-----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, RzXgfm8Hsp77yosMamdt7gJdIjN8oMFh4Z8gOMJMDeczjtJAJ+CnI21w/rVGRSCC Lk/u8hpvkkccGFKrzphHHA== 0000042293-99-000024.txt : 19990813 0000042293-99-000024.hdr.sgml : 19990813 ACCESSION NUMBER: 0000042293-99-000024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990812 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: 99686191 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 the Quarter Ended June 30, 1999 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, 1999, was 55,003,154 shares. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The consolidated financial statements of Golden West Financial Corporation and subsidiaries (Golden West or Company) for the three and six months ended June 30, 1999 and 1998 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, 1999, are not necessarily indicative of the results for the full year. Golden West Financial Corporation Consolidated Statement of Financial Condition (Dollars in thousands)
June 30 June 30 December 31 1999 1998 1998 ------------ ------------- ------------- (Unaudited) --------------------------- Assets: Cash $ 240,911 $ 198,513 $ 250,875 Securities available for sale at fair value 380,541 416,441 377,005 Other investments at cost 316,880 144,000 422,385 Purchased mortgage-backed securities available for sale at fair value 92,879 136,289 113,585 Purchased mortgage-backed securities held to maturity at cost 476,598 678,434 572,376 Mortgage-backed securities held to maturity with recourse at cost 3,287,113 4,523,653 3,884,347 Mortgage-backed securities-REMICs held to maturity at cost 8,146,373 3,782,403 5,461,657 Loans receivable 23,485,887 27,600,120 25,721,288 Interest earned but uncollected 175,806 209,687 209,328 Investment in capital stock of Federal Home Loan Banks--at cost which approximates fair value 534,443 708,382 780,303 Real estate held for sale or investment 24,294 44,065 45,696 Prepaid expenses and other assets 591,034 363,406 357,363 Premises and equipment--at cost less accumulated depreciation 274,214 261,836 272,521 ------------ ------------- ------------- $38,026,973 $39,067,229 $38,468,729 ============ ============= ============= Liabilities and Stockholders' Equity: Deposits $26,335,706 $24,993,708 $26,219,095 Advances from Federal Home Loan Banks 6,111,398 7,486,916 6,163,472 Securities sold under agreements to repurchase 684,938 1,816,433 1,252,469 Accounts payable and accrued expenses 582,482 521,828 468,213 Taxes on income 333,282 313,634 329,409 Subordinated notes--net of discount 812,438 1,011,159 911,753 Stockholders' equity 3,166,729 2,923,551 3,124,318 ------------ ------------- ------------- $38,026,973 $39,067,229 $38,468,729 ============ ============= =============
Golden West Financial Corporation Consolidated Statement of Net Earnings (Unaudited) (Dollars in thousands except per share figures)
Three Months Ended Six Months Ended June 30 June 30 ---------------------------- ---------------------------- 1999 1998 1999 1998 ------------- ------------ ------------ ------------ Interest Income: Interest on loans $ 445,358 $ 587,188 $ 921,602 $ 1,216,066 Interest on mortgage-backed securities 189,363 105,536 358,114 177,731 Interest and dividends on investments 50,577 47,845 100,543 101,975 ------------- ------------ ------------ ------------ 685,298 740,569 1,380,259 1,495,772 Interest Expense: Interest on deposits 306,067 321,079 613,634 636,289 Interest on advances 82,429 105,206 169,180 228,766 Interest on repurchase agreements 18,743 33,097 32,290 66,033 Interest on other borrowings 29,553 41,990 65,948 81,773 ------------- ------------ ------------ ------------ 436,792 501,372 881,052 1,012,861 ------------- ------------ ------------ ------------ Net Interest Income 248,506 239,197 499,207 482,911 Provision for (recovery of) loan losses (727) 2,682 (153) 5,647 ------------- ------------ ------------ ------------ Net Interest Income after Provision for (Recovery of) Loan Losses 249,233 236,515 499,360 477,264 Non-Interest Income: Fees 16,762 15,716 32,921 28,663 Gain on the sale of securities, MBS, and loans 8,249 19,077 18,312 21,584 Other 17,537 8,304 26,614 18,853 ------------- ------------ ------------ ------------ 42,548 43,097 77,847 69,100 Non-Interest Expense: General and administrative: Personnel 52,418 48,044 104,216 94,580 Occupancy 16,417 14,949 32,704 29,118 Deposit insurance 1,345 1,516 2,738 3,128 Advertising 3,029 3,218 5,208 5,464 Other 22,817 19,309 44,206 38,420 ------------- ------------ ------------ ------------ 96,026 87,036 189,072 170,710 Earnings before Taxes on Income and Extraordinary Item 195,755 192,576 388,135 375,654 Taxes on Income 73,368 75,626 145,380 148,623 ------------- ------------ ------------ ------------ Earnings before Extraordinary Item 122,387 116,950 242,755 227,031 Extraordinary Item: Federal Home Loan Bank advance prepayment penalty, net of tax benefit -0- -0- -0- (7,710) ------------ ------------ ------------ ------------ Net Earnings $ 122,387 $ 116,950 $ 242,755 $ 219,321 ============= ============ ============ ============ Basic earnings per share before extraordinary item $ 2.19 $ 2.04 $ 4.32 $ 3.96 Basic earnings per share on extraordinary item, net of tax benefit 0.00 0.00 0.00 (.13) ------------- ------------ ------------ ------------ Basic earnings per share $ 2.19 $ 2.04 $ 4.32 $ 3.83 ============= ============ ============ ============ Diluted earnings per share before extraordinary $ 2.17 $ 2.01 $ 4.28 $ 3.91 item Diluted earnings per share on extraordinary item, net of tax benefit 0.00 0.00 0.00 (.13) ------------- ------------ ------------ ------------ Diluted earnings per share $ 2.17 $ 2.01 $ 4.28 $ 3.78 ============= ============ ============ ============
Golden West Financial Corporation Consolidated Statement of Cash Flows (Unaudited) (Dollars in thousands)
Three Months Ended Six Months Ended June 30 June 30 ---------------------------- ---------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------- Cash Flows from Operating Activities: Net earnings $ 122,387 $ 116,950 $ 242,755 $ 219,321 Adjustments to reconcile net earnings to net cash provided by operating activities: Extraordinary item -0- -0- -0- 13,035 Provision for (recovery of) loan losses (727) 2,682 (153) 5,647 Amortization of loan fees and discounts (4,325) (5,989) (10,519) (11,094) Depreciation and amortization 7,029 5,967 13,966 11,691 Loans originated for sale (316,881) (212,419) (603,945) (333,958) Sales of loans 425,419 268,226 960,763 400,166 Decrease in interest earned but uncollected 10,955 3,903 33,522 7,236 Federal Home Loan Bank stock dividends (7,985) (10,332) (28,952) (27,715) Increase in prepaid expenses and other assets (121,119) (15,228) (227,363) (106,832) Increase in accounts payable and accrued expenses 35,279 15,648 102,134 74,472 Increase (decrease) in taxes on income (38,213) (20,707) 24,427 43,231 Other, net (1,330) (1,445) (2,579) (5,872) ------------ ------------ ------------ ------------- Net cash provided by operating activities 110,489 147,256 504,056 289,328 Cash Flows from Investing Activities: New loan activity: New real estate loans originated for portfolio (2,553,140) (1,859,213) (4,344,056) (3,204,867) Real estate loans purchased (475) (642) (935) (1,689) Other, net (26,553) (9,554) (37,134) (20,371) ------------ ------------ ------------ ------------- (2,580,168) (1,869,409) (4,382,125) (3,226,927) Real estate loan principal payments: Monthly payments 143,282 159,588 295,212 334,507 Payoffs, net of foreclosures 1,258,866 1,555,523 2,427,824 2,732,892 ------------ ------------ ------------ ------------- 1,402,148 1,715,111 2,723,036 3,067,399 Repayments of mortgage-backed securities 795,041 367,349 1,545,868 515,869 Proceeds from sales of real estate 27,396 35,131 67,803 86,536 Purchases of securities available for sale (1,315,052) (127,459) (1,465,066) (127,481) Sales of securities available for sale 10 81,150 19 81,373 Matured securities available for sale 1,271,205 243,629 1,425,413 253,671 Decrease in other investments 838,116 245,044 105,505 108,648 Purchases of Federal Home Loan Bank stock -0- (99,004) -0- (99,994) Redemption of Federal Home Loan Bank stock 266,815 -0- 266,815 -0- Additions to premises and equipment (9,047) (20,234) (17,444) (35,297) ------------ ------------ ------------ ------------- Net cash provided by investing activities 696,464 571,308 269,824 623,797
Golden West Financial Corporation Consolidated Statement of Cash Flows (Continued) (Unaudited) (Dollars in thousands)
