-----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, EE0ea7M17TyO7v+y6QVRzW/o/2oLYWpt6tM9zeYYd2wynAV+5Ahe5BV4ysGHUGif tnS5tXnlbxSUPJoTE9J51Q== 0000042293-98-000012.txt : 19980817 0000042293-98-000012.hdr.sgml : 19980817 ACCESSION NUMBER: 0000042293-98-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOLDEN WEST FINANCIAL CORP /DE/ CENTRAL INDEX KEY: 0000042293 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 952080059 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04629 FILM NUMBER: 98687173 BUSINESS ADDRESS: STREET 1: 1901 HARRISON STREET CITY: OAKLAND STATE: CA ZIP: 94612 BUSINESS PHONE: 5104663420 MAIL ADDRESS: STREET 2: 1901 HARRISON STREET CITY: OAKLAND STATE: CA ZIP: 94612 FORMER COMPANY: FORMER CONFORMED NAME: TRANS WORLD FINANCIAL CORP DATE OF NAME CHANGE: 19760806 FORMER COMPANY: FORMER CONFORMED NAME: TRANS WORLD FINANCIAL CO DATE OF NAME CHANGE: 19751124 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q For Quarter Ended June 30, 1998 Commission File Number 1-4629 GOLDEN WEST FINANCIAL CORPORATION - ------------------------------------------------------------------------------- Delaware 95-2080059 - ---------------------------------------- ----------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1901 Harrison Street, Oakland, California 94612 - ----------------------------------------- --------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (510) 446-3420 ------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---------- ----------- The number of shares outstanding of the registrant's common stock on July 31, 1998, was 57,599,599 shares. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The consolidated financial statements of Golden West Financial Corporation and subsidiaries (the Company) for the three and six months ended June 30, 1998 and 1997 are unaudited. In the opinion of the Company, all adjustments (consisting only of normal recurring accruals) that are necessary for a fair statement of the results for such three and six month periods have been included. The operating results for the three and six months ended June 30, 1998, are not necessarily indicative of the results for the full year.
June 30 June 30 December 31 1998 1997 1997 ------------- ------------ ------------- (Unaudited) --------------------------- Assets: Cash $ 198,513 $ 130,667 $ 172,241 Securities available for sale at fair value 416,441 601,278 608,544 Other investments at cost 144,000 1,044,756 252,648 Mortgage-backed securities available for sale without recourse at 136,289 206,722 157,327 fair value Mortgage-backed securities held to maturity without recourse at 678,434 768,468 752,029 cost Mortgage-backed securities held to maturity with recourse at cost 8,306,056 3,077,534 3,030,390 Loans receivable 27,600,120 31,821,887 33,260,709 Interest earned but uncollected 209,687 217,309 216,923 Investment in capital stock of Federal Home Loan Banks--at cost which approximates fair value 708,382 572,157 590,244 Real estate held for sale or investment 44,065 73,436 62,006 Prepaid expenses and other assets 363,406 356,021 247,003 Premises and equipment--at cost less accumulated depreciation 261,836 224,847 240,207 ------------ ------------ ------------ $ 39,067,229 $39,095,082 $ 39,590,271 ============= ============ ============= Liabilities and Stockholders' Equity: Deposits $ 24,993,708 $24,036,660 $ 24,109,717 Advances from Federal Home Loan Banks 7,486,916 7,359,039 8,516,605 Securities sold under agreements to repurchase 1,816,433 2,954,221 2,334,048 Medium-term notes -0- 309,936 109,992 Accounts payable and accrued expenses 521,828 485,805 446,325 Taxes on income 313,634 248,759 265,065 Subordinated notes--net of discount 1,011,159 1,209,772 1,110,488 Stockholders' equity 2,923,551 2,490,890 2,698,031 ------------- ------------ ------------- $ 39,067,229 $39,095,082 $ 39,590,271 ============= ============ =============
Three Months Ended Six Months Ended June 30 June 30 ---------------------------- ---------------------------- 1998 1997 1998 1997 ------------- ------------ ------------ ------------ Interest Income: Interest on loans $ 587,188 $ 583,659 $ 1,216,066 $ 1,148,722 Interest on mortgage-backed securities 105,536 72,369 177,731 147,302 Interest and dividends on investments 47,845 34,211 101,975 68,494 ------------- ------------ ------------ ------------ 740,569 690,239 1,495,772 1,364,518 Interest Expense: Interest on deposits 321,079 294,122 636,289 574,442 Interest on advances 105,206 107,781 228,766 220,389 Interest on repurchase agreements 33,097 40,470 66,033 68,368 Interest on other borrowings 41,990 31,286 81,773 66,047 ------------ ------------ ------------- ------------ 501,372 473,659 1,012,861 929,246 ------------- ------------ ------------ ------------ Net Interest Income 239,197 216,580 482,911 435,272 Provision for loan losses 2,682 13,111 5,647 33,806 ------------- ------------ ------------ ------------ Net Interest Income after Provision for Loan Losses 236,515 203,469 477,264 401,466 Non-Interest Income: Fees 15,716 11,298 28,663 22,035 Gain on the sale of securities, MBS, and loans 19,077 3,061 21,584 4,284 Other 8,304 5,451 18,853 12,723 ------------- ------------ ------------ ------------ 43,097 19,810 69,100 39,042 Non-Interest Expense: General and administrative: Personnel 48,044 43,892 94,580 87,992 Occupancy 14,949 13,408 29,118 26,796 Deposit insurance 1,516 1,937 3,128 3,983 Advertising 3,218 2,342 5,464 4,760 Other 19,309 17,048 38,420 34,266 ------------- ------------ ------------ ------------ 87,036 78,627 170,710 157,797 Earnings Before Taxes on Income and Extraordinary Item 192,576 144,652 375,654 282,711 Taxes on Income 75,626 57,375 148,623 112,060 ------------- ------------ ------------ ------------ Earnings Before Extraordinary Item 116,950 87,277 227,031 170,651 Extraordinary Item: Federal Home Loan Bank advance prepayment penalty, net of tax of $5,325 -0- -0- (7,710) -0- ------------- ------------ ------------ ------------ Net Earnings $ 116,950 $ 87,277 $ 219,321 $ 170,651 ============= ============ ============ ============ Basic Earnings Per Share Before Extraordinary $ 2.04 $ 1.53 $ 3.96 $ 2.99 Basic Earnings Per Share on Extraordinary Item, Net of Tax 0.00 0.00 (0.13) 0.00 ------------- ------------ ------------ ------------ Basic Earnings Per Share $ 2.04 $ 1.53 $ 3.83 $ 2.99 ============= ============ ============ ============ Diluted Earnings Per Share Before Extraordinary $ 2.01 $ 1.51 $ 3.91 $ 2.94 Diluted Earnings Per Share on Extraordinary Item, Net of Tax 0.00 0.00 (0.13) 0.00 ------------- ------------ ------------ ------------ Diluted Earnings Per Share $ 2.01 $ 1.51 $ 3.78 $ 2.94 ============= ============ ============ ============
Golden West Financial Corporation Consolidated Statement of Cash Flows (Unaudited) (Dollars in thousands)
Three Months Ended Six Months Ended June 30 June 30 -------------------------- --------------------------- 1998 1997 1998 1997 ----------- ----------- ------------ ------------ Cash Flows From Operating Activities: Net earnings $ 116,950 $ 87,277 $ 219,321 $ 170,651 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Extraordinary item -0- -0- 13,035 -0- Provision for loan losses 2,682 13,111 5,647 33,806 Amortization of loan fees and discounts (5,989) (4,810) (11,094) (9,251) Depreciation and amortization 5,967 5,164 11,691 10,307 Loans originated for sale (212,419) (45,191) (333,958) (98,751) Sales of loans originated for sale 268,226 48,796 400,166 98,304 Decrease (increase) in interest earned but 3,903 (5,029) 7,236 4,295 uncollected Federal Home Loan Bank stock dividends (10,332) (8,596) (27,715) (24,318) Increase in prepaid expenses and other assets . (15,228) (62,881) (106,832) (121,462) Increase in accounts payable and accrued 15,648 3,470 74,472 33,623 expenses Increase (decrease) in taxes on income (20,707) (29,799) 43,231 24,869 Other, net (1,445) (3,244) (5,872) (7,870) ----------- ----------- ----------- ----------- Net cash provided by (used in) operating 147,256 (1,732) 289,328 114,203 activities Cash Flows From Investing Activities: New loan activity: New real estate loans originated for portfolio (1,859,213) (2,109,072) (3,204,867) (3,450,976) Real estate loans purchased (642) (608) (1,689) (1,260) Other, net (9,554) (14,849) (20,371) (23,119) ----------- ----------- ----------- ----------- (1,869,409) (2,124,529) (3,226,927) (3,475,355) Real estate loan principal payments: Monthly payments 159,588 170,310 334,507 334,559 Payoffs, net of foreclosures 1,476,320 699,963 2,554,813 1,187,683 Refinances 79,203 70,223 178,079 127,606 ----------- ----------- ----------- ----------- 1,715,111 940,496 3,067,399 1,649,848 Repayments of mortgage-backed securities 367,349 132,561 515,869 238,586 Proceeds from sales of real estate 35,131 60,636 86,536 113,316 Purchases of securities available for sale (127,459) (1,177) (127,481) (1,187) Sales of securities available for sale 81,150 961 81,373 961 Matured securities available for sale 243,629 48,452 253,671 224,053 Decrease in other investments 245,044 493,795 108,648 34,076 Purchases of Federal Home Loan Bank stock (99,004) -0- (99,994) (56,239) Additions to premises and equipment (20,234) (8,785) (35,297) (23,132) ----------- ----------- ----------- ----------- Net cash provided by (used in) investing 571,308 (457,590) 623,797 (1,295,073) activities
Golden West Financial Corporation Consolidated Statement of Cash Flows (Continued) (Unaudited) (Dollars in thousands)
