM 1. BUSINESS (Continued) REGULATION (continued) The table below shows a reconciliation of WSL's equity capital to regulatory capital at December 31, 1996.
TABLE 25 World Savings and Loan Association Reconciliation of Equity Capital to Regulatory Capital (Dollars in thousands) Core/ Tier 1 Total Equity Tangible Tangible Leverage Risk-Based Risk-Based Capital Capital Equity Capital Capital Capital ------------ ------------ ------------- ------------ ------------ ------------ Common stock $ 150 Paid-in surplus 233,441 Retained earnings 1,101,222 Unrealized gains on securities available for sale 93,101 ------------ Equity capital $ 1,427,914 $ 1,427,914 $ 1,427,914 $ 1,427,914 $ 1,427,914 1,427,914 ============ Unrealized gains on securities available for sale (93,101) (93,101) (93,101) (93,101) (93,101) Equity/other investments (2,591) Subordinated debt 199,510 General valuation allowance 124,088 ------------- ------------- ------------ ------------- ------------- Regulatory capital $ 1,334,813 $ 1,334,813 $ 1,334,813 $ 1,334,813 $ 1,655,820 ============= ============= ============ ============= ============= Total assets $21,040,890 ============ Adjusted total assets $ 20,950,249 $ 20,950,249 $20,950,249 ============= ============= ============ Risk-weighted assets $ 11,907,883 $ 11,907,883 ============= ============= CAPITAL RATIO - ACTUAL 6.79% 6.37% 6.37% 6.37% 11.21% 13.91% ============ ============= ============= ============ ============= ============= Regulatory Capital Ratio Requirements: Well capitalized, equal to or greater than 5.00% 6.00% 10.00% ============ ============= ============ Adequately capitalized, equal to or greater than 1.50% 4.00% 4.00% 8.00% ============ ============ ============= ============ Undercapitalized, less than 1.50% 4.00% 4.00% 8.00% ============ ============ ============= ============ Significantly undercapitalized, less than 3.00% 3.00% 6.00% ============ ============= ============ Critically undercapitalized, equal to or less than 2.00% ============
ITEM 1. BUSINESS (Continued) REGULATION (continued) The table below compares WFSB's regulatory capital to the well capitalized classification at December 31.
TABLE 26 World Savings Bank, a Federal Savings Bank Regulatory Capital Compared to Well Capitalized Classification (Dollars in thousands) 1997 1996 ------------------------------------------------ ------------------------------------------------- ACTUAL WELL CAPITALIZED ACTUAL WELL CAPITALIZED ---------------------- ----------------------- ----------------------- ----------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ----------- -------- ------------ -------- ------------ --------- ----------- --------- Leverage $ 1,603,530 6.51% $ 1,232,313 5.00 $ 1,133,016 6.69% $ 847,132 5.00% Tier I riskbased 1,603,530 12.10 795,018 6.00 1,133,016 12.68 535,957 6.00 Total riskbased 1,695,565 12.80 1,325,031 10.00 1,173,583 13.14 893,261 10.00
The table below compares WSL's regulatory capital to the well capitalized classification at December 31.
TABLE 27 World Savings and Loan Association Regulatory Capital Compared to Well Capitalized Classification (Dollars in thousands) 1997 1996 ------------------------------------------------ ------------------------------------------------- ACTUAL WELL CAPITALIZED ACTUAL WELL CAPITALIZED ---------------------- ----------------------- ----------------------- ----------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ----------- -------- ------------ -------- ------------ --------- ----------- --------- Leverage $ 980,483 6.42% $ 763,168 5.00% $ 1,334,813 6.37% $1,047,512 5.00% Tier 1 risk-based 980,483 11.28 521,709 6.00 1,334,813 11.21 714,473 6.00 Total resk-based 1,186,445 13.64 869,514 10.00 1,655,820 13.91 1,190,788 10.00
CAPITAL DISTRIBUTIONS BY SAVINGS ASSOCIATIONS. The OTS limits capital distributions, including cash dividends, payments to shareholders of another institution in a cash out merger and other distributions charged against capital, by savings associations such as WFSB and WSL. Under these regulations, a savings association is classified as either Tier 1, if it meets each of its capital requirements before and after a capital distribution; Tier 2, if it currently meets each of its capital requirements but does not meet one or more of its capital requirements immediately prior to or after giving effect to the proposed capital distribution; or Tier 3, if it does not meet its capital requirements immediately prior to or after giving effect to the proposed capital distribution. A savings association that would otherwise be classified as Tier 1 is treated as Tier 2 or Tier 3 if the OTS so notifies the association based on the OTS' conclusion that the association is in need of more than normal supervision. ITEM 1. BUSINESS (Continued) REGULATION (continued) Under the regulations, a Tier 1 association may make capital distributions during a calendar year up to 100% of its net income to date during the calendar year plus up to one-half of its capital in excess of the fully phased-in requirement at the beginning of the calendar year. Distributions beyond these amounts are allowed only with the specific, prior approval of the OTS, which WSL obtained during 1997. A Tier 2 association may make capital distributions up to 75% of its net income over the most recent four quarter period, with the percentage varying based on its level of risk-based capital. Any capital distributions by a Tier 3 association or in excess of the foregoing amounts by a Tier 1 or Tier 2 association are subject to either prior OTS approval or notice must given to the OTS, which may disapprove the distribution. However, current law prohibits capital distributions by an institution that does not meet its capital requirements. Savings associations are required to give the OTS 30-day advance written notice of all proposed capital distributions. For purposes of capital distributions, the OTS has classified WFSB and WSL as Tier 1 institutions. WSL paid a total of $515 million in upstream dividends to Golden West during 1997. LIMITATION ON LOANS TO ONE BORROWER. Current law subjects savings associations to the same loans-to-one borrower restrictions that are applicable to national banks with limited provisions for exceptions. In general, the national bank standard restricts loans to a single borrower to no more than 15% of a bank's unimpaired capital and unimpaired surplus, plus an additional 10% if the loan is collateralized by certain readily marketable collateral. (Real estate is not included in the definition of "readily marketable collateral".) At December 31, 1997, the maximum that WFSB could have loaned to one borrower was $254 million while the largest amount of loans it had to one borrower was $30 million. At December 31, 1997, the maximum amount that WSL could have loaned to one borrower (and related entities) was $178 million. At such date, the largest amount of loans that WSL had outstanding to any one borrower was $24 million. DEPOSITOR PRIORITIES. In the event of the appointment of a receiver of a federally chartered savings association or a savings bank, such as WFSB or WSL, based upon the failure of the savings associations to meet certain minimum capital requirements or the existence of certain other conditions, the Federal Deposit Insurance Act recognizes a priority in favor of holders of withdrawable deposits (including the FDIC subrogee or transferee) over general creditors (including holders of debt of the Insured Institutions). Thus, in the event of a liquidation of the Insured Institutions or a similar event, claims for deposits would have a priority over claims of holders of debt. As of December 31, 1997, the Insured Institutions had approximately $24.1 billion of deposits outstanding. ITEM 1. BUSINESS (Continued) REGULATION (continued) POWERS OF THE FDIC IN CONNECTION WITH THE INSOLVENCY OF AN INSURED DEPOSITORY INSTITUTION. If the FDIC is appointed a receiver or conservator of an insured depository institution, such as WFSB or WSL, the FDIC may disaffirm or repudiate any contract or lease to which such institution is a party, the performance of which is determined to be burdensome, and the disaffirmance or repudiation of which is determined to promote the orderly administration of the institution's affairs. The FDIC may contend that its power to repudiate "contracts" extends to obligations such as the debt of the depository institution and at least one court has held that the FDIC can repudiate publicly-traded debt obligations. The effect of any such repudiation should be to accelerate the maturity of debt. Such repudiation would result in a claim by each holder of debt against the receivership. The claim may be for principal and interest accrued through the date of the date of the appointment of the conservator or receiver. Alternatively, at least one court has held that the claim would be in the amount of the fair market value of the debt as of the date of the repudiation, which amount could be more or less than accrued principal and interest. The amount paid on the claims of the holders of the debt would depend, among other factors, upon the amount of receivership assets available for the payment of unsecured claims and the priority of the claim relative to the claims of other unsecured creditors and depositors, and may be less than the amount owed to the holders of the debt. See "Depositor Priorities" on the previous page. If the maturity of the debt were so accelerated, and a claim relating to the debt paid by the receivership, the holders of the debt might not be able, depending upon economic conditions, to reinvest any amounts paid on the debt at a rate of interest comparable to that paid on the debt. In addition, although the holders of the debt may have the right to accelerate the debt in the event of the appointment of a conservator or receiver of the depository institution, the FDIC as conservator or receiver may enforce most types of contracts, including the debt pursuant to their terms, notwithstanding any such acceleration provision. The FDIC as conservator or receiver may also transfer to a new obligor any of the depository institution's assets and liabilities, without the approval or consent of its creditors. In its resolutions of the problems of an insured depository institution in default or in danger of default, the FDIC is generally obligated to satisfy its obligations to insured depositors at the least possible cost to the deposit insurance fund. In addition, the FDIC may not take any action that would have the effect of increasing the losses to deposit insurance fund by protecting depositors for more than the insured portion of deposits (generally $100,000) or by protecting creditors other than depositors. Existing law authorizes the FDIC to settle all uninsured and unsecured claims in the insolvency of an insured institution by making a final payment after the declaration of insolvency. Such a payment would constitute full payment and disposition of the FDIC's obligations to claimants. Existing law provides that the rate of such final payment is to be a percentage reflecting the FDIC's receivership recovery experience. ITEM 1. BUSINESS (Continued) REGULATION (continued) SAVINGS AND LOAN HOLDING COMPANY LAW. The Company is a "savings and loan holding company" under the HomeOwners Loan Act (HOLA). As such, it has registered with the OTS and is subject to OTS regulation and OTS and FDIC examination, supervision, and reporting requirements. Among other things, the OTS has authority to determine that an activity of a savings and loan holding company constitutes a serious risk to the financial safety, soundness, or stability of its subsidiary savings institutions and thereupon may impose, among other things, restrictions on the payment of dividends by the subsidiary institutions and on transactions between the subsidiary institutions, the holding company and subsidiaries or affiliates of either. As WFSB's and WSL's parent company, Golden West is considered an "affiliate" of WFSB and WSL for regulatory purposes. In addition, WFSB and WSL are considered to be affiliates of each other. Savings associations are subject to the rules relating to transactions with affiliates and loans to insiders generally applicable to commercial banks that are members of the Federal Reserve System set forth in Sections 23A, 23B, and 22(h) of the Federal Reserve Act, as well as additional limitations set forth in current law and as adopted by the OTS. In addition, current law generally prohibits a savings association from lending or otherwise extending credit to an affiliate, other than the association's subsidiaries, unless the affiliate is engaged only in activities that the Federal Reserve Board has determined to be permissible for bank holding companies and that the OTS has not disapproved. OTS regulations provide guidance in determining an affiliate of a savings association and in calculating compliance with the quantitative limitations or transactions with affiliates. QTL TEST. The HOLA requires savings institutions to meet a qualified thrift lender (QTL) test. Under the QTL test, a savings institution is required to maintain at least 65% of its "portfolio assets" in certain "qualified thrift investments" (primarily residential mortgages and related investments, including certain mortgage-backed and related securities) in at least nine months out of each 12 month period. A savings institution that fails the QTL test must either convert to a bank charter or operate under certain restrictions. At December 31, 1997, WFSB and WSL were in compliance with the QTL test. TAXATION. The Company files consolidated federal income tax returns with its subsidiaries. The provision for federal and state taxes on income is based on taxes currently payable and taxes expected to be payable in the future as a result of events that have been recognized in the financial statements or tax returns. ITEM 1. BUSINESS (Continued) REGULATION (continued) In years prior to 1996, WSL was permitted by the Internal Revenue Code to deduct from taxable income an annual addition to a reserve for bad debts subject to certain limitations. In the event distributions (which are subject to the regulatory restrictions described under "Regulatory Capital") are made from these reserves, such distributions will be subject to federal income taxes at the then prevailing corporate rates. It is not contemplated that accumulated reserves will be used in a manner that will create income tax liabilities. Golden West utilizes the accrual method of accounting for income tax purposes and for preparing its published financial statements. For financial reporting purposes only, the Company uses "purchase accounting" in connection with certain assets acquired through mergers. The purchase accounting portion of income is not subject to tax. EMPLOYEE RELATIONS The Company had a total of 4,031 full-time and 848 permanent part-time employees at December 31, 1997. None of the employees of the Company are represented by any collective bargaining group. The management of the Company considers employee relations to be good. ITEM 2. PROPERTIES Properties owned by the Company are located in Arizona, California, Colorado, Florida, Ilinois, Kansas, New Jersey, and Texas. The executive offices of the Company are located at 1901 Harrison Street, Oakland, California, in leased facilities. The Company has a 300,000 square-foot office complex on an 111-acre site in San Antonio, Texas. This complex houses its Loan Service, Savings Operations, and Information Systems Departments. The Company owns 206 of its branches, some of which are located on leased land. For further information regarding the Company's investment in premises and equipment and expiration dates of long-term leases, see Note I to the Financial Statements included in Item 14. The Company continuously evaluates the suitability and adequacy of the offices of the Company and has a program of relocating or remodeling them as necessary to maintain efficient and attractive facilities. ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries are parties to actions arising in the ordinary course of business, none of which, in the opinion of management, is material to the Company's consolidated financial condition or results of operations, or is otherwise required to be discussed pursuant to Item 103 of Regulation S-K. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Inapplicable. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS MARKET PRICES OF STOCK Golden West's stock is listed on the New York Stock Exchange and Pacific Exchange and traded on the Boston and Midwest Stock Exchanges under the ticker symbol GDW. The quarterly price ranges for the Company's common stock during 1997 and 1996 were as follows:
TABLE 28 Common Stock Price Range 1997 1996 -------------------------- ----------------------- First Quarter 61 3/4 - 74 1/4 49 - 55 7/8 Second Quarter 59 7/8 - 73 1/4 50 - 56 1/2 Third Quarter 70 13/16 - 90 15/16 51 - 58 3/8 Fourth Quarter 84 1/16 - 97 13/16 59 1/2 - 68 3/4
PER SHARE CASH DIVIDENDS DATA Golden West's cash dividends paid per share for 1996 and 1995 were as follows:
TABLE 29 Cash Dividends Per Share 1997 1996 --------- --------- First Quarter $ .110 $ .095 Second Quarter $ .110 $ .095 Third Quarter $ .110 $ .095 Fourth Quarter $ .125 $ .110
The principal sources of funds for the payment by Golden West of cash dividends are cash dividends paid to it by WSL, investment income, and short-term borrowings. Under OTS regulations, the OTS must be given at least 30 days' advance notice by WFSB or WSL of any proposed dividend to be paid to the parent. Under OTS regulations, WFSB and WSL are classified as Tier 1 associations and are, therefore, allowed to distribute dividends up to 100% of their net income in any year plus one-half of capital in excess of the OTS fully phased-in capital requirement as of the end of the prior year. Distributions beyond these amounts are allowed only with the specific, prior approval of the OTS. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS (Continued) At December 31, 1997, $252 million of the Insured Institutions' retained earnings had not been subjected to federal income taxes due to the application of the bad debt deduction and $998 million of the Insured Institutions' retained earnings were available for the payment of cash dividends without the imposition of additional federal income taxes. STOCKHOLDERS At the close of business on March 24, 1998, 57,190,004 shares of Golden West's Common Stock were outstanding and were held by 1,558 stockholders of record. At the close of business on March 24, 1998, the Company's common stock price was 98 9/16. The transfer agent and registrar for the Golden West Common Stock is Chase Mellon Shareholder Services, L.C., San Francisco, California 94101. The Securities and Exchange Commission (Commission) maintains a web site which contains reports, proxy and information statements and other information pertaining to registrants that file electronically with the Commission including Golden West. The address is: http://www.sec.gov. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected consolidated financial and other data for Golden West for the years indicated. Such information is qualified in its entirety by the more detailed financial information set forth in the financial statements and notes thereto appearing in documents incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA (Continued)
TABLE 30 Five Year Consolidated Summary of Operations (Dollars in thousands except per share figures) Year Ended December 31 --------------------------------------------------------------------- 1997 1996 1995 1994 1993 ----------- ------------ ----------- ----------- ------------ Interest Income: Interest on loans $2,392,175 2,203,752 2,097,664 1,649,413 1,637,764 Interest on mortgage-backed securities 282,499 246,293 181,355 103,927 138,874 Interest on dividends and investments 157,823 131,516 148,422 123,137 93,534 ----------- ------------ ----------- ----------- ------------ 2,832,497 2,581,561 2,427,441 1,876,477 1,870,172 Interest Expense: Interest on deposits 1,209,646 1,061,414 1,048,390 714,353 705,700 Interest on advances and other borrowings 732,356 689,187 656,215 440,754 431,714 ----------- ------------ ----------- ----------- ------------ 1,942,002 1,750,601 1,704,605 1,155,107 1,137,414 ----------- ------------ ----------- ----------- ------------ Net interest income 890,495 830,960 722,836 721,370 732,758 Provision for loan losses 57,609 84,256 61,190 62,966 65,837 ----------- ------------ ----------- ----------- ------------ Net interest income after provision for loan losses 832,886 746,704 661,646 658,404 666,921 Non-Interest Income: Fees 45,910 38,558 29,200 28,816 31,061 Gain (loss) on the sale of securities, mortgage-backed securities, and loans 8,197 11,954 (493) (120) 22,541 Other 27,161 24,387 11,071 6,201 10,026 ----------- ------------ ----------- ----------- ------------ 81,268 74,899 39,778 34,897 63,628 Non-interest Expense General and administrative expenses Personnel 180,917 163,243 151,352 150,220 132,472 Occupancy 55,508 50,171 48,737 44,472 40,443 Deposit insurance 7,454 167,528 44,993 40,220 35,706 Advertising 11,525 9,277 9,850 10,761 10,782 Other 71,555 63,203 61,260 57,246 53,764 ----------- ------------ ----------- ----------- ------------ 326,959 453,422 316,192 302,919 273,167 ----------- ------------ ----------- ----------- ------------ Earnings before taxes on income 587,195 368,181 385,232 390,382 457,382 Taxes on income 233,057 (1,732) 150,693 159,933 183,528 ----------- ------------ ----------- ----------- ------------ Earnings before cumulative effect of change in accounting for goodwill 354,138 369,913 234,539 230,449 273,854 Cumulative effect of change in accounting for goodwill -0- (205,242) -0- -0- -0- ----------- ------------ ----------- ----------- ------------ Net earnings $ 354,138 164,671 234,539 230,449 273,854 =========== ============ =========== =========== ============ Basic earnings per share before cumulative effect of change in accounting for goodwill $ 6.22 6.38 4.00 3.71 4.28 Cumulative effect of change in accounting for goodwill 0.00 (3.54) 0.00 0.00 0.00 ----------- ------------ ------------ ------------ ------------ Basic earnings per share $ 6.22 2.84 4.00 3.71 4.28 =========== ============ =========== =========== ============ Diluted earnings per share before cumulative effect of change in accounting for goodwill $ 6.13 6.29 3.94 3.66 4.22 Cumulative effect of change in accounting for goodwill 0.00 (3.49) 0.00 0.00 0.00 ----------- ------------ ----------- ----------- ------------ Diluted earnings per share $ 6.13 2.80 3.94 3.66 4.22 =========== ============ =========== =========== ============
ITEM 6. SELECTED FINANCIAL DATA (Continued)
TABLE 31 Five Year Summary of Financial Condition (Dollars in thousands) At December 31 --------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 --------------- --------------- --------------- --------------- --------------- Assets $ 39,590,271 $ 37,730,598 $ 35,118,156 $ 31,683,741 $ 28,829,288 Cash, securities available for sale, and other investments 1,033,433 2,078,876 2,310,711 2,265,886 2,417,871 Mortgage-backed securities 3,939,746 4,293,582 3,409,341 1,194,378 1,522,536 Loans receivable 33,260,709 30,113,421 28,181,353 27,071,266 23,912,571 Deposits 24,109,717 22,099,934 20,847,910 19,219,389 17,422,484 Advances from FHLBs 8,516,605 8,798,433 6,447,201 6,488,418 6,281,691 Securities sold under agreements to repurchase and other borrowings 2,334,048 1,908,126 1,817,943 601,821 1,119,414 Medium-term notes 109,992 589,845 1,597,507 1,164,079 676,540 Subordinated debt 1,110,488 1,323,996 1,322,392 1,221,559 1,220,061 Stockholders' equity 2,698,031 2,350,477 2,278,353 2,000,274 2,065,604
ITEM 6. SELECTED FINANCIAL DATA (Continued)
TABLE 32 Five Year Selected Other Data (Dollars in thousands except per share figures) Year Ended December 31 ----------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------- ------------- ------------- ------------- ------------- New real estate loans originated $ 7,482,973 $ 7,012,562 $ 5,949,064 $ 6,637,653 $ 6,411,877 Average yield on new real estate loans 7.59% 7.59% 7.56% 6.44% 6.86% Deposits increase ($) $ 2,009,783 $ 1,252,024 $ 1,628,521 $ 1,796,905 $ 936,238 Deposits increase (%) 9.1% 6.0% 8.5% 10.3% 5.7% Net earnings/average net worth (ROE) 14.14% 7.46%(a) 10.98% 11.11% 14.68% Net earnings/average assets (ROA) .91% .46%(a) .69% .78% .98% General and administrative expense (G&A) to: Total revenues 11.22% 17.07%(a) 12.80% 15.83% 14.14% Average assets .84% 1.26%(a) .93% 1.02% .97% Ratio of earnings to fixed charges: (b) Including interest on deposits 1.30x 1.21x 1.23x 1.34x 1.40x Excluding interest on deposits 1.79x 1.53x 1.58x 1.87x 2.05x Yield on loan portfolio 7.53% 7.43% 7.69% 6.85% 6.73% Yield on MBS 7.23% 7.13% 7.41% 8.37% 8.67% Yield on investments 6.48% 6.88% 5.96% 5.42% 3.80% Yield on earning assets 7.48% 7.37% 7.56% 6.81% 6.61% Cost of deposits 5.04% 4.98% 5.15% 4.57% 3.92% Cost of borrowings 5.99% 5.80% 6.15% 5.85% 4.69% Cost of funds 5.36% 5.28% 5.50% 5.00% 4.18% Spread 2.12% 2.09% 2.06% 1.81% 2.43% Nonperforming asset/total assets (c) .96% 1.21% 1.11% 1.12% 1.37% Stockholders' equity/total assets 6.81% 6.23% 6.49% 6.31% 7.16% Average stockholders' equity/average asset 6.45% 6.15% 6.30% 6.98% 6.65% World Savings Bank, FSB (WFSB) regulatory capital ratios: (d) Tangible capital 6.51% 6.69% 14.01% --- --- Core capital 6.51% 6.69% 14.01% --- --- Risk-based capital 12.80% 13.14% 26.55% --- --- World Savings and Loan Association (WSL) regulatory capital ratios: (d) Tangible capital 6.42% 6.37% 6.38% 6.26% 7.27% Core capital 6.42% 6.37% 6.38% 6.64% 8.02% Risk-based capital 13.64% 13.91% 13.40% 13.54% 17.42% Number of savings branch offices 250 244 233 237 227 Cash dividends per share $ .455 $ .395 $ .35 $ .31 $ .27 Dividend payout ratio 7.32% 13.91% 8.75% 8.34% 6.31%
(a) The numbers for the year ended December 31, 1996 include the 1996 SAIF assessment of $133 million, the special tax credit of $139 million, and the $205 million cumulative effect of the change in accounting for goodwill. The ratios for the year ended December 31, 1996, excluding the three 1996 nonrecurring items are: ROE 13.97%, ROA .86%, G&A to total revenues 12.08%, and G&A to average assets .89%. (b) Earnings represent income from continuing operations before income taxes, cumulative effect of change in accounting, and fixed charges. Fixed charges include interest expense and amortization of debt expense. (c) The definition of nonperforming assets includes nonaccrual loans (loans that are 90 days or more past due) and real state owned acquired through foreclosure. (d) The requirements are 1.5%, 3.0%, and 8.0% for tangible, core, and risk-based capital, respectively. WFSB and WSL currently meet their fully phased-in capital requirement. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the year ended December 31, 1997, Golden West Financial Corporation (Golden West or Company) reported net earnings of $354 million, or Basic Earnings Per Share (EPS) of $6.22 per share and Diluted EPS of $6.13 per share, compared with operating earnings of $308 million, or Basic EPS of $5.31 per share and Diluted EPS of $5.24 per share, in 1996 and $235 million, or Basic EPS $4.00 per share and Diluted EPS of $3.94 per share in 1995. Reported net earnings for the year ended December 31, 1996 amounted to $165 million, or Basic EPS of $2.84 per share and Diluted EPS of $2.80 per share, and included three nonrecurring items: the federally mandated recapitalization of the Savings Association Insurance Fund (SAIF) which resulted in a one-time charge of $133 million (see Deposit Insurance section on page 72); the recognition of $139 million of tax benefits arising from an earlier year acquisition (see Taxes on Income section on page 72); and the adoption of Statement of Financial Accounting Standards No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions," (SFAS 72) for goodwill related to the Company's acquisitions prior to September 30, 1982, which resulted in the write-off of $205 million of goodwill effective January 1, 1996 (see Change in Accounting for Goodwill section on page 62). Golden West's principal subsidiaries are World Savings, FSB (WFSB) and World Savings and Loan Association (WSL). WFSB and WSL are headquartered in Oakland, California. WFSB and WSL had $25 billion and $15 billion in assets at December 31, 1997, respectively. At December 31, 1997, Golden West had a savings network of 123 branches in California, 47 in Colorado, 27 in Florida, 19 in Texas, 13 in Arizona, 11 in New Jersey, and ten in Kansas. By virtue of being federally chartered, WFSB and WSL can originate mortgages anywhere in the nation, even though they may not be authorized to conduct deposit gathering business in those jurisdictions. In addition to the states with savings operations referenced above, the Company had lending operations in Connecticut, Delaware, Idaho, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Mexico, North Carolina, Oregon, Pennsylvania, South Dakota, Utah, Virginia, Washington, and Wisconsin. The savings accounts offered by WFSB are insured by the Bank Insurance Fund (BIF) of the Federal Deposit Insurance Corporation (FDIC). WSL's accounts are insured by the Savings Association Insurance Fund (SAIF) of the FDIC. WFSB and WSL share savings branches in which all of each institution's products are made available. Interest rates set on deposit accounts offered by WFSB and WSL are based on market conditions, cost and funding needs. The following narrative focuses on the significant financial statement changes that have taken place at Golden West over the past three years and includes a discussion of the Company's financial condition, results of operations, and liquidity and capital resources. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION The accompanying table summarizes the Company's major asset, liability, and equity components in percentage terms at yearends 1997, 1996, 1995, and 1994. As the 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.