Three Months Ended Six Months Ended June 30 June 30 ---------------------------- ------------- ------------ 1999 1998 1999 1998 ------------- ------------ ------------ ------------ Cash Flows from Financing Activities: Deposit activity: Increase (decrease) in deposits, net $ (324,317) $ 171,678 $ (393,517) $ 375,813 Interest credited 264,583 262,760 510,128 508,178 ------------- ------------ ------------ ------------ (59,734) 434,438 116,611 883,991 Additions to Federal Home Loan Bank advances 4,430 2,553,300 1,513,080 3,264,500 Repayments of Federal Home Loan Bank advances (7,579) (2,718,566) (1,565,152) (4,306,273) Proceeds from agreements to repurchase securities 4,000,156 1,808,100 4,000,251 3,063,990 Repayments of agreements to repurchase securities (4,007,842) (2,176,658) (4,567,782) (3,581,605) Repayments of medium-term notes -0- -0- -0- (110,000) Decrease in federal funds purchased (475,000) (500,000) -0- -0- Repayment of subordinated debt (100,000) (100,000) (100,000) (100,000) Dividends on common stock (7,833) (7,163) (15,754) (14,303) Exercise of stock options 2,487 8,585 4,554 12,847 Purchase and retirement of Company stock (112,101) -0- (169,652) -0- ------------- ------------ ------------ ------------ Net cash used in financing activities (763,016) (697,964) (783,844) (886,853) ------------- ------------ ------------ ------------ Net Increase (Decrease) in Cash 43,937 20,600 (9,964) 26,272 Cash at beginning of period 196,974 177,913 250,875 172,241 ------------- ------------ ------------ ------------ Cash at end of period $ 240,911 $ 198,513 $ 240,911 $ 198,513 ============= ============ ============ ============ Supplemental cash flow information: Cash paid for: Interest $ 443,133 $ 507,214 $ 878,526 $ 1,014,588 Income taxes 111,618 100,251 121,104 104,082 Cash received for interest and dividends 696,253 744,472 1,413,781 1,503,008 Noncash investing activities: Loans converted from adjustable rate to fixed-rate 299,956 35,015 471,326 43,389 Loans transferred to foreclosed real estate 18,496 27,492 38,568 59,053 Loans securitized into MBS and MBS-REMICs 3,700,579 5,197,466 3,700,579 5,698,458
Golden West Financial Corporation Consolidated Statement of Stockholders' Equity (Unaudited) (Dollars in thousands)
For the Six Months Ended June 30, 1999 ------------------------------------------------------------------------------------ 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, 1999 $ 5,686 $ 122,159 $2,781,925 $ 214,548 $ 3,124,318 Comprehensive income: Net earnings -0- -0- 242,755 -0- 242,755 $ 242,755 Change in unrealized gains on securities available for sale, net of tax -0- -0- -0- (18,742) (18,742) (18,742) Reclassification adjustment for gains included in income -0- -0- -0- (750) (750) (750) -------------- Comprehensive Income $ 223,263 ============== Cash dividends on common stock ($.28 per share) -0- -0- (15,754) -0- (15,754) Common stock issued upon exercise of stock options, including tax benefits 17 4,537 -0- -0- 4,554 Purchase and retirement of Company stock (178) -0- (169,474) -0- (169,652) ---------- ----------- ---------- -------------- ------------- Balance at June 30, 1999 $ 5,525 $ 126,696 $2,839,452 $ 195,056 $ 3,166,729 ========== =========== ========== ============== =============
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 -0- 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) -------------- Comprehensive Income $ 226,976 ============== Cash dividends on common stock ($.25 per share) -0- -0- (14,303) -0- (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 ========== =========== ========== ============== =============
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, 1998, as well as certain material changes in results of operations during the three and six month periods ended June 30, 1999, and 1998, respectively. The following narrative is written with the presumption that the users have read or have access to the Company's 1998 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, 1998, and for the year then ended. Therefore, only material changes in financial condition and results of operations are discussed herein. This report contains certain forward-looking statements, which are not historical facts and pertain to future operating results of the Company. Such statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward looking statements are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond the Company's control. In addition, these forward-looking statements are subject to change. Actual results may differ materially from the results discussed in these forward-looking statements for the reasons, among others, discussed under the heading "Asset/Liability Management" in the Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 1998 Annual Report on Form 10-K. NEW ACCOUNTING PRONOUNCEMENTS In 1998, Golden West adopted Statement of Financial Accounting Standards 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. The Company operates as a single segment and, therefore, SFAS 131 had no effect on the Company's financial statements. 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 derivative instruments as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133" (SFAS 137) which delayed the effective date of SFAS 133 until fiscal years beginning after June 15, 2000. The Company is in the process of assessing 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 1999 1998 1998 ------------- ------------ -------------- Assets $ 38,026,973 $39,067,229 $ 38,468,729 Loans receivable including mortgage-backed securities 35,488,850 36,720,899 35,753,253 Deposits 26,335,706 24,993,708 26,219,095 Stockholders' equity 3,166,729 2,923,551 3,124,318 Stockholders' equity/total assets 8.33% 7.48% 8.12% Book value per common share $ 57.31 $ 50.76 $ 54.95 Common shares outstanding 55,252,599 57,590,999 56,861,124 Diluted common shares outstanding 55,802,439 58,368,822 57,429,914 Yield on loan portfolio 7.06% 7.51% 7.36% Yield on mortgage-backed securities 7.07% 7.23% 7.20% Yield on investments 6.45% 6.89% 5.53% Yield on earning assets 7.06% 7.44% 7.30% Cost of deposits 4.50% 4.99% 4.67% Cost of borrowings 5.59% 6.02% 5.87% Cost of funds 4.75% 5.29% 4.96% Yield on earning assets less cost of funds 2.31% 2.15% 2.34% Ratio of nonperforming assets to total assets .69% .89% .79% Ratio of troubled debt restructured to total assets .04% .08% .06% World Savings Bank, a Federal Savings Bank: Total assets $ 33,277,749 $28,789,260 $ 31,912,264 Net worth 2,337,301 1,931,153 2,164,854 Net worth/total assets 7.02% 6.71% 6.78% Regulatory capital ratios: Core capital 7.01% 6.69% 6.77% Risk-based capital 12.95% 12.91% 12.93% World Savings and Loan Association: Total assets $ 6,010,867 $10,103,271 $ 6,810,266 Net worth 743,145 1,049,734 687,778 Net worth/total assets 12.36% 10.39% 10.10% Regulatory capital ratios: Core capital 9.52% 9.00% 7.25% Risk-based capital 18.60% 17.78% 16.24% World Savings Bank, a State Savings Bank: Total assets $ 3,536,112 $ 2,355,375 $ 3,519,046 Net worth 194,087 123,638 186,411 Net worth/total assets 5.49% 5.25% 5.30% Regulatory capital ratios: Tier 1 leverage capital 5.41% 11.38% 5.26% Total risk-based capital 26.21% 24.12% 25.15%
Golden West Financial Corporation Financial Highlights (Unaudited) (Dollars in thousands except per share figures)
Three Months Ended Six Months Ended June 30 June 30 ------------------------- -------------------------- 1999 1998 1999 1998 ----------- ----------- ------------ ----------- New real estate loans originated $2,870,021 $2,071,632 $4,948,001 $3,538,825 Average yield on new real estate loans 7.55% 7.76% 7.57% 7.76% Current average rate on new real estate loans (a) 6.06% 6.13% 6.09% 6.24% Increase (decrease) in deposits (b)(c) $ (59,734) $ 434,438 $ 116,611 $ 883,991 Earnings before extraordinary item 122,387 116,950 242,755 227,031 Net earnings 122,387 116,950 242,755 219,321 Basic earnings per share before extraordinary item 2.19 2.04 4.32 3.96 Diluted earnings per share before extraordinary 2.17 2.01 4.28 3.91 item Basic earnings per share 2.19 2.04 4.32 3.83 Diluted earnings per share 2.17 2.01 4.28 3.78 Cash dividends on common stock .14 .125 .28 .25 Average common shares outstanding 55,888,459 57,338,227 56,232,804 57,233,046 Average diluted common shares outstanding 56,432,405 58,110,247 56,767,835 57,969,377 Ratios:(d) Net earnings/average net worth (ROE)(e) 15.42% 16.31% 15.37% 15.58% Net earnings/average assets (ROA)(e) 1.28% 1.19% 1.27% 1.11% Net interest income/average assets 2.59% 2.43% 2.60% 2.44% General and administrative expense/average assets 1.00% .88% .99% .86% Efficiency ratio (f) 32.99% 30.83% 32.77% 30.93%
(a) The current rate reflects the actual rate being paid by the borrower at time of origination. (b) Includes a decrease of $525 million of wholesale deposits for the six months ended June 30, 1998. (c) Includes the effect of the sale of three branches with a total of $119 million in deposits during the second quarter of 1999 and the sale of one branch with $36 million in deposits in March of 1998. (d) 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. (e) The ratios for the six months ended June 30, 1998 include the extraordinary item. The ratios for the six months ended June 30, 1998 excluding the extraordinary item are: ROE 16.13% and ROA 1.15%. (f) The efficiency ratio is calculated by dividing general and administrative expense by net interest income plus other income. 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, 1999 and 1998, and December 31, 1998. The reader is referred to page 53 of the Company's 1998 Annual Report on Form 10-K for similar information for the years 1995 through 1998 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 1999 1998 1998 ------- ------- ------------- Assets: Cash and investments 2.5% 1.9% 2.7% Mortgage-backed securities 31.6 23.3 26.1 Loans receivable 61.8 70.7 66.9 Other assets 4.1 4.1 4.3 ------- ------- ------- 100.0% 100.0% 100.0% ======= ======= ======= Liabilities and Stockholders' Equity: Deposits 69.3% 64.0% 68.1% Federal Home Loan Bank advances 16.1 19.2 16.0 Securities sold under agreements to repurchase 1.8 4.6 3.3 Other liabilities 2.4 2.1 2.1 Subordinated debt 2.1 2.6 2.4 Stockholders' equity 8.3 7.5 8.1 ------- ------- ------- 100.0% 100.0% 100.0% ======= ======= =======