Three Months Ended Six Months Ended June 30 June 30 -------------------------- --------------------------- 1998 1997 1998 1997 ----------- ------------ ------------ ------------ Cash Flows From Financing Activities: Deposit activity: Increase in deposits, net $ 171,678 $ 854,966 $ 375,813 $ 1,473,148 Interest credited 262,760 237,770 508,178 463,578 ------------ ------------ ------------ ------------ 434,438 1,092,736 883,991 1,936,726 Additions to Federal Home Loan Bank advances 2,553,300 22,600 3,264,500 44,200 Repayments of Federal Home Loan Bank advances (2,718,566) (797,490) (4,306,273) (1,483,689) Proceeds from agreements to repurchase securities 1,808,100 1,011,791 3,063,990 2,436,493 Repayments of agreements to repurchase securities (2,176,658) (719,749) (3,581,605) (1,390,398) Repayments of medium-term notes -0- -0- (110,000) (280,000) Proceeds from federal funds purchased 35,060,000 -0- 79,850,000 -0- Repayments of federal funds purchased (35,560,000) -0- (79,850,000) -0- Repayment of subordinated debt (100,000) (115,000) (100,000) (115,000) Dividends on common stock (7,163) (6,253) (14,303) (12,554) Exercise of stock options 8,585 320 12,847 2,329 Purchase and retirement of Company stock -0- (31,938) -0- (45,289) ------------ ------------ ------------ ------------ Net cash provided by (used in) financing (697,964) 457,017 (886,853) 1,092,818 activities ------------ ------------ ------------ ------------ Net Increase (Decrease) in Cash 20,600 (2,305) 26,272 (88,052) Cash at beginning of period 177,913 132,972 172,241 218,719 ============ ============ ============ ============ Cash at end of period $ 198,513 $ 130,667 $ 198,513 $ 130,667 ============ ============ ============ ============ Supplemental cash flow information: Cash paid for: Interest $ 507,214 $ 476,118 $ 1,014,588 $ 928,642 Income taxes 100,251 87,903 104,082 88,514 Cash received for interest and dividends 744,472 685,210 1,503,008 1,368,813 Noncash investing activities: Loans transferred to foreclosed real estate 27,492 54,069 59,053 104,726 Loans securitized into mortgage-backed securities with recourse 5,197,466 -0- 5,698,458 -0-
Golden West Financial Corporation Consolidated Statement of Stockholders' Equity (Unaudited) (Dollars in thousands)
For the Six Months Ended June 30, 1998 ------------------------------------------------------------------------------------- Accumulated Comprehensive Income From Additional Unrealized Total Common Paid-in Retained Gains On Stockholders' Comprehensive Stock Capital Earnings Securities Equity Income ---------- ---------- ---------- -------------- ------------ --------------- Balance at January 1, 1998 $ 5,707 $ 85,532 $ 2,457,055 $ 149,737 $ 2,698,031 Comprehensive income: Net earnings -0- -0- 219,321 219,321 $ 219,321 Change in unrealized gains on securities available for sale, net of tax -0- -0- -0- 15,677 15,677 15,677 Reclassification adjustment for gains included in income -0- -0- -0- (8,022) (8,022) (8,022) Cash dividends on common stock ($.25 per share) -0- -0- (14,303) (14,303) Common stock issued upon exercise of stock options, including tax benefits 52 12,795 -0- -0- 12,847 --------- ----------- ------------ ------------ ------------ ------------ Balance at June 30, 1998 $ 5,759 $ 98,327 $ 2,662,073 $ 157,392 $ 2,923,551 $ 226,976 ========= =========== ============ ============ ============ ============
For the Six Months Ended June 30, 1997 ------------------------------------------------------------------------------------- Accumulated Comprehensive Income From Additional Unrealized Total Common Paid-in Retained Gains On Stockholders' Comprehensive Stock Capital Earnings Securities Equity Income ---------- ---------- ------------ -------------- ------------ --------------- Balance at January 1, 1997 $ 5,734 $ 67,953 $ 2,177,098 $ 99,692 $ 2,350,477 Comprehensive income: Net earnings -0- -0- 170,651 170,651 $ 170,651 Change in unrealized gains on securities available for sale, net of tax -0- -0- -0- 27,020 27,020 27,020 Reclassification adjustment for gains included in income -0- -0- -0- (1,744) (1,744) (1,744) Cash dividends on common stock ($.22 per share) -0- -0- (12,554) (12,554) Common stock issued upon exercise of stock options, including tax benefits 9 2,320 -0- 2,329 Purchase and retirement of Company stock (69) -0- (45,220) (45,289) ----------- ----------- ------------ ----------- ----------- ----------- Balance at June 30, 1997 $ 5,674 $ 70,273 $ 2,289,975 $ 124,968 $ 2,490,890 $ 195,927 =========== =========== ============ =========== =========== ===========
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion and analysis included herein covers those material changes in liquidity and capital resources that have occurred since December 31, 1997, as well as certain material changes in results of operations during the three and six month periods ended June 30, 1998, and 1997, respectively. The following narrative is written with the presumption that the users have read or have access to the Company's 1997 Annual Report on Form 10-K, which contains the latest audited financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 1997, and for the year then ended. Therefore, only material changes in financial condition and results of operations are discussed herein. NEW ACCOUNTING PRONOUNCEMENT Effective January 1, 1998, Golden West adopted Statement 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. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). This Statement establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company has not yet completed a full assessment of the impact of this statement on its financial statements and results of operations.
Golden West Financial Corporation Financial Highlights (Unaudited) (Dollars in thousands except per share figures) June 30 June 30 December 31 1998 1997 1997 ------------ ------------ ------------- Assets $ 39,067,229 $ 39,095,082 $ 39,590,271 Loans receivable 27,600,120 31,821,887 33,260,709 Mortgage-backed securities 9,120,779 4,052,724 3,939,746 Deposits 24,993,708 24,036,660 24,109,717 Stockholders' equity 2,923,551 2,490,890 2,698,031 Stockholders' equity/total assets 7.48% 6.37% 6.81% Book value per common share $ 50.76 $ 43.90 $ 47.28 Common shares outstanding 57,590,999 56,738,514 57,068,504 Yield on loan portfolio 7.51% 7.42% 7.53% Yield on mortgage-backed securities 7.23% 7.10% 7.23% Yield on investments 6.89% 6.51% 6.48% Yield on earning assets 7.44% 7.35% 7.48% Cost of deposits 4.99% 5.10% 5.04% Cost of borrowings 6.02% 5.97% 5.99% Cost of funds 5.29% 5.38% 5.36% Yield on earning assets less cost of funds 2.15% 1.97% 2.12% Ratio of nonperforming assets to total assets .89% 1.11% .96% Ratio of troubled debt restructured to total assets .08% .19% .11% World Savings Bank, a Federal Savings Bank: Total assets $ 28,789,260 $ 20,240,335 $ 24,608,701 Net worth 1,931,153 1,341,396 1,605,561 Net worth/total assets 6.71% 6.63% 6.52% Regulatory capital ratios: Core capital 6.69% 6.61% 6.51% Risk-based capital 12.91% 13.22% 12.80% World Savings and Loan Association: Total assets $ 10,103,271 $ 18,767,337 $ 15,446,575 Net worth 1,049,734 1,260,995 1,121,961 Net worth/total assets 10.39% 6.72% 7.26% Regulatory capital ratios: Core capital 9.00% 6.13% 6.42% Risk-based capital 17.78% 13.30% 13.64%
Golden West Financial Corporation Financial Highlights (Unaudited) (Dollars in thousands except per share figures) Three Months Ended Six Months Ended June 30 June 30 ------------------------- -------------------------- 1998 1997 1998 1997 ----------- ----------- ------------ ----------- New real estate loans originated $2,071,632 $2,154,263 $ 3,538,825 $3,549,727 Average yield on new real estate loans 7.76% 7.51% 7.76% 7.52% Increase in deposits (a) $ 434,438 $1,092,736 $ 883,991 $1,936,726 Earnings before extraordinary item 116,950 87,277 227,031 170,651 Net earnings 116,950 87,277 219,321 170,651 Basic earnings per share before extraordinary item 2.04 1.53 3.96 2.99 Diluted earnings per share before extraordinary item 2.01 1.51 3.91 2.94 Basic earnings per share 2.04 1.53 3.83 2.99 Diluted earnings per share 2.01 1.51 3.78 2.94 Cash dividends on common stock .125 .11 .25 .22 Average common shares outstanding 57,338,227 56,892,526 57,233,046 57,102,416 Average diluted common shares outstanding 58,110,247 57,815,785 57,969,377 58,030,202 Ratios:(b) Net earnings/average net worth (ROE)(c) 16.31% 14.24% 15.58% 14.09% Net earnings/average assets (ROA)(c) 1.19% .90% 1.11% .89% Net interest income/average assets 2.43% 2.24% 2.44% 2.27% General and administrative expense/average assets .88% .81% .86% .82%
(a) Includes an increase of $674 million of wholesale deposits for the quarter ended June 30, 1997. Includes a decrease of $525 million and an increase of $1.1 billion of wholesale deposits for the six months ended June 30, 1998 and 1997, respectively. (b) Ratios are annualized by multiplying the quarterly computation by four and the semi-annual computation by two. Averages are computed by adding the beginning balance and each monthend balance during the quarter and six-month period and dividing by four and seven, respectively. (c) The year-to-date ratios as of June 30, 1998 include the extraordinary item. The year-to-date ratios as of June 30, 1998 excluding the extraordinary item are: ROE 16.13% and ROA 1.15%. FINANCIAL CONDITION The consolidated condensed balance sheet shown in the table below presents the Company's assets and liabilities in percentage terms at June 30, 1998 and 1997, and December 31, 1997. The reader is referred to page 52 of the Company's 1997 Annual Report on Form 10-K for similar information for the years 1994 through 1997 and a discussion of the changes in the composition of the Company's assets and liabilities in those years.