TABLE 33 Asset, Liability, and Equity Components as Percentages of the Total Balance Sheet December 31 ---------------------------------------------------- 1997 1996 1995 1994 ----------- ---------- ---------- ----------- Assets: Cash and investments 2.6% 5.5% 6.6% 7.2% Mortgage-backed securities 10.0 11.4 9.7 3.8 Loans receivable 84.0 79.8 80.2 85.4 Other assets 3.4 3.3 3.5 3.6 ----------- ----------- ---------- ----------- 100.0% 100.0% 100.0% 100.0% =========== ========== ========== =========== Liabilities and Stockholders' Equity: Deposits 60.9% 58.6% 59.4% 60.7% FHLB advances 21.5 23.3 18.4 20.5 Securities sold under agreements to repurchase 5.9 5.1 5.2 1.9 Medium-term notes 0.3 1.6 4.5 3.7 Other liabilities 1.8 1.7 2.2 3.1 Subordinated debt 2.8 3.5 3.8 3.8 Stockholders' equity 6.8 6.2 6.5 6.3 ----------- ---------- ---------- ------------ 100.0% 100.0% 100.0% 100.0% =========== ========== ========== ===========
ASSET/LIABILITY MANAGEMENT The Company's earnings depend primarily on its net interest income, which is the difference between the amounts it receives from interest earned on loans, MBS and investments and the amounts it pays in interest on deposits and borrowings. Therefore, the Company's profitability is largely dependent upon its ability to manage credit risk and interest rate risk. The Company mitigates its credit risk through strict underwriting standards and loan reviews. The Company manages interest rate risk by managing the repricing of interest-rate sensitive assets and liabilities. The Company enters into interest rate swaps as part of its interest rate risk management strategy. Such instruments are entered into solely to alter the repricing characteristics of designated assets and liabilities. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) One measure of exposure to interest rate risk is the gap analysis, the difference between the repricing of assets and liabilities. The Company is subject to interest rate risk to the extent its assets and liabilities reprice at different times. The disparity between the repricing (maturity, prepayment, 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 following is the Company's gap table at December 31, 1997:
TABLE 34 Repricing of Interest-Earning Assets and Interest-Bearing Liabilities, Repricing Gaps, and Gap Ratio As of December 31, 1997 (Dollars in Millions) Projected Repricing(a) ----------------------------------------------------------------------- 0 - 3 4 - 12 1 - 5 Over 5 Months Months Years Years Total ------------ ------------ ------------ ----------- ----------- Interest-Earning Assets: Investments $ 536 $ 308 $ 15 $ 2 $ 861 Mortgage-backed securities 3,121 102 360 357 3,940 Loans receivable: Rate-sensitive 28,819 1,635 123 -0- 30,577 Fixed-rate 97 275 1,053 1,045 2,470 Other(b) 716 -0- -0- -0- 716 Impact of swaps 402 355 (441) (316) -0- ------------ ------------- ------------- ----------- ----------- Total $ 33,691 $ 2,675 $ 1,110 $ 1,088 $ 38,564 ============ ============ ============ =========== =========== Interest-Bearing Liabilities(c): Deposits $ 11,677 $ 9,667 $ 2,753 $ 13 $ 24,110 FHLB advances 6,829 1,275 32 381 8,517 Other borrowings 2,338 200 818 199 3,555 Impact of swaps 1,063 (693) (279) (91) -0- ------------ ------------ ------------ ------------ ------------ Total $ 21,907 $ 10,449 $ 3,324 $ 502 $ 36,182 ============ ============ ============ ============ ============ Repricing gap $ 11,784 $ (7,774) $ (2,214) $ 586 ============ ============ ============ ============ Cumulative gap $ 11,784 $ 4,010 $ 1,796 $ 2,382 ============ ============ ============ ============ Cumulative gap as a percentage of total assets 29.8% 10.1% 4.5% ============ ============ ============
(a) Based on scheduled maturity or scheduled repricing; loans reflect scheduled repayments and projected prepayments of principal. (b) Includes cash in banks and FHLB stock. (c) Liabilities with no maturity date, such as passbook and money market deposit accounts, are assigned zero months. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) The gap table shows that, as of December 31, 1997, the Company's assets reprice sooner than its liabilities. If all repricing assets and liabilities responded equally to changes in the interest rate environment, then the gap analysis would suggest that Golden West's earnings would rise when interest rates increase and would fall when interest rates decrease. However, Golden West's earnings are also affected by the built-in reporting and repricing 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 (ARMs). The reporting lag occurs because of the time it takes to gather the data needed to compute the index. As a result, the COFI in effect in any month actually reflects the Eleventh District's cost of funds at the level it was two months prior. The repricing lag occurs because COFI is based on a portfolio of accounts, not all of which reprice immediately. Therefore, COFI does not initially fully 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 caps or limits on individual rate changes, and interest rate floors. On balance, the COFI and ARM structural features cause the Company's assets initially to reprice more slowly than its liabilities, resulting in a temporary reduction in net interest income when rates increase. Golden West estimates the sensitivity of the Company's net interest income, net earnings, and capital ratios to interest rate changes based on simulations using an asset/liability model which takes into account the lags described above. The simulation model projects net interest income, net earnings, and capital ratios based on an immediate interest rate increase that is sustained for a thirty-six month period. The model is based on the actual maturity and repricing characteristics of interest-rate sensitive assets and liabilities. For certain assets, the model incorporates assumptions regarding the impact of changing interest rates on prepayment rates which are based on the Company's historical prepayment information. The model factors in projections for anticipated activity levels by product lines offered by the Company. Based on the information and assumptions in effect at December 31, 1997, Management believes that a 200 basis point rate increase sustained over a thirty-six month period would not affect the Company's long-term profitability and financial strength. The table on the following page reflects the Company's expected cash flows and applicable yields on the balances of its interest sensitive assets and liabilities as of December 31, 1997, and takes into consideration expected prepayments of the Company's long-term assets (primarily mortgage-backed securities and loans receivable) and the resulting current fair value. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued)
TABLE 35 Summary of Market Risk on Financial Instruments As of December 31, 1997 (Dollars in Millions) - ------------------------------------------------------------------------------------------------------------------ Expected Maturity Date as of December 31, 1997 ----------------------------------------------------------------------------------- 2003 & Total Fair 1998 1999 2000 2001 2002 thereafterBalance Value --------- --------- --------- --------- --------- --------- --------- --------- Interest-Sensitive Assets: Investments $ 839 $ 8 $ 6 $ 5 $ 2 $ 1 $ 861 $ 861 Weighted average interest rate 6.48% 6.37% 6.38% 6.34% 6.34% 8.85% 6.48% MBS Fixed rate $ 173 $ 124 $ 93 $ 68 $ 51 $ 346 $ 855 876 Weighted average 9.01% 8.70% 8.39% 8.12% 7.89% 7.24% 8.04% interest rate Variable rate $ 499 $ 418 $ 350 $ 293 $ 246 $ 1,279 $ 3,085 3,115 Weighted average interest 7.01% 7.01% 7.01% 7.01% 7.01% 7.00% 7.01% rate Loans Receivable Fixed rate $ 504 $ 371 $ 295 $ 237 $ 193 $ 1,092 $ 2,692 2,750 Weighted average 9.10% 8.75% 8.60% 8.51% 8.43% 8.14% 8.51% interest rate Variable rate $ 4,636 $ 4,097 $ 3,511 $ 3,022 $ 2,512 $12,791 $ 30,569 30,473 Weighted average 7.50% 7.51% 7.52% 7.52% 7.52% 7.49% 7.41% interest rate (a) --------- --------- --------- --------- --------- --------- --------- --------- Total $ 6,651 $ 5,018 $ 4,255 $ 3,625 $ 3,004 15,509 $ 38,062 $ 38,075 ========= ========= ========= ========= ========= ========= ========= ========= Interest-Sensitive Liabilities: Deposits (b) $ 21,345 $ 2,148 $ 345 $ 130 $ 130 $ 12 $ 24,110 $ 24,167 Weighted avg. interest rate 4.93% 5.79% 5.67% 5.79% 5.69% 8.63% 5.03% FHLB Advances Fixed rate $ 30 $ 26 $ 89 $ 21 $ 36 $ 536 $ 738 748 Weighted avg. int. rate 6.85% 6.85% 6.15% 6.85% 7.11% 6.05% 6.20% Variable rate $ 1,449 $ 550 $ 2,100 $ 1,150 $ 1,200 $ 1,330 $ 7,779 7,805 Weighted avg. int. rate 5.87% 6.00% 5.81% 5.84% 5.92% 5.23% 5.76% Reverse Repurchase Agreements Fixed rate $ 35 $ 6 $ 100 $ -0- $ -0- $ -0- $ 141 141 Weighted avg. int. rate 1.43% 8.09% 5.74% 0.00% 0.00% 0.00% 4.80% Variable rate $ 1,050 $ 550 $ 500 $ 93 $ -0- $ -0- $ 2,193 2,194 Weighted avg. int. rate 5.83% 5.84% 5.75% 5.84% 0.00% 0.00% 5.81% interest rate Medium-Term Notes $ 110 $ -0- $ -0- $ -0- $ -0- $ -0- $ 110 110 Weighted avg. int. rate 6.19% 0.00% 0.00% 0.00% 0.00% 0.00% 6.19% Subordinated Notes $ 200 $ -0- $ 314 $ -0- $ 397 $ 199 $ 1,110 1,154 Weighted avg. int. rate 9.01% 0.00% 9.27% 0.00% 7.73% 6.12% 8.11% --------- --------- --------- ----------- --------- --------- --------- --------- Total $ 24,219 $ 3,280 $ 3,448 $ 1,394 $ 1,763 $ 2,077 $36,181 $ 36,319 ========= ========= ========= ========= ========= ========= ========= ========= Off-Balance Sheet Items: Interest Rate Swaps Receive fixed swaps $ 1,166 $ 329 $ 46 $ 35 $ 12 $ 91 $ 1,679 $ 8 Weighted avg. receive rate 6.12% 6.71% 6.73% 6.61% 6.52% 6.39% 6.28% Weighted average pay rate 5.67% 5.92% 5.93% 5.93% 6.02% 5.89% 5.74% Pay fixed swaps $ 209 $ 172 $ 10 $ 96 $ 305 $ 316 $ 1,108 (34) Weighted avg receive rate 6.02% 5.96% 5.94% 5.96% 6.01% 5.94% 5.98% Weighted average pay rate 7.66% 8.26% 6.08% 8.13% 7.54% 6.39% 7.38% --------- --------- ---------- ---------- --------- --------- --------- ---------- Total $ 1,375 $ 501 $ 56 $ 131 $ 317 $ 407 $ 2,787 (26) ========= ========= ========== ========== ========= ========= ========= ==========
(a) The total weighted average interest rate for variable loans receivable reflects loans with teaser (start) rates in effect at December 31, 1997. Those loans are assumed to mature outside the teaser period at fully-indexed rates (the fully-indexed rate is equal to the effective index plus the loan margin). Consequently, the weighted average rate of all maturing variable rate loans will not equal the weighted average rate of total variable rate loans at December 31, 1997 as indicated in the total balance column. (b) Deposits with no maturity are included in the 1998 column. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) CASH AND INVESTMENTS Golden West's investment portfolio is composed primarily of federal funds, short-term repurchase agreements collateralized by mortgage-backed securities, short-term money market securities, United States government obligations, and collateralized mortgage obligations. In determining the amounts of assets to invest in each class of investments, the Company considers relative rates, liquidity, and credit quality. The Office of Thrift Supervision (OTS) requires insured institutions, such as WFSB and WSL, to maintain a minimum amount of cash and certain qualifying investments for liquidity purposes. As of December 1, 1997, the current minimum requirement was changed to equal 4% of the quarterly average of daily balances of short-term deposits and borrowings or 4% of the prior quarter's ending balance of short-term deposits and borrowings. For all other months during 1997, the minimum liquidity requirement was equal to 5% of the monthly average of customer deposits and short-term borrowings. For the months ended December 31, 1997, 1996, and 1995, WFSB's regulatory average liquidity ratio was 11%, 6%, and 6%, respectively. WSL's regulatory average liquidity ratio was 12%, 8%, and 8%, for the months ended December 31, 1997, 1996, and 1995. WFSB and WSL exceeded the quarterly 4% requirement for the quarter ended December 31, 1997. WFSB and WSL exceeded the monthly 5% requirement for all months during 1997, 1996, and 1995. 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. During 1997, the Company more effectively managed its liquidity portfolio within each month, resulting in a lower liquidity balance at monthends. At December 31, 1997, and 1996, the Company had securities available for sale in the amount of $609 million and $781 million, respectively, including net unrealized gains on securities available for sale of $245 million and $159 million, respectively. At December 31, 1997 and 1996, the Company had no securities held to maturity or for trading in its investment securities portfolio. Included in the securities available for sale at December 31, 1997, and 1996, were collateralized mortgage obligations (CMOs) in the amount of $71 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 CMO's. At December 31, 1997, the majority of the Company's CMOs had remaining terms to maturity of five years or less and all CMOs qualified for inclusion in the regulatory liquidity measurement. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) MORTGAGE-BACKED SECURITIES At December 31, 1997 and 1996, the Company had mortgage-backed securities held to maturity in the amount of $3.8 billion and $4.1 billion, respectively, including $3.0 billion of Federal National Mortgage Association (FNMA) mortgage-backed securities (MBS) subject to full credit recourse to the Company at December 31, 1997 and $3.3 billion at December 31, 1996. At December 31, 1997, and 1996, the Company had mortgage-backed securities available for sale in the amount of $157 million and $227 million, respectively, including net unrealized gains on mortgage-backed securities available for sale of $8 million and $11 million at December 31, 1997 and 1996, respectively. At December 31, 1997 and 1996, the Company had no trading MBS. During 1997, the Company desecuritized $856 million of FNMA COFI-indexed MBS in November and securitized $1.0 billion of adjustable rate mortgages (ARMs) into FNMA COFI-indexed MBS in December. During 1996, the Company securitized $1.3 billion of adjustable rate mortgages into FNMA COFI-indexed MBS. 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 and, accordingly, these MBS are classified as held to maturity. The FNMA MBS held to maturity are available to be used as collateral for borrowings and are subject to full credit recourse to the Company. At December 31, 1997, $3.1 billion of the Company's total MBS portfolio were backed by ARMs. The percentage of MBS backed by ARMs was 78% at yearend 1997 compared to 77% at yearend 1996 and 67% at yearend 1995. The large amount of adjustable rate MBS is mainly due to the large amount of ARM loans securitized with recourse in 1995, 1996, and 1997. At December 31, 1997, fixed-rate mortgage-backed securities comprise the other 22% of the total MBS portfolio. Repayments of MBS during the years 1997, 1996, and 1995 amounted to $518 million, $413 million, and $210 million, respectively. MBS repayments were higher in 1997 due to an increase in prepayments on the underlying mortgages. MBS repayments were higher in 1996 due to the increase in total MBS outstanding and an increase in prepayments on the underlying mortgages. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) LOAN PORTFOLIO New loan originations in 1997, 1996, and 1995 amounted to $7.5 billion, $7.0 billion, and $5.9 billion, respectively. The increase in loan volume in 1997 occurred because of a continued strong housing market and solid demand for ARMs, the Company's principal product. The increase in loan volume in 1996 occurred because rates on new fixed-rate mortgages generally remained around the 8% level during 1996, while the starting rates on ARMs, remained low and more affordable. Refinanced loans constituted 33% of new loan originations in 1997 compared to 34% in 1996 and 32% in 1995. The Company continues to sell most of its fixed-rate originations. Loans originated for sale were $217 million, $477 million, and $169 million for the years ended December 31, 1997, 1996, and 1995. The Company sold $209 million, $485 million, and $142 million of loans during 1997, 1996, and 1995, respectively. At December 31, 1997, the balance of loans sold with recourse was $653 million. Golden West continues to emphasize adjustable rate mortgages--loans with interest rates that change periodically in accordance with movements in specified indexes. The portion of the mortgage portfolio (excluding MBS) composed of rate-sensitive loans was 93% at yearend 1997 compared to 91% at yearend 1996 and 90% at yearend 1995. Golden West's ARM originations constituted approximately 95% of new mortgage loans made by the Company in 1997, compared with 90% in 1996 and 93% in 1995. Approximately $5.5 billion of the Company's ARMs have terms that state that the interest rate may not fall below a lifetime floor set at the time of origination or assumption. As of December 31, 1997, $558 million of these ARMs had reached their rate floors. The weighted average floor rate on the loans that had reached their floor was 7.76% at December 31, 1997, compared to 7.75% at December 31, 1996. Without the floor, the average yield on these loans would have been 7.21% at December 31, 1997 and 7.10% at December 31, 1996. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) The Company has lending operations in 26 states. The primary source of mortgage origination is loans secured by residential properties in California. In 1997, 54% of total loan originations were on residential properties in California, compared to 50% and 53% in 1996 and 1995, respectively. The five largest states, other than California, for originations for the year ended December 31, 1997, were Florida, Texas, Illinois, New Jersey, and Colorado with a combined total of 25% of total originations. The percentage of loans originated in California increased in 1997 as compared to 1996 due to the improvement in the California real estate market. Although California originations were a large portion of total 1996 originations, the California share of total 1996 originations decreased in 1996 as compared to 1995 due to increased loan volume in markets outside of California. The percentage of the total loan portfolio (excluding mortgage-backed securities) that is comprised of residential loans in California was 63% at December 31, 1997, 69% at December 31, 1996, and 73% at December 31, 1995. The percentage of the total loan portfolio (including mortgage-backed securities with recourse) that is comprised of residential loans in California was 66% at December 31, 1997, 69% at December 31, 1996, and 73% at December 31, 1995. The total growth in the portfolio for the year ended December 31, 1997, was $3.1 billion or 10% compared to $1.9 billion or 7% for the year ended December 31, 1996. Had there not been $1.3 billion of loans securitized into MBS during 1996, the loan portfolio growth for 1996 would have been $3.0 billion or 10%. Loan repayments consisting of monthly loan amortization, payoffs, and refinances during the years 1997, 1996, and 1995 amounted to $3.8 billion, $3.1 billion, and $2.3 billion, respectively. The increase in repayments in 1997 was due to an increase in the balance of the loan portfolio as well as increased prepayment rates. The increase in repayments in 1996 was due to higher mortgage payoffs and higher refinances within the portfolio as well as an increase in the portfolio balance. The 1996 increase would have been even higher if the Company had not securitized $1.3 billion of loans into MBS during the year. 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 nonaccrual loans. NPAs amounted to $379 million, $456 million, and $390 million at yearends 1997, 1996, and 1995, respectively. The decrease in NPAs during 1997 reflected the improving California economy. The increase in NPAs during 1996 reflected the continued weakness in the Southern California housing market and increased bankruptcies nationwide. The Company continues to closely monitor all delinquencies and takes appropriate steps to protect its interests. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) The Company's troubled debt restructured (TDRs) were $44 million, or .11% of assets, at December 31, 1997, compared to $84 million, or .22% of assets, at December 31, 1996, and $45 million, or .13% of assets, at December 31, 1995. The Company's TDRs are made up of loans on which delinquent loan payments have been capitalized or on which temporary interest rate reductions have been made, primarily to customers negatively impacted by adverse economic conditions. The Company's ratio of NPAs and TDRs to total assets decreased to 1.07% at December 31, 1997 compared to 1.43% and 1.24% at yearends 1996 and 1995, respectively. The Company has other impaired loans on which specific loss reserves have been provided and that were not otherwise included in nonperforming loans or troubled debt restructured because the loans were performing in full accordance with the loan terms. Other impaired loans amounted to $71 million, $56 million, and $60 million at yearends 1997, 1996, and 1995, respectively. ALLOWANCE FOR LOAN LOSSES The Company's allowance for loan losses was $233 million at December 31, 1997, compared to $196 million and $142 million at yearends 1996 and 1995, respectively. The provision for loan losses was $58 million, $84 million, and $61 million in 1997, 1996, and 1995, respectively. The provision for loan losses as a percentage of the loan portfolio (including MBS with recourse) was .16% for the year ended December 31, 1997 as compare to .25% and .20% for the years ended December 31, 1996 and 1995, respectively. The allowance for loan losses as a percentage of the loan portfolio (including MBS with recourse) was .64% for the year ended December 31, 1997, as compared to .59% and .47% for the years ended December 31, 1996 and 1995, respectively. Net chargeoffs for the years ended December 31, 1997, 1996, and 1995 were $20 million, $31 million, and $43 million, respectively. The ratio of net chargeoffs to average loans outstanding (including MBS with recourse) was .06% for the year ended December 31, 1997, as compared to .10% and .15% for the years ended 1996 and 1995, respectively. The improvements in these ratios reflect the improvement in the California economy as previously discussed in "Asset Quality." ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) 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 data base that identifies losses on loans and foreclosed real estate from past years to the present, broken down by year of origination, type of loan, and geographical area. Management is then able to estimate a range of general loss allowances to cover losses in the portfolio. In addition, periodic reviews are made of major loans and real estate owned, and major lending areas are regularly reviewed to determine potential problems. Where indicated, valuation allowances are established or adjusted. In estimating possible losses, consideration is given to the estimated sales price, cost of refurbishing, payment of delinquent taxes, cost of disposal, and cost of holding property. Additions to, and reductions from, the allowance are reflected in current earnings. REAL ESTATE HELD FOR SALE At December 31, 1997, the Company had real estate held for sale in the amount of $62 million, compared to $82 million a year earlier. The largest balance of real estate held for sale continues to be one- to four-family properties in California. MORTGAGE SERVICING RIGHTS On January 1, 1996, the Company adopted Statement of Financial Accounting Standard No. 122, "Accounting for Mortgage Servicing Rights" (SFAS 122). SFAS 122 amended Statement of Financial Accounting Standard No. 65, "Accounting for Certain Mortgage Banking Activities," to require that any financial institution participating in the secondary 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 required 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 December 31, 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) which superseded SFAS 122. The accounting for mortgage servicing assets under SFAS 125 is substantially the same as the accounting for mortgage servicing assets under SFAS 122. For the years ended December 31, 1997 and 1996, Golden West recognized gains of $5 million and ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) $11 million, respectively, on the sale of loans due to the capitalization of servicing rights. After amortization, the balance at December 31, 1997 and 1996 of the capitalized servicing rights was $11 million and $9 million, respectively. CHANGE IN ACCOUNTING FOR GOODWILL During 1996, the Company adopted SFAS 72, effective January 1, 1996, for goodwill related to the Company's acquisitions made prior to September 30, 1982. 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. 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. As a result, the Company wrote-off goodwill totaling $205 million as the cumulative effect of the change in accounting for goodwill. The Company has been accounting for acquisitions initiated subsequent to September 30, 1982, in accordance with SFAS 72. 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. Amortization of goodwill is recorded on the Company's consolidated statement of Net Earnings under the section titled "Non-Interest Income - Other". DEPOSITS Retail deposits increased by $1.5 billion in 1997 compared to increases of $1.3 billion and $1.6 billion in 1996 and 1995, respectively. Retail deposits increased during 1997, 1996, and 1995 primarily due to ongoing marketing efforts and competitive rates offered by the Company on its insured accounts. In addition, during 1997, the Company actively promoted money market deposit accounts and a new high-yield checking account. Included in the 1995 increase was the 1995 acquisition of a savings bank in New Jersey with $48 million in deposits, which was subsequently renamed WFSB, and the effect of the sale of seven branches in Colorado with $153 million in deposits. 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 December 31, 1997 included $525 million of these wholesale CDs. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) The mix of deposits changed during 1997 and 1996 as compared to 1995. During 1997, the Company actively promoted money market deposit accounts which accounted for part of the change in mix in 1997. In addition, the change was also due in part to a new program begun in the fourth quarter of 1996. Specifically, the 1997 and 1996 reported balances of interest-bearing checking accounts decreased as compared to 1995 and the 1997 and 1996 reported balances of money market accounts increased compared to balances reported in 1995 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. ADVANCES FROM FEDERAL HOME LOAN BANKS The Company uses Federal Home Loan Bank (FHLB) borrowings, also known as "advances," to supplement cash flow and to provide funds for loan origination activities. Advances are secured by pledges of certain loans and, capital stock of the Federal Home Loan Bank. FHLB advances amounted to $8.5 billion at December 31, 1997, compared to $8.8 billion and $6.4 billion at December 31, 1996, and 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, 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 $2.3 billion, $1.9 billion, and $1.8 billion at yearends 1997, 1996, and 1995, respectively. The $2.3 billion balance at December 31, 1997, includes $250 million in Federal Home Loan Bank of San Francisco MBS Reverse Repos which all mature in 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. 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 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) 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 until January 1, 1998. The impact of SFAS 127 on the Company's financial condition and results of operations is not expected to be material. OTHER BORROWINGS As of December 31, 1997, Golden West, at the holding company level, had a total of $1.0 billion of subordinated debt issued and outstanding. At yearend 1997, the Company's subordinated debt was rated A3 and A- by Moody's Investors Service (Moody's) and Standard & Poor's Corporation (S&P), respectively. At December 31, 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. WSL also has on file a registration statement with the OTS for the sale of up to $300 million of subordinated notes and at yearend 1997, the full amount was available for issuance. As of December 31, 1997, WSL had a total of $100 million of subordinated notes issued and outstanding which were rated A2 and A by Moody's and S&P, respectively. The subordinated notes are included in WSL' risk-based regulatory capital as Supplementary Capital. WSL currently has on file a shelf registration with the OTS for the issuance of $2.0 billion of unsecured medium-term notes, all of which was available for issuance at yearend 1997. WSL has medium-term notes outstanding under prior registrations with principal amounts of $110 million at December 31, 1997, compared to $590 million at December 31, 1996, and $1.6 billion at December 31, 1995. As of December 31, 1997, WSL's medium-term notes were rated Al and A+ by Moody's and S&P, respectively. During 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 December 31, 1997, WFSB had not issued any notes under this authority. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) STOCKHOLDERS' EQUITY The Company's stockholders' equity increased during 1997 as a result of earnings and increased market values of securities available for sale. These increases were partially offset by the $48 million cost of the repurchase of Company stock. The Company's stockholders' equity increased during 1996 as a result of earnings and increased market values of securities available for sale. These increases were partially offset by the $106 million cost of the repurchase of Company stock. The Company's stockholders' equity increased during 1995 as a result of earnings and increased market values of securities available for sale. Since 1993, through three separate actions, Golden West's Board of Directors has authorized the purchase by the Company of up to total of 12.2 million shares of Golden West's common stock. As of December 31, 1997, 8.5 million shares had been repurchased and retired at a cost of $380 million since October 28, 1993, of which 731,000 shares were purchased and retired at a cost of $48 million during 1997. Dividends from subsidiaries 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. The Company has on file a shelf registration statement with the Securities and Exchange Commission to issue up to two million shares of its preferred stock. The preferred stock may be issued in one or more series, may have varying provisions and designations, and may be represented by depository shares. The preferred stock is not convertible into common stock. No preferred stock has yet been issued under the registration. The Company's preferred stock has been preliminarily rated a2 by Moody's. The OTS requires federally insured institutions, such as WFSB and WSL, to meet minimum capital requirements. Under these regulations, a savings institution is required to meet three separate capital requirements. The first requirement is to have tangible capital of 1.5% of adjusted total assets. At December 31, 1997, WFSB had tangible capital of $1.6 billion, or 6.51% of adjusted total assets, $1.2 billion in excess of the regulatory requirement. At December 31, 1997, WSL had tangible capital of $980 million, or 6.42% of adjusted total assets, $752 million in excess of the regulatory requirement. The second requirement is to have core capital of 3% of adjusted total assets. At December 31, 1997, WFSB had core capital of $1.6 billion, or 6.51% of adjusted total assets, $864 million in excess of the regulatory requirement. At December 31, 1997, WSL had core capital of $980 million, or 6.42% of adjusted total assets, $523 million in excess of the regulatory requirement. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION (continued) The third capital requirement is to have risk-based capital equal to 8.0% of risk-weighted assets. At December 31, 1997, WFSB had risk-based capital in the amount of $1.7 billion or 12.80% of risk-weighted assets, exceeding the current requirement by $636 million. At December 31, 1997, WSL had risk-based capital in the amount of $1.2 billion or 13.64% of risk-weighted assets, exceeding the current requirement by $491 million. Under OTS regulations which implement the prompt corrective action system mandated by the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), an institution is well capitalized if its ratio of total capital to risk-weighted assets is 10% or more, its ratio of core capital to risk-weighted assets is 6% or more, its ratio of core capital to total assets is 5% or more and it is not subject to any written agreement, order or directive to meet a specified capital level. The Company's insured subsidiaries qualify as well capitalized institutions under the rules applicable to them. The OTS limits capital distributions by savings associations. For purposes of capital distributions, the OTS has classified WFSB and WSL as a Tier 1 associations; thus, WFSB and WSL may pay dividends during a calendar year of up to 100% of net earnings to date during the calendar year plus up to one-half of capital in excess of the risk-based capital requirement at the end of the prior year subject to thirty days' advance notice to the OTS. Distributions beyond these amounts are allowed only with the specific, prior approval of the OTS. During 1997, WSL obtained such approval and paid a total of $515 million in dividends to Golden West during 1997. 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 and will be adopted in 1998. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS Net earnings increased in 1997 as compared to 1996 (without the three nonrecurring items) primarily due to an increase in net interest income as a result of increases in interest earning assets, a decrease in the provision for loan losses made possible by the Company's declining chargeoffs and nonperforming assets, and a decrease in deposit insurance premiums partially offset by increases in other operating expenses. Without the three nonrecurring items, net earnings increased in 1996 as compared to 1995. Net earnings increased in 1996 as compared to 1995 primarily due to improvements in net interest income as a result of increases in interest earning assets and improvements in margins; an increase in non-interest income resulting from increased loan servicing fees, the recognition of capitalized servicing rights; and a reduction in deposit insurance premiums. These improvements to net earnings were partially offset by an increase in the provision for loan losses and a slight increase in the other general and administrative expenses. EARNINGS PER SHARE In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). SFAS 128 replaced "Primary" and "Fully-Diluted" Earnings Per Share with "Basic EPS" and "Diluted EPS" for fiscal years ending after December 15, 1997. Basic EPS is calculated by dividing net earnings for the period by the weighted average common shares outstanding for that period. There is no adjustment to the number of outstanding shares for stock options or other dilutive items as was previously done in the calculation of Primary EPS. Diluted EPS takes into account the effect of dilutive instruments, such as stock options, but uses 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, Fully-Diluted EPS used the period ending share price, if it exceeded the average price, in the calculation to determine the number of incremental shares that were to be added. The Company's Basic EPS for the years ended December 31, 1997, 1996, and 1995, was $6.22, $5.31 (before the three nonrecurring items), and $4.00, respectively. The Company reported Diluted EPS of $6.13 for the year ended December 31, 1997 as compared to $5.24 (before the three nonrecurring items), and $3.94 for the years ended December 31, 1996 and 1995, respectively. PROFIT MARGINS/SPREADS An important determinant of Golden West's earnings is its primary spread--the difference between its yield on earning assets and its cost of funds. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued) The following table shows the components of the Company's primary spread at the end of the years 1995 through 1997.
TABLE 36 Yield on Earning Assets, Cost of Funds, And Primary Spread Including the Effect of Purchase Accounting December 31 -------------------------------- 1997 1996 1995 -------- --------- --------- Yield on loan portfolio 7.50% 7.39% 7.66% Yield on investments 6.48 6.88 5.96 -------- --------- --------- Yield on earning assets 7.48 7.37 7.56 -------- --------- --------- Cost of deposits 5.04 4.98 5.15 Cost of borrowings 5.99 5.80 6.15 -------- --------- --------- Cost of funds 5.36 5.28 5.50 -------- --------- --------- Primary spread 2.12% 2.09% 2.06% ======== ========= =========
YIELD ON EARNING ASSETS Golden West originates ARMs to manage the rate sensitivity of the asset side of the balance sheet. Most of the Company's ARMs have interest rates that change in accordance with an index based on the cost of deposits and borrowings of savings institutions that are members of the FHLB of San Francisco (the COFI). Nevertheless, the yield on the Company's ARM portfolio tends to lag changes in market interest rates because of lags related to the index and because of certain loan features (see Asset/Liability Management section for further discussion). COST OF FUNDS Approximately 89% of Golden West's liabilities are subject to repricing in less than one year. Higher rates on deposit accounts as well as higher rates on borrowings led to an increase in the Company's cost of funds during 1997. Lower rates paid on deposit accounts led to a decrease in the Company's cost of funds during 1996. INTEREST RATE SWAPS AND CAPS The Company enters into interest rate swaps and caps as part of its interest rate risk management strategy. The Company had no caps outstanding during 1997. 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 $5 million, $10 million, and $29 million for the years ended December 31, 1997, 1996, and 1995, respectively. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued) The following table summarizes the unrealized gains and losses for interest rate swaps at December 31, 1997 and 1996.
TABLE 37 Unrealized Gains and Losses on Interest Rate Swaps and Caps (Thousands) December 31, 1997 -------------------------------------------------- Net Unrealized Unrealized Unrealized Gains Losses (Loss) ============== ============== =============== Interest rate swaps $ 11,043 $ 36,897 $ (25,854) ============== ============== =============== December 31, 1996 -------------------------------------------------- Net Unrealized Unrealized Unrealized Gains Losses (Loss) ============== ============== =============== Interest rate swaps $ 25,085 $ 40,085 $ (15,000) ============== ============== ===============
TABLE 38 Interest Rate Swap and Cap Activity (Notional Amounts in Millions) Receive Pay Forward Interest Fixed Fixed Swaps Basis Starting Rate Swaps Swaps(a) Swaps Caps ------------ ------------ ------------ ------------ ------------ Balance at January 1, 1996 $ 3,221 $ 1,775 $ 43 $ 10 $ 225 Additions 905 -0- -0- -0- -0- Maturities (1,545) (435) (43) -0- (225) ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1996 2,581 1,340 -0- 10 -0- Additions 100 -0- -0- -0- -0- Maturities (1,002) (232) -0- -0- -0- Forward starting, becoming effective -0- -0- -0- (10) -0- ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1997 $ 1,679 1,108 -0- -0- -0- ============ ============ ============ ============ ============
(a) Receives floating, pays floating. INTEREST ON LOANS In 1997 and 1996, interest on loans increased due to an increase in the average portfolio balance. In 1997 and in 1996, the average portfolio yields on the loan portfolio remained relatively flat in spite of the changes in the yearend yields at December 31, 1997 and 1996. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued) INTEREST ON MBS In 1997 and in 1996, interest on MBS increased due to an increase in the average portfolio balance which was partially offset by a decrease in the average portfolio yield. INTEREST AND DIVIDENDS ON INVESTMENTS The income earned on the investment portfolio fluctuates, depending upon the volume outstanding and the yields available on short-term investments. Interest and dividends on investments were higher in 1997 than in 1996 due to an increase in the average portfolio balance and increase in the average portfolio yield. Interest and dividends on investments were lower in 1996 than in 1995 due to a decrease in the average portfolio balance and a decrease in the average portfolio yield. INTEREST ON DEPOSITS The major portion of the Company's deposit base consists of savings accounts with remaining maturities of one year or less. Thus, the amount of interest paid on these funds depends upon the level of short-term interest rates and the savings balances outstanding. The increase in interest expense in 1997 was due to the increase in the average cost of deposits and an increase in the average balance of deposits. The increase in interest expense on deposits in 1996 was due to an increase in the average balance of deposits partially offset by a decrease in the average cost of deposits. INTEREST ON ADVANCES Interest paid on FHLB advances was higher in 1997 as compared to 1996 due to an increase in the average outstanding balance and an increase in the average cost of these borrowings. Interest paid on FHLB advances was higher in 1996 as compared to 1995 due to an increase in the average balance of these borrowings, which was partially offset by a decrease in the average cost of these borrowings. INTEREST ON OTHER BORROWINGS Interest expense on other borrowings, including interest on reverse repurchase agreements, amounted to $295 million, $280 million, and $287 million for the years ended 1997, 1996, and 1995, respectively. The increase in the expense in 1997 over 1996 was due to an increase in the average balance of these liabilities partially offset by a decrease in the average cost of other borrowings. The decrease in expense in 1996 over 1995 was due to a decrease in the average cost of these borrowings which was partially offset by an increase in the average borrowings. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued) PROVISION FOR LOAN LOSSES The provision for loan losses was $58 million, $84 million, and $61 million for the years ended 1997, 1996, and 1995, respectively. The lower provision in 1997 reflected the decrease in net chargeoffs, the decrease in nonperforming assets, and the improving California economy. The higher provision in 1996 reflected an increase in nonaccrual loans and higher bankruptcies. NON-INTEREST INCOME Non-interest income was $81 million, $75 million, and $40 million for the years ended December 31, 1997, 1996, and 1995, respectively. The increase in non-interest income in 1997 as compared to 1996 was mainly due to an increase in loan fee income. The increase in non-interest income in 1996 as compared to 1995 was due to the adoption of SFAS 122 and the recognition of capitalized mortgage servicing rights, and increased loan servicing fee income as a result of the securitization with recourse of $1.3 billion of loans with FNMA in 1996, which the Company continues to service. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses increased during the three years under discussion. The 1997 increase was due to the ongoing expansion of the savings and loan business, as well as the implementation of several major technology initiatives. The 1996 increase was due to the one-time SAIF assessment of $133 million. Without the one-time SAIF assessment, 1996 general and administrative expenses increased slightly from 1995 reflecting the modest increase in inflation. The 1997 and 1996 general and administrative expenses benefited from the lower deposit insurance premiums which partially offset the increase in personnel expense. The primary reasons for the increase in 1995 were the growth in savings deposits and general inflation. General and administrative expenses as a percentage of average assets was .84% for the year ended December 31, 1997 compared with .89% (without the one-time 1996 SAIF assessment) and .93% for the years ended December 31, 1996 and 1995, respectively. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued) DEPOSIT INSURANCE During 1996, federal legislation was enacted 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 required members to pay a levy of $4.7 billion to bring the SAIF up to the required reserve level of 1.25% of insured deposits, but lowered savings and loan deposit insurance premiums starting in 1997. As a result of this legislation, Golden West's subsidiary, WSL, incurred a one-time charge of $133 million during 1996. Beginning on January 1, 1997, the premium paid by WSL to the FDIC was reduced from $2.30 per $1,000 in savings balances to $.648 per $1,000. Also, beginning on January 1, 1997, the premiums paid by BIF insured institutions, such as WFSB, were increased from $0.00 per $1,000 in savings balances to $.1296 per $1,000. TAXES ON INCOME Golden West utilizes the accrual method of accounting for income tax purposes and for preparing its published financial statements. For financial reporting purposes only, the Company uses "purchase accounting" in connection with certain assets acquired through mergers. The purchase accounting portion of income is not subject to tax. During 1996, the Company recognized $139 million of tax benefits associated with the Company's purchase 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 during 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 million in tax benefits, increased slightly in 1997 over 1996 and in 1996 over 1995. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued) LIQUIDITY AND CAPITAL RESOURCES WFSB's' principal sources of funds are cash flows generated from earnings; deposits; loan repayments; negotiable certificates of deposit; borrowings from the FHLB; borrowings from its affiliates; debt collateralized by mortgages, MBS, or securities; and the issuance of medium-term notes. In addition, WFSB has a number of 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. WSL'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, WSL 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, negotiable certificates of deposit, issuances of commercial paper, and borrowings from commercial banks. Furthermore, under certain conditions, WSL may borrow from the Federal Reserve Bank of San Francisco to meet short-term cash needs. The availability of these funds will vary depending upon policies of the FHLB, the Federal Reserve Bank of San Francisco, and the Federal Reserve Board. The principal sources of funds for WFSB's and WSL's parent, Golden West, are dividends from subsidiaries, 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 that WFSB and WSL 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 ($284 million in 1997 and $500 million in 1996), dividends to stockholders, the purchase of Golden West stock, and general and administrative expenses. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (continued) YEAR 2000 Golden West is aware of the system challenges that the year 2000 has created and currently has a plan in place to insure that all of the Company's systems will be year 2000 compliant by the beginning of the year 1999. The Company is currently in the process of identifying, prioritizing and modifying or replacing systems that may be affected by these year 2000 compliance issues (Year 2000 Project.) While Golden West believes it is doing everything technologically possible to assure year 2000 compliance, the success of the Year 2000 Project is to some extent dependent upon vendor cooperation. The Company is requiring its computer systems and software vendors to represent that the products provided are or will be year 2000 compliant and has planned a program of testing for compliance. The Company currently estimates that over the next two years, it will cost approximately $13 million to make all of its computer systems year 2000 compliant. The Company will expense all costs associated with the Year 2000 Project and expects to fund such costs through operating cash flows. The amount expensed in 1997 was immaterial. Included in the $13 million are estimates for compensation of employees dedicated to the Year 2000 Project, consultants, hardware and software expense and depreciation of the equipment purchased as part of this process. However, the Company's year 2000 expenses are not expected to result in a dollar for dollar increase in the Company's overall information systems expenditures because the Company is likely to dedicate a number of its existing resources solely to the Year 2000 Project. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See pages 52 through 55 in Item 7, Management's Discussion and Analysis of Financial Conditions and Results of Operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index included on page 76 and the financial statements, which begin on page F-1, which are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Inapplicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and executive officers of the Company are as follows (see footnote explanations on the following page): Name and Age Position - ------------ -------- Herbert M. Sandler, 66 Chairman of the Board and Chief Executive Officer Marion O. Sandler, 67 Chairman of the Board and Chief Executive Officer (a) James T. Judd, 59 Senior Executive Vice President Russell W. Kettell, 54 President and Treasurer (b) J. L. Helvey, 66 Executive Vice President (c) Dirk S. Adams, 46 Group Senior Vice President Robert C. Rowe, 42 Senior Vice President and Secretary (d) Carl M. Andersen, 37 Senior Vice President (e) William C. Nunan, 46 Senior Vice President (f) Maryellen B. Cattani, 54 Director Louis J. Galen, 72 Director Antonia Hernandez, 50 Director Patricia A. King, 55 Director Bernard A. Osher, 70 Director Kenneth T. Rosen, 49 Director Leslie Tang Schilling, 43 Director Each of the above persons holds the same position with WFSB and WSL with the exception of James T. Judd who is President, Chief Operating Officer, and Director of WFSB and WSL and Russell W. Kettell who is a Senior Executive Vice President and Director of WFSB and WSL. Each executive officer has had the principal occupations shown for the prior five years except as follows: ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (Continued) (a) Marion O. Sandler was elected Chairman of the Board of the Company in February 1993. Prior thereto, Mrs. Sandler served as President and Chief Executive Officer since 1980. (b) Russell W. Kettell was elected Treasurer of the Company in January 1995 and has held the position of President of the Company since February 1993. Prior thereto, Mr. Kettell served as Senior Executive Vice President since 1989, Executive Vice President since 1984, Senior Vice President since 1980, and Treasurer from 1976 until 1984. (c) J. L. Helvey was elected Executive Vice President of the Company in 1996. Prior thereto, Mr. Helvey served as Group Senior Vice President since 1988 and Senior Vice President since 1973. (d) Robert C. Rowe was elected Senior Vice President in 1995. Prior thereto, he served as Vice President and Secretary of the Company since February 1991. Prior thereto, Mr. Rowe served as Assistant Vice President and Secretary since 1989 and as General Counsel since 1988. Prior to that, Mr. Rowe was a legal counsel to the Federal Home Loan Bank of San Francisco since 1984. (e) Carl M. Andersen was elected Senior Vice President of the Company in 1997 and has held the same position with WSL since 1996. Prior thereto, Mr. Andersen served as Vice President since 1990. (f) William C. Nunan was elected Senior Vice President of the Company in 1997 and has held the same position with WSL since 1995. Prior thereto, Mr. Nunan served as Vice President since 1985. For further information concerning the directors and executive officers of the Registrant, see pages 2 and 3 of the Registrant's Proxy Statement dated March 16, 1998, which are incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 is set forth in Registrant's Proxy Statement dated March 16, 1998, on pages 3 through 5 and 7 through 8 and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item 12 is set forth on pages 2, 3, 5 and 6 of Registrant's Proxy Statement dated March 16, 1998, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See "Indebtedness of Management" on page 8 of the Registrant's Proxy Statement dated March 16, 1998, which is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Index to Financial StatementS See Index included on page 82 and the financial statements, which begin on page F-1. (2) Index to Financial Statement Schedules Financial statement schedules are omitted because they are not required or because the required information is included in the financial statements or the notes thereto. (3) Index To Exhibits Exhibit No. Description 3(a) Certificate of Incorporation, as amended, and amendments thereto, are incorporated by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K (File No. 1-4629) for the year ended December 31, 1990. 