For the first six months of 1999 and for the second half of 1998, the Company securitized $3.7 billion and $2.5 billion, respectively, of loans into mortgage-backed securities which caused the percentage of mortgage-backed securities to total assets to increase from June 30, 1998 to June 30, 1999 and the percentage of loans receivable to total assets to decrease from June 30, 1998 to June 30, 1999. For further discussion, see pages 12 and 13. As the above table shows, the largest asset components are loans receivable and mortgage-backed securities, which consist primarily of long-term mortgages. Deposits represent the majority of the Company's liabilities. 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 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, 1999, 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 benchmark 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, 1999 (Dollars in millions) Projected Repricing(a) ------------------------------------------------------------------- 0 - 3 4 - 12 1 - 5 Over 5 Months Months Years Years Total ----------- ----------- ----------- ------------ ----------- Interest-Earning Assets: Investments $ 178 $ 134 $ 100 $ 285 $ 697 Mortgage-backed securities 10,402 248 804 549 12,003 Loans receivable: Rate-sensitive 19,998 2,108 194 -0- 22,300 Fixed-rate 64 164 481 360 1,069 Other(b) 695 -0- -0- -0- 695 Impact of interest rate swaps 400 280 (680) -0- -0- ----------- ----------- ----------- ------------ ----------- Total $ 31,737 $ 2,934 $ 899 $ 1,194 $ 36,764 =========== =========== =========== ============ =========== Interest-Bearing Liabilities(c): Deposits $ 15,363 $ 9,542 $ 1,413 $ 18 $ 26,336 FHLB advances 5,700 -0- 122 289 6,111 Other borrowings 685 100 712 -0- 1,497 Impact of interest rate swaps 158 (41) (117) -0- -0- ----------- ----------- ----------- ------------ ----------- Total $ 21,906 $ 9,601 $ 2,130 $ 307 $ 33,944 =========== =========== =========== ============ =========== Repricing gap $ 9,831 $ (6,667) $ (1,231) $ 887 =========== =========== =========== ============ Cumulative gap $ 9,831 $ 3,164 $ 1,933 $ 2,820 =========== =========== =========== ============ Cumulative gap as a percentage of total assets 25.9% 8.3% 5.1% =========== =========== ===========
(a) Based on scheduled maturity or scheduled repricing; loans and MBS reflect scheduled repayments and projected prepayments of principal based on current rates of prepayment. (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. At June 30, 1999 and 1998 and at December 31, 1998, WFSB and WSL had liquidity in excess of the regulatory requirements. The state of Texas requires insured institutions, such as World Savings Bank, SSB (WSSB), to maintain a daily minimum amount of cash and certain qualifying investments for liquidity purposes. WSSB met this requirement during the periods under discussion. At June 30, 1999 and 1998, and December 31, 1998, the Company had securities available for sale in the amount of $381 million, $416 million, and $377 million, respectively, including unrealized gains on securities available for sale of $321 million, $260 million, and $358 million, respectively. At June 30, 1999 and 1998, and December 31, 1998, the Company had no securities held for trading in its investment securities portfolio. Included in the Company's investment portfolio at June 30, 1999 and 1998, and December 31, 1998, were collateralized mortgage obligations (CMOs) in the amount of $166 million, $45 million, and $196 million, respectively. The Company holds CMOs on which both principal and interest are received. At June 30, 1999, all of these CMOs qualified for inclusion in the regulatory liquidity measurement. The Company does not hold any interest-only or principal-only CMOs. LOANS RECEIVABLE AND MORTGAGE-BACKED SECURITIES The Company invests in whole loans and mortgage-backed securities (MBS) and, from time to time, the Company securitizes loans from its portfolio into MBS and Real Estate Mortgage Investment Conduit Securities (MBS-REMICs) that are available to be used as collateral for borrowings. At June 30, 1999 and 1998, and December 31, 1998, the balance of loans receivable including mortgage-backed securities was $35.5 billion, $36.7 billion, and $35.8 billion, respectively. Included in the $35.5 billion at June 30, 1999, was $3.3 billion of Federal National Mortgage Association (FNMA) mortgage-backed securities with the underlying loans subject to full credit recourse to the Company and $8.1 billion of MBS-REMICs. Included in the $35.8 billion at December 31, 1998, was $3.9 billion of FNMA MBS with the underlying loans subject to full credit recourse to the Company and $5.5 billion of MBS-REMICs. Included in the $36.7 billion at June 30, 1998, was $4.5 billion of FNMA MBS with the underlying loans subject to full credit recourse to the Company and $3.8 billion of MBS-REMICs. At June 30, 1999 and 1998, and December 31, 1998, the Company had MBS held to maturity in the amount of $11.9 billion, $9.0 billion, and $9.9 billion, respectively. At June 30, 1999 and 1998, and December 31, 1998, the Company had MBS available for sale in the amount of $93 million, $136 million, and $114 million, respectively, including unrealized gains on MBS available for sale of $2 million, $6 million, and $5 million, respectively. At June 30, 1999 and 1998 and December 31, 1998, the Company had no trading MBS. The Company securitized $3.7 billion and $6.4 billion of mortgage loans into MBS-REMICs in the first six months of 1999 and for the year ended December 31, 1998, respectively. MBS-REMICs are being used as collateral for borrowings. The Company has the ability and intent to hold these MBS until maturity and, accordingly, MBS-REMICs are classified as MBS held to maturity. During 1998, the Company securitized $1.8 billion of adjustable rate mortgages (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 being used as collateral for borrowings and the underlying loans are subject to full credit recourse to the Company. Repayments of MBS during the second quarter and first six months of 1999 were $795 million and $1.5 billion, respectively, compared to $367 million and $516 million during the same periods of 1998. MBS repayments were higher during the first six months of 1999 as compared to the first six months of 1998 due to an increase in total MBS outstanding and an increase in the prepayment rate of the underlying mortgages. LOAN VOLUME New loan originations for the three and six months ended June 30, 1999, amounted to $2.9 billion and $4.9 billion, respectively, compared to $2.1 billion and $3.5 billion for the same periods in 1998. The high volume of originations during 1999 was due to a continued strong demand for home loans for both purchases and refinances. In addition, the Company increased the size of its loan origination staff to take advantage of the favorable market conditions. Refinanced loans constituted 43% and 46% of new loan originations for the three and six months ended June 30, 1999, compared to 42% and 43% for the three and six months ended June 30, 1998. Loans originated for sale amounted to $317 million and $604 million for the three and six months ended June 30, 1999, compared to $212 million and $334 million for the same periods in 1998. In addition, during the second quarter and first six months of 1999, $300 million and $471 million of loans were converted at the customers request from adjustable rate to fixed rate compared to $35 million and $43 million for the same periods in 1998. The Company sold $425 million and $961 million of fixed-rate loans for the three and six months ended June 30, 1999, respectively, compared to $268 million and $400 million for the same periods of 1998. At June 30, 1999, the Company had lending operations in 27 states. The largest source of mortgage origination is loans secured by residential properties in California. For the three and six months ended June 30, 1999, 65% and 64% of total loan originations were on residential properties in California compared to 62% and 61% for the same periods in 1998. The five largest states, other than California, for originations for the three and six months ended June 30, 1999, were Florida, Texas, Washington, Arizona, and Illinois with a combined total of 19% of total originations. The percentage of the total loan portfolio (including mortgage-backed securities with recourse and MBS-REMICs) that is comprised of residential loans in California was 65% at June 30, 1999 compared to 66% at June 30, 1998 and December 31, 1998. The Company originates adjustable rate mortgages tied to various indexes, including the Eleventh District Cost of Funds Index (COFI), the Golden West Cost of Savings Index (COSI), and the twelve-month rolling average of the One-Year Treasury Constant Maturity (TCM). The following table shows the distribution of ARM originations by index for the second quarter and first six months of 1999 and 1998.