TABLE 1 Consolidated Condensed Balance Sheet In Percentage Terms June 30 -------------------- December 31 1998 1997 1997 ------- ------- ------------- Assets: Cash and investments 1.9% 4.5% 2.6% Mortgage-backed securities 23.3 10.4 10.0 Loans receivable 70.7 81.4 84.0 Other assets 4.1 3.7 3.4 ------- ------- ------- 100.0% 100.0% 100.0% ======= ======= ======= Liabilities and Stockholders' Equity: Deposits 64.0% 61.5% 60.9% Federal Home Loan Bank advances 19.2 18.8 21.5 Securities sold under agreements to repurchase 4.6 7.6 5.9 Medium-term notes 0.0 0.8 0.3 Other liabilities 2.1 1.8 1.8 Subordinated debt 2.6 3.1 2.8 Stockholders' equity 7.5 6.4 6.8 ------- ------- ------- 100.0% 100.0% 100.0% ======= ======= =======
As the above table shows, deposits represent the majority of the Company's liabilities. The largest asset component is mortgage-backed securities and the loan portfolio, which consists primarily of long-term mortgages. The disparity between the repricing (maturity or interest rate change) of deposits and borrowings and the repricing of mortgage loans and investments can have a material impact on the Company's results of operations. The difference between the repricing characteristics of assets and liabilities is commonly referred to as "the gap." The following gap table shows that, as of June 30, 1998, 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 the Company's earnings would rise when interest rates increase and would fall when interest rates decrease. However, the Company'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 index Golden West uses to determine the rate on the 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.
TABLE 2 Repricing of Interest-Earning Assets and Interest-Bearing Liabilities, Repricing Gaps, and Gap Ratio As of June 30, 1998 (Dollars in millions) Projected Repricing(a) ----------------------------------------------------------------- 0 - 3 4 - 12 1 - 5 Over 5 Months Months Years Years Total ----------- ---------- ----------- ---------- ----------- Interest-Earning Assets: Investments $ 531 $ 27 $ -0- $ 2 $ 560 Mortgage-backed securities 8,391 99 339 292 9,121 Loans receivable: Rate-sensitive 23,484 1,507 151 -0- 25,142 Fixed-rate 129 286 977 869 2,261 Other(b) 857 -0- -0- -0- 857 Impact of interest rate swaps 442 248 (454) (236) -0- ------------ ---------- ----------- ---------- ----------- Total $ 33,834 $ 2,167 $ 1,013 $ 927 $ 37,941 =========== ========== =========== ========== =========== Interest-Bearing Liabilities(c): Deposits $ 13,003 $ 9,721 $ 2,259 $ 11 $ 24,994 FHLB advances 6,025 1,050 122 290 7,487 Other borrowings 1,910 -0- 718 199 2,827 Impact of interest rate swaps 474 (331) (143) -0- -0- ----------- ---------- ----------- ---------- ----------- Total $ 21,412 $ 10,440 $ 2,956 $ 500 $ 35,308 =========== ========== =========== ========== =========== Repricing gap $ 12,422 $ (8,273) $ (1,943) $ 427 $ 2,633 =========== ========== =========== ========== =========== Cumulative gap $ 12,422 $ 4,149 $ 2,206 $ 2,633 =========== ========== =========== ========== Cumulative gap as a percentage of total assets 31.8% 10.6% 5.6% =========== ========== ===========
(a) Based on scheduled maturity or scheduled repricing; loans reflect scheduled repayments and projected prepayments of principal. (b) Includes cash in banks and Federal Home Loan Bank (FHLB) stock. (c) Liabilities with no maturity date, such as checking, passbook and money market deposit accounts, are assigned zero months. CASH AND INVESTMENTS The Office of Thrift Supervision (OTS) requires insured institutions, such as World Savings Bank, FSB (WFSB), and World Savings and Loan Association (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 from a monthly to a quarterly calculation and is either equal to 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 calculated monthly and was equal to 5% of the monthly average of deposits and short-term borrowings. WFSB's regulatory liquidity ratios were 16% and 11% for the quarters ended June 30, 1998 and December 31, 1997, respectively. WFSB's regulatory average liquidity ratio was 5.5% for the month ended June 30, 1997. WSL's regulatory liquidity ratios were 15% and 12% for the quarters ended June 30, 1998 and December 31, 1997, respectively. WSL's regulatory average liquidity ratio was 7% for the month ended June 30, 1997. The increase in the average liquidity ratios at June 30, 1998 and December 31, 1997, as compared to June 30, 1997, was due to a change in the revised OTS liquidity regulation which expanded the assets qualifying for the calculation. At June 30, 1998 and 1997, and December 31, 1997, the Company had securities available for sale in the amount of $416 million, $601 million, and $609 million, respectively, including unrealized gains on securities available for sale of $260 million, $203 million, and $245 million, respectively. At June 30, 1998 and 1997, and December 31, 1997, the Company had no securities held to maturity or for trading in its investment securities portfolio. Included in the securities available for sale at June 30, 1998 and 1997, and December 31, 1997, were collateralized mortgage obligations (CMOs) in the amount of $45 million, $96 million, and $71 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 June 30, 1998, all CMOs qualified for inclusion in the regulatory liquidity measurement. MORTGAGE-BACKED SECURITIES At June 30, 1998 and 1997, and December 31, 1997, the Company had mortgage-backed securities (MBS) held to maturity in the amount of $9.0 billion, $3.8 billion, and $3.8 billion, respectively, including Federal National Mortgage Association (FNMA) MBS subject to full credit recourse to the Company of $4.5 billion at June 30, 1998, $3.1 billion at June 30, 1997 and $3.0 billion at December 31, 1997 and including $3.8 billion of securities issued by a Real Estate Mortgage Investment Conduit (REMIC). At June 30, 1998 and 1997, and December 31, 1997, the Company had mortgage-backed securities available for sale in the amount of $136 million, $207 million, and $157 million, respectively, including unrealized gains on MBS available for sale of $6 million, $8 million, and $8 million, respectively. At June 30, 1998 and 1997 and December 31, 1997, the Company had no trading MBS. During the second quarter of 1998, the Company securitized $3.9 billion of mortgage loans into a Real Estate Mortgage Investment Conduit. Securities issued by the REMIC are being used as collateral for advances from the FHLB of Dallas. The securities issued by the REMIC are classified as MBS held to maturity. During the first and second quarters of 1998, the Company securitized $501 million and $1.3 billion, respectively, of adjustable rate mortgages (ARMs) into FNMA COFI-indexed MBS. During the fourth quarter of 1997, the Company desecuritized $856 million of FNMA COFI-indexed MBS in November and securitized $1.0 billion of ARMs into FNMA COFI-indexed MBS in December. 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. Repayments of MBS during the second quarter and first six months of 1998 were $367 million and $516 million, respectively, compared to $133 million and $239 million in the same periods of 1997. MBS repayments were higher during the first six months of 1998 as compared to the first six months of 1997 due to an increase in total MBS outstanding and an increase in prepayments on the underlying mortgages. LOAN PORTFOLIO LOAN VOLUME New loan originations for the three and six months ended June 30, 1998, amounted to $2.1 billion and $3.5 billion, respectively, compared to $2.2 billion and $3.5 billion for the same periods in 1997. The 1998 loan volume was similar to the 1997 loan volume due to a continued strong housing market and lower interest rates causing more borrowers to refinance. Refinanced loans constituted 42% and 43% of new loan originations for the three and six months ended June 30, 1998, compared to 31% and 33% for the three and six months ended June 30, 1997. Loans originated for sale amounted to $212 million and $334 million for the three and six months ended June 30, 1998, respectively, compared to $45 million and $99 million for the same periods in 1997. The Company continues to sell most of its fixed-rate originations. The Company has lending operations in 26 states. The primary source of mortgage origination is loans secured by residential properties in California. For the three and six months ended June 30, 1998, 62% and 61%, respectively, of total loan originations were on residential properties in California compared to 53% and 52% for the same periods in 1997. The five largest states, other than California, for originations for the three and six months ended June 30, 1998, were Florida, Texas, Colorado, Illinois and New Jersey with a combined total of 20% and 21% of total originations, respectively. The percentage of the total loan portfolio (excluding mortgage-backed securities with recourse) that is comprised of residential loans in California was 56% at June 30, 1998 compared to 67% at June 30, 1997, and 63% at December 31, 1997. The percentage of the total loan portfolio (including mortgage-backed securities with recourse) that is comprised of residential loans in California was 66% at June 30, 1998 compared to 67% at June 30, 1997, and 66% at December 31, 1997. The tables on the following two pages show the Company's loan portfolio by state at June 30, 1998 and 1997.