3(b) By-Laws, as amended, in 1997. 4(a) The Registrant agrees to furnish to the Commission, upon request, a copy of each instrument with respect to issues of long-term debt, the authorized principal amount of which does not exceed 10% of the total assets of the Company. 10(a) 1996 Stock Option Plan, as amended, is incorporated by reference to Exhibit A of the Company's Definitive Proxy Statement on Schedule 14A, filed on March 15, 1996, for the Company's 1996 Annual Meeting of Stockholders. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued) (a) (3) Index To Exhibits (continued) Exhibit No. Description ----------- ----------- 10(b) Annual Incentive Bonus Plan is incorporated by reference to Exhibit A of the Company's Definitive Proxy Statement on Schedule 14A, filed on March 14, 1997, for the Company's 1997 Annual Meeting of Stockholders. 10(c) Deferred Compensation Agreement between the Company and James T. Judd is incorporated by reference to Exhibit 10(b) of the Company's Annual Report on Form 10-K (File No. 1-4629) for the year ended December 31, 1986. 10 (d) Deferred Compensation Agreement between the Company and Russell W. Kettell is incorporated by reference to Exhibit 10(c) of the Company's Annual Report on Form 10-K (File No. 1-4629) for the year ended December 31, 1986. 10(e) Deferred Compensation Agreement between the Company and J. L. Helvey is incorporated by reference to Exhibit 10(d) of the Company's Annual Report on Form 10-K (File No. 1-4629) for the year ended December 31, 1986. 10(f) Deferred Compensation Agreement between the Company and David C. Welch is incorporated by reference to Exhibit 10(f) of the Company's Annual Report on Form 10-K (File No. 1-4629) for the year ended December 31, 1987. 10(g) Operating lease on Company headquarters building, 1901 Harrison Street, Oakland, California 94612, is incorporated by reference to Exhibit 10(e) of the Company's Annual Report on Form 10-K (File No. 1-4629) for the year ended December 31, 1986. 10(h) Form of Supplemental Retirement Agreement between the Company and certain executive officers is incorporated by reference to Exhibit 10(j) to the Company's Annual Report on Form 10-K (File No. 1-4629) for the year ended December 31, 1990. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued) (a) (3) Index To Exhibits (continued) Exhibit No. Description ----------- ----------- 21(a) Subsidiaries of the Registrant is incorporated by reference to Exhibit 22(a) of the Company's Annual Report on Form 10-K (File No. 1-4629) for the year ended December 31, 1987. 23(a) Independent Auditors' Consent. 27 Financial Data Schedule (b) Financial Statement Schedules The response to this portion of Item 14 is submitted as a part of section (a), Exhibits. (c) Reports on Form 8-K The Registrant did not file any current reports on Form 8-K with the Commission in the fourth quarter. For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned Registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into Registrant's Registration Statement on Form S-8 No. 33-14833 (filed June 5, 1987): Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued) SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. GOLDEN WEST FINANCIAL CORPORATION By: /s/ Herbert M. Sandler 3/27/98 ------------------------------------------------------- Herbert M. Sandler, Chairman of the Board and Chief Executive Officer By: /s/ Marion O. Sandler 3/27/98 ------------------------------------------------------- Marion O. Sandler, Chairman of the Board and Chief Executive Officer By: /s/ J. L. Helvey 3/27/98 ------------------------------------------------------- J. L. Helvey, Executive Vice President and Chief Financial and Accounting Officer Dated: March 27, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated: /s/ Maryellen B. Cattani 3/27/98 /s/ Bernard A. Osher 3/27/98 - ----------------------------------- ---------------------------------- Maryellen B. Cattani Bernard A. Osher Director Director /s/ Louis J. Galen 3/27/98 /s/ Kenneth T. Rosen 3/27/98 - ----------------------------------- ---------------------------------- Louis J. Galen Kenneth T. Rosen Director Director /s/ Antonia Hernandez 3/27/98 /s/ Herbert M. Sandler 3/27/98 - ----------------------------------- ---------------------------------- Antonia Hernandez Herbert M. Sandler Director Director /s/ Patricia A. King 3/27/98 /s/ Marion O. Sandler 3/27/98 - ----------------------------------- ---------------------------------- Patricia A. King Marion O. Sandler Director Director /s/ Leslie Tang Schilling 3/27/98 ---------------------------------- Leslie Tang Schilling Director INDEX TO FINANCIAL STATEMENTS Page ----- Independent Auditors' Report F-1 Golden West Financial Corporation and Subsidiaries: Consolidated Statement of Financial Condition as of December 31, 1997, and 1996 F-2, F-3 Consolidated Statement of Net Earnings for the years ended December 31, 1997, 1996, and 1995 F-4 Consolidated Statement of Stockholders' Equity for the years ended December 31, 1997, 1996, and 1995 F-5 Consolidated Statement of Cash Flows for the years ended December 31, 1997, 1996, and 1995 F-6, F-7 Notes to Consolidated Financial Statements F-8 All supplemental schedules are omitted as inapplicable or because the required information is included in the financial statements or notes thereto. Independent Auditors' Report Board of Directors and Stockholders Golden West Financial Corporation Oakland, California We have audited the accompanying consolidated statement of financial condition of Golden West Financial Corporation and subsidiaries (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of net earnings, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Golden West Financial Corporation and subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. As discussed in Note A to the consolidated financial statements, the Company changed its method of accounting for goodwill related to acquisitions made prior to September 30, 1982, effective January 1, 1996, to conform with Statement of Financial Accounting Standards No. 72. /s/ Deloitte & Touche LLP Oakland, California January 21, 1998 F-1 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Dollars in thousands except per share figures)
ASSETS December 31 ------------------------------- 1997 1996 -------------- -------------- Cash $ 172,241 $ 218,719 Securities available for sale at fair value (cost of $363,911 and $622,182) (Note B) 608,544 781,325 Other investments at cost (fair value of $252,648 and $1,078,832) (Note C) 252,648 1,078,832 Mortgage-backed securities available for sale at fair value (cost of $148,864 and $216,948) (Notes D and L) 157,327 227,466 Mortgage-backed securities held to maturity at cost (fair value of $3,833,527 and $4,089,066) (Notes E, K and L) 3,782,419 4,066,116 Loans receivable less allowance for loan losses of $233,280 and $195,702 (Notes F and K) 33,260,709 30,113,421 Interest earned but uncollected (Note G) 216,923 221,604 Investment in capital stock of Federal Home Loan Bank, at cost which approximates fair value (Note K) 590,244 500,105 Real estate held for sale or investment (Note H) 62,006 83,052 Prepaid expenses and other assets 247,003 226,054 Premises and equipment, net (Note I) 240,207 213,904 -------------- -------------- $ 39,590,271 $ 37,730,598 ============== ==============
See notes to consolidated financial statements. F-2
LIABILITIES AND STOCKHOLDERS' EQUITY December 31 ------------------------------- 1997 1996 -------------- -------------- Deposits (Note J) $ 24,109,717 $ 22,099,934 Advances from Federal Home Loan Bank (Note K) 8,516,605 8,798,433 Securities sold under agreements to repurchase (Note L) 2,334,048 1,908,126 Medium-term notes (Note M) 109,992 589,845 Accounts payable and accrued expenses 446,325 452,182 Taxes on income (Note O) 265,065 207,605 -------------- -------------- 35,781,752 34,056,125 Subordinated notes (Note N) 1,110,488 1,323,996 Stockholders' equity (Notes P and R): Preferred stock, par value $1.00: Authorized 20,000,000 shares Issued and outstanding, none Common stock, par value $.10: Authorized 200,000,000 shares Issued and outstanding, 57,068,504 and 57,342,389 shares 5,707 5,734 Additional paid-in capital 85,532 67,953 Retained earnings 2,457,055 2,177,098 -------------- -------------- 2,548,294 2,250,785 Unrealized gains on securities available for sale, net 149,737 99,692 -------------- -------------- Total Stockholders' Equity 2,698,031 2,350,477 -------------- -------------- $ 39,590,271 $ 37,730,598 ============== ==============
F-3 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF NET EARNINGS (Dollars in thousands except per share figures) Year Ended December 31 ------------------------------------------------ 1997 1996 1995 -------------- -------------- -------------- Interest Income: Interest on loans $ 2,392,175 $ 2,203,752 $ 2,097,664 Interest on mortgage-backed securities 282,499 246,293 181,355 Interest and dividends on investments 157,823 131,516 148,422 -------------- -------------- -------------- 2,832,497 2,581,561 2,427,441 Interest Expense: Interest on deposits (Note J) 1,209,646 1,061,414 1,048,390 Interest on advances 437,028 409,040 369,239 Interest on repurchase agreements 150,557 117,960 70,709 Interest on other borrowings 144,771 162,187 216,267 -------------- -------------- -------------- 1,942,002 1,750,601 1,704,605 -------------- -------------- -------------- Net Interest Income 890,495 830,960 722,836 Provision for loan losses 57,609 84,256 61,190 -------------- -------------- -------------- Net Interest Income after Provision for Loan Losses 832,886 746,704 661,646 Non-Interest Income: Fees 45,910 38,558 29,200 Gain (loss) on the sale of securities, mortgage-backed securities, and loans 8,197 11,954 (493 ) Other 27,161 24,387 11,071 -------------- -------------- -------------- 81,268 74,899 39,778 Non-Interest Expense: General and administrative: Personnel 180,917 163,243 151,352 Occupancy 55,508 50,171 48,737 Deposit insurance (Note A) 7,454 167,528 44,993 Advertising 11,525 9,277 9,850 Other 71,555 63,203 61,260 -------------- -------------- -------------- 326,959 453,422 316,192 Earnings Before Taxes on Income 587,195 368,181 385,232 Taxes on income (Note O) 233,057 (1,732) 150,693 -------------- -------------- -------------- Earnings Before Cumulative Effect of Change in Accounting for Goodwill 354,138 369,913 234,539 Cumulative effect of change in accounting for goodwill -0- (205,242) -0- -------------- -------------- -------------- Net Earnings $ 354,138 $ 164,671 $ 234,539 ============== ============== ============== Basic earnings per share before cumulative effect of change in accounting for goodwill $ 6.22 $ 6.38 $ 4.00 Cumulative effect of change in accounting for goodwill 0.00 (3.54) 0.00 -------------- -------------- -------------- Basic earnings per share (Note Q) $ 6.22 $ 2.84 $ 4.00 ============== ============== ============== Diluted earnings per share before cumulative effect of change in accounting for goodwill $ 6.13 $ 6.29 $ 3.94 Cumulative effect of change in accounting for goodwill 0.00 (3.49) 0.00 -------------- -------------- -------------- Diluted earnings per share (Note Q) $ 6.13 $ 2.80 $ 3.94 ============== ============== ==============
See notes to consolidated financial statements. F-4 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Dollars in thousands except per share figures) Unrealized Gains on Additional Securities Total Common Paid-in Retained Available Stockholders' Stock Capital Earnings for Sale Equity ----------- ---------- ------------ ------------- -------------- Balance at January 1, 1995 $ 5,859 $ 45,689 $ 1,929,740 $ 18,986 $ 2,000,274 Common stock issued upon exercise of stock options, including tax benefits - 349,290 shares 35 9,664 -0- 9,699 Net earnings -0- -0- 234,539 234,539 Cash dividends on common stock ($.35 per share) -0- -0- (20,533) (20,533) Purchase and retirement of 67,836 shares of Company stock (Note P) (7) -0- (2,863) (2,870) Change in unrealized gains on securities available for sale -0- -0- -0- 57,244 57,244 ----------- ---------- ------------ ------------- -------------- Balance at December 31, 1995 5,887 55,353 2,140,883 76,230 2,278,353 Common stock issued upon exercise of stock options, including tax benefits - 401,780 shares 40 12,600 -0- 12,640 Net earnings -0- -0- 164,671 164,671 Cash dividends on common stock ($.395 per share) -0- -0- (22,893) (22,893) Purchase and retirement of 1,930,800 shares of Company stock (Note P) (193) -0- (105,563) (105,756) Change in unrealized gains on securities available for sale -0- -0- -0- 23,462 23,462 ----------- ---------- ------------ ------------- -------------- Balance at December 31, 1996 5,734 67,953 2,177,098 99,692 2,350,477 Common stock issued upon exercise of stock options, including tax benefits - 457,215 shares 46 17,579 -0- 17,625 Net earnings -0- -0- 354,138 354,138 Cash dividends on common stock ($.455 per share) -0- -0- (25,903) (25,903) Purchase and retirement of 731,100 shares of Company stock (Note P) (73) -0- (48,278) (48,351) Change in unrealized gains on securities available for sale -0- -0- -0- 50,045 50,045 ----------- ---------- ------------ ------------- -------------- Balance at December 31, 1997 $ 5,707 $ 85,532 $ 2,457,055 $ 149,737 $ 2,698,031 =========== ========== ============ ============= ==============
See notes to consolidated financial statements. F-5 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in thousands) Year Ended December 31 ----------------------------------------------- 1997 1996 1995 ------------- ------------- -------------- Cash Flows From Operating Activities: Net earnings $ 354,138 $ 164,671 $ 234,539 Adjustments to reconcile net earnings to net cash provided by operating activities: Provision for loan losses 57,609 84,256 61,190 Cumulative effect of change in accounting for goodwill -0- 205,242 -0- Amortization of loan fees and discounts (17,958) (23,038) (20,746) Depreciation and amortization 21,270 19,592 21,568 Loans originated for sale (217,264) (476,589) (169,020) Sales of loans originated for sale 208,826 484,601 141,648 Decrease (increase) in interest earned but uncollected 4,681 3,791 (22,939) Federal Home Loan Bank stock dividends (42,590) (29,813) (21,511) (Increase) in prepaid expenses and other assets (12,259) (62,811) (11,205) Increase (decrease) in accounts payable and accrued expenses (5,857) 1,368 7,121 Increase (decrease) in taxes on income 24,069 (164,902) 21,210 Other, net (4,504) (14,032) (27,426) ------------- ------------- -------------- Net cash provided by operating activities 370,161 192,336 214,429 Cash Flows From Investing Activities: New loan activity: Real estate loans originated for portfolio (7,265,709) (6,535,973) (5,780,044) Real estate loans purchased (2,480) (5,070) (30,837) Other, net (46,781) (26,906) (64,754) ------------- ------------- -------------- (7,314,970) (6,567,949) (5,875,635) Real estate loan principal payments: Monthly payments 693,134 624,896 511,710 Payoffs, net of foreclosures 2,790,066 2,176,271 1,560,485 Refinances 303,714 276,028 182,323 ------------- ------------- -------------- 3,786,914 3,077,195 2,254,518 Purchases of mortgage-backed securities available for sale -0- -0- (6,254) Purchases of mortgage-backed securities held to maturity -0- (1,522) (99,032) Sales of mortgage-backed securities available for sale -0- -0- 6,396 Repayments of mortgage-backed securities 518,224 412,576 210,388 Proceeds from sales of real estate 226,135 203,936 193,389 Purchases of securities available for sale (2,916) (824,734) (2,992,018) Sales of securities available for sale 11,944 81,133 290,624 Matured securities available for sale 249,029 908,436 3,392,495 Decrease (increase) in other investments 826,184 111,328 (655,560) Purchases of Federal Home Loan Bank stock (56,239) (164,894) (13,486) Redemptions of Federal Home Loan Bank stock -0- 37,649 12,650 Additions to premises and equipment (53,834) (30,465) (24,099) ------------- ------------- -------------- Net cash used in investing activities (1,809,529) (2,757,311) (3,305,624)
See notes to consolidated financial statements. F-6
Year Ended December 31 ----------------------------------------------- 1997 1996 1995 ------------- ------------- -------------- Cash Flows From Financing Activities: Deposit activity: Increase in deposits, net $ 1,041,843 $ 382,732 $ 781,850 Interest credited 967,940 869,292 846,671 ------------- ------------- -------------- 2,009,783 1,252,024 1,628,521 Additions to Federal Home Loan Bank advances 2,571,200 3,695,322 1,051,490 Repayments of Federal Home Loan Bank advances (2,853,217) (1,344,429) (1,093,122) Proceeds from agreements to repurchase securities 6,385,060 4,566,506 3,424,725 Repayments of agreements to repurchase securities (5,959,138) (4,476,323) (2,208,603) Proceeds from medium-term notes -0- -0- 699,360 Repayments of medium-term notes (480,000) (1,008,135) (267,000) Proceeds from federal funds purchased 59,632,000 1,250,000 -0- Repayments of federal funds purchased (59,632,000) (1,250,000) (250,000) Proceeds from subordinated debt -0- -0- 99,283 Repayments of subordinated debt (215,000) -0- -0- Dividends on common stock (25,903) (22,893) (20,533) Exercise of stock options 8,456 8,683 6,198 Purchase and retirement of Company stock (48,351) (105,756) (2,870) ------------- ------------- -------------- Net cash provided by financing activities 1,392,890 2,564,999 3,067,449 ------------- ------------- -------------- Net Increase (Decrease) in Cash (46,478) 24 (23,746) Cash at beginning of period 218,719 218,695 242,441 ============= ============= ============== Cash at end of period $ 172,241 $ 218,719 $ 218,695 ============= ============= ============== Supplemental cash flow information: Cash paid for: Interest $ 1,948,021 $ 1,789,487 $ 1,640,261 Income taxes 201,306 165,560 128,123 Cash received for interest and dividends 2,837,178 2,585,352 2,404,502 Noncash investing activities: Loans transferred to foreclosed real estate 201,304 220,642 216,392 Mortgage-backed securities transferred from available for sale to held to maturity (at fair value) 30,003 217,719 -0- Adjustable rate mortgages securitized into mortgage-backed securities with recourse 1,022,455 1,297,669 2,325,589 Mortgage-backed securities with recourse desecuritized into adjustable rate mortgages 856,038 -0- -0-
F-7 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 1997, 1996, and 1995 (Dollars in thousands except per share figures) NOTE A - Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Golden West Financial Corporation, a Delaware corporation, and its wholly owned subsidiaries (the Company or Golden West). The Company's principal operating subsidiaries are World Savings Bank, a federally chartered savings bank (WFSB) and World Savings and Loan Association, a federally chartered association (WSL), (collectively, the Insured Institutions). At December 31, 1997, the assets of these subsidiaries were $25 billion and $15 billion, respectively. Intercompany accounts and transactions have been eliminated. Certain reclassifications have been made to prior year financial statements to conform to current year presentation. Nature of Operations Golden West Financial Corporation, through its financial institution subsidiaries, operates 250 savings branches in seven states and 227 loan offices in 26 states. The Company's primary source of revenue is interest from loans on residential real estate. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Investments Effective December 1, 1997, the Insured Institutions are required by regulation to maintain liquid assets in the form of cash and securities approved by federal regulations at either a) 4% of the quarterly average of daily balances of short-term deposits and borrowings for the prior quarter or b) 4% of the prior quarter's ending balance of short-term deposits and borrowings. Prior to December 1, 1997, the Insured Institutions were required by regulation to maintain liquid assets in the form of cash and securities approved by federal regulations at a monthly average of daily balances of not less than 5% of deposits and short-term borrowings. The Company classifies its investment securities as either held to maturity or available for sale. The Company has no trading securities. Held to maturity securities are recorded at cost with any discount or premium amortized using a method that is not materially different from the interest method, which is also known as the level yield method. Securities held to maturity are recorded at cost because the Company has the ability to hold these securities to maturity and because it is Management's intention to hold them to maturity. At December 31, 1997 and 1996, the Company had no securities held to maturity. Securities available for sale increase the Company's portfolio management flexibility for investments and are reported at fair value. Net unrealized gains and losses are excluded from earnings and reported net of applicable income taxes as a separate component of stockholders' equity until realized. Gains or losses on sales of securities are realized and recorded in earnings at the time of sale and are determined by the difference between the net sales proceeds and the cost of the security, using specific identification, adjusted for any unamortized premium or discount. The Company has other investments, consisting of federal funds and short-term repurchase agreements, which are recorded at cost with any discount or premium amortized using a method that is not materially different from the interest method. F-8 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1997, 1996, and 1995 (Dollars in thousands except per share) Mortgage-Backed Securities The Company has no mortgage-backed securities (MBS) classified as trading. Mortgage-backed securities held to maturity are recorded at cost because the Company has the ability to hold these MBS to maturity and because Management intends to hold these securities to maturity. Premiums and discounts on MBS are amortized or accreted using the interest method over the estimated life of the security. MBS available for sale are reported at fair value, with unrealized gains and losses excluded from earnings and reported net of applicable income taxes as a separate component of stockholders' equity until realized. Gains or losses on sales of MBS are realized and recorded in earnings at the time of sale and are determined by the difference between the net sales proceeds and the cost of MBS, using specific identification, adjusted for any unamortized premium or discount. The Company has securitized certain loans from its investment portfolio into MBS with recourse which are held to maturity and available to be used as collateral for borrowings. Loans Receivable The Company's real estate loan portfolio consists primarily of long-term loans collateralized by first trust deeds on single-family residences and multi-family residential property. In addition to real estate loans, the Company makes loans on the security of savings accounts. The adjustable rate mortgage (ARM) is the Company's primary real estate loan. The ARM carries an interest rate that may change as often as monthly, based on movements in certain cost of funds or other indexes. Interest rate changes and monthly payments of principal and interest may be subject to maximum increases or decreases. Negative amortization may occur during periods when payments are limited. The Company also offers "modified" ARMs, loans that offer a low, fixed rate generally from 1% to 3% below the contract rate for an initial period, primarily one to 12 months. The Company does make a limited number of loans that are held for sale, primarily fixed-rate loans. These loans are recorded at the lower of cost or market. Some of these loans are sold with recourse and a recourse liability reserve is provided on the sale of these loans. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company's policy is to measure impairment based on the fair value of the collateral. When the value of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance. The valuation allowance and provision for loan losses are adjusted for changes in the fair value of the collateral. Loan origination fees, net of certain direct loan origination costs, are deferred and amortized as an interest income yield adjustment over the actual life of the related loans using the interest method. "Fees," which include fees for prepayment of loans, income for servicing loans, late charges for delinquent payments, fees from deposit accounts, and miscellaneous fees, are recorded when collected. Premiums and discounts on purchased loans, including premiums and discounts arising from acquisitions of other associations, are generally amortized using the interest method over the actual life of the loans. Nonperforming assets consist of loans 90 days or more delinquent, with balances not reduced for loan loss reserves, and real estate owned through foreclosure. For loans past due 90 days or more, all interest earned but uncollected is fully reserved. Troubled debt restructured consists of loans that have been modified by the lender to grant a concession to the borrower because of a perceived temporary weakness in the collateral and/or borrower. F-9 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1997, 1996, and 1995 (Dollars in thousands except per share figures) Real Estate Held for Sale or Investment Real estate held for sale or investment is comprised primarily of improved property acquired through foreclosure. All real estate owned is recorded at the lower of cost or fair value. Included in the fair value is the estimated selling price in the ordinary course of business less estimated costs to repair, hold, and dispose of the property. Costs relating to holding property, net of rental and option income, are expensed in the current period. Gains on the sale of real estate are recognized at the time of sale. Losses realized and expenses incurred in connection with the disposition of foreclosed real estate are charged to current earnings. Allowance for Loan Losses The Company provides specific valuation allowances for losses on loans when impaired, including loans securitized into MBS with recourse, and on real estate owned when any significant and permanent decline in value is identified. The Company also utilizes a methodology, based on trends in the basic portfolio, for monitoring and estimating loan losses that is based on both historical experience in the loan portfolio and factors reflecting current economic conditions. This approach uses a database that identifies losses on loans and foreclosed real estate from past years to the present, broken down by year of origination, type of loan, and geographical area. Management is then able to estimate a range of general loss allowances to cover losses in the portfolio. In addition, periodic reviews are made of major loans and real estate owned, and major lending areas are regularly reviewed to determine potential problems. Where indicated, valuation allowances are established or adjusted. In estimating loan losses, consideration is given to the estimated sales price, cost of refurbishing, payment of delinquent taxes, cost of disposal and cost of holding the property. Additions to, and reductions from the allowances are reflected in current earnings. Mortgage Servicing Rights 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 (CMSRs) 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 any financial institution participating in the secondary mortgage market should evaluate and measure impairment of CMSRs based on the fair value of those rights on a disaggregated basis. CMSRs are periodically reviewed for impairment based on fair value. The fair value of the CMSRs, for the purposes of impairment, is measured using a discounted cash flow analysis based on the Company's estimated annual cost of servicing, market prepayment rates, and market discount rates. At December 31, 1997 and 1996, there was no impairment. 