TABLE 3 Adjustable Rate Mortgage Originations by Index (Dollars in thousands) Three Months Ended Six Months Ended June 30 June 30 ---------------------------- ---------------------------- ARM Index 1999 1998 1999 1998 ------------------- ------------ ------------- ------------ ------------ COFI $ 761,557 $ 1,027,847 $ 1,310,190 $ 2,017,751 COSI 1,730,440 462,010 2,807,828 595,258 TCM 33,091 300,658 71,741 464,633 ------------ ------------- ------------ ------------ $ 2,525,088 $ 1,790,515 $ 4,189,759 $ 3,077,642 ============ ============= ============ ============
The following table shows the distribution by index of the Company's outstanding balance of adjustable rate mortgages (including ARM MBS with recourse and ARM MBS-REMICs) at June 30, 1999 and 1998 and December 31, 1998.
TABLE 4 Adjustable Rate Mortgage Portfolio by Index (Including ARM MBS with recourse and ARM MBS-REMICs) (Dollars in thousands) June 30 -------------------------------- December 31 ARM Index 1999 1998 1998 ------------------ -------------- --------------- --------------- COFI $ 26,986,275 $ 32,306,021 $ 29,761,484 COSI 4,343,877 601,496 1,703,283 TCM 1,210,583 528,337 1,256,775 Other 165,118 244,605 201,756 -------------- --------------- --------------- $ 32,705,853 $ 33,680,459 $ 32,923,298 ============== =============== ===============
The tables on the following two pages show the Company's loan portfolio by state at June 30, 1999 and 1998.
TABLE 5 Loan Portfolio by State June 30, 1999 (Dollars in thousands) Residential Real Estate Commercial Loans as ------------------------- Real Total a% of State 1 - 4 5+ Land Estate Loans(a) Portfolio - ---------------- ------------ ----------- ---------- -------------- ----------- ------------ California $19,585,296 $ 3,306,202 $ 200 $ 34,185 $22,925,883 65.30% Florida 1,515,516 16,661 1 508 1,532,686 4.37 Texas 1,404,240 61,801 482 1,288 1,467,811 4.18 Illinois 1,110,849 132,960 -0- -0- 1,243,809 3.54 New Jersey 1,181,787 -0- -0- 4,150 1,185,937 3.38 Colorado 895,407 175,984 -0- 5,457 1,076,848 3.07 Washington 578,534 447,979 -0- 670 1,027,183 2.93 Arizona 754,233 22,462 -0- -0- 776,695 2.21 Other (b) 3,814,922 45,575 59 11,220 3,871,776 11.02 ------------ ----------- ---------- ------------- ------------ --------- Totals $30,840,784 $4,209,624 $ 742 $ 57,478 35,108,628 100.00% ============ =========== ========== ============= ========= SFAS 91 net deferred loan costs 28,432 Loan discount on purchased loans (2,199) Undisbursed loan funds (3,803) Allowance for loan losses (233,471) Loans to facilitate (LTF) interest reserve (356) Troubled debt restructured (TDR) interest reserve (1,414) Loans on deposits 23,556 ------------ Total loan portfolio and loans securitized into FNMA MBS with recourse and MBS-REMICs 34,919,373 Loans securitized into FNMA MBS with recourse and MBS-REMICs (11,433,486)(c) ------------ Total loans receivable $23,485,887 ============
(a) The Company has no commercial loans other than commercial real estate loans. (b) Includes states with loans less than 2% of total loans. (c) The above schedule includes the June 30, 1999 balances of loans that were securitized and retained as FNMA MBS with recourse and MBS-REMICs.
TABLE 6 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% Florida 1,422,475 19,575 5 819 1,442,874 3.99 Texas 1,407,972 74,256 529 1,405 1,484,162 4.11 Illinois 1,202,328 158,430 -0- 1,529 1,362,287 3.77 New Jersey 1,240,886 -0- -0- 5,267 1,246,153 3.45 Colorado 1,060,890 221,099 -0- 6,951 1,288,940 3.57 Washington 534,073 408,648 -0- 702 943,423 2.61 Arizona 761,859 25,980 -0- 532 788,371 2.18 Other (b) 3,721,150 54,135 73 13,880 3,789,238 10.49 ------------ ----------- ---------- ------------- ------------ --------- Totals $31,705,702 $4,376,613 $ 830 $ 74,428 36,157,573 100.00% ============ =========== ========== ============= ========= SFAS 91 net 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 interest reserve (564) Troubled debt restructured interest reserve (2,869) Loans on deposits 27,791 ------------ Total loan portfolio and loans securitized into FNMA MBS with recourse and MBS-REMIC 35,906,176 Loans securitized into FNMA MBS with recourse and MBS-REMIC (8,306,056)(c) ------------ Total loans receivable $27,600,120 ============
(a) The Company has no commercial loans other than commercial real estate loans. (b) Includes states with loans less than 2% of total loans. (c) The above schedule includes the June 30, 1998 balances of loans that were securitized and retained as FNMA MBS with recourse and MBS-REMIC. 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 (including MBS and MBS-REMICs) composed of rate-sensitive loans was 92% at June 30, 1999, 1998 and December 31, 1998. The Company's ARM originations for the first half of 1999 constituted 85% of new mortgage loans made in 1999 compared to 87% for the first half of 1998. The weighted average maximum lifetime cap rate on the Company's ARM loan portfolio (including ARMs swapped into MBS with recourse and MBS-REMICs) was 12.54%, or 5.55% above the actual weighted average rate at June 30, 1999, versus 12.67%, or 5.31% above the weighted average rate at June 30, 1998. Approximately $4.8 billion of the Company's ARM loans (including MBS with recourse and MBS-REMICs) 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, 1999, $501 million of ARM loans had reached their rate floors. The weighted average floor rate on the loans that had reached their floor was 7.62% at June 30, 1999 compared to 7.74% at June 30, 1998. Without the floor, the average rate on these loans would have been 7.11% at June 30, 1999 and 7.16% at June 30, 1998. Loan repayments consist of monthly loan amortization and loan payoffs. For the three and six months ended June 30, 1999, loan repayments were $1.4 billion and $2.7 billion, respectively, compared to $1.7 billion and $3.1 billion in the same periods of 1998. Although the balance of loans receivable was smaller due largely to the securitization of loans into MBS, prepayments remained high due to the strong refinance and home sale activity. MORTGAGE SERVICING RIGHTS The Company accounts for mortgage servicing rights in accordance with SFAS 125. Capitalized mortgage servicing rights are included in "Prepaid expenses and other assets" on the Consolidated Statement of Financial Condition. The following table shows the changes in capitalized mortgage servicing rights for the three and six months ended June 30, 1999 and 1998.