TABLE 3 Loan Portfolio by State June 30, 1998 (Dollars in thousands) Residential Real Estate Commercial Loans as ------------------------- Real Total a % of State 1 - 4 5+ Land Estate Loans(a) Portfolio - --------------- ------------ ----------- ---------- --------------- ----------- ------------ California $20,354,069 $3,414,490 $ 223 $ 43,343 $23,812,125 65.83% Texas 1,407,972 74,256 529 1,405 1,484,162 4.11 Florida 1,422,475 19,575 5 819 1,442,874 3.99 Illinois 1,202,328 158,430 -0- 1,529 1,362,287 3.77 Colorado 1,060,890 221,099 -0- 6,951 1,288,940 3.57 New Jersey 1,240,886 -0- -0- 5,267 1,246,153 3.45 Washington 534,073 408,648 -0- 702 943,423 2.61 Arizona 761,859 25,980 -0- 532 788,371 2.18 Pennsylvania 636,666 4,191 -0- 3,054 643,911 1.78 Virginia 514,365 8,461 -0- 1,250 524,076 1.45 Connecticut 492,953 -0- -0- 17 492,970 1.36 Maryland 358,397 2,136 -0- 463 360,996 1.00 Oregon 255,116 14,527 -0- 244 269,887 0.75 Minnesota 213,871 8,073 -0- -0- 221,944 0.61 Utah 207,871 51 -0- 1,460 209,382 0.58 Nevada 176,984 944 -0- -0- 177,928 0.49 Kansas 168,717 4,990 -0- 164 173,871 0.48 Wisconsin 168,218 3,826 -0- -0- 172,044 0.48 Massachusetts 133,710 -0- -0- -0- 133,710 0.37 Missouri 88,044 5,662 -0- -0- 93,706 0.26 Washington DC 53,429 -0- -0- -0- 53,429 0.15 New Mexico 50,032 -0- -0- -0- 50,032 0.14 New York 39,509 -0- -0- -0- 39,509 0.11 Delaware 33,109 -0- -0- -0- 33,109 0.09 Idaho 31,562 -0- -0- -0- 31,562 0.09 Georgia 27,634 -0- -0- 1,375 29,009 0.08 North Carolina 21,943 -0- -0- -0- 21,943 0.06 Michigan 20,962 -0- -0- -0- 20,962 0.06 Ohio 8,924 1,274 73 3,061 13,332 0.04 South Dakota 11,397 -0- -0- -0- 11,397 0.03 Other 7,737 -0- -0- 2,792 10,529 0.03 ------------ ----------- ---------- ------------ ------------ --------- Totals $31,705,702 $4,376,613 $ 830 $ 74,428 36,157,573 100.00% ============ =========== ========== ============ ========= SFAS 91 deferred loan fees (28,652) Loan discount on purchased loans (3,410) Undisbursed loan funds (4,156) Allowance for loan losses (239,537) Loans to facilitate (LTF) interest reserve (564) Troubled debt restructured (TDR) interest reserve (2,869) Loans on deposits 27,791 ------------ Total loan portfolio and loans securitized into FNMA MBS with recourse and REMIC MBS 35,906,176 Loans securitized into FNMA MBS with recourse and REMIC MBS (8,306,056)(b) ------------ Loans receivable $27,600,120 ============
(a) The Company has no commercial loans. (b) The above schedule includes the June 30, 1998 balances of adjustable rate loans that have been securitized with full recourse into Federal National Mortgage Association mortgage-backed securities and loans that have been securitized into REMIC mortgage-backed securities.
TABLE 4 Loan Portfolio by State June 30, 1997 (Dollars in thousands) Residential Real Estate Commercial Loans as ------------------------- Real Total a % of State 1 - 4 5+ Land Estate Loans (a) Portfolio - --------------- ------------ ----------- ---------- --------------- ----------- ------------ California $20,327,373 $3,397,605 $ 244 $ 53,442 $23,778,664 67.65% Texas 1,268,634 105,901 567 1,521 1,376,623 3.92 Illinois 1,142,439 178,242 -0- 1,712 1,322,393 3.76 Colorado 1,043,506 233,298 -0- 7,059 1,283,863 3.65 Florida 1,187,442 20,192 59 932 1,208,625 3.44 New Jersey 1,132,637 404 -0- 5,594 1,138,635 3.24 Washington 478,018 382,828 -0- 746 861,592 2.45 Arizona 700,736 45,145 -0- 568 746,449 2.12 Pennsylvania 538,703 4,240 -0- 3,414 546,357 1.55 Virginia 516,245 8,550 -0- 1,397 526,192 1.50 Connecticut 451,883 -0- -0- 21 451,904 1.29 Maryland 351,507 2,178 -0- 521 354,206 1.01 Oregon 240,586 11,539 -0- 246 252,371 0.72 Nevada 190,579 1,064 -0- -0- 191,643 0.55 Utah 182,707 57 -0- 1,685 184,449 0.52 Minnesota 163,919 8,171 -0- -0- 172,090 0.49 Kansas 155,432 4,823 -0- 183 160,438 0.46 Wisconsin 123,442 3,879 -0- -0- 127,321 0.36 Massachusetts 101,971 -0- -0- 20 101,991 0.29 Missouri 77,011 6,276 -0- -0- 83,287 0.24 Washington DC 47,912 -0- -0- -0- 47,912 0.14 New York 46,359 -0- -0- -0- 46,359 0.13 New Mexico 41,547 -0- -0- -0- 41,547 0.12 Georgia 33,270 -0- -0- 1,637 34,907 0.10 Idaho 28,494 -0- -0- -0- 28,494 0.08 Delaware 26,548 -0- -0- -0- 26,548 0.08 Ohio 14,676 1,832 189 3,822 20,519 0.06 South Dakota 8,714 -0- -0- -0- 8,714 0.02 North Carolina 7,488 -0- -0- 476 7,964 0.02 Other 10,429 5 -0- 4,491 14,925 0.04 ------------ ----------- ---------- ------------ ------------ --------- Totals $30,640,207 $ 4,416,229 $ 1,059 $ 89,487 35,146,982 100.00% ============ =========== ========== ============ ========= SFAS 91 deferred loan fees (48,304) Loan discount on purchased loans (3,755) Undisbursed loan funds (4,069) Allowance for loan losses (216,651) Loans to facilitate interest reserve (668) Troubled debt restructured interest reserve (6,098) Loans on deposits 31,984 ------------ Total loan portfolio and loans securitized into FNMA MBS with recourse 34,899,421 Loans securitized into FNMA MBS with recourse (3,077,534)(b) ------------ Loans receivable $31,821,887 ============
(a) The Company has no commercial loans. (b) The above schedule includes the June 30, 1997 balances of adjustable rate loans that have been securitized with full recourse into Federal National Mortgage Association mortgage-backed securities, which can be used to collateralize reverse repurchase agreements. The Company continues to emphasize ARM loans with interest rates that change periodically in accordance with movements in specified indexes. The portion of the mortgage portfolio (excluding MBS) composed of rate-sensitive loans was 92% at June 30, 1998 and 1997, compared to 93% at December 31, 1997. The portion of the mortgage portfolio (including MBS) composed of rate-sensitive loans was 92% at June 30, 1998 compared to 91% at June 30, 1997 and December 31, 1997. The Company's ARM originations for the first half of 1998 constituted 87% of new mortgage loans made in 1998 compared to over 95% in the first half of 1997. The weighted average maximum lifetime cap rate on the Company's ARM loan portfolio (including MBS with recourse) was 12.67%, or 5.31% above the actual weighted average rate at June 30, 1998, versus 12.81%, or 5.55% above the weighted average rate at June 30, 1997. Approximately $5.1 billion of the Company's ARM loans (including MBS with recourse) have terms that state that the interest rate may not fall below a lifetime floor set at the time of origination or assumption. As of June 30, 1998, $522 million of ARM loans had reached their rate floors. The weighted average floor rate on the loans that had reached their floor was 7.74% at June 30, 1998 compared to 7.73% at June 30, 1997. Without the floor, the average yield on these loans would have been 7.16% at June 30, 1998 and 7.09% at June 30, 1997. Loan repayments consist of monthly loan amortization, loan payoffs, and refinances. For the three and six months ended June 30, 1998, loan repayments were $1.7 billion and $3.1 billion, respectively, compared to $940 million and $1.6 billion in the same periods of 1997. The increase in prepayments for the first half of 1998 as compared to the first six months of 1997 was due to an apparent surge in refinance activity. MORTGAGE SERVICING RIGHTS The Company accounts for mortgage servicing rights in accordance with SFAS 122 and SFAS 125. For the first quarter and first six months of 1998, the Company recognized gains of $4.4 million and $6.6 million, respectively, on the sale of loans due to the capitalization of servicing rights compared to $1.1 million and $2.1 million for the same periods in 1997. After amortization, the balance at June 30, 1998 and 1997 of the capitalized servicing rights was $15.7 million and $10.0 million, respectively. The book value of Golden West's servicing rights did not exceed the fair value at June 30, 1998 or 1997 and, therefore, no write-down of the servicing rights to their fair value was necessary. ASSET QUALITY One measure of the soundness of the Company's portfolio is its ratio of nonperforming assets (NPAs) to total assets. Nonperforming assets includes non-accrual loans (loans, including loans swapped into MBS with recourse, that are 90 days or more past due) and real estate acquired through foreclosure. No interest is recognized on non-accrual loans. The Company's troubled debt restructured (TDRs) is made up of loans on which delinquent payments have been capitalized or on which temporary interest rate reductions have been made, primarily to customers adversely impacted by economic conditions. The following table shows the components of the Company's nonperforming assets and troubled debt restructured and the various ratios to total assets.