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. The balance of CMSRs is included in "Prepaid expenses and other assets" in the Consolidated Statement of Financial Condition and is being amortized over the projected servicing period. The amortization of the CMSRs is included in "Fee income" in the Consolidated Statement of Net Earnings. F-10 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1997, 1996, and 1995 (Dollars in thousands except per share figures) 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 as the cumulative effect of the change in accounting for goodwill. Financial statements for the 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. 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. Amortization of goodwill is recorded on the Consolidated Statement of Net Earnings under the section titled "Non-Interest Income - Other." Securities Sold Under Agreements to Repurchase The Company enters into sales of securities under agreements to repurchase (reverse repurchase agreements) only with selected dealers and banks. Reverse repurchase agreements are treated as financings and the obligations to repurchase securities sold are reflected as a liability in the Consolidated Statement of Financial Condition. The securities underlying the agreements remain in the asset accounts. 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. 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 until January 1, 1998. The impact of SFAS 127 on the Company's financial condition and results of operations is not expected to be material. Interest Rate Swaps and Caps The Company utilizes certain derivative financial instruments, primarily various types of interest rate swaps and caps, as a part of its interest rate risk management strategy. Such instruments are entered into solely to alter the repricing characteristics of designated assets and liabilities. The Company does not hold any derivative financial instruments for trading purposes. An interest rate swap is an agreement between two parties in which one party exchanges cash payments based on a fixed or floating rate of interest for a counterparty's cash payment based on a floating rate of interest. The amounts to be paid are defined by agreement and determined by applying the specified interest rates to a notional principal amount. Interest rate swap agreements are entered into to limit the impact of changes in interest rates on mortgage loans, or other designated assets, deposits or borrowings. The interest rate differential paid or received on interest rate swap agreements is recognized over the life of the agreements, with income and expense recorded in the same category as the designated balance sheet item. The designated balance sheet item is generally a pool of assets or liabilities with similar interest rate characteristics. Some interest rate swaps are entered into with starting dates in the future in anticipation of future prepayments on fixed-rate assets. F-11 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1997, 1996, and 1995 (Dollars in thousands except per share figures) An interest rate cap is an agreement between two parties in which one party pays a fee for the right to receive a payment from a counterparty based on the excess, if any, of an open market floating rate over a base rate applied to a notional principal amount. The excess that may be received on interest rate cap agreements limits the impact of changes in interest rates on mortgage loans or other designated assets. Amounts that may be received on interest rate cap agreements and fees paid to purchase the agreements are recognized over the life of the agreements, with income and expense recorded in the same category as the designated balance sheet item. Taxes on Income The Company files consolidated federal income tax returns with its subsidiaries. The provision for federal and state taxes on income is based on taxes currently payable and taxes expected to be payable in the future as a result of events that have been recognized in the financial statements or tax returns. In years prior to 1996, the Insured Institutions were permitted by the Internal Revenue Code to deduct from taxable income an annual addition to a reserve for bad debts subject to certain limitations. In the event distributions (which are subject to the regulatory restrictions described under "Regulatory Capital Requirements") are made from these reserves, such distributions will be subject to federal income taxes at the then prevailing corporate rates. It is not contemplated that accumulated reserves will be used in a manner that will create income tax liabilities. Regulatory Capital Requirements The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) established capital standards. Under FIRREA, thrifts and savings banks must have tangible capital equal to 1.5% of adjusted total assets, have core capital equal to 3% of adjusted total assets, and have risk-based capital equal to 8% of risk-weighted assets. At December 31, WFSB had the following regulatory capital calculated in accordance with FIRREA's capital standards:
1997 1996 --------------------------------------------------- --------------------------------------------------- ACTUAL REQUIRED ACTUAL REQUIRED ------------------------- ------------------------- ------------------------- ------------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ------------- -------- -------------- -------- ------------- -------- ------------- -------- Tangible $ 1,603,530 6.51% $ 369,694 1.50 % $ 1,133,016 6.69% $ 254,140 1.50% Core 1,603,530 6.51 739,388 3.00 1,133,016 6.69 508,279 3.00 Risk-based 1,695,565 12.80 1,060,024 8.00 1,173,583 13.14 714,609 8.00
At December 31, WSL had the following regulatory capital calculated in accordance with FIRREA's capital standards:
1997 1996 --------------------------------------------------- --------------------------------------------------- ACTUAL REQUIRED ACTUAL REQUIRED ------------------------- ------------------------- ------------------------- ------------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ------------- -------- -------------- -------- ------------- -------- ------------- -------- Tangible $ 980,483 6.42% $ 228,950 1.50 % $ 1,334,813 6.37% $ 314,254 1.50% Core 980,483 6.42 457,901 3.00 1,334,813 6.37 628,507 3.00 Risk-based 1,186,445 13.64 695,611 8.00 1,655,820 13.91 952,631 8.00
The Office of Thrift Supervision (OTS) has adopted rules based upon five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The rules provide that a savings association is "well capitalized" if its total risk-based capital ratio is 10% or greater, its Tier 1 risk-based capital ratio is 6% or greater, its leverage ratio is 5% or greater, and the institution is not subject to a capital directive. F-12 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1997, 1996, and 1995 (Dollars in thousands except per share figures) As used herein, the total risk-based capital ratio is the ratio of total capital to risk-weighted assets, Tier 1 risk-based capital ratio means the ratio of core capital to risk-weighted assets, and the leverage ratio is the ratio of core capital to adjusted total assets, in each case as calculated in accordance with current OTS capital regulations. WFSB and WSL, are both regulated by the OTS. As of December 31, 1997, the most recent notification from the OTS categorized both WFSB and WSL, as "well capitalized" under the current requirements. There are no conditions or events that have occurred since that notification that the Company believes would have an impact on the categorization of either WFSB or WSL. At December 31, WFSB had the following regulatory capital calculated in accordance with FDICIA's capital standards:
1997 1996 ----------------------------------------------- ------------------------------------------------- ACTUAL WELL CAPITALIZED ACTUAL WELL CAPITALIZED ----------------------- ---------------------- ---------------------- ----------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ------------ --------- ----------- -------- ----------- --------- ------------ --------- Leverage $ 1,603,530 6.51% $ 1,232,313 5.00% $ 1,133,016 6.69% $ 847,132 5.00% Tier 1 risk-based 1,603,530 12.10 795,018 6.00 1,133,016 12.68 535,957 6.00 Total risk-based 1,695,565 12.80 1,325,031 10.00 1,173,583 13.14 893,261 10.00
At December 31, WSL had the following regulatory capital calculated in accordance with FDICIA's capital standards:
1997 1996 ----------------------------------------------- ------------------------------------------------- ACTUAL WELL CAPITALIZED ACTUAL WELL CAPITALIZED ----------------------- ---------------------- ---------------------- ----------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ------------ --------- ----------- -------- ----------- --------- ------------ --------- Leverage $ 980,483 6.42% $ 763,168 5.00% $ 1,334,813 6.37% $ 1,047,512 5.00% Tier 1 risk-based 980,483 11.28 521,709 6.00 1,334,813 11.21 714,473 6.00 Total risk-based 1,186,445 13.64 869,514 10.00 1,655,820 13.91 1,190,788 10.00
Retained Earnings Under OTS regulations, the OTS must be given at least 30 days' advance notice by WFSB or WSL of any proposed dividend to be paid to the Company. Under OTS regulations, WFSB and WSL are classified as Tier 1 institutions and are, therefore, allowed to distribute dividends up to 100% of their net income in any year plus one-half of their capital in excess of the OTS capital requirement as of the end of the prior year. Distributions beyond these amounts are allowed only with the specific, prior approval of the OTS. At December 31, 1997, $252 million of the Insured Institutions' retained earnings had not been subjected to federal income taxes due to the application of the bad debt deduction, and $998 million of the Insured Institutions' retained earnings were available for the payment of cash dividends without the imposition of additional federal income taxes. The Company is not subject to the same tax and reporting restrictions as are WFSB and WSL. Earnings Per Share In March 1997, the FASB 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. The Company has adopted SFAS 128 as of December 31, 1997 and has calculated Basic EPS and Diluted EPS in accordance with the guidelines established in SFAS 128. (See footnote Q for further details.) F-13 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1997, 1996, and 1995 (Dollars in thousands except per share figures) Deposit Insurance During 1996, legislation was enacted to recapitalize the Savings Association Insurance Fund (SAIF) in order to bring it into parity with the FDIC's other insurance fund, the Bank Insurance Fund (BIF). The 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 deposits, but lowered savings and loan deposit insurance premiums starting in the fourth quarter of 1996. As a result of this legislation, Golden West's subsidiary, WSL, incurred a one-time charge of $133 million during 1996. Beginning on January 1, 1997, the premium paid by WSL 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. NOTE B - Securities Available for Sale The following is a summary of securities available for sale:
December 31, 1997 -------------------------------------------------------------- Unrealized Unrealized Fair Cost Gains Losses Value -------------- -------------- -------------- -------------- U.S. Treasury and government agency obligations $ 200,989 $ 856 $ -0- $ 201,845 Collateralized mortgage obligations 72,545 7 1,120 71,432 Equity securities 90,377 244,897 7 335,267 -------------- -------------- -------------- -------------- $ 363,911 $ 245,760 $ 1,127 $ 608,544 ============== ============== ============== ==============
December 31, 1996 ---------------------------------------------------------------- Unrealized Unrealized Fair Cost Gains Losses Value -------------- -------------- -------------- -------------- Certificates of deposit $ 150,001 $ -0- $ 4 $ 149,997 U.S. Treasury and government agency obligations 199,727 1,117 -0- 200,844 Collateralized mortgage obligations 171,999 101 2,288 169,812 Equity securities 100,455 160,263 46 260,672 -------------- -------------- -------------- -------------- $ 622,182 $ 161,481 $ 2,338 $ 781,325 ============== ============== ============== ==============
The weighted average portfolio yields on securities available for sale were 6.88% and 6.64% at December 31, 1997, and 1996, respectively. Sales of securities available for sale resulted in realized gains of $3,039 (1997), $841 (1996), and $10 (1995) and realized losses of $46 (1997), $-0- (1996), and $515 (1995). At December 31, 1997, the securities available for sale had maturities as follows:
Amortized Fair Maturity Cost Value ----------------------------------- -------------- ------------- No maturity $ 90,377 $ 335,267 1998 225,763 226,219 1999 through 2002 18,643 18,390 2003 through 2007 971 1,000 2008 and thereafter 28,157 27,668 -------------- ------------- $ 363,911 $ 608,544 ============== =============
F-14 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1997, 1996, and 1995 (Dollars in thousands except per share figures) NOTE C - Other Investments The following is a summary of other investments:
December 31 -------------------------------- 1997 1996 -------------- --------------- Eurodollar time deposits, at cost $ 180,000 $ 102,400 Federal funds, at cost 72,648 324,432 Short-term repurchase agreements collateralized by mortgage-backed securities, at cost -0- 652,000 -------------- --------------- $ 252,648 $ 1,078,832 ============== ===============
At December 31, 1997, and 1996, cost approximated fair market value and there were no unrealized gains or losses. The weighted average portfolio yields on other investments were 5.91% and 7.01% at December 31, 1997, and 1996, respectively. There were no sales of other investments during 1997, 1996, or 1995. As of December 31, 1997, the entire other investments portfolio matures in 1998. NOTE D - Mortgage-Backed Securities Available for Sale Mortgage-backed securities available for sale are summarized as follows:
December 31, 1997 ------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------- ------------- ------------- -------------- Available for sale without recourse: FNMA $ 53,855 $ 2,365 $ 62 $ 56,158 FHLMC 56,822 3,147 72 59,897 GNMA 38,110 3,097 8 41,199 Other 77 -0- 4 73 ------------- ------------- ------------- -------------- Total available for sale $ 148,864 $ 8,609 $ 146 $ 157,327 ============= ============= ============= ==============
December 31, 1996 ------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------- ------------- ------------- -------------- Available for sale without recourse: FNMA $ 97,696 $ 3,395 $ 421 $ 100,670 FHLMC 71,372 3,913 135 75,150 GNMA 47,784 3,807 40 51,551 Other 96 -0- 1 95 -------------- ------------- ------------- -------------- Total available for sale $ 216,948 $ 11,115 $ 597 $ 227,466 ============= ============= ============= ==============
The weighted average portfolio yields on mortgage-backed securities available for sale were 9.18% and 8.73% at December 31, 1997, and 1996, respectively. Principal proceeds from the sales of securities from the mortgage-backed securities available for sale portfolio were $-0- (1997), $-0- (1996), and $6,409 (1995) and resulted in realized gains of $-0- (1997), $-0- (1996), and $13 (1995) and no realized losses for 1997, 1996, or 1995. F-15 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1997, 1996, and 1995 (Dollars in thousands except per share figures) At December 31, 1997, mortgage-backed securities available for sale had contractual maturities as follows:
Amortized Fair Maturity Cost Value ------------------------------------ -------------- -------------- 1998 through 2002 $ 429 $ 434 2003 through 2007 2,733 2,789 2008 and thereafter 145,702 154,104 -------------- -------------- $ 148,864 $ 157,327 ============== ==============
NOTE E - Mortgage-Backed Securities Held to Maturity Mortgage-backed securities held to maturity are summarized as follows:
December 31, 1997 ------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------- ------------- ------------- -------------- Held to maturity without recourse: FNMA $ 639,902 $ 13,569 $ 1,973 651,498 FHLMC 58,071 5,195 -0- 63,266 GNMA 54,056 4,916 -0- 58,972 ------------- ------------- ------------- -------------- 752,029 23,680 1,973 773,736 Held to maturity with recourse: FNMA 3,030,390 29,401 -0- 3,059,791 ------------- ------------- ------------- -------------- Total held to maturity $ 3,782,419 $ 53,081 $ 1,973 $ 3,833,527 ============= ============= ============= ==============
December 31, 1996 ------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------- ------------- ------------- -------------- Held to maturity without recourse: FNMA $ 662,584 $ 7,897 $ 9,974 $ 660,507 FHLMC 71,418 6,153 -0- 77,571 GNMA 66,690 5,030 -0- 71,720 ------------- ------------- ------------- -------------- 800,692 19,080 9,974 809,798 Held to maturity with recourse: FNMA 3,265,424 13,844 -0- 3,279,268 ------------- ------------- ------------- -------------- Total held to maturity $ 4,066,116 $ 32,924 $ 9,974 $ 4,089,066 ============= ============= ============= ==============
The weighted average portfolio yields on mortgage-backed securities held to maturity were 7.15% and 7.05% at December 31, 1997, and 1996, respectively. There were no sales of securities from the mortgage-backed securities held to maturity portfolio during 1997, 1996, or 1995. At December 31, 1997, mortgage-backed securities held to maturity had contractual maturities as follows:
Amortized Fair Maturity Cost Value ------------------------------------ -------------- -------------- 1998 through 2002 $ -0- $ -0- 2003 through 2007 50 53 2008 and thereafter 3,782,369 3,833,474 -------------- --------------- $ 3,782,419 $ 3,833,527 ============== ==============
F-16 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1997, 1996, and 1995 (Dollars in thousands except per share figures) NOTE F - Loans Receivable
December 31 -------------------------------- 1997 1996 -------------- -------------- Loans collateralized primarily by first deeds of trust: One- to four-family dwelling units $ 28,978,476 $ 25,862,898 Over four-family dwelling units 4,462,990 4,403,389 Commercial property 82,888 97,852 Land 977 1,147 -------------- -------------- 33,525,331 30,365,286 Loans on savings accounts 28,167 31,936 -------------- -------------- 33,553,498 30,397,222 Less: Undisbursed loan funds 3,306 3,920 Unearned fees and discounts 45,953 69,938 Unamortized discount arising from acquisitions 10,250 14,241 Allowance for loan losses 233,280 195,702 ============== ============== $ 33,260,709 $ 30,113,421 ============== ==============
In addition to loans receivable, WSL services loans for others. At December 31, 1997, and 1996, the amount of loans serviced for others (non-affiliated) was $4,403,254 and $4,563,113, respectively, including $1.0 billion in 1997, $1.3 billion in 1996, and $2.3 billion in 1995 of loans that were securitized into FNMA MBS with recourse. During 1997, the Company desecuritized $856 million of MBS with recourse into adjustable rate mortgages which had a balance of $844 million at December 31, 1997. These adjustable rate mortgages have been separately identified as "held to maturity" and it is the Company's intention to hold them to maturity. At December 31, 1997, and 1996, the Company had $23 million and $15 million, respectively, in loans held for sale, all of which are carried at the lower of cost or market. Outstanding loans sold with recourse amounted to $653 million and had a valuation liability of $886 thousand as of December 31, 1997. Capitalized mortgage servicing rights are included in "Prepaid expenses and other assets" on the balance sheet. The following is a summary of capitalized mortgage servicing rights:
Year Ended December 31 --------------------------- 1997 1996 ----------- ----------- Balance at January 1 $ 9,325 $ -0- New capitalized mortgage servicing rights from loan sales 4,914 10,809 Amortization of capitalized mortgage servicing rights (3,123) (1,484) ------------ ----------- Balance at December 31 $ 11,116 $ 9,325 =========== ===========
A summary of the changes in the allowance for loan losses is as follows: Year Ended December 31 --------------------------------------------- 1997 1996 1995 ------------ ------------- ------------ Balance at January 1 $ 195,702 $ 141,988 $ 124,003 Provision for loan losses charged to expense 57,609 84,256 61,190 Less loans charged off (20,818) (31,239) (44,656) Recoveries 787 697 1,451 ------------ ------------- ------------ Balance at December 31 $ 233,280 $ 195,702 $ 141,988 ============ ============= ============
F-17 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1997, 1996, and 1995 (Dollars in thousands except per share figures) The following is a summary of impaired loans:
December 31 ----------------------------- 1997 1996 ------------ ------------ Nonperforming loans $ 317,550 $ 373,157 Troubled debt restructured 43,795 84,082 Other impaired loans 71,022 55,961 ------------ ------------ $ 432,367 $ 513,200 ============ ============
The portion of the allowance for loan losses that was specifically provided for impaired loans was $19,848 and $19,356 at December 31, 1997 and 1996, respectively. The average recorded investment in total impaired loans was $495,592 and $477,426 during 1997 and 1996, respectively. All amounts involving impaired loans have been measured based upon the fair value of the related collateral. The amount of interest income recognized during years ended December 31, 1997, 1996, and 1995 on the total of impaired loans at each yearend was $20,064 (1997), $25,140 (1996), and $19,141 (1995). NOTE G - Interest Earned But Uncollected
December 31 --------------------------------- 1997 1996 -------------- -------------- Loans receivable $ 135,262 $ 127,534 Mortgage-backed securities 27,947 22,410 Interest rate swaps 41,990 58,418 Other 11,724 13,242 -------------- -------------- $ 216,923 $ 221,604 ============== ==============
NOTE H - Real Estate Held for Sale or Investment
December 31 --------------------------------- 1997 1996 -------------- -------------- Real estate acquired through foreclosure of loans, net of allowance for losses $ 61,517 $ 82,075 Real estate in judgment, net of allowance for losses 67 416 Real estate held for investment, net of allowance for losses 422 561 -------------- -------------- $ 62,006 $ 83,052 ============== ==============
NOTE I - Premises and Equipment
December 31 ------------------------------- 1997 1996 -------------- -------------- Land $ 61,178 $ 56,319 Building and leasehold improvements 175,834 161,413 Furniture, fixtures, and equipment 158,162 139,173 -------------- -------------- 395,174 356,905 Accumulated depreciation and amortization 154,967 143,001 -------------- -------------- $ 240,207 $ 213,904 ============== ==============
Depreciation and amortization, computed by the straight-line method for financial statement purposes, are provided over the useful lives of the various classes of premises and equipment. The aggregate rentals under long-term operating leases on land or premises in effect on December 31, 1997, and which expire between 1998 and 2064, amounted to approximately $157,751. The approximate minimum payments during the five years ending 2002 are $16,683 (1998), $14,616 (1999), $12,584 (2000), $8,713 (2001), and $7,570 (2002). Certain of the leases provide for options to renew and for the payment of taxes, insurance, and maintenance costs. The rental expense for the year amounted to $19,531 (1997), $18,289 (1996), and $17,540 (1995). F-18 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1997, 1996, and 1995 (Dollars in thousands except per share figures) NOTE J - Deposits
December 31 -------------------------------------------------------- 1997 1996 --------------------------- --------------------------- Rate* Amount Rate* Amount -------- -------------- ---------- -------------- Deposits by rate: Interest-bearing checking accounts 1.75% $ 85,343 1.17% $ 318,422 Passbook accounts 2.14 528,727 2.22 550,075 Money market deposit accounts 3.95 4,160,734 2.44 1,565,682 Term certificate accounts with original maturities of: 4 weeks to 1 year 5.15 8,996,965 5.20 10,144,102 1 to 2 years 5.47 5,750,387 5.20 5,012,735 2 to 3 years 5.45 1,478,756 5.85 1,587,068 3 to 4 years 5.67 431,400 5.67 565,997 4 years and over 5.87 1,440,434 5.71 1,993,983 Retail jumbo CDs 5.54 711,010 5.23 360,441 Wholesale CDs 5.86 525,305 0.00 -0- All other 7.62 656 7.70 1,429 -------------- -------------- $ 24,109,717 $ 22,099,934 ============== ==============
*Weighted average interest rate including the impact of interest rate swaps.