TABLE 7 Capitalized Mortgage Servicing Rights (Dollars in thousands) Three Months Ended Six Months Ended June 30 June 30 -------------------------- -------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ------------ Beginning balance of capitalized mortgage servicing rights $ 35,250 $ 12,375 $ 28,635 $ 11,116 New capitalized mortgage servicing rights from loan sales 7,491 4,437 16,459 6,588 Amortization of capitalized mortgage servicing rights (2,881) (1,063) (5,234) (1,955) ----------- ----------- ----------- ------------ Ending balance of capitalized mortgage servicing rights $ 39,860 $ 15,749 $ 39,860 $ 15,749 =========== =========== =========== ============
The book value of Golden West's servicing rights did not exceed the fair value at June 30, 1999 or 1998 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 loan and MBS 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 and loans securitized into MBS-REMICs, 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) 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 adversely impacted by economic conditions. The following table shows the components of the Company's NPAs and TDRs and the various ratios to total assets.
TABLE 8 Nonperforming Assets and Troubled Debt Restructured (Dollars in thousands) June 30 -------------------------- December 31 1999 1998 1998 ----------- ----------- -------------- Non-accrual loans $ 239,937 $ 302,922 $ 262,332 Real estate acquired through foreclosure 20,805 43,643 42,572 Real estate in judgment 439 -0- 74 ----------- ----------- ------------ Total nonperforming assets $ 261,181 $ 346,565 $ 304,978 =========== =========== ============ TDRs $ 15,896 $ 31,978 $ 22,774 =========== =========== ============ Ratio of NPAs to total assets .69% .89% .79% =========== =========== ============ Ratio of TDRs to total assets .04% .08% .06% =========== =========== ============ Ratio of NPAs and TDRs to total assets .73% .97% .85% =========== =========== ============
The lower NPAs at June 30, 1999 as compared to June 30, 1998 reflect primarily the strong economy and housing market, especially in California. The Company continues to closely monitor all delinquencies and takes appropriate steps to protect its interests. Interest foregone on non-accrual loans amounted to $1 million and $3 million in the second quarter and first six months of 1999 compared to $2 million and $5 million for the same periods in 1998. Interest foregone on TDRs amounted to $108 thousand and $243 thousand for the three and six months ended June 30, 1999, compared to $241 thousand and $527 thousand for the three and six months ended June 30, 1998. The tables on the following page show the Company's nonperforming assets by state as of June 30, 1999 and 1998.
TABLE 9 Nonperforming Assets by State June 30, 1999 (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 $148,755 $ 2,958 $ 1,787 $16,191 $ 931 $ 129 $ 170,751 .74% Florida 14,346 -0- 29 755 -0- -0- 15,130 .99 Texas 7,850 -0- -0- 393 -0- -0- 8,243 .56 Illinois 11,069 216 -0- 667 -0- -0- 11,952 .96 New Jersey 15,784 -0- 371 156 -0- -0- 16,311 1.38 Colorado 2,249 -0- 3 372 -0- -0- 2,624 .24 Washington 1,792 -0- -0- 29 -0- -0- 1,821 .18 Arizona 4,323 -0- -0- 84 -0- -0- 4,407 .57 Other (c) 25,411 997 1,997 2,043 -0- -0- 30,448 .79 --------- --------- ----------- -------- --------- --------- ---------- ----- Totals $231,579 $ 4,171 $ 4,187 $20,690 $ 931 $ 129 261,687 .75% ========= ========= =========== ======== ========= ========= REO general valuation allowance (506) (.00) ---------- ----- Total nonperforming assets $261,181 .75% ========== =====
(a) Non-accruals loans are 90 days or more past due and have no unpaid interest accrued. (b) The June 30, 1999 balances include loans that were securitized into FNMA MBS and MBS-REMICs. (c) Includes states with loans less than 2% of total loans.
TABLE 10 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% Florida 13,447 -0- 187 390 -0- -0- 14,024 .97 Texas 7,463 -0- -0- 1,078 -0- -0- 8,541 .58 Illinois 10,572 220 -0- 818 -0- -0- 11,610 .85 New Jersey 17,249 -0- 210 704 -0- -0- 18,163 1.46 Colorado 1,904 -0- 3 -0- -0- -0- 1,907 .15 Washington 1,577 747 -0- 111 -0- -0- 2,435 .26 Arizona 1,700 -0- -0- 493 -0- -0- 2,193 .28 Other (c) 27,683 40 -0- 1,408 162 11 29,304 .77 --------- --------- --------- -------- --------- --------- --------- ----- Totals $290,608 $11,461 $ 853 $43,020 $ 1,551 $ 11 347,504 .96% ========= ========= ========= ======== ========= ========= REO general valuation allowance (939) (.00) --------- ----- Total nonperforming assets $346,565 .96% ========= =====
(a) Non-accruals loans are 90 days or more past due and have no unpaid interest accrued. (b) The June 30, 1998 balances include loans that were securitized into FNMA MBS and MBS-REMIC. (c) Includes states with loans less than 2% of total loans. The Company provides specific valuation allowances for losses on loans when impaired, and on real estate owned when any significant and permanent decline in value is identified. The Company also utilizes a methodology for monitoring and estimating loan losses that is based on both historical experience in the loan portfolio and factors reflecting current economic conditions. This approach uses a database that identifies losses on loans and foreclosed real estate from past years to the present, broken down by year of origination, type of loan, and geographical area. Management is then able to estimate a range of general loss allowances to cover losses in the portfolio. In addition, periodic reviews are made of major loans and real estate owned, and major lending areas are regularly reviewed to determine potential problems. Where indicated, valuation allowances are established or adjusted. In estimating possible losses, consideration is given to the estimated sale price, cost of refurbishing, payment of delinquent taxes, cost of disposal, and cost of holding the property. Additions to and reductions from the allowances are reflected in current earnings. The table below shows the changes in the allowance for loan losses for the three and six months ended June 30, 1999 and 1998.
TABLE 11 Changes in Allowance for Loan Losses (Dollars in thousands) Three Months Ended Six Months Ended June 30 June 30 ------------------------ ------------------------ 1999 1998 1999 1998 ----------- ----------- ----------- ---------- Beginning allowance for loan losses $ 236,476 $ 237,186 $ 244,466 $ 233,280 Provision (recovery) charged to expense (727) 2,682 (153) 5,647 Transfer of allowance to reserve for losses on loans sold or securitized and retained (2,385) -0- (12,135) -0- Less loans charged off, net (225) (467) -0- -0- Add recoveries 332 136 1,293 610 ----------- ----------- ----------- ---------- Ending allowance for loan losses $ 233,471 $ 239,537 $ 233,471 $ 239,537 =========== =========== =========== ========== Ratio of chargeoffs net of recoveries to average loans outstanding (including MBS with recourse and MBS-REMICs) .00% .00% (.01%) .00% =========== =========== =========== ==========
As previously mentioned, the Company has securitized loans from its portfolio into FNMA MBS with recourse and MBS-REMICs. The Company's intent is to hold these MBS and MBS-REMICs to maturity. Because these loans underlying the MBS and MBS-REMICs are similar in all respects to the loans in its loan portfolio, the Company estimates its reserve on these securities in a manner similar to the method it uses for the allowance for loan losses. The Company also sells loans with full credit recourse and has established a reserve for potential losses on these loans. The liability for this reserve for losses on loans sold or securitized and retained is included in accounts payable and accrued expenses. The table below shows the changes in the reserve for losses on loans sold or securitized and retained for the three and six months ended June 30, 1999 and 1998.