TABLE 5 Nonperforming Assets and Troubled Debt Restructured (Dollars in thousands) June 30 -------------------------- December 31 1998 1997 1997 ----------- ------------ -------------- Non-accrual loans $ 302,922 $ 361,860 $ 317,550 Real estate acquired through foreclosure 43,643 72,697 61,517 Real estate in judgment -0- 191 67 ----------- ------------ ------------ Total nonperforming assets $ 346,565 $ 434,748 $ 379,134 =========== ============ ============ TDRs $ 31,978 $ 75,834 $ 43,795 =========== ============ ============ Ratio of NPAs to total assets 0.89% 1.11% .96% =========== ============ ============ Ratio of TDRs to total assets 0.08% .19% .11% =========== ============ ============ Ratio of NPAs and TDRs to total assets 0.97% 1.30% 1.07% =========== ============ ============
The decrease in NPAs during 1998 reflects the improving California economy. The Company continues to closely monitor all delinquencies and takes appropriate steps to protect its interests. Interest foregone on non-accrual loans is fully-reserved and amounted to $2 million and $5 million in the second quarter and first six months of 1998 compared to $4 million and $9 million for the same periods of 1997. Interest foregone on TDRs amounted to $241 thousand and $527 thousand for the three and six months ended June 30, 1998, compared to $555 thousand and $1.1 million for the three and six months ended June 30, 1997. The tables on the following two pages show the Company's nonperforming assets by state at June 30, 1998 and 1997.
TABLE 6 Nonperforming Assets by State June 30, 1998 (Dollars in thousands) Non-Accrual Loans (a) Real Estate Owned ---------------------------------- -------------------------------- Residential Commercial Commercial NPAs as Real Estate Real Residential Real Total a% of State 1 -4 5+ Estate 1 - 4 5+ Estate NPAs(b) Loans - ---------------- --------- --------- -------- ------- --------- -------- --------- --------- California $209,013 $ 10,454 $ 453 $38,018 $ 1,389 $ -0- $259,327 1.09% Texas 7,463 -0- -0- 1,078 -0- -0- 8,541 0.58 Florida 13,447 -0- 187 390 -0- -0- 14,024 0.97 Illinois 10,572 220 -0- 818 -0- -0- 11,610 0.85 Colorado 1,904 -0- 3 -0- -0- -0- 1,907 0.15 New Jersey 17,249 -0- 210 704 -0- -0- 18,163 1.46 Washington 1,577 747 -0- 111 -0- -0- 2,435 0.26 Arizona 1,700 -0- -0- 493 -0- -0- 2,193 0.28 Pennsylvania 7,066 -0- -0- 289 -0- -0- 7,355 1.14 Virginia 2,012 -0- -0- 150 -0- -0- 2,162 0.41 Connecticut 3,656 -0- -0- 194 -0- -0- 3,850 0.78 Maryland 1,789 -0- -0- 170 -0- -0- 1,959 0.54 Oregon 646 -0- -0- -0- -0- -0- 646 0.24 Minnesota 1,336 -0- -0- 47 -0- -0- 1,383 0.62 Utah 2,147 -0- -0- -0- -0- -0- 2,147 1.03 Nevada 2,483 -0- -0- 270 -0- -0- 2,753 1.55 Kansas 361 40 -0- -0- -0- -0- 401 0.23 Wisconsin 520 -0- -0- -0- -0- -0- 520 0.30 Massachusetts 369 -0- -0- -0- -0- -0- 369 0.28 Missouri 234 -0- -0- 91 162 -0- 487 0.52 Washington, DC 101 -0- -0- -0- -0- -0- 101 0.19 New Mexico 407 -0- -0- -0- -0- -0- 407 0.81 New York 3,309 -0- -0- 104 -0- 11 3,424 8.67 Delaware 81 -0- -0- -0- -0- -0- 81 0.24 Idaho 235 -0- -0- -0- -0- -0- 235 0.74 Georgia 819 -0- -0- 93 -0- -0- 912 3.14 North Carolina -0- -0- -0- -0- -0- -0- -0- 0.00 Michigan 14 -0- -0- -0- -0- -0- 14 0.07 Ohio 2 -0- -0- -0- -0- -0- 2 0.02 South Dakota 72 -0- -0- -0- -0- -0- 72 0.63 Other 24 -0- -0- -0- -0- -0- 24 0.22 --------- --------- -------- ------- --------- -------- --------- ----- Totals $290,608 $ 11,461 $ 853 $43,020 $ 1,551 $ 11 347,504 0.96% ========= ========= ======== ======= ========= ======== REO general valuation allowance (939) 0.00 --------- ----- Total nonperforming assets $346,565 0.96% ========= =====
(a) Non-accruals loans are 90 days or more past due and have no unpaid interest accrued. (b) During the past four years, the Company has securitized adjustable rate loans into FNMA mortgage-backed securities with full credit recourse. In addition, during the second quarter of 1998, the Company securitized mortgage loans into REMIC MBS. The June 30, 1998 balances of the related nonperforming assets are reflected in the amounts above.
TABLE 7 Nonperforming Assets by State June 30, 1997 (Dollars in thousands) Non-Accrual Loans (a) Real Estate Owned ---------------------------------- -------------------------------- Residential Commercial Commercial NPAs as Real Estate Real Residential Real Total a% of State 1 -4 5+ Estate 1 - 4 5+ Estate NPAs(b) Loans - ---------------- --------- --------- -------- ------- --------- -------- --------- --------- California $280,013 $ 12,211 $ 1,123 $59,394 $ 8,886 $ 2,167 $363,794 1.53% Texas 7,454 -0- -0- 711 -0- -0- 8,165 0.59 Illinois 8,148 223 -0- 367 -0- -0- 8,738 0.66 Colorado 1,814 -0- 3,088 -0- -0- -0- 4,902 0.38 Florida 7,008 -0- 195 515 -0- -0- 7,718 0.64 New Jersey 15,213 -0- 826 365 -0- -0- 16,404 1.44 Washington 2,525 -0- -0- -0- -0- -0- 2,525 0.29 Arizona 1,158 -0- -0- 210 -0- -0- 1,368 0.18 Pennsylvania 4,988 -0- 4 152 -0- -0- 5,144 0.94 Virginia 1,543 -0- -0- 524 -0- -0- 2,067 0.39 Connecticut 2,620 -0- -0- 590 -0- -0- 3,210 0.71 Maryland 1,627 -0- -0- 289 -0- -0- 1,916 0.54 Oregon 804 -0- -0- -0- -0- -0- 804 0.32 Nevada 1,252 -0- -0- 227 -0- -0- 1,479 0.77 Utah 375 -0- -0- -0- -0- -0- 375 0.20 Minnesota 506 -0- -0- -0- -0- -0- 506 0.29 Kansas 426 40 -0- -0- -0- -0- 466 0.29 Wisconsin 591 -0- -0- -0- -0- -0- 591 0.46 Massachusetts 160 -0- 20 -0- -0- -0- 180 0.18 Missouri 423 42 -0- 32 -0- -0- 497 0.60 Washington, DC 74 -0- -0- -0- -0- -0- 74 0.15 New York 3,412 -0- -0- 302 -0- -0- 3,714 8.01 New Mexico -0- -0- -0- -0- -0- -0- -0- 0.00 Georgia 1,784 -0- -0- -0- -0- -0- 1,784 5.11 Idaho -0- -0- -0- -0- -0- -0- -0- 0.00 Delaware 118 -0- -0- -0- -0- -0- 118 0.44 Ohio 7 -0- 2 -0- -0- -0- 9 0.04 South Dakota -0- -0- -0- -0- -0- -0- -0- 0.00 North Carolina -0- -0- -0- -0- -0- -0- -0- 0.00 Other 43 -0- -0- -0- -0- -0- 43 0.29 --------- --------- -------- ------- --------- -------- --------- ----- Totals $344,086 $ 12,516 $ 5,258 $63,678 $ 8,886 $ 2,167 436,591 1.24% ========= ========= ======== ======= ========= ======== REO general valuation allowance (1,843) (0.00) --------- ------ Total nonperforming assets $434,748 1.24% ========= ======
(a) Non-accruals loans are 90 days or more past due and have no unpaid interest accrued. (b) During 1995, 1996, and 1997, the Company securitized adjustable rate mortgages into FNMA mortgage-backed securities with full credit recourse. The June 30, 1997 balances of the related nonperforming assets are reflected in the amounts above. The Company provides specific valuation allowances for losses on loans when impaired, including loans securitized into MBS with recourse or loans sold with recourse, and on real estate owned when any significant and permanent decline in value is identified. The Company also utilizes a methodology, based on trends in the basic portfolio, for monitoring and estimating loan losses that is based on both historical experience in the loan portfolio and factors reflecting current economic conditions. This approach uses a database that identifies losses on loans and foreclosed real estate from past years to the present, broken down by year of origination, type of loan, and geographical area. Management is then able to estimate a range of general loss allowances to cover losses in the portfolio. In addition, periodic reviews are made of major loans and real estate owned, and major lending areas are regularly reviewed to determine potential problems. Where indicated, valuation allowances are established or adjusted. In estimating possible losses, consideration is given to the estimated sale price, cost of refurbishing, payment of delinquent taxes, cost of disposal, and cost of holding the property. Additions to and reductions from the allowances are reflected in current earnings. The table below shows the changes in the allowance for loan losses for the three months ended June 30, 1998 and 1997.