December 31 ------------------------------------ 1997 1996 -------------- -------------- Deposits by remaining maturity at yearend: No contractual maturity $ 4,774,804 $ 2,434,179 Maturity within one year: 1st quarter 6,902,716 7,811,583 2nd quarter 3,882,891 4,737,429 3rd quarter 3,427,126 3,221,586 4th quarter 2,357,047 1,238,244 -------------- -------------- 16,569,780 17,008,842 1 to 2 years 2,147,644 1,518,861 2 to 3 years 344,990 810,336 3 to 4 years 129,787 161,935 Over 4 years 142,712 165,781 -------------- -------------- $ 24,109,717 $ 22,099,934 ============== ==============
At December 31, the weighted average cost of deposits was 5.04% (1997) and 4.98% (1996). Interest expense on deposits is summarized as follows:
Year Ended December 31 ------------------------------------------------- 1997 1996 1995 -------------- --------------- -------------- Interest-bearing checking accounts $ 1,100 $ 7,536 $ 9,258 Passbook accounts 15,989 17,967 17,771 Money market deposit accounts 70,810 25,294 30,262 Term certificate accounts 1,121,747 1,010,617 991,099 -------------- --------------- -------------- $ 1,209,646 $ 1,061,414 $ 1,048,390 ============== =============== ==============
F-19 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1997, 1996, and 1995 (Dollars in thousands except per share figures) NOTE K - Advances from Federal Home Loan Bank Advances are secured by pledges of $11,417,428 of certain loans, capital stock of the Federal Home Loan Bank, and MBS with a market value of $500,349, and these borrowings have maturities and interest rates as follows:
December 31, 1997 ------------------------------------------------------------------------------------ Receive Stated Fixed Adjusted Maturity Amount Rate Swaps Rate* ---------------------- -------------- ---------- ------------ ----------- 1998 $ 1,478,629 5.89% 5.89% 1999 576,471 6.04 6.04 2000 2,188,592 5.82 (0.01)% 5.81 2001 1,171,304 5.85 5.85 2002 1,235,305 5.96 5.96 2003 and thereafter 1,866,304 5.47 (0.06) 5.41 -------------- $ 8,516,605 ==============
December 31, 1996 ------------------------------------------------------------------------------------ Receive Stated Fixed Adjusted Maturity Amount Rate Swaps Rate* ---------------------- ------------- ----------- ----------- ----------- 1997 $ 2,649,000 5.56% 5.56% 1998 1,470,102 5.66 5.66 1999 568,933 4.82 4.82 2000 681,775 5.85 (0.03)% 5.82 2001 665,241 5.59 5.59 2002 and thereafter 2,763,382 5.34 (0.04) 5.30 ------------- $ 8,798,433 =============
*Weighted average interest rate adjusted for impact of interest rate swaps. At December 31, the weighted average adjusted interest rate was 5.78% (1997) and 5.47% (1996). These borrowings averaged $7,813,493 (1997) and $7,343,334 (1996) and the maximum outstanding at any monthend was $8,516,605 (1997) and $8,798,433 (1996). F-20 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1997, 1996, and 1995 (Dollars in thousands except per share figures) NOTE L - Securities Sold Under Agreements to Repurchase Securities sold under agreements to repurchase are collateralized by mortgage-backed securities with a market value of $2,398,471 and $1,956,455 at December 31, 1997, and 1996, respectively.
December 31, 1997 ------------------------------------------------------------------------------------------------- Pay Receive Stated Fixed Fixed Adjusted Maturity Amount Rate Swaps Swaps Rate* ----------------------- ------------- ---------- ---------- ------------ ----------- 1998 $ 1,084,586 5.69% (0.03)% 5.66% 1999 556,600 5.86 (0.03)% 5.83 2000 600,000 5.75 5.75 2001 92,862 5.84 5.84 ------------- $ 2,334,048 =============
December 31, 1996 ------------------------------------------------------------------------------------------------- Pay Receive Stated Fixed Fixed Adjusted Maturity Amount Rate Swaps Swaps Rate* ----------------------- ------------- ---------- ---------- ----------- ----------- 1997 $ 1,335,335 5.40% 5.40% 1998 450,000 5.58 (0.02)% 5.56 1999 6,600 8.09 (2.88)% 5.21 2001 116,191 5.58 5.58 ------------- $ 1,908,126 =============
*Weighted average interest rate adjusted for impact of interest rate swaps. At December 31, these liabilities had a weighted average adjusted interest rate of 5.73% (1997) and 5.45% (1996). These borrowings averaged $2,563,891 (1997) and $2,013,427 (1996) and the weighted average interest rate on these averages was 5.61% for 1997 and 5.78% for 1996. The maximum outstanding at any monthend was $2,955,649 (1997) and $2,375,573 (1996). At the end of 1997 and 1996, respectively, $2,334,048 and $1,614,763 of the agreements to repurchase with broker/dealers and the Federal Home Loan Bank of San Francisco were to reacquire the same securities. Agreements with broker/dealers to repurchase substantially the same securities amounted to $-0- (1997) and $293,363 (1996). NOTE M - Medium-Term Notes Medium-term notes are unsecured obligations of WSL. They have maturities and interest rates as follows:
December 31, 1997 ----------------------------------------------------- Stated Maturity Amount Rate* ---------------- -------------- -------------- 1998 $ 109,992 6.19% ==============
*Weighted average interest rate. F-21 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1997, 1996, and 1995 (Dollars in thousands except per share figures)
December 31, 1996 ------------------------------------------------------------------------------------ Receive Stated Fixed Adjusted Maturity Amount Rate Swaps Rate* ---------------- -------------- ------------ ------------ ------------- 1997 $ 479,912 6.58% (0.80)% 5.78% 1998 109,933 5.83 5.83 -------------- $ 589,845 ==============
*Weighted average interest rate adjusted for impact of interest rate swaps. At December 31, medium-term notes had a weighted average adjusted interest rate of 6.19% (1997) and 5.79% (1996). NOTE N - Subordinated Notes
December 31 ------------------------------- 1997 1996 -------------- -------------- Parent: Subordinated notes, unsecured, due from 1998 to 2003, at coupon rates of 6.00% to 10.25%, net of unamortized discount of $4,209 (1997) and $5,514 (1996) $ 1,010,791 $ 1,124,486 WSL: Subordinated note, unsecured, due July 1, 2000, callable on April 1, 1999, at a coupon rate of 9.90%, net of unamortized discount of $303 (1997) and $490 (1996) 99,697 199,510 -------------- -------------- $ 1,110,488 1,323,996 ============== ==============
At December 31, subordinated notes had a weighted average interest rate of 8.11% (1997) and 8.48% (1996). At December 31, 1997, subordinated notes had maturities and interest rates as follows:
Maturity Rate* Amount ----------------------------------- ---------- -------------- 1998 9.01% $ 199,871 2000 9.27 313,988 2002 7.73 397,654 2003 6.12 198,975 -------------- $ 1,110,488 ==============
*Weighted average interest rate. F-22 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1997, 1996, and 1995 (Dollars in thousands except per share figures) NOTE O - Taxes on Income The following is a comparative analysis of the provision for federal and state taxes on income.
Year Ended December 31 ----------------------------------------------- 1997 1996 1995 -------------- -------------- -------------- Federal income tax: Current $ 181,304 $ (35,754) $ 108,717 Deferred 3,193 1,863 6,287 State tax: Current 46,678 33,742 36,887 Deferred 1,882 (1,583) (1,198) -------------- -------------- -------------- $ 233,057 $ (1,732) $ 150,693 ============== ============== ==============
The amounts of net deferred liability included in taxes on income in the Consolidated Statement of Financial Condition are:
December 31 ------------------------------ 1997 1996 -------------- -------------- Federal income tax $ 156,332 $ 126,484 State tax 58,352 50,703
The deferred tax liability results from changes in the amounts of temporary differences during the year. The components of the net deferred tax liability are as follows:
December 31 ----------------------------------- 1997 1996 --------------- --------------- Deferred tax liabilities: Unrealized gains on debt and equity securities $ 103,390 $ 69,968 FHLB stock dividends 91,710 78,605 Loan fees and interest income 90,276 81,977 Bad debt reserve 27,651 26,836 Depreciation 15,443 14,872 Other deferred tax liabilities 5,376 5,127 --------------- --------------- Gross deferred tax liabilities 333,846 277,385 Deferred tax assets: Provision for losses on loans 89,678 76,704 State taxes 17,414 12,472 Loan discount primarily related to acquisitions 4,561 6,293 Other deferred tax assets 7,509 4,729 --------------- --------------- Gross deferred tax assets 119,162 100,198 --------------- --------------- Net deferred tax liability $ 214,684 177,187 =============== ===============
F-23 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1997, 1996, and 1995 (Dollars in thousands except per share figures) A reconciliation of income taxes at the federal statutory corporate rate to the effective tax rate follows:
Year Ended December 31 ------------------------------------------------------------------------------------ 1997 1996 1995 -------------------------- -------------------------- -------------------------- Percent Percent Percent of of of Pretax Pretax Pretax Amount Income Amount Income Amount Income ------------ ----------- ------------ ----------- ------------ ------------ Computed standard corporate tax expense $ 205,518 35.0% $ 128,864 35.0% $ 134,831 35.0% Increases (reductions) in taxes resulting from: Net financial income, not subject to income tax, primarily related to acquisitions (4,163) (0.7) (150,963) (41.0) (6,706) (1.7) State tax, net of federal income tax benefit 33,564 5.7 22,133 6.0 24,046 6.2 Other (1,862) (0.3) (1,766) (0.5) (1,478) (0.4) ------------ ----------- ------------ ----------- ------------- ------------ $ 233,057 39.7% $ (1,732) (0.5)% $ 150,693 39.1% ============ =========== ============ =========== ============ ============
"Net financial income, not subject to income tax, primarily related to acquisitions," includes $139 million of tax benefits realized in 1996 from operating losses which had been accumulated at the predecessor institution of Beach Federal Savings and Loan Association (Beach) up to the time of the government approved transaction with Beach in 1988. In accordance with Financial Accounting Standards Board pronouncement 109, "Accounting for Income Taxes," a deferred tax liability has not been recognized for the tax bad debt reserve of WSL that arose in tax years that began prior to December 31, 1987. At December 31, 1997 and 1996, the portion of the tax bad debt reserve attributable to pre-1988 tax years was approximately $252 million. The amount of unrecognized deferred tax liability at December 31, 1997 and 1996, was approximately $88 million. This deferred tax liability could be recognized if certain distributions are made with respect to the stock of WSL, or the bad debt reserve is used for any purpose other than absorbing bad debt losses. NOTE P - Stockholders' Equity On October 28, 1993, the Company's Board of Directors authorized the purchase by the Company of up to 3.2 million shares of Golden West's common stock. On July 28, 1994 and August 1, 1995, the Company's Board of Directors authorized the purchase by the Company of an additional 3.1 million and 5.9 million shares, respectively, of Golden West's common stock. As of December 31, 1997, 8,494,916 of such shares had been repurchased and retired at a cost of $380 million since October 28, 1993. During 1997, 731,100 of the shares were purchased and retired at a cost of $48 million. F-24 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1997, 1996, and 1995 (Dollars in thousands except per share figures) NOTE Q - Earnings Per Share Golden West calculates Basic Earnings Per Share (EPS) and Diluted EPS in accordance with SFAS 128. Basic EPS is calculated by dividing net earnings for the period by the weighted-average common shares outstanding for that period. Diluted EPS takes into account the effect of dilutive instruments, such as stock options, but uses 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. The following is a summary of the calculation of basic and diluted EPS:
Year Ended December 31 ------------------------------------------------ 1997 1996 1995 -------------- -------------- -------------- Earnings before cumulative effect of change in accounting for goodwill $ 354,138 369,913 234,539 Cumulative effect of change in accounting for goodwill -0- (205,242) -0- -------------- -------------- -------------- Net earnings $ 354,138 $ 164,671 $ 234,539 ============== ============== ============== Weighted average shares 56,940,494 57,989,327 58,657,422 Add: Options outstanding at yearend 2,209,750 2,674,215 2,978,295 Less: Shares assumed purchased back with proceeds from the exercise of options 1,377,479 1,807,422 2,161,496 -------------- -------------- --------------- Diluted average shares outstanding 57,772,765 58,856,120 59,474,221 ============== ============== ============== Basic Earnings Per Share Calculation: Basic earnings per share before cumulative effect of change in accounting for goodwill $ 6.22 $ 6.38 $ 4.00 Cumulative effect of change in accounting for goodwill 0.00 (3.54) 0.00 -------------- -------------- -------------- Basic earnings per share $ 6.22 $ 2.84 $ 4.00 ============== ============== ============== Diluted Earnings Per Share Calculation: Diluted earnings per share before cumulative effect of change in accounting for goodwill $ 6.13 $ 6.29 $ 3.94 Cumulative effect of change in accounting for goodwill 0.00 (3.49) 0.00 -------------- -------------- -------------- Diluted earnings per share $ 6.13 $ 2.80 $ 3.94 ============== ============== ==============
F-25 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1997, 1996, and 1995 (Dollars in thousands except per share figures) NOTE R - Stock Options The Company's 1996 stock option plan authorizes the granting of options to key employees to purchase up to 7 million shares of the Company's common stock. The plan permits the issuance of either non-qualified stock options or incentive stock options. Under terms of the plan, incentive stock options have been granted at fair market value as of the date of grant and are exercisable any time after two to six years and prior to ten years from the grant date. Non-qualified options have been granted at fair market value as of the date of grant and are exercisable after two to six years and prior to ten years and one month from the grant date. At December 31, shares available for option amounted to 2,753,750 (1997), 2,746,500 (1996), and 2,844,200 (1995). Outstanding options at December 31, 1997, were held by 302 employees and had expiration dates ranging from May 24, 1998, to December 9, 2007. At December 31, 1997, the range of exercise prices on outstanding options was from $12.06 to $92.00 and the weighted average remaining contractual life on all outstanding options was 4.1 years. A summary of the transactions of the stock option plan follows:
Average Price per Shares Share ------------- ------------ Outstanding, January 1, 1995 3,067,585 $ 23.51 Granted 278,250 $ 51.21 Exercised (349,290) $ 17.74 Canceled (18,250) $ 35.71 ------------- ------------ Outstanding, December 31, 1995 2,978,295 $ 26.70 Granted 116,000 $ 53.42 Exercised (401,780) $ 21.61 Canceled (18,300) $ 42.07 ------------- ------------ Outstanding, December 31, 1996 2,674,215 $ 28.51 Granted 3,000 $ 92.00 Exercised (457,215) $ 18.50 Canceled (10,250) $ 43.63 ------------- ------------ Outstanding, December 31, 1997 2,209,750 $ 30.60 ============= ============
At December 31, options exercisable amounted to 2,032,750 (1997), 1,976,965 (1996), and 2,170,745 (1995). The weighted-average fair value per share of options granted during 1997 was $27.08 per share and $15.21 per share for those granted during 1996. For these disclosure purposes, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1997, 1996 and 1995, respectively; dividend yield of 0.7% (1997) and 1.1% (1996 and 1995); expected volatility of 21% (1997) and 20% (1996 and 1995); expected lives of 5.3 years for all years; and risk-free interest rates of 5.71% (1997), 6.21% (1996) and 5.36% (1995). During the initial phase-in period, the effects of applying SFAS 123 may not be representative of the effects on reported net income for future years because options vest over several years and additional awards can be made each year. F-26 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1997, 1996, and 1995 (Dollars in thousands except per share figures) The Company applies APB 25 and related interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for the plan. Had compensation cost for the plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method prescribed by SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
Year Ended December 31 ----------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Net income As reported $ 354,138 $ 164,671 $ 234 539 Pro forma 352,773 163,307 234,302 Basic earnings per share As reported $ 6.22 $ 2.84 $ 4.00 Pro forma 6.20 2.82 3.99 Diluted earning per share As reported $ 6.13 $ 2.80 $ 3.94 Pro forma 6.10 2.77 3.94
NOTE S - Financial Instruments with Off-Balance-Sheet Risk and Concentrations of Credit Risk As of December 31, 1997, the Company's loans receivable balance was $33.3 billion. Of that $33.3 billion balance, 32% were Northern California loans, 31% were Southern California loans, 4% were Texas loans, 4% were Illinois loans, 4% were Florida loans, 4% were Colorado loans, 4% were New Jersey loans, 3% were Washington loans, and 2% were Arizona loans. No other single state made up more than 2% of the total loan portfolio. The majority of these loans are secured by first deeds of trust on one- to four-family residential property. Economic conditions and real estate values in the states in which the Company lends are the key factors that affect the credit risk of the Company's loan portfolio. In order to reduce its exposure to fluctuations in interest rates, the Company is a party to financial instruments with off-balance-sheet risk entered into in the normal course of business. These financial instruments include commitments to fund loans; commitments to purchase or sell securities, mortgage-backed securities, and loans; and interest rate swaps and caps. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statement of financial condition. The contract or notional amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. To limit credit exposure, among other things, the Company enters into financial instrument contracts only with the Federal Home Loan Bank of San Francisco and with major banks and securities dealers selected by the Company upon the basis of their creditworthiness and other matters. The Company initially has not required collateral or other security to support these financial instruments because of the creditworthiness of the counterparties. Commitments to originate mortgage loans are agreements to lend to a customer providing that the customer satisfies the terms of the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Prior to entering each commitment, the Company evaluates the customer's creditworthiness. The amount of outstanding loan commitments at December 31, 1997, and 1996, was $312 million and $290 million, respectively. Most of these commitments were for adjustable rate mortgages. The Company enters into commitments to purchase or sell mortgage-backed securities and other mortgage derivative products. The commitments generally have a fixed delivery or receipt settlement date. The Company controls the credit risk of such commitments through credit evaluations, limits, and monitoring procedures. The interest rate risk of the commitment is considered by the Company and may be matched with the appropriate funding sources. The Company had no outstanding commitments to purchase or sell mortgage-backed securities as of December 31, 1997, and 1996. F-27 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1997, 1996, and 1995 (Dollars in thousands except per share figures) Interest rate swaps and caps are utilized to limit the Company's sensitivity to interest rate changes. The Company is exposed to credit risk in the event of nonperformance by the other parties to the interest rate swap and cap agreements. However, the Company does not anticipate nonperformance by the other parties. NOTE T - Interest Rate Swaps and Caps The Company has entered into interest rate swap and cap agreements with selected banks and government security dealers to reduce its exposure to fluctuations in interest rates. The Company had no caps outstanding during 1997. The possible inability of counterparties to satisfy the terms of these contracts exposes the Company to credit risk to the extent of the net difference between the calculated pay and receive amounts on each transaction. Net differences of that amount are generally settled quarterly. The Company has not experienced any credit losses from interest rate swaps or caps. The information presented below is based on interest rates at December 31, 1997. To the extent that rates change, variable interest rate information will change. The basis swaps were contracts in which the Company received an amount based on one interest rate index and paid an amount based on a different interest rate index. The forward starting swaps were entered into to convert floating rate assets to fixed-rate in the future in anticipation of future prepayments of matched fixed-rate assets. The following table illustrates the maturities and weighted average rates as of December 31, 1997 forinterest rate swaps held by the Company by product type.