TABLE 12 Changes in Reserve for Losses on Loans Sold with Recourse or Securitized and Retained (Dollars in thousands) Three Months Ended Six Months Ended June 30 June 30 ------------------------ ------------------------ 1999 1998 1999 1998 ----------- ----------- ----------- ---------- Beginning balance of reserve for losses on loans sold with recourse or securitized and retained $ 12,549 $ 1,023 $ 2,256 $ 886 Initial recourse at time of sale charged to expense 463 340 1,006 477 Transfer from allowance for loan losses 2,385 -0- 12,135 -0- ----------- ----------- ----------- ---------- Ending balance of reserve for losses on loans sold with recourse or securitized and retained $ 15,397 $ 1,363 $ 15,397 $ 1,363 =========== =========== =========== ==========
The ratio to nonperforming assets of the allowance for loan losses and the reserve for losses on loans sold or securitized and retained was 95.3% and 69.5% at June 30, 1999 and 1998, respectively. At June 30, 1999 and 1998, the ratio to total loans (including MBS with recourse and MBS-REMICs) of the allowance for loan losses and the reserve for losses on loans sold or securitized and retained was .71% and .67%, respectively. DEPOSITS Retail deposits decreased during the second quarter of 1999 by $60 million, including interest credited of $265 million, compared to an increase of $434 million, including interest credited of $263 million, in the second quarter of 1998. Retail deposits increased during the first half of 1999 by $117 million, including interest credited of $510 million, compared to an increase of $1.4 billion, including interest credited of $508 million, in the first half of 1998. During the second quarter of 1999, the Company sold three branches with a total of $119 million in deposits. During the first quarter of 1998, the Company sold one branch with $36 million in deposits. Retail deposit balances were essentially unchanged during 1999 as the Company concentrated marketing efforts on building the loyalty of existing depositors. Retail deposits increased during the first half of 1998 primarily due to ongoing marketing efforts as well as active promotions of market rate transaction accounts. At June 30, 1999 and 1998, transaction accounts (which includes checking, passbook, and money market accounts) represented 39% and 27%, respectively, of the total balance of deposits. Beginning in January 1997, the Company began a program to use government securities dealers to sell certificates of deposit (CDs) to institutional investors (wholesale CDs). There were no outstanding wholesale CDs at June 30, 1999 or at June 30, 1998. The table below shows the Company's deposits by interest rate and by remaining maturity at June 30, 1999 and 1998.
TABLE 13 Deposits (Dollars in millions) June 30 --------------------------------------------------- 1999 1998 ------------------------ ------------------------ Rate* Amount Rate* Amount --------- ----------- ------------------------ Deposits by rate: Interest-bearing checking accounts (a) 3.42% $ 109 3.23% $ 84 Passbook accounts 1.82 507 2.22 544 Money market deposit accounts (a) 4.11 9,646 4.28 6,040 Term certificate accounts with original maturities of: 4 weeks to 1 year 4.40 5,270 5.10 7,977 1 to 2 years 4.94 7,572 5.44 6,688 2 to 3 years 5.27 1,379 5.46 1,458 3 to 4 years 5.21 330 5.34 372 4 years and over 5.72 950 5.76 1,208 Retail jumbo CDs 4.70 573 5.34 622 Wholesale CDs 0.00 -0- 0.00 -0- All other 0.00 -0- 7.56 1 ----------- ------------ $ 26,336 $ 24,994 =========== ============ 1999 1998 ----------- ------------ Deposits by remaining maturity: No contractual maturity $ 10,262 $ 6,668 Maturity within one year 14,645 16,056 1 to 5 years 1,412 2,259 Over 5 years 17 11 ----------- ------------ $ 26,336 $ 24,994 =========== ============
* Weighted average interest rate, including the impact of interest rate swaps. (a) At June 30, 1999, $3.1 billion of interest-bearing checking accounts were swept into money market deposit accounts. At June 30, the weighted average cost of deposits was 4.50% (1999) and 4.99% (1998). ADVANCES FROM FEDERAL HOME LOAN BANKS The Company uses borrowings from FHLBs, also known as "advances," to supplement cash flow and to provide funds for loan origination activities. Advances are secured by pledges of certain loans, MBS-REMICs, other MBS, and capital stock of FHLBs. FHLB advances amounted to $6.1 billion at June 30, 1999, compared to $7.5 billion and $6.2 billion at June 30, 1998, and December 31, 1998, respectively. During 1998, the Company paid off, before maturity, $4.4 billion of high-cost FHLB of San Francisco advances and, as a result, incurred a $21 million pre-tax charge for the penalties associated with these prepayments. See Extraordinary Item discussion on page 31. 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 $685 million, $1.8 billion, and $1.3 billion at June 30, 1999 and 1998, and December 31, 1998, 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. OTHER BORROWINGS At June 30, 1999, Golden West, at the holding company level, had a total of $812 million of subordinated debt issued and outstanding. As of June 30, 1999, the Company's subordinated debt securities were rated A3 and A- by Moody's Investors Service (Moody's) and Standard & Poor's (S&P), respectively. At June 30, 1999, 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. 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, 1999, WFSB had not issued any notes under this authority. STOCKHOLDERS' EQUITY The Company's stockholders' equity increased during the first six months of 1999 as a result of net earnings partially offset by decreased market values of securities available for sale, the payment of quarterly dividends to stockholders, and the $170 million cost of the repurchase of Company stock. The Company's stockholders' equity increased during the first six months of 1998 as a result of net earnings and increased market values of securities available for sale partially offset by the payment of quarterly dividends to stockholders. Unrealized gains, net of taxes, on securities and MBS available for sale included in stockholders' equity at June 30, 1999 and 1998, and December 31, 1998, were $195 million, $157 million, and $215 million, respectively. From time to time, 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, 1999, 11.3 million shares had been repurchased and retired at a cost of $630 million since October 1993, of which 1.8 million shares were purchased and retired at a cost of $170 million during the first six months of 1999. On July 22, 1999, Golden West's Board of Directors authorized the purchase by the Company of an additional 2.8 million shares of its common stock. 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 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. The following table shows WFSB's regulatory capital ratios and compares them to the OTS minimum requirements at June 30, 1999 and 1998.
TABLE 14 World Savings Bank, FSB Regulatory Capital Ratios (Dollars in thousands) June 30, 1999 June 30, 1998 ----------------------------------------------- ---------------------------------------------- ACTUAL REQUIRED ACTUAL REQUIRED ---------------------- ---------------------- ---------------------- --------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ----------- --------- ----------- --------- ---------- --------- ---------- -------- Tangible $2,336,862 7.01% $ 499,791 1.50% $1,929,619 6.69% $ 432,456 1.50% Core 2,336,862 7.01 1,332,775 4.00 1,929,619 6.69 1,153,217 4.00 Risk-based 2,483,193 12.95 1,533,886 8.00 2,013,581 12.91 1,259,075 8.00
The following table shows WSL's current regulatory capital ratios and compares them to the OTS minimum requirements at June 30, 1999 and 1998.
TABLE 15 World Savings and Loan Association Regulatory Capital Ratios (Dollars in thousands) June 30, 1999 June 30, 1998 ------------------------------------------------ ------------------------------------------------ ACTUAL REQUIRED ACTUAL REQUIRED ----------------------- ---------------------- ---------------------- ----------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ----------- --------- ----------- --------- ----------- -------- ----------- --------- Tangible $ 548,213 9.52% $ 86,344 1.50% $ 892,726 9.00% $ 148,730 1.50% Core 548,213 9.52 230,252 4.00 892,726 9.00 396,614 4.00 Risk-based 584,207 18.60 251,217 8.00 1,067,516 17.78 480,347 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, 1999, 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, 1999.
TABLE 16 World Savings Bank, FSB Regulatory Capital Compared to Well-Capitalized Classification (Dollars in thousands) ACTUAL WELL-CAPITALIZED ------------------------ -------------------------- Capital Ratio Capital Ratio ----------- ---------- ------------ ----------- Leverage $ 2,336,862 7.01% $ 1,665,968 5.00% Tier 1 risk-based 2,336,862 12.19 1,150,415 6.00 Total risk-based 2,483,193 12.95 1,917,358 10.00
The table below shows that WSL's regulatory capital exceeds the requirements of the well-capitalized classification at June 30, 1999.
TABLE 17 World Savings and Loan Association Regulatory Capital Compared to Well-Capitalized Classification (Dollars in thousands) ACTUAL WELL-CAPITALIZED ------------------------ -------------------------- Capital Ratio Capital Ratio ----------- ---------- ------------ ----------- Leverage $ 548,213 9.52% $ 287,815 5.00% Tier 1 risk-based 548,213 17.46 188,413 6.00 Total risk-based 584,207 18.60 314,022 10.00
World Savings Bank, SSB is regulated by the FDIC and the state of Texas. At June 30, WSSB had the following regulatory capital calculated in accordance with the FDIC's capital standards:
TABLE 18 World Savings Bank, SSB Regulatory Capital Ratios (Dollars in thousands) June 30, 1999 June 30, 1998 ----------------------------------------------- ---------------------------------------------- ACTUAL REQUIRED ACTUAL REQUIRED ---------------------- ---------------------- ---------------------- ---------------------- Capital Ratio Capital Ratio Capital Ratio Capital Ratio ----------- -------- ----------- --------- ---------- --------- ----------- --------- Tier 1 leverage $ 194,087 5.41% $ 107,577 3.00% $ 123,638 11.38% $ 32,583 3.00% Tier 1 risk-based 194,087 26.19 29,648 4.00 123,638 24.08 20,537 4.00 Total risk-based 194,301 26.21 59,296 8.00 123,824 24.12 41,074 8.00
RESULTS OF OPERATIONS NET EARNINGS Net earnings for the three months ended June 30, 1999 were $122 million compared to net earnings of $117 million for the three months ended June 30, 1998. Net earnings for the six months ended June 30, 1999 were $243 million compared to net earnings of $227 million, before an extraordinary item (see extraordinary item discussion on page 32), for the six months ended June 30, 1998. Net earnings increased for the first six months of 1999 as compared to the same period in 1998 as a result of increased net interest income, a decrease in the provision for loan losses, increased non-interest income before the one-time gains (see non-interest income discussion on page 31), and a lower effective tax rate. These increases to net earnings were partially offset by an increase in general and administrative expenses. 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, 1999 and 1998, and December 31, 1998.