TABLE 8 Changes in Allowance for Loan Losses (Dollars in thousands) Three Months Ended Six Months Ended June 30 June 30 -------------------------- -------------------------- 1998 1997 1998 1997 ------------ ------------ ----------- ------------ Beginning allowance for loan losses $ 237,186 $ 209,077 $ 233,280 $ 195,702 Provision charged to expense 2,682 13,111 5,647 33,806 Less loans charged off (467) (5,747) -0- (13,305) Add recoveries 136 210 610 448 ------------ ------------ ----------- ------------ Ending allowance for loan losses $ 239,537 $ 216,651 $ 239,537 $ 216,651 ============ ============ =========== ============ Ratio of chargeoffs net of recoveries to average loans outstanding (including MBS with recourse) .00% .06% .00% .08% ============ ============ =========== ============ Ratio of allowance for loan losses to nonperforming assets 69.1% 49.8% =========== ============ Ratio of allowance for loan losses to total loans (including MBS with recourse) .67% .62% =========== ============
DEPOSITS Retail deposits increased during the second quarter of 1998 by $434 million, including interest credited of $263 million, compared to an increase of $419 million, including interest credited of $238 million, in the second quarter of 1997. Retail deposits increased during the first half of 1998 by $1.4 billion, including interest credited of $508 million, compared to an increase of $866 million, including interest credited of $464 million, in the first half of 1997. Retail deposits increased during the first six months of 1998 and 1997 primarily due to ongoing marketing efforts and competitive rates offered by the Company on its insured accounts. In addition, the Company began actively promoting market rate transaction accounts during the second half of 1997, which continued during the first half of 1998. Beginning in January 1997, the Company began a program to use brokers to sell certificates of deposit (CDs) to institutional investors. There were no outstanding wholesale CDs at June 30, 1998 as compared to $1.1 billion at June 30, 1997. The table below shows the Company's deposits by interest rate and by remaining maturity at June 30, 1998 and 1997.
TABLE 9 Deposits (Dollars in millions) June 30 --------------------------------------------------- 1998 1997 ---------------------- ----------------------- Rate* Amount Rate* Amount -------- ---------- --------- ---------- Deposits by interest rate: Interest-bearing checking accounts 3.23% $ 84 1.17% $ 276 Passbook accounts 2.22 544 2.22 545 Money market deposit accounts 4.28 6,040 3.02 1,940 Term certificate accounts with original maturities of: 4 weeks to 1 year 5.10 7,977 5.32 12,543 1 to 2 years 5.44 6,688 5.37 3,687 2 to 3 years 5.46 1,458 5.44 1,322 3 to 4 years 5.34 372 5.79 489 4 years and over 5.76 1,208 5.87 1,648 Retail jumbo CDs 5.34 622 5.51 515 Wholesale CDs 0.00 -0- 5.64 1,071 All other 7.56 1 7.67 1 ----------- ----------- $ 24,994 $ 24,037 =========== =========== Deposits by remaining maturity: No contractual maturity $ 6,668 $ 2,761 Maturity within one year: 3rd quarter 6,335 7,289 4th quarter 5,463 7,237 1st quarter 2,567 2,499 2nd quarter 1,691 1,371 ----------- ----------- 16,056 18,396 1 to 2 years 1,718 1,929 2 to 3 years 289 679 3 to 4 years 144 110 4 years and over 119 162 ----------- ----------- $ 24,994 $ 24,037 =========== ===========
* Weighted average interest rate, including the impact of interest rate swaps. At June 30, the weighted average cost of deposits was 4.99% (1998) and 5.10% (1997). ADVANCES FROM FEDERAL HOME LOAN BANKS The Company uses borrowings from the FHLB, also known as "advances," to supplement cash flow and to provide funds for loan origination activities. Advances are secured by pledges of certain loans and capital stock of the FHLB. FHLB advances amounted to $7.5 billion at June 30, 1998, compared to $7.4 billion and $8.5 billion at June 30, 1997, and December 31, 1997, respectively. During the first quarter of 1998, the Company notified the FHLB of San Francisco that it would pay off, before maturity, $2.9 billion of high-cost advances and, as a result, incurred a $13 million pre-tax charge during the first quarter of 1998 for the penalties associated with these prepayments. See Extraordinary Item discussion on page 30. During July 1998, the Company notified the FHLB that it would pay off an additional $1.5 billion, before maturity, of FHLB advances and, as a result, will incur an additional $8 million pre-tax charge during the third quarter of 1998 for the penalties associated with these prepayments. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE The Company borrows funds through transactions in which securities are sold under agreements to repurchase (Reverse Repos). Reverse Repos are entered into with selected major government securities dealers, large banks, and the Federal Home Loan Bank of San Francisco, typically using MBS from the Company's portfolio. Reverse Repos with dealers, banks and the Federal Home Loan Bank of San Francisco amounted to $1.8 billion, $3.0 billion, and $2.3 billion at June 30, 1998 and 1997, and December 31, 1997, respectively. The Company uses accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities in accordance with SFAS 125 and SFAS 127. The Company adopted SFAS 127 on January 1, 1998 and the adoption of SFAS 127 had no effect on the Company's financial condition and results of operations. OTHER BORROWINGS At June 30, 1998, Golden West, at the holding company level, had a total of $911 million of subordinated debt issued and outstanding. As of June 30, 1998, the Company's subordinated debt securities were rated A3 and A- by Moody's Investors Service (Moody's) and Standard & Poor's Corporation (S&P), respectively. At June 30, 1998, 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 June 30, 1998, the full amount was available for issuance. As of June 30, 1998, 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'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 at June 30, 1998. WSL had no medium-term notes outstanding under prior registrations at June 30, 1998, compared to $310 million at June 30, 1997, and $110 million at December 31, 1997. As of June 30, 1998, WSL's medium-term notes had a preliminary rating of A1 and A+ by Moody's and S&P, respectively. 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 June 30, 1998, WFSB had not issued any notes under this authority. STOCKHOLDERS' EQUITY The Company's stockholders' equity increased by $226 million during the first six months of 1998. The increase in stockholders' equity was a result of net earnings for the first six months of 1998 and an $8 million increase in market values of securities available for sale since December 31, 1997, partially offset by the payment of $14 million in quarterly dividends to stockholders. The Company's stockholders' equity increased by $140 million during the first six months of 1997. The increase in stockholders' equity was primarily as a result of net earnings for the first six months of 1997 and a $25 million increase in market values of securities available for sale since December 31, 1996, which were partially offset by the $45 million cost of the purchase of Company stock and the payment of $13 million in quarterly dividends to stockholders. Unrealized gains net of taxes on securities and MBS available for sale included in stockholders' equity at June 30, 1998 and 1997, and December 31, 1997, were $157 million, $125 million, and $150 million, respectively. During periods of low asset growth, the Company's capital ratios may build to levels well in excess of the amounts necessary to meet regulatory capital requirements. Golden West's Board of Directors periodically reviews alternative uses of excess capital, including faster growth and acquisitions. At times, the Board has determined that the purchase of the Company's common stock is a wise use of excess capital. Since 1993, through three separate actions, Golden West's Board of Directors has authorized the purchase by the Company of up to 12.2 million shares of Golden West's common stock. As of June 30, 1998, 8.5 million shares had been purchased and retired at a cost of $380 million since October 1993. The Company did not purchase any stock during the first six months of 1998. 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. WSL paid a $100 million dividend to Golden West in March and $100 million in June 1998. In addition, WSL has received approval from the OTS to pay up to $150 million more in upstream dividends to Golden West. Also, Golden West purchased from WSL, and subsequently contributed as capital to WFSB, $100 million of loans during the first quarter of 1998 and $100 million in loans during the second quarter of 1998. The Company has on file a shelf registration statement with the Securities and Exchange Commission to issue up to two million shares of its preferred stock. The preferred stock may be issued in one or more series, may have varying provisions and designations, and may be represented by depository shares. The preferred stock is not convertible into common stock. No preferred stock has yet been issued under the registration. The Company's preferred stock has been preliminarily rated a2 by Moody's. REGULATORY CAPITAL The OTS requires federally insured institutions, such as WFSB and WSL, to meet certain minimum capital requirements. Effective March 31, 1998, FIRREA's old 3% minimum requirement for Core (or Leverage) Capital has been superseded by a 4% minimum requirement under the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). The following table shows WFSB's regulatory capital ratios and compares them to the OTS minimum requirements at June 30, 1998 and 1997.
TABLE 10 World Savings Bank, a Federal Savings Bank Regulatory Capital Ratios (Dollars in thousands) June 30, 1998 June 30, 1997 ----------------------------------------------- ---------------------------------------------- ACTUAL REQUIRED ACTUAL REQUIRED ---------------------- ---------------------- ---------------------- ---------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ----------- --------- ----------- --------- ---------- --------- ---------- -------- Tangible $1,929,619 6.69% $ 432,456 1.50% $1,338,857 6.61% $ 304,005 1.50% Core 1,929,619 6.69 1,153,217 4.00 1,338,857 6.61 608,010 3.00 Risk-based 2,031,581 12.91 1,259,075 8.00 1,406,712 13.22 851,290 8.00
The following table shows WSL's current regulatory capital ratios and compares them to the OTS minimum requirements at June 30, 1998 and 1997. TABLE 11 World Savings and Loan Association Regulatory Capital Ratios (Dollars in thousands) June 30, 1998 June 30, 1997 ------------------------------------------------ ------------------------------------------------ ACTUAL REQUIRED ACTUAL REQUIRED ----------------------- ----------------------- ---------------------- ----------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ----------- --------- ----------- --------- ----------- -------- ----------- -------- Tangible $ 892,726 9.00% $ 148,730 1.50% $ 1,142,979 6.13% $ 279,515 1.50% Core 892,726 9.00 396,614 4.00 1,142,979 6.13 559,030 3.00 Risk-based 1,067,516 17.78 480,347 8.00 1,458,621 13.30 877,655 8.00
In addition, institutions whose exposure to interest rate risk as determined by the OTS is deemed to be above normal may be required to hold additional risk-based capital. The OTS has determined that neither WFSB nor WSL has above-normal exposure to interest rate risk. The OTS has adopted rules based upon five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The determination of whether an association falls into a certain classification depends primarily on its capital ratios. As of June 30, 1998, 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. The table below shows that WFSB's regulatory capital exceeds the requirements of the well capitalized classification at June 30, 1998.