Maturities of December 31, 1997 Interest Rate Swaps - ---------------------------------------------------------------------------------------------------------------------- Maturity Balance at --------------------------------------------------------------- 1998 1999 2000 2001 2002+ December 31, 1997 ---------- ----------- ----------- ----------- ---------- ------------------ Received fixed generic swaps: Notional amount $1,166,295 $ 329,373 $ 45,901 $ 34,401 $ 102,800 $ 1,678,770 Weighted average receive rate 6.12% 6.71% 6.73% 6.61% 6.40% 6.28% Weighted average pay rate 5.67% 5.92% 5.93% 5.93% 5.91% 5.74% Pay fixed generic swaps: Notional amount $ 209,000 $ 172,000 $ 10,000 $ 96,495 $ 620,600 $ 1,108,095 Weighted average receive rate 6.02% 5.96% 5.94% 5.96% 5.98% 5.98% Weighted average pay rate 7.66% 8.26% 6.08% 8.13% 6.95% 7.38% ----------- ----------- ----------- ----------- ---------- ------------- Total notional value $1,375,295 $ 501,373 $ 55,901 $ 130,896 $ 723,400 $ 2,786,865 ========== =========== =========== =========== ========== ============ Total weighted average rate on swaps: Receive rate 6.10% 6.45% 6.59% 6.13% 6.04% 6.16% ========== =========== =========== =========== ========== ============ Pay rate 5.97% 6.72% 5.96% 7.56% 6.80% 6.39% ========== =========== =========== =========== ========== ============
During 1997, the range of floating interest rates received on swap contracts was 5.47% to 6.19% and the range of floating interest rates paid on swap contracts was 4.76% to 6.08%. The range of fixed interest rates received on swap contracts was 4.62% to 8.68% and the range of fixed interest rates paid on swap contracts was 5.38% to 9.14%. F-28 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1997, 1996, and 1995 (Dollars in thousands except per share figures) Activity in interest rate swaps and caps is summarized as follows:
Interest Rate Swap and Cap Activity For the Years Ended December 31, 1997, 1996, and 1995 (Notional amounts in millions) Receive Pay Forward Interest Fixed Fixed Basis Starting Rate Swaps Swaps Swaps Swaps Caps ----------- ----------- ----------- ------------ ----------- Balance, January 1, 1995 $ 4,991 $ 2,225 $ 200 $ 135 $ 300 Additions 219 -0- 43 -0- -0- Maturities (2,114) (450) (200) -0- (75) Forward starting, becoming effective 125 -0- -0- (125) -0- ----------- ----------- ----------- ------------ ----------- Balance, December 31, 1995 3,221 1,775 43 10 225 Additions 905 -0- -0- -0- -0- Maturities (1,545) (435) (43) -0- (225) Forward starting, becoming effective -0- -0- -0- -0- -0- ----------- ----------- ----------- ------------ ----------- Balance, December 31, 1996 2,581 1,340 -0- 10 -0- Additions 100 -0- -0- -0- -0- Maturities (1,002) (232) -0- -0- -0- Forward starting, becoming effective -0- -0- -0- (10) -0- ----------- ----------- ----------- ------------ ----------- Balance, December 31, 1997 $ 1,679 $ 1,108 $ -0- $ -0- $ -0- =========== =========== =========== ============ ===========
Interest rate swaps and caps activity decreased net interest income by $5 million, $10 million, and $29 million for the years ended December 31, 1997, 1996, and 1995, respectively. F-29 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1997, 1996, and 1995 (Dollars in thousands except per share figures) NOTE U - Disclosure About Fair Value of Financial Instruments The Financial Accounting Standards Board Pronouncement No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of the fair value of financial instruments for which it is practicable to estimate that value. The statement provides for a variety of different valuation methods, levels of aggregation, and assessments of practicability of estimating fair value. Fair value estimates are not necessarily more relevant than historical cost values. Fair values may have limited usefulness in evaluating portfolios of long-term financial instrument assets and liabilities held by going concerns. Moreover, there are significant inherent weaknesses in any estimating techniques employed. Differences in the alternative methods and assumptions selected by various companies as well as differences in the methodology utilized between years may, and probably will, significantly limit comparability and usefulness of the data displayed. For these reasons, as well as others, management believes that the disclosure presented herein has limited relevance to the Company and its operations. The values presented are based upon information as of December 31, 1997, and 1996, and do not reflect any subsequent changes in fair value. Fair values may have changed significantly following the balance sheet dates. The estimates presented herein are not necessarily indicative of amounts that could be realized in a current transaction. The following methods and assumptions were used to estimate the fair value of each class of financial instruments: The historical cost amounts approximate the fair value of the following financial instruments: cash, interest earned but uncollected, investment in capital stock of Federal Home Loan Bank, other investments, demand deposits, and securities sold under agreements to repurchase with brokers/dealers due within 90 days. Fair values are based on quoted market prices for securities available for sale, mortgage-backed securities available for sale, mortgage-backed securities held to maturity, securities sold under agreements to repurchase with the Federal Home Loan Bank of San Francisco and brokers/dealers with terms greater than 90 days, and subordinated notes. Fair values are estimated using projected cash flows present valued at replacement rates currently offered for instruments of similar remaining maturities for: term deposits, advances from Federal Home Loan Bank, consumer repurchase agreements, and medium-term notes. For loans receivable and loan commitments, the fair value is estimated by present valuing projected future cash flows, using current rates at which similar loans would be made to borrowers and with assumed rates of prepayment. Adjustment for credit risk is estimated based upon the classification status of the loans. For mortgage servicing rights, the fair value is estimated using a discounted cash flow analysis based on the Company's estimated annual cost of servicing, market prepayment rates, and market discount rates. The fair value of interest rate swap agreements is the estimated amount the Company would receive or pay to terminate the swap agreements on the reporting date, considering current interest rates. F-30 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1997, 1996, and 1995 (Dollars in thousands except per share figures)
December 31 ---------------------------------------------------------------- 1997 1996 ------------------------------- ------------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------------- --------------- -------------- -------------- Financial Assets: Cash $ 172,241 $ 172,241 $ 218,719 $ 218,719 Securities available for sale 608,544 608,544 781,325 781,325 Other investments 252,648 252,648 1,078,832 1,078,832 Mortgage-backed securities available for sale 157,327 157,327 227,466 227,466 Mortgage-backed securities held to maturity 3,782,419 3,833,527 4,066,116 4,089,066 Loans receivable 33,260,709 33,223,479 30,113,421 30,123,449 Interest earned but uncollected 216,923 216,923 221,604 221,604 Investment in capital stock of Federal Home Loan Bank 590,244 590,244 500,105 500,105 Capitalized mortgage servicing rights 11,116 16,900 9,325 12,387 Financial Liabilities: Deposits 24,109,717 24,166,679 22,099,934 22,159,594 Advances from Federal Home Loan Bank 8,516,605 8,553,213 8,798,433 8,798,236 Securities sold under agreements to repurchase 2,334,048 2,334,967 1,908,126 1,907,541 Medium-term notes 109,992 110,015 589,845 590,832 Subordinated notes 1,110,488 1,153,634 1,323,996 1,367,938
Off-Balance Sheet Instruments (based on estimated fair value at December 31):
----------------------------------------------------------------------------------------- December 31 ----------------------------------------------------------------------------------------- 1997 1996 ------------------------------------------- ------------------------------------------- Net Net Unrealized Unrealized Unrealized Unrealized Unrealized Unrealized Gains Losses Gain (Loss) Gains Losses Gain (Loss) ------------ ------------ ------------- ------------ ------------ ------------- Interest rate swaps: Receive fixed $ 9,646 $ 1,022 $ 8,624 $ 17,910 $ 3,436 $ 14,474 Pay fixed 1,397 35,875 (34,478) 6,829 36,649 (29,820) Forward starting -0- -0- -0- 346 -0- 346 Loan commitments 1,494 -0- 1,494 943 -0- 943 ------------ ------------ ------------- ------------ ------------ ------------- Total $ 12,537 $ 36,897 $ (24,360) $ 26,028 $ 40,085 $ (14,057) ============ ============ ============= ============ ============ =============
F-31 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1997, 1996, and 1995 (Dollars in thousands except per share figures) NOTE V - Parent Company Financial Information Statement of Net Earnings
Year Ended December 31 -------------------------------------------- 1997 1996 1995 ------------ ------------ ------------- Revenues: Investment income $ 57,020 $ 48,356 $ 49,893 Insurance commissions 1,392 1,381 1,403 Other 20 19 24 ------------ ------------ ------------- 58,432 49,756 51,320 Expenses: Interest 83,687 91,943 88,662 General and administrative 3,470 3,166 3,631 ------------ ------------ ------------- 87,157 95,109 92,293 ------------ ------------ ------------- Loss before earnings of subsidiaries and income tax credit (28,725) (45,353) (40,973) Income tax credit 13,296 20,306 18,498 Earnings of subsidiaries before cumulative effect of change in accounting for goodwill 369,567 394,960 257,014 ------------ ------------ ------------- Earnings Before Cumulative Effect of Change in Accounting for Goodwill 354,138 369,913 234,539 Cumulative effect of change in accounting for goodwill -0- (205,242) -0- ------------ ------------ ------------- Net Earnings $ 354,138 $ 164,671 $ 234,539 ============ ============ =============
Statement of Financial Condition
Assets ------ December 31 -------------------------------- 1997 1996 -------------- -------------- Cash $ 10,826 $ 7,092 Securities available for sale 97,935 153,192 Overnight note receivable from subsidiary 76,146 -0- Other investments 180,087 152,485 Notes receivable from subsidiary 600,000 600,000 Prepaid expenses and other assets 9,343 13,637 Investment in subsidiaries 2,766,544 2,580,050 -------------- -------------- $ 3,740,881 $ 3,506,456 ============== ==============
Liabilities and Stockholders' Equity ------------------------------------
Accounts payable and accrued expenses $ 32,059 $ 31,493 Subordinated notes, net 1,010,791 1,124,486 Stockholders' equity 2,698,031 2,350,477 -------------- -------------- $ 3,740,881 $ 3,506,456 ============== ==============
F-32 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1997, 1996, and 1995 (Dollars in thousands except per share figures) NOTE V- Parent Company Financial Information (Continued) Statement of Cash Flows - -----------------------
Year Ended December 31 ------------------------------------------ 1997 1996 1995 ------------- ------------ ------------ Cash flows from operating activities: Net earnings $ 354,138 $ 164,671 $ 234,539 Adjustments to reconcile net earnings to net cash used in operating activities: Equity in earnings of subsidiaries before cumulative effect of change in accounting for goodwill (369,567) (394,960) (257,014) Cumulative effect of change in accounting for -0- 205,242 -0- goodwill Amortization of intangibles and discount on subordinated debt 1,305 1,393 1,404 Other, net 12,543 4,072 (7,290) ------------- ------------ ------------ Net cash used in operating activities (1,581) (19,582) (28,361) Cash flows from investing activities: Loans purchased from subsidiary (80,661) -0- -0- Capital contributed to subsidiaries (203,769) (500,225) (580,582) Dividends received from subsidiary 515,225 830,000 280,000 Purchases of securities available for sale (2,878) (306,590) (2,638,824) Sales of securities available for sale 11,944 6,182 102,911 Matured securities available for sale 50,000 350,000 2,664,121 Issuances of overnight notes receivable from subsidiary (6,121,548) -0- -0- Repayments of overnight notes receivable from subsidiary 6,045,402 -0- -0- Decrease (increase) in other investments (27,602) 364,717 (130,495) Issuances of notes receivable from subsidiaries (600,000) (2,501,500) (450,000) Repayments of notes receivable from subsidiaries 600,000 1,901,500 700,000 ------------- ------------ ------------ Net cash provided by (used in) investing activities 186,113 144,084 (52,869) Cash flows from financing activities: Proceeds from subordinated debt -0- -0- 99,283 Repayment of subordinated debt (115,000) -0- -0- Dividends on common stock (25,903) (22,893) (20,533) Exercise of stock options 8,456 8,683 6,198 Purchase and retirement of Company stock (48,351) (105,756) (2,870) ------------- ------------ ------------ Net cash provided by (used in) financing activities (180,798) (119,966) 82,078 Net increase in cash 3,734 4,536 848 Cash at beginning of period 7,092 2,556 1,708 ------------- ------------ ------------ Cash at end of period $ 10,826 $ 7,092 $ 2,556 ============= ============ ============ Supplemental cash flow information: Loans contributed to subsidiary $ 80,661 $ -0- $ -0-
F-33 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1997, 1996, and 1995 (Dollars in thousands except per share figures) NOTE W - Selected Quarterly Financial Data (Unaudited)
1997 ---------------------------------------------------------------- Quarter Ended ---------------------------------------------------------------- March 31 June 30 September 30 December 31 -------------- -------------- -------------- -------------- Interest income $ 674,279 $ 690,239 $ 718,202 $ 749,777 Interest expense 455,587 473,659 496,057 516,699 -------------- -------------- -------------- -------------- Net interest income 218,692 216,580 222,145 233,078 Provision for loan losses 20,695 13,111 9,980 13,823 Non-interest income 19,232 19,810 20,420 21,806 Non-interest expense 79,170 78,627 83,234 85,928 -------------- -------------- -------------- -------------- Earnings before taxes on income 138,059 144,652 149,351 155,133 Taxes on income 54,685 57,375 59,344 61,653 -------------- -------------- -------------- -------------- Net earnings $ 83,374 $ 87,277 $ 90,007 $ 93,480 ============== ============== ============== ============== Basic earnings per share $ 1.45 $ 1.53 $ 1.59 $ 1.65 ============== ============== ============== ============== Diluted earnings per share $ 1.43 $ 1.51 $ 1.56 $ 1.62 ============== ============== ============== ============== Cash dividends per share $ .11 $ .11 $ .11 $ .125 ============== ============== ============== ==============
F-34 GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1997, 1996, and 1995 (Dollars in thousands except per share figures)
1996 --------------------------------------------------------------- Quarter Ended --------------------------------------------------------------- March 31 June 30 September 30 (a) December 31 -------------- -------------- -------------- -------------- Interest income $ 639,107 $ 630,178 $ 646,587 $ 665,689 Interest expense 431,448 421,675 441,640 455,838 -------------- -------------- -------------- -------------- Net interest income 207,659 208,503 204,947 209,851 Provision for loan losses 18,522 17,236 23,498 25,000 Non-interest income 19,524 18,826 17,676 18,873 Non-interest expense (b) 80,791 80,469 211,282 80,880 -------------- -------------- -------------- -------------- Earnings (loss) before taxes on income 127,870 129,624 (12,157) 122,844 Taxes on income 49,277 50,039 (147,942) 46,894 -------------- -------------- -------------- -------------- Earnings before cumulative effect of change in accounting for goodwill 78,593 79,585 135,785 75,950 Cumulative effect of change in accounting for goodwill (b) (205,242) -0- -0- -0- -------------- -------------- -------------- -------------- Net earnings (loss) $ (126,649) $ 79,585 $ 135,785 $ 75,950 ============== ============== ============== ============== Basic earnings per share before cumulative effect of change in accounting for goodwill $ 1.34 $ 1.37 $ 2.36 $ 1.33 Cumulative effect of change in accounting for goodwill (b) (3.49) 0.00 0.00 0.00 -------------- -------------- -------------- -------------- Basic earnings (loss) per share $ (2.15) 1.37 2.36 1.33 ============== ============== ============== ============== Diluted earnings per share before cumulative effect of change in accounting for goodwill $ 1.32 $ 1.34 $ 2.32 $ 1.30 Cumulative effect of change in accounting for goodwill (b) (3.44) 0.00 0.00 0.00 -------------- -------------- -------------- -------------- Diluted earnings (loss) per share $ (2.12) $ 1.34 $ 2.32 $ 1.30 ============== ============== ============== ============== Cash dividends per share $ .095 $ .095 $ .095 $ .11 ============== ============== ============== ==============
(a) The third quarter of 1996 was significantly influenced by two nonrecurring items: the federally-mandated recapitalization of the Savings Association Insurance Fund which resulted in a one-time charge of $133 million; and the recognition of $139 million of tax benefits arising from an earlier acquisition. See discussion in Note A. (b) During 1996, the Company adopted SFAS 72 for goodwill related to acquisitions prior to September 30, 1982, which resulted in the write-off of $205 million of goodwill effective January 1, 1996. See discussion in Note A. F-35 EX-3.(II) 2 REVISED BYLAWS REVISED BYLAWS OF GOLDEN WEST FINANCIAL CORPORATION (As amended July 29, 1997) ARTICLE I Section 1. OFFICES. The registered office of the Corporation is hereby fixed and located at 100 W. 10th Street, Wilmington, Delaware. The Corporation may also have such offices at such other places within or without the State of Delaware as the Board of Directors shall from time to time prescribe. ARTICLE II Meetings of Stockholders Section 1. PLACE OF MEETINGS. The annual meeting of stockholders and all other meetings of stockholders shall be held either at the registered office of the Corporation or at any other place within or without the State of Delaware which may be designated by the Board of Directors of the Corporation. Section 2. ANNUAL MEETINGS. The annual meeting of stockholders shall be held on the last Thursday in April of each year, at 2:00 o'clock P.M. of said day, if not a legal holiday, and if a legal holiday, then on the next day following which is not a legal holiday, or at such other date and time as the Board of Directors may determine. Written notice of each annual meeting shall be given to each stockholder entitled to vote, either personally or by mail or other means of written communication, charges prepaid, addressed to such stockholder at his address appearing on the books of the Corporation or given by him to the Corporation for the purpose of notice. If a stockholder gives no address, notice shall be deemed to have been given him if sent by mail or other means of written communication addressed to the place where the registered office of the Corporation is situated, or if published at least once in some newspaper of general circulation in the county in which said office is located. Notice of any such meeting of stockholders shall be sent to each stockholder entitled thereto not less than ten (10) days before each annual meeting, and shall specify the place, the day and the hour of such meeting. Section 3. SPECIAL MEETINGS. Special meetings of stockholders for any purpose or purposes whatsoever may be called at any time by the Chairman of the Board or the Board of Directors. Except in special cases where other express provision is made by statute, notice of such special meetings shall be given in the same manner as for annual meetings of stockholders. Notices of any special meetings shall specify in addition to the place, day and hour of such meeting, the general nature of the business to be transacted. Section 4. ADJOURNED MEETINGS AND NOTICE THEREOF. In the absence of a quorum, any meeting of stockholders may be adjourned from time to time by the vote of a majority of the shares, the holders of which are either present in person or represented by proxy thereat, but no other business may be transacted. If any stockholders' meeting, either annual or special, is adjourned for thirty (30) days or more or if after adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given as in the case of an original meeting. Save as aforesaid, it shall not be necessary to give any notice of an adjournment or of the business to be transacted at any adjourned meeting other than by announcement at the meeting at which such adjournment is taken. Section 5. ENTRY OF NOTICE. An affidavit of the Secretary or an Assistant Secretary or the transfer agent of the Corporation that notice has been duly given shall be prima facie evidence that due notice of such meeting was given to such stockholder, as required by law and the Bylaws of the Corporation. Section 6. VOTING. At all meetings of stockholders every stockholder entitled to vote shall have the right to vote in person or by proxy the number of shares standing in his own name on the stock records of the Corporation on the day three (3) days prior to any meeting of stockholders, or, if some other day be fixed for the determination of stockholders of record, then on such other day. Such voting may be viva voce or by ballot. Every stockholder entitled to vote at an election for directors shall have the right to cumulate his votes and give one candidate a number of votes equal to the number of directors to be elected, multiplied by the number of votes to which his shares are entitled, or to distribute his votes on the same principal among as many candidates as he shall think fit. The candidates receiving the highest number of votes up to the number of directors to be elected, shall be elected. Section 7. QUORUM. The presence in person or by proxy of the holders of a majority of the shares entitled to vote at any meeting shall constitute a quorum for the transaction of business. The stockholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Section 8. CONSENT OF ABSENTEES. The transactions of any meeting of stockholders, either annual or special, however called and noticed, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, such of the stockholders entitled to vote, not present in person or by proxy, signs a written waiver of notice, or a consent to the holding of such meeting, or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 9. ACTION WITHOUT MEETING. Any action which under any provision of the general corporation laws of Delaware may be taken at a meeting of the stockholders, may be taken without a meeting if authorized by a writing signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Such consent shall be filed with the Secretary of the Corporation. Notwithstanding any inconsistent provision which may be contained in these Bylaws, in order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the Secretary, request the Board of Directors to fix a record date. The Board of Directors shall promptly, but in all events within ten days after the date on which such a request is received, adopt a resolution fixing the record date. If no record date has been fixed by the Board of Directors within ten days of the date upon which such a request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or any officer or agent of the Corporation having custody of the book in which proceedings of stockholders' meetings are recorded, to the attention of the Secretary of the Corporation. Delivery shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by applicable law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the date on which the Board of Directors adopts the resolution taking such prior action. Section 10. PROXIES. Every person entitled to vote or execute consents shall have the right to do so either in person or by an agent or agents authorized by a written proxy executed by such person or his duly authorized agent. A proxy shall be valid only for the specific meeting with respect to which it has been granted and any adjournment of such meeting; provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date of its execution. Any proxy duly executed and outstanding shall be deemed not to have been revoked, and to be in full force and effect, unless and until an instrument revoking said proxy, or a duly executed proxy bearing a later date, is executed and delivered. Notwithstanding that a valid proxy may be outstanding, the powers of the proxy holder or holders shall be suspended, except in the case of a proxy coupled with an interest, which shall state the fact on its face, if the person or persons executing such proxy shall be present at the meeting and elect to vote in person. Section 11. ADVANCE NOTICE OF STOCKHOLDER PROPOSALS. At any annual or special meeting of stockholders, proposals by stockholders and persons nominated for election as directors by stockholders shall be considered only if advance notice thereof has been timely given as provided herein and such proposals or nominations are otherwise proper for consideration under applicable law and the restated certificate of incorporation and by-laws of the Corporation. Notice of any proposal to be presented by any stockholder or of the name of any person to be nominated by any stockholder for election as a director of the Corporation at any meeting of stockholders shall be delivered to the Secretary of the Corporation at its principal executive office not less than 90 nor more than 120 days prior to the date of the meeting; provided, however, that if the date of the meeting is first publicly announced or disclosed (in a public filing or otherwise) less than 70 days prior to the date of the meeting, such advance notice shall be given not more than ten days after such date is first so announced or disclosed. Public notice shall be deemed to have been given more than 70 days in advance of the annual meeting if the Corporation shall have previously disclosed, in these by-laws or otherwise, that the annual meeting in each year is to be held on a determinable date, unless and until the Board determines to hold the meeting on a different date. Any stockholder who gives notice of any such proposal shall deliver therewith the text of the proposal to be presented and a brief written statement of the reasons why such stockholder favors the proposal and setting forth such stockholder's name and address, the number and class of all shares of each class of stock of the Corporation beneficially owned by such stockholder and any material interest of such stockholder in the proposal (other than as a stockholder). Any stockholder desiring to nominate any person for election as a director of the Corporation shall deliver with such notice a statement in writing setting forth the name of the person to be nominated, the number and class of all shares of each class of stock of the Corporation beneficially owned by such person, the information regarding such person required by paragraphs (a), (e) and (f) of Item 401 of Regulation S-K adopted by the Securities and Exchange Commission (or the corresponding provisions of any regulation subsequently adopted by the Securities and Exchange Commission applicable to the Corporation), such person's signed consent to serve as a director of the Corporation if elected, such stockholder's name and address and the number and class of all shares of each class of stock of the Corporation beneficially owned by such stockholder. As used herein, shares "beneficially owned" shall mean all shares as to which such person, together with such person's affiliates and associates (as defined in Rule 12b-2 under the Securities and Exchange Act of 1934), may be deemed to