TABLE 19 Yield on Earning Assets, Cost of Funds, and Primary Spread June 30 ---------------------------- December 31 1999 1998 1998 ------------ ------------ ------------- Yield on loan portfolio 7.06% 7.51% 7.36% Yield on MBS 7.07 7.23 7.20 Yield on investments 6.45 6.89 5.53 --------- --------- --------- Yield on earning assets 7.06 7.44 7.30 --------- --------- --------- Cost of deposits 4.50 4.99 4.67 Cost of borrowings 5.59 6.02 5.87 --------- --------- --------- Cost of funds 4.75 5.29 4.96 --------- --------- --------- Primary spread 2.31% 2.15% 2.34% ========= ========= =========
The Company holds ARMs to manage the rate sensitivity of the asset side of the balance sheet. 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. 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). On balance, COFI lags 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 and a temporary increase in net interest income when rates fall. 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, 1999 and 1998, in order to focus on the changes in interest income between years as well as changes in other revenue and expense amounts. TABLE 20 Selected Revenue and Expense Items as Percentages of Total Revenues Three Months Ended Six Months Ended June 30 June 30 ---------------------- ----------------------- 1999 1998 1999 1998 --------- --------- ---------- ---------- Interest on loans(a) 61.2% 74.9% 63.1% 77.7% Interest on mortgage-backed securities(a) 26.0 13.5 24.6 11.4 Interest and dividends on investments 7.0 6.1 6.9 6.5 --------- --------- ---------- ---------- 94.2 94.5 94.6 95.6 Less: Interest on deposits 42.1 41.0 42.1 40.6 Interest on advances and other borrowings 18.0 23.0 18.3 24.1 --------- --------- ---------- ---------- 60.1 64.0 60.4 64.7 Net interest income 34.1 30.5 34.2 30.9 Provision for (recovery of) loan losses (.1) .3 0.0 .4 --------- --------- ---------- ---------- Net interest income after provision for loan losses 34.2 30.2 34.2 30.5 Add: Fees 2.3 2.0 2.3 1.8 Gain on the sale of securities, MBS, and loans 1.1 2.4 1.3 1.4 Other non-interest income 2.4 1.1 1.8 1.2 --------- --------- ---------- ---------- 5.8 5.5 5.4 4.4 Less: General and administrative expenses 13.2 11.1 13.0 10.9 Taxes on income 10.0 9.7 10.0 9.5 --------- --------- ---------- ---------- Earnings before extraordinary item 16.8 14.9 16.6 14.5 Extraordinary item 0.0 0.0 0.0 (.5) --------- --------- ---------- ---------- Net earnings 16.8% 14.9% 16.6% 14.0% ========= ========= ========== ==========
(a) During the six months ended June 30, 1999 and the year ended December 31, 1998, the Company securitized $3.7 billion and $8.2 billion, respectively, of loans into MBS which caused the percentage of interest on mortgage-backed securities to total revenues to increase from June 30, 1998 to June 30, 1999 and the percentage of interest on loans to total revenues to decrease from June 30, 1998 to June 30, 1999. For further discussion, see pages 12 and 13. 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 $927 thousand and $3.7 million for the three and six months ended June 30, 1999, as compared to decreases of $2 million and $4 million for the same periods in 1998. The following table summarizes the unrealized gains and losses for interest rate swaps at June 30, 1999 and 1998.
TABLE 21 Schedule of Unrealized Gains and Losses on Interest Rate Swaps (Dollars in thousands) June 30, 1999 June 30, 1998 ---------------------------------------- ---------------------------------------- Net Net Unrealized Unrealized Unrealized Unrealized Gain Unrealized Unrealized Gain Gains Losses (Loss) Gains Losses (Loss) ------------ ------------ ------------ ------------ ------------ ------------ Interest rate swaps: Receive fixed $ 917 $ 150 $ 767 $ 6,779 $ 303 $ 6,476 Pay fixed 3,631 15,643 (12,012) 436 34,226 (33,790) ------------ ------------ ------------ ------------ ------------ ------------- $ 4,548 $ 15,793 $ (11,245) $ 7,215 $ 34,529 $ (27,314) ============ ============ ============ ============ ============ =============
TABLE 22 Schedule of Interest Rate Swaps Activity (Notional amounts in millions) Six Months Ended June 30, 1999 ---------------------------- Receive Pay Fixed Fixed Swaps Swaps ------------ ------------ Balance at December 31, 1998 $ 512 $ 899 Additions -0- -0- Maturities (237) (77) ------------ ------------ Balance at June 30, 1999 $ 275 $ 822 ============ ============
The range of floating interest rates received on swap contracts in the first six months of 1999 was 4.97% to 5.47%, and the range of floating interest rates paid on swap contracts was 4.99% to 5.29%. The range of fixed interest rates received on swap contracts in the first six months of 1999 was 5.50% to 8.66% and the range of fixed interest rates paid on swap contracts was 5.58% to 9.14%. INTEREST ON LOANS In the second quarter of 1999, interest on loans was lower than in the comparable 1998 period by $142 million or 24.2%. The decrease in the second quarter of 1999 was due to a $6.5 billion decrease in the average portfolio balance and a 33 basis point decrease in the average portfolio yield. For the first half of 1999, interest on loans was lower than in the comparable 1998 period by $294 million or 24.2%. The decrease was due to a $6.9 billion decrease in the average portfolio balance and a 27 basis point decrease in the average portfolio yield. The decrease in the average loan portfolio balance was primarily due to the securitization of loans into FNMA MBS and MBS-REMICs (see pages 12 and 13). INTEREST ON MORTGAGE-BACKED SECURITIES In the second quarter of 1999, interest on mortgage-backed securities was higher than in the comparable 1998 period by $84 million or 79.4%. The 1999 increase was due primarily to a $4.9 billion increase in the average portfolio balance, which was partially offset by a 7 basis point decrease in the average portfolio yield. For the first half of 1999, interest on mortgage-backed securities was higher than in the comparable 1998 period by $180 million or 101.5% due primarily to a $5.2 billion increase in the average portfolio balance, which was partially offset by a 10 basis point decrease in the average portfolio yield. The increase in the mortgage-backed securities portfolio is primarily due to the securitization of loans into FNMA MBS and MBS-REMICs, as discussed on pages 12 and 13. 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 1999, interest and dividends on investments was higher than in the comparable 1998 period by $2.7 million or 5.7%. The increase was primarily due to a $743 million increase in the average portfolio balance, which was partially offset by a 71 basis point decrease in the average portfolio yield. For the first half of 1999, interest and dividends on investments was lower than in the comparable 1998 period by $1.4 million or 1.4%. The decrease was primarily due to a 70 basis point decrease in the average portfolio yield which was partially offset by a $385 million increase in the average portfolio balance. INTEREST ON DEPOSITS In the second quarter of 1999, interest on deposits decreased by $15 million or 4.7% from the comparable period in 1998. The second quarter decrease was due to a 50 basis point decrease in the average cost of deposits, which was partially offset by a $1.5 billion increase in the average balance of deposits. In the first half of 1999, interest on deposits decreased by $23 million or 3.6% from the comparable period in 1998. The six month decrease was primarily due to a 47 basis point decrease in the average cost of deposits, which was partially offset by a $1.6 billion increase in the average balance of deposits. INTEREST ON ADVANCES AND OTHER BORROWINGS For the second quarter and first half of 1999, interest on advances and other borrowings decreased by $50 million or 27.5% and $109 million or 29.0%, respectively, from the comparable periods of 1998. The second quarter decrease was primarily due to a $2.5 billion decrease in the average balance and a 50 basis point decrease in the average cost of these borrowings. The six month decrease was primarily due to a $3.0 billion decrease in the average balance and a 43 basis point decrease in the average cost of these borrowings. PROVISION FOR (RECOVERY OF) LOAN LOSSES The recovery of loan losses was $727 thousand and $153 thousand, respectively, for the three and six months ended June 30, 1999, compared to a provision for loan losses of $3 million and $6 million for the same periods in 1998. The decrease in the provision in 1999 was due to declining nonperforming assets and lower loan losses as a result of the strong California housing market and economy. NON-INTEREST INCOME Non-interest income was $43 million and $78 million, respectively, for the three and six months ended June 30, 1999, compared to $43 million and $69 million for the same periods in 1998. Non-interest income for the three and six months ended June 30, 1999 included gains of $7 million from the sale of three savings offices located in markets with limited growth potential. Non-interest income for the three and