TABLE 12 World Savings Bank, a Federal Savings Bank Regulatory Capital Compared to Well Capitalized Classification (Dollars in thousands) ACTUAL WELL CAPITALIZED ------------------------- -------------------------- Capital Ratio Capital Ratio ----------- ---------- ----------- ----------- Leverage $ 1,929,619 6.69% $ 1,441,521 5.00% Tier 1 risk-based 1,929,619 12.26 944,306 6.00 Total risk-based 2,031,581 12.91 1,573,844 10.00
The table below shows that WSL's regulatory capital exceeds the requirements of the well capitalized classification at June 30, 1998.
TABLE 13 World Savings and Loan Association Regulatory Capital Compared to Well Capitalized Classification (Dollars in thousands) ACTUAL WELL CAPITALIZED ------------------------- -------------------------- Capital Ratio Capital Ratio ----------- ---------- ----------- ----------- Leverage $ 892,726 9.00% $ 495,768 5.00% Tier 1 risk-based 892,726 14.87 360,260 6.00 Total risk-based 1,067,516 17.78 600,434 10.00
RESULTS OF OPERATIONS NET EARNINGS Net earnings before an extraordinary item (see extraordinary item discussion on page 30) for the six months ended June 30, 1998 were $227 million compared to net earnings of $171 million for the six months ended June 30, 1997. Net earnings after the extraordinary item for the six months ended June 30, 1998 were $219 million compared to net earnings of $171 million for the six months ended June 30, 1997. Net earnings for the first half of 1998 included a gain of $13 million before tax from the redemption of preferred stock which was called by the issuer. In addition to the stock gain, net earnings increased in 1998 as compared 1997 as a result of increased net interest income and a decrease in the provision for loan losses. These increases to net earnings were partially offset by an increase in general and administrative expense. 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 Company's Basic EPS before the extraordinary item and the preferred stock gain of $.13 per share for the quarter and six months ended June 30, 1998 were $1.91 and $3.96, respectively, as compared to $1.53 and $2.99 for the quarter and six months ended June 30, 1997, respectively. Basic EPS after the extraordinary item and including the preferred stock gain for the quarter and six months ended June 30, 1998 were $2.04 and $3.83, respectively, as compared to $1.53 and $2.99, for the quarter and six months ended June 30, 1997, respectively. The Company reported Diluted EPS (before the extraordinary item and the preferred stock gain) of $1.88 and $3.91, for the quarter and six months ended June 30, 1998, compared to $1.51 and $2.94 for the three and six months ended June 30, 1997. Diluted EPS after the extraordinary item and the preferred stock gain for the quarter and six months ended June 30, 1998 were $2.01 and $3.78, respectively, as compared to $1.51 and $2.94 for the quarter and six months ended June 30, 1997, respectively. SPREADS An important determinant of the Company's earnings is its primary spread -- the difference between its yield on earning assets and its cost of funds. The table below shows the components of the Company's spread at June 30, 1998 and 1997, and December 31, 1997.
TABLE 14 Yield on Earning Assets, Cost of Funds, and Primary Spread June 30 --------------------------- December 31 1998 1997 1997 ----------- ----------- ------------- Yield on loan portfolio 7.51% 7.42% 7.53% Yield on MBS 7.23 7.10 7.23 Yield on investments 6.89 6.51 6.48 ---------- -------- ---------- Yield on earning assets 7.44 7.35 7.48 ---------- -------- ---------- Cost of deposits 4.99 5.10 5.04 Cost of borrowings 6.02 5.97 5.99 ---------- -------- ---------- Cost of funds 5.29 5.38 5.36 ---------- -------- ---------- Primary spread 2.15% 1.97% 2.12% ========== ======== ==========
The Company 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. These features include 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, 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. The following table shows the Company's revenues and expenses as a percentage of total revenues for the three and six months ended June 30, 1998 and 1997, in order to focus on the changes in interest income between years as well as changes in other revenue and expense amounts. TABLE 15 Selected Revenue and Expense Items as Percentages of Total Revenues Three Months Ended Six Months Ended June 30 June 30 ---------------------- ---------------------- 1998 1997 1998 1997 --------- --------- --------- --------- Interest on loans 74.9% 82.2% 77.7% 81.8% Interest on mortgage-backed securities 13.5 10.2 11.4 10.5 Interest and dividends on investments 6.1 4.8 6.5 4.9 --------- --------- --------- --------- 94.5 97.2 95.6 97.2 Less: Interest on deposits 41.0 41.4 40.6 40.9 Interest on advances and other borrowings 23.0 25.3 24.1 25.3 --------- --------- --------- --------- 64.0 66.7 64.7 66.2 Net interest income 30.5 30.5 30.9 31.0 Provision for loan losses 0.3 1.8 0.4 2.4 --------- --------- --------- --------- Net interest income after provision for loan 30.2 28.7 30.5 28.6 losses Add: Fees 2.0 1.6 1.8 1.6 Gain on the sale of securities, MBS, and loans 2.4 0.4 1.4 0.3 Other non-interest income 1.1 0.8 1.2 0.9 --------- --------- --------- --------- 5.5 2.8 4.4 2.8 Less: General and administrative expenses 11.1 11.1 10.9 11.2 Taxes on income 9.7 8.1 9.5 8.0 --------- --------- --------- --------- Earnings before extraordinary item 14.9 12.3 14.5 12.2 Extraordinary item 0.0 0.0 0.5 0.0 --------- --------- --------- --------- Net earnings 14.9% 12.3% 14.0% 12.2% ========= ========= ========= =========
INTEREST RATE SWAPS The Company enters into interest rate swaps as a part of its interest rate risk management strategy. Such instruments are entered into solely to alter the repricing characteristics of designated assets and liabilities. The Company does not hold any derivative financial instruments for trading purposes. Interest rate swap activity decreased net interest income by $2 million and $4 million for the three and six months ended June 30, 1998, as compared to a decrease of $1 million and $2 million for the same periods in 1997. The following table summarizes the unrealized gains and losses for interest rate swaps at June 30, 1998 and 1997.