beneficially own pursuant to Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, as well as all shares as to which such person, together with such person's affiliates and associates, has the right to become the beneficial owner pursuant to any agreement or understanding, or upon the exercise of warrants, options or rights to convert or exchange (whether such rights are exercisable immediately or only after the passage of time or the occurrence of conditions). The person presiding at the meeting, in addition to making any other determinations that may be appropriate to the conduct of the meeting, shall determine whether such notice has been duly given and shall direct that proposals and nominees not be considered if such notice has not been given. ARTICLE III Directors Section 1. POWERS. Subject to the limitations of the Certificate of Incorporation, of the Bylaws, and of the general corporation law of Delaware as to action to be authorized or approved by the stockholders, and subject to the duties of directors as prescribed by the Bylaws, all corporate powers shall be exercised by or under the authority of and business and affairs of the Corporation shall be controlled by, the Board of Directors. Without prejudice to such general powers, but subject to the same limitations, it is hereby expressly declared that the directors shall have the following powers to wit: First - To select and remove all officers, agents and employees of the Corporation, prescribe such powers and duties for them as may not be inconsistent with law, with the Certificate of Incorporation or the Bylaws, fix their compensation and require from them security for faithful service. Second - To conduct, manage and control the affairs and business of the Corporation, and to make such rules and regulations therefore not inconsistent with law, the Certificate of Incorporation or the Bylaws as them may deem proper. Third - To adopt, make and use a corporate seal, and to prescribe the forms of certificates of stock, and to alter the form of such seal or such certificates from time to time in a lawful manner as they may see fit. Fourth - To authorize the issuance of shares of stock of the Corporation from time to time, upon such terms as may be lawful, in consideration of money paid, labor done, or services actually rendered, debts or securities cancelled, or tangible or intangible property actually received, or amounts transferred from surplus to stated capital upon the issuance of shares as a dividend. Fifth - To borrow money and incur indebtedness for the purposes of the Corporation, and to cause to be executed and delivered therefor, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations or other evidences of debt and securities therefor. Sixth - To appoint, by resolution passed by a majority of the full Board of Directors, an executive committee, and to delegate to such committee, subject to the control of the Board of Directors, any of the powers and authority of said Board except as specifically limited by statute or the Certificate of Incorporation. The executive committee shall be composed of two or more directors and shall act only in the intervals between meetings of the Board of Directors and shall be subject at all times to the control thereof. Section 2. NUMBER, ELECTION AND TERM OF OFFICE OF DIRECTORS. The number of directors of the Corporation shall be nine. Except as otherwise provided in the Certificate of Incorporation, the Board of Directors shall be elected at the annual meeting of stockholders, but if any such annual meeting is not held, or the directors are not elected thereat, the directors may be elected at any special meeting of stockholders held for that purpose. All directors shall hold office until their respective successors are elected. Section 3. VACANCIES. A vacancy or vacancies in the Board of Directors shall be deemed to exist in the case of the death, resignation or removal of any director, or if the authorized number of directors be increased, or if the stockholders fail at any annual, regular or special meeting of stockholders at which any director or directors are elected to elect the full authorized number of directors to be voted for at that meeting. Except as otherwise provided in the Certificate of Incorporation, vacancies may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director and each director so elected shall hold office until his successor is elected at an annual or regular or a special meeting of the stockholders. The stockholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors. If the Board of Directors accepts the resignation of a director tendered to take effect at a future time, the Board or the stockholders may elect a successor to take office when the resignation is to become effective. No reduction of the number of directors shall have the effect of removing any director prior to the expiration of his term of office. Section 4. PLACE OF MEETING. All meetings of the Board of Directors shall be held at the registered office of the Corporation or at any other place within or without the State of Delaware designated from time to time by resolution of the Board of Directors or by written consent of all members of the Board. Section 5. ORGANIZATION MEETING. Immediately following each annual meeting of stockholders, the Board of Directors shall hold a regular meeting for the purpose of organization, election of officers, and the transaction of other business. Notice of such meeting is hereby dispensed with. Section 6. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such times as may from time to time be designated by resolution of the Board of Directors. Section 7. SPECIAL MEETINGS. Special meetings of the Board of Directors for any purpose or purposes shall be called at any time by the Chairman of the Board, or if he is absent or unable or refuses to act, by the Vice Chairman of the Board, the President or by any three directors. Written notice of the time and place of regular and special meetings shall be delivered personally to the directors or sent to each director by letter or by telegram, charges prepaid, addressed to him at his address as it is shown upon the records of the Corporation, or if it is not so shown on such records or is not readily ascertainable, at the city in which the meetings of the directors are regularly held. In case such notice is mailed or telegraphed, it shall be deposited in the United States mail or delivered to the telegraph company at least forty-eight (48) hours prior to the time of the holding of the meeting. In case such notice is personally delivered, it shall be so delivered at least twenty-four (24) hours prior to the time of the holding of the meeting. Such mailing, telegraphing or delivery as above provided shall be due, legal and personal notice to such director. Section 8. NOTICE OF ADJOURNMENT. Notice of the time and place of holding an adjourned meeting of a directors' meeting need not be given to absent directors if the time and place be fixed at the meeting adjourned. Section 9. ENTRY OF NOTICE. Whenever any director has been absent from any special meeting of the Board of Directors, an entry in the minutes to the effect that notice has been duly given shall be conclusive and incontrovertible evidence that due notice of such special meeting was given to such director, as required by law and the Bylaws of the Corporation. Section 10. WAIVER OF NOTICE. The transactions of any meetings of the Board of Directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present, and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, or a consent to holding such meeting or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 11. QUORUM. A majority of the number of directors as fixed by the Bylaws shall be necessary to constitute a quorum of the Board for the transaction of business, except to adjourn as hereinafter provided. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board of Directors, except that a majority of the full board shall be required for amendment of the Bylaws and except as otherwise provided in the Certificate of Incorporation. Section 12. ADJOURNMENT. A quorum of the directors may adjourn any director's meeting to meet again at a stated day and hour; provided, however, that in the absence of a quorum, a majority of the directors present at any directors' meeting, either regular or special, may adjourn from time to time until the time fixed for the next regular meeting of the board. Section 13. FEES AND COMPENSATION. Directors and members of the executive committee may be allowed a fixed fee to be determined by resolution of the Board of Directors for attendance at each meeting. Nothing herein contained shall be construed to preclude any director from serving the Corporation in another capacity as an officer, agent, employee or otherwise, and receiving compensation therefor. ARTICLE IV Officers Section 1. OFFICERS. The officers of the Corporation shall be one or more Chief Executive Officers, a Chairman of the Board, a Vice Chairman of the Board, a President, one or more Vice Presidents, a Secretary and a Treasurer. The Corporation may also have, at the discretion of the Board of Directors, one or more Assistant Secretaries, one or more Assistant Treasurers and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article. Any two or more offices, except those of President and Secretary, may be held by the same person. Section 2. ELECTION. The officers of the Corporation, except such officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article, shall be chosen annually by the Board of Directors, and each shall hold his office until he shall resign or shall be removed or otherwise disqualified to serve, or his successor shall be elected and qualified. Section 3. SUBORDINATE OFFICERS, ETC. The Board of Directors may appoint such other officers as the business of the Corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the Bylaws or as the Board of Directors may from time to time determine. Section 4. REMOVAL AND RESIGNATION. Any officer may be removed, either with or without cause, by a majority of the directors at the time in office, at any regular or special meeting of the Board of Directors. Any officer may resign at any time by giving notice to the Board of Directors, to the Chairman of the Board, or to the Secretary of the Corporation. Section 5. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification, or any other cause shall be filled in the manner prescribed by the Bylaws for regular appointment to such office. Section 6. CHIEF EXECUTIVE OFFICERS. The Chief Executive Officer or Officers of the Corporation shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and other officers of the Corporation, and if there is more than one Chief Executive Officer, such powers and duties shall be shared or divided between them as they shall determine. Section 7. CHAIRMAN OF THE BOARD. The Chairman of the Board, if present, shall preside at all meetings of the stockholders and of the Board of Directors, and shall exercise and perform such other powers and duties as may be from time to time assigned to the Chairman of the Board by the Board of Directors. Section 8. VICE CHAIRMAN OF THE BOARD. The Vice Chairman of the Board shall exercise and perform such powers and duties as may be from time to time assigned to the Vice Chairman of the Board by the Chairman of the Board or the Board of Directors. Section 9. PRESIDENT. The President shall exercise and perform such powers and duties as may be from time to time assigned to the President by either of the Chief Executive Officers or by the Board of Directors. Section 10. VICE PRESIDENTS. The Vice Presidents shall exercise and perform such powers and duties as may be from time to time assigned to them respectively by either of the Chief Executive Officers or the Board of Directors. Section 11. SECRETARY. The Secretary shall keep, or cause to be kept, a book of minutes at the registered office of the Corporation or such other place as the Board of Directors may order; of all meetings of directors and stockholders, with the time and place held, whether regular or special and if special, how authorized, the notice thereof given, the names of those present at directors' meetings, the number of shares present or represented at stockholders' meetings and the proceedings thereof. The Secretary shall keep or cause to be kept, at the registered office of the Corporation, or at the office of the Corporation's transfer agent, a share register or a duplicate share register, showing the names of the stockholders and their addresses; the number of classes of shares held by each; the number and date of certificates issued for the same; and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors required by the Bylaws to be given, and he shall keep the seal of the Corporation in safe custody and shall have such other powers and perform such other duties as may be from time to time assigned to the Secretary by either of the Chief Executive Officers or the Board of Directors. Section 12. TREASURER. The Treasurer shall keep and maintain, or cause to be kept and maintained, adequate and correct accounts of the properties and business transactions of the Corporation, including accounts of its assets, liabilities, receipts, disbursement, gains, losses, capital, surplus, and shares. Any surplus, including earned surplus, paid-in surplus and surplus arising from a reduction of stated capital, shall be classified according to source and shown in a separate account. The books of account shall at all times be open to inspection by any director. The Treasurer shall deposit all moneys and other valuables in the name and to the credit of the Corporation with such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be authorized, shall render to the Chairman of the Board and directors, whenever they request it, an account of all of his transactions as Treasurer and of the financial condition of the Corporation, and shall have such other powers and perform such other duties as may be assigned to the Treasurer by either of the Chief Executive Officers or the Board of Directors. ARTICLE V Miscellaneous Section 1. RECORD DATE AND CLOSING STOCK BOOKS. The Board of Directors may fix a time, in the future, not exceeding sixty (60) days preceding the date of any meeting of stockholders or the date fixed for the payment of any dividend or distribution, or for the allotment of rights or when any change or conversion or exchange of shares shall go into effect, as a record date for the determination of the stockholders entitled to notice of and to vote at any such meeting, or entitled to receive any such dividend or distribution, or any such allotment of rights, or to exercise the rights in respect to any such change, conversion or exchange of shares, and in such case only stockholders of record on the date so fixed shall be entitled to notice of and to vote at such meeting, or to receive such dividend, distribution or allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after any record date fixed as aforesaid. The Board of Directors may close the books of the Corporation against transfer of shares during the whole, or any part, of any such period. Section 2. CERTIFICATES OF STOCK. A certificate or certificates for shares of the capital stock of the Corporation shall be issued to each stockholder when any such shares are fully paid up. All such certificates shall be signed by the Chairman of the Board, the President and the Secretary or an Assistant Secretary. Section 3. LOST OR DESTROYED CERTIFICATES. Any person claiming a certificate of stock to be lost or destroyed shall make an affidavit or affirmation of that fact and advertise the same in such manner as the Board of Directors may require, and shall if the directors so require give the Corporation a bond of indemnity, in form and with one or more sureties satisfactory to the Board, in at least double the value of the stock represented by such certificate, whereupon a new certificate may be issued of the same tenor and for the same number of shares as the one alleged to be lost or destroyed. Section 4. TRANSFER AGENTS AND REGISTRARS. The Board of Directors may appoint one or more transfer agents or transfer clerks, and one or more registrars, which shall be an incorporated bank or trust company, either domestic or foreign, who shall be appointed at such times and places as the requirements of the Corporation may necessitate and the Board of Directors may designate. Section 5. SHARES OF OTHER CORPORATIONS. In the absence of any action thereon by the Board of Directors, the Chairman of the Board, Vice Chairman of the Board, President or any Vice President and the Secretary or an Assistant Secretary of this Corporation are authorized to vote, represent and exercise on behalf of this Corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this Corporation. The authority herein granted to said officers to vote or represent on behalf of this Corporation any and all such shares of other corporations may be exercised either by such officers in person or by any other person authorized to do so by proxy or power of attorney duly executed by said officers. Section 6. ANNUAL REPORT. The Board of Directors shall cause annual reports to be given or mailed to the shareholders not later than 120 days after the close of the fiscal or calendar year. Section 7. BOARD AND COMMITTEE ACTION WITHOUT MEETING. The Board of Directors or any Committee thereof may take any action, without holding a meeting, which they are authorized to take at a meeting lawfully held, provided, that all of the directors or members of such Committee consent in writing to any actions so taken without meeting. Section 8. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS. (a) Actions, Suits or Proceedings Other Than By or in the Right of the Corporation. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he or she is or was or has agreed to become a director or officer of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise (including, without limitation, service with respect to employee benefit plans), or by reason of any action alleged to have been taken or omitted in such capacity, against costs, charges, expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her or on his or her behalf in connection with such action, suit or proceeding and any appeal therefrom, if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful. (b) Actions or Suits by or in the Right of the Corporation. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he or she is or was or has agreed to become a director or officer of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a director or officer of another corporation, partnership, joint venture , trust or other enterprise (including, without limitation, service with respect to employee benefit plans), or by reason of any action alleged to have been taken or omitted in such capacity, against costs, charges and expenses (including attorneys' fees) actually and reasonably incurred by him or her or on his or her behalf in connection with the defense or settlement of such action or suit and any appeal therefrom, if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification shall be made under this Section 8(b) in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of such liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such costs, charges and expenses which the Court of Chancery or such other court shall deem proper. (c) Indemnification for Costs, Charges and Expenses of Successful Party. Notwithstanding any other provision of this Article V, to the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in defense of any action, suit or proceeding referred to in Sections 8(a) or 8(b) of this Article V or in defense of any claim, issue or matter therein, he or she shall be indemnified against all costs, charges and expenses (including attorneys' fees) actually and reasonably incurred by him or her or on his or her behalf in connection therewith. (d) Determination of Right to Indemnification. Any indemnification under Sections 8(a) or 8(b) of this Article V (unless ordered by a court) shall be paid by the Corporation only as authorized in the specific case upon a determination that indemnification is proper in the circumstances because the indemnified person has met the applicable standard of conduct set forth in Sections 8(a) or 8(b) of this Article V. Such determination shall be made (1) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel (who may be the regular counsel of the Corporation) in a written opinion, or (3) by the stockholders. (e) Advancement of Costs, Charges and Expenses. Costs, charges and expenses (including attorneys' fees) incurred by a director or officer referred to in Sections 8(a) or 8(b) of this Article V in defending a civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the Corporation, in advance of a determination of right to indemnification pursuant to Section 8(d) of this Article V or the final disposition of such action, suit or proceeding, upon the written request of such director or officer; provided, however, that the payment of such costs, charges and expenses in advance of the determination of right to indemnification or the final disposition of such action, suit or proceeding shall be made only upon receipt of an undertaking by or on behalf of such director or officer to repay all amounts so advanced in the event that it shall ultimately be determined that such director or officer is not entitled to be indemnified by the Corporation as authorized in this Section 8. The Board of Directors may, in such case, and upon approval of such director or officer of the Corporation, authorize the Corporation's counsel to represent such person, in any action, suit or proceeding, whether or not the Corporation is a party to such action, suit or proceeding. Such costs, charges and expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. (f) Procedure for Indemnification. Any indemnification under Sections 8(a), 8(b) or 8(c) of this Article V, or advance of costs, charges and expenses under Section 8(e) of this Article V, shall be made promptly, and in any event within 60 days, upon the written request of the indemnified person. The right to indemnification or advances as granted by this Section 8 shall be enforceable by the indemnified person in any court of competent jurisdiction, if the Corporation denies such request, in whole or in part, or if no disposition thereof is made within 60 days. Such person's costs and expenses actually and reasonably incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the Corporation. It shall be a defense to any such action (other than action brought to enforce a claim for the advance of costs, charges and expenses under Section 8(e) of this Article V where the required undertaking, if any, has been received by the Corporation) that the claimant has not met the standard of conduct set forth in Section 8 (a) or 8(b) of this Article V, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, its independent legal counsel, and its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in Sections 8(a) or 8(b) of this Article V, nor the fact that there has been an actual determination by the Corporation (including its Board of Directors, its independent legal counsel, and its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. (g) Other Rights; Continuation of Right to Indemnification. The indemnification and advancement of costs, charges and expenses provided by, or granted pursuant to, this Section 8 shall not be deemed exclusive of any other rights to which a person seeking indemnification or advancement of costs, charges and expenses may be entitled under any law (common or statutory), agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office as set forth in Sections 8(a) and 8(b) of this Article V or otherwise, and shall continue as to a person who has ceased to hold such office and shall inure to the benefit of the estate, heirs, executors and administrators of such person. All rights to indemnification under this Section 8 shall be deemed to be a contract between the Corporation and each director and officer of the Corporation who serves or served in such capacity at any time while this Section 8 is in effect. Any repeal or modification of this Section 8 or any repeal or modification of relevant provision of the Delaware General Corporation Law or any other applicable laws shall not in any way diminish any rights to indemnification of such director or officer or the obligations of the Corporation arising hereunder. (h) Indemnification of Employees and Other Agents. The Board of Directors in its discretion shall have power on behalf of the Corporation, subject to applicable law, to indemnify any person made a party to any action, suit or proceeding by reason of the fact that such person, or his or her testator or intestate, is or was an employee or other agent of the Corporation and to advance costs, charges and expenses (including attorney's fees) incurred by such person in defending any such action, suit or proceeding. (i) Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was or has agreed to become a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her or his or her behalf in any such capacity, or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify him or her against such liability under the provision of this Section 8. (j) Savings Clause. If this Section 8 or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each director and officer of the Corporation as to costs, charges and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of the Corporation, to the full extent permitted by any applicable portion of this Section 8 that shall not have been invalidated and to the full extent permitted by applicable law. ARTICLE VI Amendments Section 1. POWER OF AMENDMENT. Bylaws may be adopted, amended, or repealed by the vote of the holders of a majority in interest of the stockholders of the Corporation present in person or by proxy at any annual or special meeting of the stockholders and entitled to vote thereat, a quorum being present, or by the affirmative vote of a majority of the whole Board of Directors. Section 2. RECORD OF AMENDMENTS. Whenever an amendment or new Bylaw is adopted, it shall be copied in the book of bylaws with the original Bylaws, in the appropriate place. If any Bylaw is repealed, the fact of repeal with the date of the meeting at which the repeal was enacted or written assent was filed shall be stated in said book. * * * * * * * * I, Robert C. Rowe, Secretary of Golden West Financial Corporation, do hereby certify that these Bylaws are those which have been previously adopted by the Corporation and are in effect as of this date. Dated: July 31, 1997 /s/ Robert C. Rowe _____________________________ Robert C. Rowe Secretary EX-23 3 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Post Effective Amendment No. 2 to Registration Statement No. 2-66913 on Form S-8, Registration Statement No. 33-14833 on Form S-8, Registration Statement No. 33-29286 on Form S-3, Registration Statement No. 33-40572 on Form S-8, Registration Statement No. 33-48976 on Form S-3, Registration Statement No. 33-57882 on Form S-3 and Amendment No. 1 to Registration Statement No. 33-61293 on form S-3 of our report dated January 21, 1998 appearing in this Annual Report on Form 10-K of Golden West Financial Corporation for the year ended December 31, 1997. /s/ Deloitte & Touche LLP March 26, 1998 EX-27 4
9 12-MOS DEC-31-1997 DEC-31-1997 172,241 0 72,648 0 765,871 3,782,419 3,833,527 33,260,709 233,280 39,590,271 24,109,717 2,873,078 711,390 12,071,133 0 0 5,707 2,692,324 39,590,271 2,392,175 157,823 282,499 2,832,497 1,209,646 1,942,002 890,495 57,609 3,039 326,959 587,195 587,195 0 0 354,138 6.22 6.13 7.48 317,550 0 43,795 71,022 195,702 20,818 787 233,280 233,280 0 0
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