six months ended June 30, 1998, included a gain of $13 million before tax from the redemption of preferred stock which was called by the issuer and non-interest income for the six months ended June 30, 1998 included a gain of $3 million from the sale of one savings branch. Without the effects of these one-time gains, non-interest income for the three and six months ended June 30, 1999, was $35 million and $70 million, respectively, as compared to $30 million and $53 million for the same periods in 1998. The increases in 1999 as compared to 1998 resulted from higher loan prepayment fees and increased gains on the sale of fixed-rate mortgages. GENERAL AND ADMINISTRATIVE EXPENSES For the second quarter and first half of 1999, general and administrative expenses (G&A) were $96 million and $189 million, respectively, compared to $87 million and $171 million for the comparable periods in 1998. G&A as a percentage of average assets on an annualized basis was 1.00% and .99%, respectively, for the second quarter and first half of 1999 compared to .88% and .86%, respectively, for the same periods in 1998. G&A expenses increased in 1999 because of normal increases in employee compensation, the expansion of the loan origination organization to take advantage of opportunities to increase mortgage volume, and investments in new computers and automated teller machines to enhance customer service in our branches. EXTRAORDINARY ITEM During the first quarter of 1998, the Company paid off, before maturity, $2.9 billion of high-cost FHLB of San Francisco 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. In addition, in the third quarter of 1998, the Company paid off, before maturity, an additional $1.5 billion of high-cost FHLB advances. As a result, the Company incurred an $8 million pretax charge in the third quarter of 1998 for the penalties associated with the prepayments. 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 37.5%, for the second quarter and first half of 1999 compared to 39.3% and 39.6%, respectively, for the same periods a year ago. The decrease in the tax rate in 1999 as compared to 1998 was due to a lower overall state tax rate due to the expansion of business in lower taxing states. LIQUIDITY AND CAPITAL RESOURCES WFSB's principal sources of funds are cash flows generated from earnings; deposits; loan repayments; sales of loans; negotiable certificates of deposit; borrowings from the FHLB; investments and borrowings from its affiliates; debt collateralized by mortgages, MBS, or securities. In addition, WFSB has other alternatives available to provide liquidity or finance operations including federal funds purchased, borrowings from public offerings of debt, 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, 1999, and 1998, and December 31, 1998, 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 and debt collateralized by mortgages, MBS, or securities. In addition, WSL has a number of other alternatives available to provide liquidity or finance operations. These include federal funds purchased, 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. For a discussion of WSL's liquidity positions at June 30, 1999, and 1998, and December 31, 1998, see the Cash and Investments section on page 12. WSSB's principal sources of funds are cash flows generated from earnings; deposits; loan repayments; borrowings from the FHLB Dallas; debt collateralized by mortgages or securities; and borrowings from its affiliates. The principal sources of funds for WFSB's, WSL's, and WSSB'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, capital contributions to its insured subsidiaries (including $489 million for the year ended December 31, 1998 and $311 million for the six months ended June 30, 1998), dividends to stockholders, the purchase of Golden West stock (see stockholders' equity section on page 23), and general and administrative expenses. At June 30, 1999 and 1998, and December 31, 1998, Golden West's total cash and investments amounted to $725 million, $750 million, and $898 million, respectively. Included in the June 30, 1999 and 1998, and December 31, 1998 amounts are loans to WFSB and WSL. YEAR 2000 The Company is aware of the system challenges that the Year 2000 has created and has implemented a plan (Year 2000 Project) to insure that all of the Company's mission critical systems are Year 2000 compliant by the end of the second quarter of 1999, and to evaluate, test, and modify other systems that might also be affected. The evaluation, correction and testing of the mission-critical systems was completed during the first quarter of 1999, and during the second quarter of 1999, the Company successfully completed integration testing to confirm that all such systems function together. All mission critical systems have now been upgraded and placed into production. The Company has completed an inventory and assessment of all other non-mission systems and is currently in the process of testing and modifying or replacing those systems that may be affected by Year 2000 compliance issues. The Company expects to complete the testing and installation of non-mission critical systems by the end of the third quarter of 1999. The Year 2000 project was developed in accordance with guidance set forth by federal banking regulators in a series of jointly-issued policy statements. Federal banking regulators regularly monitor the Company's progress in meeting the requirements of such policy statements. 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 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 1998 was $8 million and $6 million was incurred for the six months ended June 30, 1999. 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 has dedicated 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 at the beginning of the year 2000, 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 should such systems not perform. In the unlikely event of a problem with the Company's systems or the systems of others which relate to the Company's core business, the Company has developed contingency plans to address the potential that one or more systems might fail, despite efforts to the contrary. Although the Company has no reason to believe that such contingency plans will not effectively avoid or mitigate any adverse consequences of such system failures, no assurances can be given that such plans will be effective. 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 and anticipated growth 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, 1999, 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, 1998, for the Company's 1998 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) 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. 10(g) Operating lease on Company headquarters building, 1901 Harrison Street, Oakland, California 94612, is incorporated by reference to Exhibit 10(h) of the Company's Quarterly Report on Form 10-Q (File No. 1-4629) for the quarter ended September 30, 1998. 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 during the first six months of 1999. 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 12, 1999 /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 --------------------------- --------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Earnings Before Extraordinary Item $ 122,387 $ 116,950 $ 242,755 $ 227,031 Extraordinary Item, Net of Tax -0- -0- -0- (7,710) ------------ ------------ ------------ ------------ Net Earnings $ 122,387 $ 116,950 $ 242,755 $ 219,321 ============ ============ ============ ============ Weighted Average Shares 55,888,459 57,338,227 56,232,804 57,233,046 Add: Options outstanding at period end 1,842,305 1,971,505 1,842,305 1,971,505 Less: Shares assumed purchased back with proceeds of options exercised 1,298,359 1,199,485 1,307,274 1,235,174 ------------ ------------ ------------ ------------ Diluted Average Shares Outstanding 56,432,405 58,110,247 56,767,835 57,969,377 ============ ============ ============ ============ Basic Earnings Per Share Calculation: Basic Earnings Per Share Before Extraordinary Item $ 2.19 $ 2.04 $ 4.32 $ 3.96 Extraordinary Item, Net of Tax 0.00 0.00 0.00 (.13) ------------ ------------ ------------ ------------ Basic Earnings Per Share $ 2.19 $ 2.04 $ 4.32 $ 3.83 ============ ============ ============ ============ Diluted Earnings Per Share Calculation: Diluted Earnings Per Share Before Extraordinary Item $ 2.17 $ 2.01 $ 4.28 $ 3.91 Extraordinary Item, Net of Tax 0.00 0.00 0.00 (.13) ------------ ------------ ------------ ------------ Diluted Earnings Per Share $ 2.17 $ 2.01 $ 4.28 $ 3.78 ============ ============ ============ ============
EX-27 3
9 6-MOS DEC-31-1998 JUN-30-1999 240,911 4,992 85,025 0 473,420 11,910,084 11,691,814 23,485,887 233,471 38,026,973 26,335,706 160,597 915,764 7,448,177 0 0 5,525 3,161,204 38,026,973 921,602 100,543 358,114 1,380,259 613,634 881,052 499,207 (153) 0 189,072 388,135 388,135 0 0 242,755 4.32 4.28 7.06 239,937 0 15,896 70,255 244,466 0 1,293 233,471 233,471 0 0
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