TABLE 16 Schedule of Unrealized Gains and Losses on Interest Rate Swaps (Dollars in thousands) June 30, 1998 June 30, 1997 ---------------------------------------- ---------------------------------------- Net Net Unrealized Unrealized Unrealized Unrealized Unrealized Unrealized Gains Losses Gain (Loss) Gains Losses Gain (Loss) ------------ ------------ ------------- ------------ ------------ ------------ Interest rate swaps $ 7,215 $ (34,529) $ (27,314) $ 17,881 $ (31,179) $ (13,298) ============ ============ ============= ============ ============= =============
TABLE 17 Schedule of Interest Rate Swaps (Notional amounts in millions) Six Months Ended June 30, 1998 ---------------------------- Receive Pay Fixed Fixed Swaps Swaps ------------- ------------ Balance at December 31, 1997 $ 1,679 $ 1,108 Additions -0- -0- Maturities (803) (140) ------------ ------------ Balance at June 30, 1998 $ 876 $ 968 ============ ============
The range of floating interest rates received on swap contracts in the first six months of 1998 was 5.62% to 6.19%, and the range of floating interest rates paid on swap contracts was 4.95% to 6.08%. The range of fixed interest rates received on swap contracts in the first six months of 1998 was 4.86% to 8.68% and the range of fixed interest rates paid on swap contracts was 5.38% to 9.14%. INTEREST ON LOANS In the second quarter of 1998, interest on loans was higher than in the comparable 1997 period by $3.5 million or 0.6%. The increase in the second quarter of 1998 was due to a 13 basis point increase in the average portfolio yield, partially offset by a $340 million decrease in the average portfolio balance. For the first half of 1998, interest on loans was higher than in the comparable 1997 period by $67 million or 5.9%. The increase was due to a $1.2 billion increase in the average portfolio balance and a 13 basis point increase in the average portfolio yield. INTEREST ON MORTGAGE-BACKED SECURITIES In the second quarter of 1998, interest on mortgage-backed securities was higher than in the comparable 1997 period by $33 million or 45.8%. The 1998 increase was due primarily to an $1.9 billion increase in the average portfolio balance. For the first half of 1998, interest on mortgage-backed securities was higher than in the comparable 1997 period by $30 million or 20.7% due primarily to an $835 million increase in the average portfolio balance and a four basis point increase 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. For the second quarter of 1998, interest and dividends on investments was higher than in the comparable 1997 period by $14 million or 39.9%. The increase was primarily due to a $882 million increase in the average portfolio balance, which was partially offset by a 5 basis point decrease in the average portfolio yield. For the first half of 1998, interest and dividends on investments was higher than in the comparable 1997 period by $33 million or 48.9%. The increase was primarily due to a $1.1 billion increase in the average portfolio balance and a two basis point increase in the average portfolio yield. INTEREST ON DEPOSITS In the second quarter of 1998, interest on deposits increased by $27 million or 9.2% from the comparable period in 1997. In the first half of 1998, interest on deposits increased by $62 million or 10.8% from the comparable period in 1997. The second quarter increase was due to a $2.2 billion increase in the average balance of deposits, which was partially offset by a 2 basis point decrease in the average cost of deposits. The six month increase was primarily due to a $2.4 billion increase in the average balance of deposits and a 2 basis point increase in the average cost of deposits. INTEREST ON ADVANCES AND OTHER BORROWINGS For the second quarter and first half of 1998, interest on advances and other borrowings increased by $1 million or 0.4% and $22 million or 6.1%, respectively, from the comparable periods of 1997. The second quarter increase was primarily due to a seven basis point increase in the average cost of these borrowings, which was partially offset by a $102 million decrease in the average balance. The six month increase was primarily due to a $486 million increase in the average balance and a 12 basis point increase in the average cost of these borrowings. PROVISION FOR LOAN LOSSES The provision for loan losses was $3 million and $6 million, respectively, for the three and six months ended June 30, 1998, compared to $13 million and $34 million for the same periods in 1997. The lower provision in 1998 was due to lower chargeoffs resulting from the strong California housing market and declining nonperforming assets. GENERAL AND ADMINISTRATIVE EXPENSES For the second quarter and first half of 1998, general and administrative expenses (G&A) was $87 million and $171 million, respectively, compared to $79 million and $158 million for the comparable periods in 1997. G&A as a percentage of average assets on an annualized basis was .88% and .86%, respectively, for the second quarter and first half of 1998 compared to .81% and .82%, respectively, for the same periods in 1997. Expenses are likely to rise in subsequent quarters because of the seasonal increase in mortgage activity during the summer months, the ongoing expansion of the Company's branch system, and the implementation of a variety of technology initiatives including addressing the "Year 2000 " computer issue (see Year 2000 discussion on page 32). EXTRAORDINARY ITEM During the first quarter of 1998, the Company notified the FHLB of San Francisco that it intended to retire before maturity, $2.9 billion of high-cost FHLB advances. As a result, the Company incurred a $13 million pretax charge in the first quarter of 1998 for the penalties associated with the prepayments. Golden West will replace the prepaid FHLB advances with new low-cost obligations that will produce more favorable interest expense for the Company over the next five years. TAXES ON INCOME The Company utilizes the accrual method of accounting for income tax purposes and for preparing its published financial statements. For financial reporting purposes only, the Company uses purchase accounting in connection with certain assets acquired through mergers. The purchase accounting portion of income is not subject to tax. Taxes as a percentage of earnings before the extraordinary item were 39.3% and 39.6%, respectively, for the second quarter and first half of 1998 compared to 39.7% and 39.6%, respectively, for the same periods a year ago. 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; investments and borrowings from its affiliates; debt collateralized by mortgages, MBS, or securities; and the issuance of medium-term notes. In addition, WFSB has other alternatives available to provide liquidity or finance operations including borrowings from public offerings of debt, sales of loans, issuances of commercial paper, and borrowings from commercial banks. Furthermore, under certain conditions, WFSB may borrow from the Federal Reserve Bank of San Francisco to meet short-term cash needs. The availability of these funds will vary depending upon policies of the FHLB, the Federal Reserve Bank of San Francisco, and the Federal Reserve Board. For a discussion of WFSB's liquidity positions at June 30, 1998, and 1997, and December 31, 1997, see the Cash and Investments section on page 12. 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, World may borrow from the Federal Reserve Bank of San Francisco to meet short-term cash needs. The availability of these funds will vary depending upon policies of the FHLB, the Federal Reserve Bank of San Francisco, and the Federal Reserve Board. For a discussion of WSL's liquidity positions at June 30, 1998, and 1997, and December 31, 1997, see the Cash and Investments section on page 12. 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 WFSB and WSL can pay. The principal liquidity needs of Golden West are for payment of interest and principal on subordinated debt securities (of which $200 million mature in 1998), capital contributions to its insured subsidiaries (including $311 million for the six months ended June 30, 1998 and $284 million for the year ended December 31, 1997 to WFSB), dividends to stockholders, the purchase of Golden West stock (see stockholders' equity section on page 23), and general and administrative expenses. At June 30, 1998 and 1997, and December 31, 1997, Golden West's total cash and investments amounted to $750 million, $900 million, and $965 million, respectively. Included in the June 30, 1998 and 1997, and December 31, 1997 amounts is a $600 million long-term loan to WFSB. YEAR 2000 The Company 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 mission critical systems will be Year 2000 compliant by early 1999. The plan has been developed in accordance with guidance set forth by federal banking regulators in a series of jointly-issued policy statements. The Company has completed an inventory and assessment of its systems. The Company is currently in the process of testing and modifying or replacing systems that may be affected by these Year 2000 compliance issues (Year 2000 Project.) Included in this process are both information technology systems and other systems (e.g. elevators, doorlocks) that could be affected by Year 2000 issues. The Company has placed priority on information technology systems affecting its core business of deposit-taking and lending. Testing of individual systems for the ability to function during the Year 2000 has been started, with such testing to be substantially completed by December 31, 1998. During the first quarter of 1999, the Company will commence integrated testing and ascertain that all systems function together. All systems affecting the Company's core business are scheduled to be Year 2000 compliant by June 1999. While the Company 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. Such testing is included in the testing previously described in this section. To date, the Company has no indication that its principal vendors or their systems will adversely affect the Company's Year 2000 compliance efforts. The Company currently estimates that over the next two years, it will cost approximately $19 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 Year 2000 Project expense incurred during the first half of 1998 was $4 million. Included in the $19 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. The Company believes that its Year 2000 Project will result in the Company's systems functioning normally, without adverse consequences. While the systems of others, with whom and through which the Company conducts business, are not within the Company's control, the Year 2000 Project is intended to provide the Company with sufficient advance warning that such systems will not perform. In the unlikely event of a system problem, the Company has developed contingency plans to address the potential that one or more systems might fail, despite efforts to the contrary. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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 on pages 11 and 27. 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 June 30, 1998, 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. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) 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. 1-4269) for the year ended December 31, 1990. 3(b) By-Laws of the Company, as amended in 1997,. are incorporated by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K (File No. 1-4269) for the year ended December 31, 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. 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. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (Continued) (a) Index To Exhibits (continued) Exhibit No. Description ----------- ----------- 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. 11 Statement of Computation of Earnings Per Share 27 Financial Data Schedule (b) Reports on Form 8-K The Registrant did not file any current reports on Form 8-K with the Commission in the first quarter. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GOLDEN WEST FINANCIAL CORPORATION Dated: August 14, 1998 /s/ J. L. Helvey -------------------------------------------- J. L. Helvey Executive Vice President (duly authorized and principal financial officer) EX-11 2 EXHIBIT 11 Golden West Financial Corporation Statement of Computation of Basic and Diluted Earnings Per Share (Dollars in thousands except per share figures)
Three Months Ended Six Months Ended June 30 June 30 --------------------------- ---------------------------- 1998 1997 1998 1997 ------------ ------------ ------------- ------------- Earnings Before Extraordinary Item $ 116,950 $ 87,277 $ 227,031 $ 170,651 Extraordinary Item, Net of Tax -0- -0- (7,710) -0- ------------ ------------ ------------- ------------- Net Earnings $ 116,950 $ 87,277 $ 219,321 $ 170,651 ============ ============ ============= ============= Weighted Average Shares 57,338,227 56,892,526 57,233,046 57,102,416 Add: Options outstanding at period end 1,971,505 2,584,240 1,971,505 2,584,240 Less: Shares assumed purchased back with proceeds of options 1,199,485 1,660,981 1,235,174 1,656,454 ------------ ------------ ------------- ------------- Diluted Average Shares Outstanding 58,110,247 57,815,785 57,969,377 58,030,202 ============ ============ ============= ============= Basic Earnings Per Share Calculation: Basic Earnings Per Share Before Extraordinary Item $ 2.04 $ 1.53 $ 3.96 $ 2.99 Extraordinary Item, Net of Tax 0.00 0.00 (0.13) 0.00 ------------ ------------ ------------- ------------- Basic Earnings Per Share $ 2.04 $ 1.53 $ 3.83 $ 2.99 ============ ============ ============= ============= Diluted Earnings Per Share Calculation: Diluted Earnings Per Share Before Extraordinary Item $ 2.01 $ 1.51 $ 3.91 $ 2.94 Extraordinary Item, Net of Tax 0.00 0.00 (0.13) 0.00 ------------ ------------ ------------- ------------- Diluted Earnings Per Share $ 2.01 $ 1.51 $ 3.78 $ 2.94 ============ ============ ============= =============
EX-27 3
9 6-MOS DEC-31-1997 JUN-30-1998 198,513 95,000 49,000 0 552,730 8,984,490 9,111,591 27,600,120 239,537 39,067,229 24,993,708 1,884,135 835,462 8,430,373 0 0 5,759 2,917,792 39,067,229 1,216,066 101,975 177,731 1,495,772 636,289 1,012,861 482,911 5,647 7 170,710 375,654 375,654 7,710 0 219,321 3.83 3.78 7.44 302,922 0 31,978 64,271 233,280 0 610 239,537 239,537 0 0
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